FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549(MARK ONE) |X|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR | |TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _____________ Commission File No. 1-9321 UNIVERSAL HEALTH REALTY INCOME TRUST (Exact name of registrant as specified in its charter) Maryland 23-6858580 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Universal Corporate Center 367 South Gulph Road P.O. Box 61558 19406-0958 King of Prussia, Pennsylvania (Zip Code)(Address of principal executive offices) Registrant's telephone number, including area code: (610) 265-0688 Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of exchange on which registeredShares of beneficial interest, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark whether the registrant (1) has filed all reports to befiled by Section 13 or 15(d) of the Securities and Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes [x] No [ ]Indicate by check mark if disclosure of delinquent filers pursuant to Item 405of Regulation S-K is not contained herein, and will not be contained, to thebest of Registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. |X|Aggregate market value of voting shares held by non-affiliates as of January 31,1997: $163,009,548. Number of shares of beneficial interest outstanding ofregistrant as of January 31, 1997: 8,952,340. DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant's definitive proxy statement for its 1997 AnnualMeeting of Shareholders, which will be filed with the Securities and ExchangeCommission within 120 days after December 31, 1996 (incorporated by referenceunder Part III). PART I Item 1. BUSINESSGeneralThe Trust commenced operations on December 24, 1986. As of December 31, 1996,the Trust had investments in twenty-six facilities located in thirteen statesconsisting of the following: Facility Name Location Type of Facility GuarantorChalmette Medical Centers: Patricia Street Campus (A) Chalmette, LA Acute Care Universal Health Services, Inc. Virtue Street Campus (A) Chalmette, LA Rehabilitation Universal Health Services, Inc.Inland Valley Regional Medical Ctr. (A) Wildomar, CA Acute Care Universal Health Services, Inc.McAllen Medical Center (A) McAllen, TX Acute Care Universal Health Services, Inc.Meridell Achievement Center (A) Austin, TX Behavioral Health Universal Health Services, Inc.The BridgeWay (A) N.Little Rock, AR Behavioral Health Universal Health Services, Inc.Wellington Regional Medical Center (A) W.Palm Beach, FL Acute Care Universal Health Services, Inc.THC-Chicago (B) Chicago, IL Sub-Acute Care Community Psychiatric Ctrs.Tri-State Rehabilitation Hospital (B) Evansville, IN Rehabilitation HEALTHSOUTH CorporationMadison Irving Medical Center (C) Syracuse, NY Ambulatory Trmt. Ctr. Crouse Irving Memorial HospitalFresno Herndon Medical Plaza (B) Fresno, CA Medical Office Bldg. ---Family Doctor's Medical Office Bldg. (B) Shreveport, LA Medical Office Bldg. Columbia/HCA Healthcare Corp.Kelsey-Seybold Clinic at Kings Crossing (B) Kingwood, TX Medical Office Bldg. Caremark International, Inc.Professional Bldgs. at Kings Crossing (B) Kingwood, TX Medical Office Bldg. ---Chesterbrook Academy (B) Audubon, PA Preschool & Childcare Nobel Education Dynamics & Subs.Carefree Learning Center (B) New Britain, PA Preschool & Childcare Nobel Education Dynamics & Subs.Carefree Learning Center (B) Newtown, PA Preschool & Childcare Nobel Education Dynamics & Subs.Carefree Learning Center (B) Uwchlan, PA Preschool & Childcare Nobel Education Dynamics & Subs.The Southern Crescent Center (B) Riverdale, GA Medical Office Bldg. ---Desert Samaritan Hospital MOBs (D) Phoenix, AZ Medical Office Bldg. ---Suburban Medical Plaza II (E) Louisville, KY Medical Office Bldg. ---Maryvale Samaritan Hospital MOBs (D) Phoenix, AZ Medical Office Bldg. ---Desert Valley Medical Center MOB (F) Phoenix, AZ Medical Office Bldg. ---Cypresswood Professional Center (G) Houston, TX Medical Office Bldg. ---Samaritan West Valley Medical Ctr. (H) Goodyear, AZ MOB, Imaging Ctr. ---Lake Shore Hospital (I) Manchester, NH Unoccupied --- (A) Leased to subsidiaries of Universal Health Services, Inc. (B) Real estate assets owned by the Trust and leased to an unaffiliated third party or parties. (C) The Trust holds a mortgage loan with Crouse Irving Memorial Properties on the real estate assets of this facility. (D) The Trust has 50% equity interest in a limited liability corporation ("LLC") which owns the real estate assets of this facility. (E) The Trust has 33% equity interest in a LLC which owns the real estate assets of this facility. Construction on this facility was completed during the third quarter of 1996. In connection with this property, the Trust posted a $3.5 million standby letter of credit for the benefit of the lender providing the construction financing. The construction loan matures in November, 1997 and the Trust expects the LLC to arrange for permanent financing prior to that date. (F) Trust has 95% equity interest in a LLC which owns the real estate assets of this facility. (G) The Trust is providing construction financing to a limited partnership in which the Trust has a 77% controlling equity interest during the construction period, which increases to 98% upon completion and occupancy of the building. The construction is scheduled to be completed in the third quarter of 1997. In connection with this investment, the Trust made a capital contribution of $343,000 to the limited partnership that will develop and own this facility. (H) The Trust is providing construction financing to a LLC in which the Trust has 50% equity interest during the construction period, which increases to 70% upon completion and occupancy of the building. The construction is scheduled to be completed in the fourth quarter of 1997. 1 (I) The Trust received free and clear title to the real estate assets of Lake Shore Hospital during 1995. The Trust continues to actively negotiate with third parties interested in purchasing or leasing the real estate assets of the Lake Shore facility.As of December 31, 1996, the Trust has invested an aggregate of $174 million invarious real estate assets, mortgage loans, construction loans and limitedliability corporations and limited partnerships which own real estate assets.Included in the Trust's portfolio is ownership of nine hospital facilities(aggregate investment of $136 million) which contain an aggregate of 1,279licensed beds. The leases with respect to such facilities have fixed terms withan average of four years remaining and provide for renewal options for up to sixfive-year terms. The initial terms of these leases expire beginning in 1999.Minimum rents are payable based on the initial acquisition costs of thefacilities and, with respect to all facilities other than the one leased toTHC-Chicago, additional rents are payable based upon a percentage of eachfacility's revenue in excess of base year amounts or CPI increases in excess ofbase year amounts. The lessees have rights of first refusal to purchase the base year amounts. The lessees have rights of first refusal to purchase thefacilities exercisable during and in most cases for 180 days after theexpiration of the lease terms and also have purchase options exercisable uponthree to six months notice at the end of each lease term at the facility's fairmarket value. For the hospital facilities owned by the Trust, the combined ratioof earnings before interest, taxes, depreciation, amortization and lease andrental expense (EBITDAR) (excluding a favorable prior year net revenueadjustment recorded during 1996 at one of the Trust's facilities) to minimumrent plus additional rent payable to the Trust was approximately 5.0, 5.3, and4.3 for the years ended December 31, 1996, 1995 and 1994, respectively. Thecoverage ratio for individual facilities varies (see "Relationship to UniversalHealth Services, Inc.").Lessees are required to maintain all risk, replacement cost and commercialproperty insurance policies on the leased properties. The Trust is one of thenamed insured and believes the leased properties are adequately insured.Relationship to Universal Health Services, Inc.Leases. As of December 31, 1996, subsidiaries of UHS leased seven of the ninehospital facilities owned by the Trust with initial terms expiring in 1999through 2003. The leases to the subsidiaries of UHS are guaranteed by UHS andare cross-defaulted with one another. Each of the leases contains renewaloptions of up to six 5-year periods. These leases accounted for 83% of the totalrevenue of the Trust for the five years ended December 31, 1996.For the year ended December 31, 1996, two of the UHS facilities did not generatesufficient EBITDAR to cover the 1996 rent expense payable to the Trust. Theleases on these facilities, which mature in 2000 and 2001, generated 18% of theTrust's 1996 rental income. One additional UHS facility had 1996 EBITDAR whichwas less than 1.5 times the 1996 rent payable to the Trust. The lease on thisfacility, which matures in 2001, generated 10% of the Trust's 1996 rentalincome. One additional UHS facility had 1996 EBITDAR (excluding a favorableprior year net revenue adjustment) which was less than 2.0 times the 1996 rentexpense payable to the Trust. The lease on this facility, which matures in 1999generated 6% of the Trust's 1996 rental income. All of the Trust's remaininghospital facilities, including the facilities operated by non-related parties,had a combined 1996 EBITDAR of 7.5 times (ranging from 2.1 times to 8.9 times)the 1996 rent expense payable to the Trust. 2In recent years, an increasing number of legislative initiatives have beenintroduced or proposed in Congress and in state legislatures that would effectmajor changes in the healthcare system, either nationally or at the state level.In addition, the healthcare industry has been characterized in recent years byincreased competition and consolidation. Management of the Trust is unable topredict the effect, if any, these industry factors will have on the operatingresults of its leasees, including the facilities leased to subsidiaries of UHS,or on their ability to meet their obligations under the terms of their leaseswith the Trust. As mentioned above, certain of the Trust's facilities leased tosubsidiaries of UHS have had EBITDAR of less than 1.5 times the rent payable tothe Trust. Management of the Trust can not predict whether the leases withsubsidiaries of UHS, which have renewal options at existing lease rates, or anyof the Trust's other leases, will be renewed at the end of their initial leaseterms. If the leases are not renewed at their current rates, the Trust would berequired to find other operators for those facilities and/or enter into leaseson terms potentially less favorable to the Trust than the current leases.For the year ended December 31, 1995, one of the UHS facilities did not generatesufficient earnings before interest, taxes, depreciation, amortization and leaseand rental expense (EBITDAR) to cover the 1995 rent expense payable to theTrust. The lease on this facility, which matures in 2001, generated 12% of theTrust's 1995 rental income. Three additional UHS facilities had 1995 EBITDARwhich was less than 1.5 times the 1995 rent expense payable to the Trust. Theleases on these three facilities, which mature in 1999, 2000 and 2001, generatedon a combined basis, 22% of the Trust's 1995 rental income. All of the Trust's remaining hospital facilities, including the facilities operated by non-relatedparties, had a combined 1995 EBITDAR of 8.1 times (ranging from 2.8 times to10.5 times) the 1995 rent expense payable to the Trust.Pursuant to the terms of the leases with UHS, the lessees have rights of firstrefusal to: (i) purchase the respective leased facilities during and for 180days after the lease terms at the same price, terms and conditions of any thirdparty offer, or; (ii) renew the lease on the respective leased facility at theend of, and for 180 days after, the lease term at the same terms and conditionspursuant to any third party offer. The leases also grant the lessees options,exercisable on at least six months notice, to purchase the respective leasedfacilities at the end of the lease term or any renewal term at the facility'sthen fair market value. The terms of the leases also provide that in the eventUHS discontinues operations at the leased facility for more than one year, orelects to terminate its lease prior to the expiration of its term for prudentbusiness reasons, UHS is obligated to offer a substitution property. If theTrust does not accept the substitution property offered, UHS is obligated topurchase the leased facility back from the Trust at a price equal to the greaterof its then fair market value or the original purchase price paid by the Trust.As noted below, transactions with UHS must be approved by a majority of Trusteeswho are unaffiliated with UHS (the "Independent Trustees"). However, thepurchase options and rights of first refusal granted to the respective lesseesto purchase or lease, after the expiration of the lease term, the respectiveleased facilities may, in addition to adversely affecting the Trust's ability tosell or lease a facility, present a potential conflict of interest between theTrust and UHS since the price and terms offered by a third party are likely tobe dependent, in part, upon the financial performance of the facility during thefinal years of the lease term. 3Advisory Agreement. UHS of Delaware, Inc. (the "Advisor"), a wholly-ownedsubsidiary of UHS, serves as Advisor to the Trust under an Advisory Agreementdated December 24, 1986 between the Advisor and the Trust (the "AdvisoryAgreement"). Under the Advisory Agreement, the Advisor is obligated to presentan investment program to the Trust, to use its best efforts to obtaininvestments suitable for such program (although it is not obligated to presentany particular investment opportunity to the Trust), to provide administrativeservices to the Trust and to conduct the Trust's day-to-day affairs. Inperforming its services under the Advisory Agreement, the Advisor may utilizeindependent professional services, including accounting, legal and otherservices, for which the Advisor is reimbursed directly by the Trust. TheAdvisory Agreement expires on December 31 of each year, however, it is renewableby the Trust, subject to a determination by the Independent Trustees that theAdvisor's performance has been satisfactory. The Advisory Agreement may beterminated for any reason upon sixty days written notice by the Trust or theAdvisor. The Advisory Agreement has been renewed for 1997. All transactions withUHS must be approved by the Independent Trustees. The Advisory Agreementprovides that the Advisor is entitled to receive an annual advisory fee equal to .60% of the average invested real estate assets of the Trust, as derived fromits consolidated balance sheet from time to time. In addition, the Advisor isentitled to an annual incentive fee equal to 20% of the amount by which cashavailable for distribution to shareholders for each year, as defined in theAdvisory Agreement, exceeds 15% of the Trust's equity as shown on its balancesheet, determined in accordance with generally accepted accounting principleswithout reduction for return of capital dividends. No incentive fees were paidduring 1996, 1995 and 1994. The advisory fee is payable quarterly, subject toadjustment at year end based upon audited financial statements of the Trust.Share Purchase Option. UHS has the option to purchase shares of beneficialinterest in the Trust at fair market value to maintain a 5% interest in theTrust. As of December 31, 1996, UHS owned 8% of the outstanding shares ofbeneficial interest.Competition The Trust believes that it is one of thirteen publicly traded real estateinvestment trusts (REITs) currently investing primarily in income-producing realestate with an emphasis on healthcare related facilities. The REITs compete withone another in that each is continually seeking attractive investmentopportunities in healthcare related facilities.The Trust may also compete with banks and other companies, including UHS, in theacquisition, leasing and financing of healthcare related facilities. In mostgeographical areas in which the Trust's facilities operate, there are otherfacilities which provide services comparable to those offered by the Trust'sfacilities, some of which are owned by governmental agencies and supported bytax revenues, and others of which are owned by nonprofit corporations and may besupported to a large extent by endowments and charitable contributions. Suchsupport is not available to the Trust's facilities. In addition, certainhospitals which are located in the areas served by the Trust's facilities arespecial service hospitals providing medical, surgical and behavioral healthservices that are not available at the Trust's hospitals or other generalhospitals. The competitive position of a hospital is to a large degree dependentupon the number and quality of staff physicians. Although a physician may at anytime terminate his or her affiliation with a hospital, the Trust's hospitalsseek to retain doctors of varied specializations on its hospital staffs and toattract other 4qualified doctors by improving facilities and maintaining high ethical andprofessional standards. The competitive position of a hospital is also affectedby alternative healthcare delivery systems such as preferred providerorganizations, health maintenance organizations and indemnity insuranceprograms. Such systems normally involve a discount from a hospital's establishedcharges. Outpatient treatment and diagnostic facilities, outpatient surgicalcenters, and freestanding ambulatory surgical centers also impact the healthcaremarketplace.The Trust anticipates investing in additional healthcare related facilities andleasing the facilities to qualified operators, perhaps including UHS andsubsidiaries of UHS.RegulationPrivate as well as Federal and state payment programs, and the impact of otherlaws and regulations, could have a significant effect on the utilization of theTrust's properties and its revenues. A number of legislative initiatives havebeen proposed that could result in major changes in the healthcare system,either nationally or at the state level. See "Management's Discussion andAnalysis of Financial Condition and Results of Operations". 5 Executive Officers of the Registrant The executive officers of the Trust are as follows: Name Age Position Alan B. Miller 59 Chairman of the Board and Chief Executive Officer Kirk E. Gorman 46 President, Chief Financial Officer,Secretary and Trustee Charles F. Boyle 37 Vice President and Controller Cheryl K. Ramagano 34 Vice President and Treasurer Timothy J. Fowler 41 Vice President, Acquisition and DevelopmentMr. Alan B. Miller has been Chairman of the Board and Chief Executive Officer ofthe Trust since its inception in 1986. He served as President of the Trust untilMarch, 1990. Mr. Miller has been Chairman of the Board, President and ChiefExecutive Officer of UHS since its inception in 1978. Mr. Miller also serves asa director of CDI Corp, Genesis Health Ventures and Penn Mutual Life InsuranceCompany.Mr. Kirk E. Gorman has been President and Chief Financial Officer of the Trustsince March, 1990 and was elected to the Board of Trustees and Secretary inDecember, 1994. Mr. Gorman had previously served as Vice President and ChiefFinancial Officer of the Trust since April, 1987. Mr. Gorman was elected SeniorVice President, Treasurer and Chief Financial Officer of UHS in 1992 and servedas its Senior Vice President and Treasurer since 1989.Mr. Charles F. Boyle was elected Vice President and Controller of the Trust inJune, 1991. Mr. Boyle was promoted to Assistant Vice President - Accounting ofUHS in 1994 and served as its Director of Corporate Accounting since 1989.Ms. Cheryl K. Ramagano was elected Vice President and Treasurer of the Trust inSeptember, 1992. Ms. Ramagano was promoted to Assistant Treasurer of UHS in 1994and served as its Director of Finance since 1990.Mr. Timothy J. Fowler was elected Vice President, Acquisition and Development ofthe Trust upon the commencement of his employment with UHS in October, 1993.Prior thereto, he served as a Vice President of The Chase Manhattan Bank, N.A.since 1986.The Trust has no salaried employees and the Trust's officers are all employeesof UHS and receive no cash compensation from the Trust. 6Item 2. PropertiesThe following table shows the Trust's individual investments by the type offacility, capacity in terms of beds, and five-year occupancy levels based on theinformation provided by the lessees or mortgagors. Number of available Lease Term Type of beds @ Average Occupancy (1) Minimum End of RenewalFacility Name and Location facility 12/31/96 1996 1995 1994 1993 1992 rent initial term term (years) Chalmette Medical Centers Virtue Street Campus Rehabilitation 45 61% 57% 92% 81% 81% $1,261,000 1999 25 Patricia Street Campus Acute Care 118 66% 67% 66% 68% 69% 879,000 2003 15 Chalmette, Louisiana (2)Inland Valley Regional Medical Center Acute Care 80 49% 49% 45% 50% 53% 1,857,000 2001 30 Wildomar, California (3)McAllen Medical Center Acute Care 407 88% 87% 89% 86% 91% 5,485,000 2001 30 McAllen, Texas (3)Wellington Regional Medical Center Acute Care 120 36% 30% 32% 35% 33% 2,495,000 2001 30 West Palm Beach, Florida (3)The BridgeWay Behavioral Health 70 62% 65% 61% 57% 54% 683,000 1999 25 North Little Rock, ArkansasMeridell Achievement Center Behavioral Health 114 45% 65% 47% 44% 61% 1,071,000 2000 20 Austin, TexasTri-State Regional Rehabilitation Hospital Rehabilitation 80 59% 59% 61% 71% 78% 1,113,000 1999 25 Evansville, Indiana (4)THC - Chicago Sub-Acute Care 86 45% 38% 38% - - 1,065,000 2001 25 Chicago, Illinois (5)Fresno - Herndon Medical Plaza Medical - 100% 100% - - - 704,000 1999 - various Fresno, California (6) Office Building 2003Family Doctor's Medical Office Building Medical - 100% 100% - - - 175,000 2001 10 Shreveport, Louisiana (7) Office Building 7Item 2. Properties (continued) Number of available Lease Term Type of beds @ Average Occupancy (1) Minimum End of RenewalFacility Name and Location facility 12/31/96 1996 1995 1994 1993 1992 rent initial term term (years)Kelsey-Seybold Clinic at King's Crossing Medical - 100% 100% - - - $242,000 2005 variousProfessional Center at Office Buildings King's Crossing - 93% 100% - - - 255,000 2000-2005 various Kingwood, Texas (8)Chesterbrook Academy Preschool & - 100% - - - - 155,000 2010 14 Audubon, Pennsylvania (9) ChildcareCarefree Learning Center Preschool & - 100% - - - - 118,000 2010 14 New Britian, Pennsylvania (9) ChildcareCarefree Learning Center Preschool & - 100% - - - - 113,000 2010 14 Newtown, Pennsylvania (9) ChildcareCarefree Learning Center Preschool & - 100% - - - - 118,000 2010 14 Uwchlan, Pennsylvania (9) ChildcareThe Southern Crescent Center Medical - 89% - - - - 716,000 1999-2006 various Riverdale, Georgia (10) Office Buildings 8(1) Average occupancy rate for the hospital facilities is based on the averagenumber of available beds occupied during the five years ended December 31, 1996.Average occupancy rate for the preschool and childcare centers and themulti-tenant medical office buildings is based on the occupied square footage ofeach building. See "Management's Discussion and Analysis of Financial Conditionand Results of Operations" for effects of various occupancy levels at theTrust's hospital facilities. Average available beds is the number of beds whichare actually in service at any given time for immediate patient use with thenecessary equipment and staff available for patient care. A hospital may haveappropriate licenses for more beds than are in service for a number of reasons,including lack of demand, incomplete construction, and anticipation of futureneeds.(2) Chalmette Medical Centers, which was formed at the end of 1989 by theconsolidation of two acute care hospitals (Chalmette General Hospital and De LaRonde Hospital), consists of two facilities separated by approximately one mile.Each facility is leased pursuant to a separate lease. The Patricia Street Campusis a 118-bed medical/surgical facility. The Virtue Street Campus is a 73-bedfacility made up of a physical rehabilitation unit, skilled nursing andinpatient behavioral health services. No assurance can be given as to the effectof the consolidation on the underlying value of the Virtue Street and PatriciaStreet Campuses. Rental commitments and the guarantee by UHS under the existingleases continue for the remainder of the respective terms of the leases.(3) During the third quarter of 1995, UHS purchased the assets of WestlakeMedical Center, ("Westlake") a 126-bed hospital of which the majority of realestate assets were owned by the Trust and leased to UHS. In exchange for thereal estate assets of Westlake and the termination of the lease, the Trustreceived substitution properties valued at approximately $19 million (theTrust's original purchase price of Westlake) consisting of additional realestate assets which were owned by UHS but related to three acute carefacilities, of which the Trust owns the real estate and which are operated byUHS (McAllen Medical Center, Inland Valley Regional Medical Center andWellington Regional Medical Center). These additional real estate assetsrepresent major additions and expansions made to these facilities by UHS sincethe purchase of the facilities by the Trust from UHS in 1986. The Trust alsopurchased from UHS, additional real estate assets related to McAllen MedicalCenter for approximately $1.9 million in cash. Total annual base rental paymentsfrom UHS to the Trust on the substituted properties will be $2.4 million whichequals the total base and bonus rental earned by the Trust on the Westlake facility during 1994 ($2.1 million base and $300,000 bonus). Total annual baserental payments on the additional real estate assets purchased related toMcAllen Medical Center will be approximately $200,000. Bonus rental on thesubstituted and purchased real estate assets will be equal to 1% of the growthin revenues, in excess of base year amounts, generated by these additionalassets. The guarantee by UHS under the existing leases, as amended to includethe additional property, will continue.(4) The Trust purchased this hospital during 1989 for approximately $7.5million. During 1993, the Trust purchased for approximately $1.1 million, a 20bed addition which was added to the facility. The Trust entered into anagreement with the operator, an unaffiliated third party, to lease the facilityfor an initial fixed term of 10 years, with the operator having the option toextend the lease for five 5-year renewal terms.(5) During December of 1993, UHS the former lessee and operator of BelmontCommunity Hospital, sold the operations of the facility to THC-Chicago, Inc.("THC"), an indirect wholly- 9owned subsidiary of Community Psychiatric Centers ("CPC"). Concurrently, theTrust purchased certain related real property from UHS for $1 million in cashand a note payable with a carrying value of $1,082,000 at December 31, 1996. Thenote payable has a face value of $1 million and is due on December 31, 2001. Theamount of interest payable on this note is contingent upon the financialperformance of this leased facility and its estimated fair value at the end ofthe initial lease term. The Trust has estimated the total amount payable underthe terms of this note and has discounted the payments to their net presentvalue using a 6% rate. Included in the Trust's 1996 financial results isapproximately $61,000 of interest expense related to this note. In connectionwith this transaction, UHS's lease with the Trust was terminated and the Trustentered into an eight year lease agreement with THC, which is guaranteed by CPC,for the real property of this facility, now operating as THC-Chicago.(6) In November of 1994, the Trust purchased the Fresno-Herndon Medical Plazalocated in Fresno, California for $6.3 million. The 37,800 square foot medicaloffice building is leased to several tenants, including an outpatient surgerycenter operated by Columbia/HCA Healthcare Corporation, under the terms ofleases with expiration dates ranging from November, 1999 to March, 2003. TheTrust has granted the seller the option to repurchase the property in November,2001 for $7,250,000.(7) During the third quarter of 1995, the Trust purchased for $1.6 million, amedical office building on the campus of a hospital owned by Columbia/HCAHealthcare Corporation located in Shreveport, Louisiana. The medical officebuilding is currently being leased under the terms of a master lease agreementwith Columbia/HCA Healthcare Corporation.(8) In December of 1994, the Trust agreed to provide construction financing forthe Professional Center at Kings Crossing, of which $1.1 million was advancedduring 1994 and $3.2 million was advanced during 1995. During the fourth quarterof 1995, upon completion and occupancy of the properties, the Trust purchasedthe single tenant and two multi-tenant medical office buildings for the totalconstruction cost of $4.3 million. The single tenant building consists of 20,000net square feet and is leased to Kelsey-Seybold, a subsidiary of CaremarkInternational, Inc., for an initial term of 10 years. The two multi-tenantbuildings total 27,535 net square feet and are occupied by tenants consistingprimarily of medical professionals.(9) During the second quarter of 1996, the Trust purchased four preschool andchildcare centers located in southeast Pennsylvania for a total of $3.9 million.The childcare centers, which were purchased from a subsidiary of Nobel EducationDynamics, Inc. ("Nobel"), were leased back to Nobel pursuant to the terms oflong-term, triple net leases. (10) During the second quarter of 1996, the Trust purchased The SouthernCrescent Center, multi-tenant medical office building, for approximately $6million. The Southern Crescent Center is a 41,400 square foot, multi-tenantmedical office building located adjacent to the Southern Regional Medical Centerin Riverdale, Georgia.Item 3. LEGAL PROCEEDINGSNot Applicable.Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10Not applicable. No matter was submitted during the fourth quarter of the yearended December 31, 1996 to a vote of security holders. PART IIItem 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSThe Trust's shares of beneficial interest are listed on the New York StockExchange. The high and low closing sales prices for the Trust shares ofbeneficial interest for each quarter in the two years ended December 31, 1996and 1995 are summarized below: 1996 1995 High Price Low Price High Price Low Price First Quarter $ 20 $ 17 1/2 $ 16 7/8 $ 15 7/8 Second Quarter $ 19 7/8 $ 18 1/8 $ 16 7/8 $ 15 7/8 Third Quarter $ 19 7/8 $ 18 3/8 $ 16 7/8 $ 16 Fourth Quarter $ 20 1/2 $ 18 1/2 $ 17 7/8 $ 16 1/2As of January 31, 1997 there were approximately 1,135 shareholders of record ofthe Trust's shares of beneficial interest. It is the Trust's intention todeclare quarterly dividends to the holders of its shares of beneficial interestso as to comply with applicable sections of the Internal Revenue Code governingreal estate investment trusts. Covenants relating to the revolving creditfacility limit the Trust's ability to increase dividends in excess of 95% ofcash available for distribution unless additional distributions are required tobe made as to comply with applicable sections of the Internal Revenue Code andrelated regulations governing real estate investment trusts. In each of the pastfive years, dividends per share were declared as follows: 1996 1995 1994 1993 1992 First Quarter $ .420 $ .42 $ .415 $ .415 $ .40 Second Quarter .425 .42 .415 .415 .41 Third Quarter .425 .42 .415 .415 .41 Fourth Quarter .425 .42 .420 .415 .41 ------ ----- ------ ----- ----- $1.695 $1.68 $1.665 $1.66 $1.63 ====== ===== ====== ===== ===== 11Item 6. SELECTED FINANCIAL DATAFinancial highlights for the Trust for the five years ended December 31, 1996were as follows: 1996 (1) 1995 (1) 1994 (1) 1993 1992 Revenues $21,923,000 $20,417,000 $18,826,000 $18,263,000 $19,047,000Net income (loss) $14,158,000 $13,584,000 $14,312,000 $12,259,000 ($1,782,000)Funds fromOperations (2) $17,837,000 $17,024,000 $17,501,000 $14,911,000 $13,737,000Per Share Data:Net income (loss) $1.58 $1.52 $1.60 $1.45 ($0.25)Dividends $1.695 $1.68 $1.665 $1.66 $1.63 (1) See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Funds from operations, which does not represent cash provided by operating activities as defined by generally accepted accounting principles and should not be considered as an alternative to net income as an indicator of the Trust's operating performance or to cash flows as a measure of liquidity, is calculated as follows: 1996 1995 1994 1993 1992 Net income (loss) $14,158,000 $13,584,000 $14,312,000 $12,259,000 ($1,782,000) Depreciation expense 3,554,000 3,315,000 3,127,000 3,023,000 3,052,000 Amortization of interest rate cap 125,000 125,000 62,000 -- -- Provision for investment losses -- -- -- -- 12,467,000 Gain on disposal of assets -- -- -- (371,000) -- ----------- ----------- ----------- ----------- ----------- Total $17,837,000 $17,024,000 $17,501,000 $14,911,000 $13,737,000 =========== =========== =========== =========== =========== At End of Period 1996 1995 1994 1993 1992 Total Assets $148,566,000 $132,770,000 $128,907,000 $126,657,000 $126,885,000 Debt $43,082,000 $26,396,000 $21,283,000 $18,947,000 $49,600,000 12Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSLiquidity and Capital ResourcesThe Trust commenced operations on December 24, 1986. As of December 31, 1996,the Trust had investments in twenty-six facilities located in thirteen statesconsisting of the following: Facility Name Location Type of Facility Guarantor Chalmette Medical Centers: Patricia Street Campus (A) Chalmette, LA Acute Care Universal Health Services, Inc. Virtue Street Campus (A) Chalmette, LA Rehabilitation Universal Health Services, Inc.Inland Valley Regional Medical Ctr. (A) Wildomar, CA Acute Care Universal Health Services, Inc.McAllen Medical Center (A) McAllen, TX Acute Care Universal Health Services, Inc.Meridell Achievement Center (A) Austin, TX Behavioral Health Universal Health Services, Inc.The BridgeWay (A) N.Little Rock, AR Behavioral Health Universal Health Services, Inc.Wellington Regional Medical Center (A) W.Palm Beach, FL Acute Care Universal Health Services, Inc.THC-Chicago (B) Chicago, IL Sub-Acute Care Community Psychiatric Ctrs.Tri-State Rehabilitation Hospital (B) Evansville, IN Rehabilitation HEALTHSOUTH CorporationMadison Irving Medical Center (C) Syracuse, NY Ambulatory Trmt. Ctr Crouse Irving Memorial HospitalFresno Herndon Medical Plaza (B) Fresno, CA Medical Office Bldg. ---Family Doctor's Medical Office Bldg. (B) Shreveport, LA Medical Office Bldg. Columbia/HCA Healthcare Corp.Kelsey-Seybold Clinic at Kings Crossing (B) Kingwood, TX Medical Office Bldg. Caremark International, Inc.Professional Bldgs. at Kings Crossing (B) Kingwood, TX Medical Office Bldg. ---Chesterbrook Academy (B) Audubon, PA Preschool & Childcare Nobel Education Dynamics & Subs.Carefree Learning Center (B) New Britain, PA Preschool & Childcare Nobel Education Dynamics & Subs.Carefree Learning Center (B) Newtown, PA Preschool & Childcare Nobel Education Dynamics & Subs.Carefree Learning Center (B) Uwchlan, PA Preschool & Childcare Nobel Education Dynamics & Subs.The Southern Crescent Center (B) Riverdale, GA Medical Office Bldg. ---Desert Samaritan Hospital MOBs (D) Phoenix, AZ Medical Office Bldg. ---Suburban Medical Plaza II (E) Louisville, KY Medical Office Bldg. ---Maryvale Samaritan Hospital MOBs (D) Phoenix, AZ Medical Office Bldg. ---Desert Valley Medical Center MOB (F) Phoenix, AZ Medical Office Bldg. ---Cypresswood Professional Center (G) Houston, TX Medical Office Bldg. ---Samaritan West Valley Medical Ctr. (H) Goodyear, AZ MOB, Imaging Ctr. ---Lake Shore Hospital (I) Manchester, NH Unoccupied --- (A) Leased to subsidiaries of Universal Health Services, Inc. (B) Real estate assets owned by the Trust and leased to an unaffiliated third party or parties. (C) The Trust holds a mortgage loan with Crouse Irving Memorial Properties on the real estate assets of this facility. (D) The Trust has 50% equity interest in a limited liability corporation ("LLC") which owns the real estate assets of this facility. (E) The Trust has 33% equity interest in a LLC which owns the real estate assets of this facility. Construction on this facility was completed during the third quarter of 1996. In connection with this property, the Trust posted a $3.5 million standby letter of credit for the benefit of the lender providing the construction financing. The construction loan matures in November, 1997 and the Trust expects the LLC to arrange for permanent financing prior to that date. (F) Trust has 95% equity interest in a LLC which owns the real estate assets of this facility. (G) The Trust is providing construction financing to a limited partnership in which the Trust has a 77% controlling equity interest during the construction period, which increases to 98% upon completion and occupancy of the building. The construction is scheduled to be completed in the third quarter of 1997. In connection with this investment, the Trust made a capital contribution of $343,000 to the limited partnership that will develop and own this facility. (H) The Trust is providing construction financing to a LLC in which the Trust has 50% equity interest during the construction period, which increases to 70% upon completion and occupancy of the building. The construction is scheduled to be completed in the fourth quarter of 1997. 13 (I) The Trust received free and clear title to the real estate assets of Lake Shore Hospital during 1995. The Trust continues to actively negotiate with third parties interested in purchasing or leasing the real estate assets of the Lake Shore facility.It is the Trust's intention to declare quarterly dividends to the holders of itsshares of beneficial interest so as to comply with applicable sections of theInternal Revenue Code governing real estate investment trusts. Convenantsrelating to the revolving credit facility limit the Trust's ability to increasedividends in excess of 95% of cash available for distribution unless additionaldistributions are required to be made to comply with applicable sections of theInternal Revenue Code and related regulations governing real estate investmenttrusts. During 1996, dividends of $1.695 per share, or $15,174,000 in theaggregate, were declared and paid.Net cash generated by operating activities was $18.0 million in 1996, $17.1million in 1995 and $18.2 million in 1994. The $900,000 net increase in 1996 ascompared to 1995 was due primarily to a $1 million increase in net income plusthe addback of the non-cash charges (depreciation, amortization, reserve forinvestment losses and amortization of interest rate cap expense). The $1.1million net decrease in 1995 as compared to 1994 was attributable to: (i) the$1.5 million of cash received during 1994 related to the settlement agreement onLake Shore Hospital; (ii) a $300,000 increase in the payment of expenses relatedto Lake Shore Hospital during 1995 as compared to 1994, and; (iii) a $700,000favorable increase in 1995 over 1994 in operating cash flows generated from theremainder of the Trust's portfolio.During 1996, the $18.0 million of cash flows generated from operations and the$16.6 million of additional borrowings were used primarily to: (i) pay dividends($15.2 million); (ii) purchase additional real property ($10.2 million, see Note3); (iii) purchase equity interest in various limited liability corporations($7.6 million, see Note 3), and; (iv) begin construction on two new medical office buildings which will be owned by limited liability corporations andlimited partnerships in which the Trust will own equity interests ($1.6 million,see Note 3).During 1995, the $17.1 million of cash flows generated from operations and the$5.1 million of additional borrowings were used primarily to: (i) pay dividends($15.0 million); (ii) purchase additional real property including three medicaloffice buildings ($4.8 million, net, see Note 3), and; (iii) purchase additionalassets at hospitals operated by UHS and owned by the Trust ($1.9 million, seeNote 3). During 1994, the $18.2 million of cash flows generated from operationswere used primarily to pay dividends ($14.9 million) and purchase the realproperty of a medical building held for lease ($6.3 million, see Note 3).The Trust amended and restated its unsecured non-amortizing revolving creditagreement (the "Agreement") in 1996. The Agreement, which expires on September30, 2001, provides for $70 million in borrowing capacity. The Agreement providesfor interest at the Trust's option, at the certificate of deposit rate plus 3/4%to 1 1/8%, Eurodollar rate plus 5/8% to 1 1/8% or the prime rate. A fee of .15%to .375% is required on the unused portion of this commitment. The margins overthe certificate of deposit rate, Eurodollar rate and the commitment fee arebased upon the Trust's debt to cash flow ratio as defined by the agreement. AtDecember 31, 1996 the applicable margin over the certificate of deposit andEurodollar rates were 7/8% and 3/4%, respectively, and the commitment fee was .20%. There are no compensating balance requirements. The Agreement contains aprovision whereby the commitments will be reduced by 50% of the proceedsgenerated from any new equity offering. At December 31, 1996, the Trust hadapproximately $25 million of available borrowing capacity. 14Covenants relating to the revolving credit facility require the maintenance of aminimum tangible net worth and specified financial ratios, limit the Trust'sability to incur additional debt, limit the aggregate amount of mortgagereceivables and limit the Trust's ability to increase dividends in excess of 95%of cash available for distribution, unless additional distributions are requiredto comply with the applicable section of the Internal Revenue Code and relatedregulations governing real estate investment trusts.The Trust has entered into interest rate swap agreements and an interest ratecap agreement which are designed to reduce the impact of changes in interestrates on its floating rate revolving credit notes. The Trust has threeoutstanding swap agreements, two in the amount of $5 million each which maturein April, 1997, and May, 1999, and another in the amount of $1,580,000 whichmatures May, 2001. These swap agreements effectively fix the interest rate on$11,580,000 of variable rate debt at 7.55%. The interest rate cap, for which theTrust paid $622,750, (unamortized premium of $311,000 at December 31, 1996)matures in June, 1999 and fixes the maximum rate on $15 million of variable raterevolving credit notes at 7.75%. The interest rate swap and cap agreements wereentered into in anticipation of certain borrowing transactions made by the Trustduring 1994, 1995 and 1996. The effective rate on the Trust's revolving creditnotes including commitment fees and interest rate swap expense was 6.8%, 7.5%and 6.7% during 1996, 1995 and 1994, respectively. Additional interest expenserecorded as a result of the Trust's hedging activity was $130,000, $69,000 and$109,000 in 1996, 1995 and 1994, respectively. The Trust is exposed to creditloss in the event of nonperformance by the counterparties to the interest rateswap and cap agreements. These counterparties are major financial institutionsand the Trust does not anticipate nonperformance by the counterparties which arerated A or better by Moody's Investors Service. Termination of the interest rateswaps at December 31, 1996 would have resulted in payments to the counterpartiesof approximately $202,000 and termination of the interest rate cap would haveresulted in a payment to the Trust of approximately $73,000. The fair value ofthe interest rate swap and cap agreements at December 31, 1996 reflects theestimated amounts that the Trust would pay or receive to terminate the contractsand are based on quotes from the counterparties.General The matters discussed in this report as well as the news releases issued fromtime to time by the Trust contain certain forward-looking statements thatinvolve risks and uncertainties, including the fact that a substantial portionof the Trust's revenues are dependent on one operator, Universal HealthServices, Inc., and that a substantial portion of the Trust's leases andmortgagors are involved in the healthcare industry which is undergoingsubstantial changes and is subject to pressure from government reimbursementprograms and other third party payors. In recent years, an increasing number oflegislative initiatives have been introduced or proposed in Congress and instate legislatures that would effect major changes in the healthcare system,either nationally or at the state level. In addition, the healthcare industryhas been characterized in recent years by increased competition andconsolidation. Management of the Trust is unable to predict the effect, if any,these industry factors will have on the operating results of its lessees,including the facilities leased to subsidiaries of UHS, or on their ability tomeet their obligations under the terms of their leases with the Trust. Inaddition, certain of the Trust's facilities leased to subsidiaries of UHS havehad EBITDAR of less than 1.5 times the rent payable to the Trust. (see Note 2).Management of the Trust can not predict whether the leases with subsidiaries ofUHS, which have renewal options at existing lease rates, or any of the Trust'sother leases, will be renewed at the end of their 15initial lease terms. If the leases are not renewed at their current rates, theTrust would be required to find other operators for those facilities and/orenter into leases on terms potentially less favorable to the Trust than thecurrent leases. Results of OperationsTotal revenues increased 7% or $1.5 million to $21.9 million in 1996 as comparedto 1995 and 9% or $1.6 million to $20.4 million in 1995 as compared to 1994. The$1.5 million increase during 1996 over 1995 was primarily attributable to anincrease in base rentals from non-related parties due to the variousacquisitions made by the Trust during the fourth quarter of 1995 and the secondquarter of 1996 (see Note 3). The $1.6 million increase during 1995 as comparedto 1994 was attributable to: (i) a $224,000 increase in base rental from UHSfacilities resulting from the purchase by the Trust of additional real estateassets related to McAllen Medical Center and additional base rental generatedfrom the Westlake Medical Center swap transaction (see Note 3), (ii) a $1.1million increase in base rental from non-related parties resulting from theacquisitions of office buildings in November of 1994 and the third and fourthquarters of 1995 (see Note 3), (iii) a $144,000 increase in bonus rentals, whichare computed as a percentage of each facility's revenue in excess of base yearamounts or CPI increases in excess of base year amounts, and; (iv) a $125,000increase in interest income.The average occupancy rate of a hospital is affected by a number of factors,including the number of physicians using the hospital, changes in the number ofbeds, the composition and size of the population of the community in which thehospital is located, general and local economic conditions, variations in localmedical and surgical practices and the degree of outpatient use of the hospitalservices. Current industry trends in utilization and occupancy have beensignificantly affected by changes in reimbursement policies of third partypayors. A continuation of such industry trends could have a material adverseimpact upon the future operating performance of the Trust's facilities. TheTrust's facilities have experienced growth in outpatient utilization over thepast several years. The increase is primarily the result of advances in medicaltechnologies, which allow more services be provided on an outpatient basis, andincreased pressure from Medicare, Medicaid, health maintenance organizations(HMOs), preferred provider organizations (PPOs) and insurers to reduce hospitalstays and provide services, where possible, on a less expensive outpatientbasis. The Trust expects growth in outpatient services to continue, although therate of growth may be moderated in the future.An increased proportion of the Trust's hospitals revenue is derived from fixed payment services, including Medicare and Medicaid. Management of the Trust'shospitals expects the Medicare and Medicaid revenues to continue to increase asa larger portion of the general population qualifies for coverage as a result ofthe aging population and expansion of the state Medicaid programs. The Medicareprogram reimburses the Trust's hospitals primarily based on established rates bya diagnosis related group for acute care hospitals and by a cost based formulafor behavioral health facilities. In addition to the Medicare and Medicaidprograms, other payors continue to actively negotiate the amounts they will payfor services performed. In general, management of the Trust's hospitals expectsthe percentage of its business from managed care programs, including HMOs andPPOs to grow. The consequent growth in managed networks and the resulting impactof these networks on the operating results of the Trust's facilities vary amongthe market in which the Trust's facilities operate. Management of the Trust isunable to predict the rate of growth of the net revenues of its facilities andthe resulting impact on bonus revenues, which are computed as a percentage ofeach facility's net revenues in excess of base year amounts or CPI increases inexcess of base year amounts, because the net revenues of the Trust's facilitiesare dependent upon 16developments in medical technologies and physician practice patterns, both ofwhich are beyond the control of management of the facilities.In addition to the trends described above that continue to have an impact on therevenues of the Trust's facilities, there are a number of other, more generalfactors affecting the Trust's facilities. In February 1997, the Presidentsubmitted his fiscal year 1998 budget plan which calls for a $100 billionreduction in the rate of increase in Medicare spending over the next five yearsand a $138 billion reduction over six years. Included in this proposal arereductions in the future rate of increases to payments made to hospitals. BothRepublicans and Democrats are working towards a balanced budget by the year 2002and it is likely that future budgets will contain certain reductions in the rateof increase of Medicare and Medicaid spending. The Trust cannot predict whetherthe above proposal or any other proposals will be adopted, and if adopted, noassurance can be given that the implementation of such plans will not have amaterial adverse effect on the operating results of the Trust's facilities.Interest expense increased $740,000 or 41% in 1996 as compared to 1995 dueprimarily to the additional borrowings used to finance the purchase of equityinterests in various limited liability corporations and limited partnershipsduring the first and second quarters of 1996, the purchase of the four preschooland child-care centers during the second quarter of 1996, and the medical officebuildings acquired by the Trust during the third and fourth quarters of 1996(see Note 3). Interest expense increased $679,000 or 59% in 1995 over 1994 dueprimarily to the increased borrowings used to finance the purchase of themedical office buildings in Kingwood, Texas and Shreveport, Louisiana and thepurchase of an additional $1.9 million of real assets related to McAllen MedicalCenter. Also contributing to the increased interest expense in 1995 as comparedto 1994 was the $6.3 million of additional borrowings used to finance thepurchase of the Fresno-Herndon Medical Plaza in November of 1994.Depreciation and amortization expense increased $254,000 or 8% in 1996 ascompared to 1995 due primarily to the depreciation expense related to the 1996and 1995 acquisitions described in Note 3. Depreciation and amortization expenseincreased $100,000 or 3% in 1995 as compared to 1994 due to: (i) a $188,000increase in depreciation expense related primarily to the purchase of themedical office buildings and additional real estate assets purchased in 1995, asmentioned above, and a full year of depreciation expense recorded on theFresno-Herndon MOB which was purchased by the Trust in December of 1994, and;(ii) an $88,000 decrease in amortization of financing costs related to the oldrevolving credit agreement.Other operating expenses increased $476,000 or 70% in 1996 as compared to 1995due primarily to the expenses related to the medical office buildings acquiredby the Trust during the fourth quarter of 1995 and the second quarter of 1996and a $220,000 increase in the reserve established for future expenses related to the settlement of Lake Shore Hospital. As of December 31, 1996, the balancein the Lake Shore Hospital reserve account was $151,000. The expenses related tothe medical office buildings, which totaled $551,000 in 1996 and $290,000 in1995, are passed on directly to the tenants and are included as revenue in theTrust's statements of income. Other operating expenses increased $262,000 or 64%in 1995 as compared to 1994 due primarily to the expenses related to theFresno-Herndon Medical Plaza which was acquired by the Trust in November of1994. 17Included in the financial results for 1994, and recorded as recovery ofinvestment losses was $1,234,000 consisting of $1.5 million of cash paymentsreceived related to the Lake Shore Hospital settlement agreement and $184,000 ofproceeds received during 1994 related to an investment in marketable equitysecurities which was written down to zero in a prior year. Partially offsettingthese amounts was a $450,000 increase in the reserve established for futureexpenses related to the settlement of Lake Shore Hospital.Net income for 1996 was $14.2 million or $1.58 per share compared to $13.6million or $1.52 per share in 1995 and $14.3 million or $1.60 per share in 1994.Funds from operations ("FFO"), which is the sum of net income plus depreciationexpense and amortization of interest rate cap expense, totaled $17.8 million in1996, $17.0 million in 1995 and $17.5 million in 1994. FFO does not representcash flows from operations as defined by generally accepted accountingprinciples and should not be considered as an alternative to net income as anindicator of the Trust's operating performance or to cash flows as a measure ofliquidity.Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe Trust's Balance Sheets and its Statements of Income, Changes inShareholders' Equity and Cash Flows, together with the report of Arthur AndersenLLP, independent public accountants, are included elsewhere herein. Reference ismade to the "Index to Financial Statements and Schedules."Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURENot applicable. 18 PART IIIItem 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTThere is hereby incorporated by reference the information to appear under thecaption "Election of Trustees" in the Trust's definitive Proxy Statement to befiled with the Securities and Exchange Commission within 120 days after December31, 1996. See also "Executive Officers of the Registrant" appearing in Part Ihereof.Item 11. EXECUTIVE COMPENSATIONThere is hereby incorporated by reference the information under the caption"Executive Compensation" and "Compensation Pursuant to Plans" in the Trust'sdefinitive Proxy Statement to be filed with the Securities and ExchangeCommission within 120 days after December 31, 1996.Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There is hereby incorporated by reference the information under the caption"Security Ownership of Certain Beneficial Owners and Management" in the Trust'sdefinitive Proxy Statement to be filed with the Securities and ExchangeCommission within 120 days after December 31, 1996.Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSThere is hereby incorporated by reference the information under the caption"Transactions With Management and Others" in the Trust's definitive ProxyStatement to be filed with the Securities and Exchange Commission within 120days after December 31, 1996. 19 PART IVItem 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K(a) Financial Statements and Financial Statement Schedules: 1) Report of Independent Public Accountants 2) Financial Statements Consolidated Balance Sheets - December 31, 1996 and December 31, 1995. Consolidated Statements of Income - Years Ended December 31, 1996, 1995 and 1994. Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements - December 31, 1996 (3) Schedules Schedule II - Valuation and Qualifying Accounts - Years Ended December 31, 1996, 1995 and 1994. Schedule III - Real Estate and Accumulated Depreciation - December 31, 1996. Notes to Schedule III - December 31, 1996.(b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the year ended December 31, 1996.(c) Exhibits: 3.1 Declaration of Trust, dated as of August 1986, previously filed asExhibit 3.1 Amendment No. 3 of the Registration Statement on Form S-11 and FormS-2 of Universal Health Services, Inc. and the Trust (Registration No. 33-7872),is incorporated herein by reference. 3.2 Amendment to Declaration of Trust, dated as of June 23, 1993,previously filed as Exhibit 3.2 to the Trust's Annual Report on Form 10-K forthe year ended December 31, 1993, is incorporated herein by reference. 3.3 Amended and restated bylaws, filed as Exhibit 3.2 to the Trust's AnnualReport on Form 10-K for the year ended December 31, 1988, is incorporated hereinby reference. 10.1 Advisory Agreement, dated as of December 24, 1986, between UHS ofDelaware, Inc. and The Trust, previously filed as Exhibit 10.2 to the Trust'sCurrent Report on Form 8-K dated December 24, 1986, is incorporated herein byreference. 20 10.2 Agreement effective January 1, 1997, to renew Advisory Agreement datedas of December 24, 1986 between Universal Health Realty Income Trust and UHS ofDelaware, Inc. 10.3 Contract of Acquisition, dated as of August 1986, between the Trustand certain subsidiaries of Universal Health Services, Inc., previously filed asExhibit 10.2 to Amendment No. 3 of the Registration Statement on Form S-11 andS-2 of Universal Health Services, Inc. and the Trust (Registration No. 33-7872),is incorporated herein by reference. 10.4 Form of Leases, including Form of Master Lease Document Leases,between certain subsidiaries of Universal Health Services, Inc. and the Trust,previously filed as Exhibit 10.3 to Amendment No. 3 of the RegistrationStatement on Form S-11 and Form S-2 of Universal Health Services, Inc. and theTrust (Registration No. 33-7872), is incorporated herein by reference. 10.5 Share Option Agreement, dated as of December 24, 1986, between theTrust and Universal Health Services, Inc., previously filed as Exhibit 10.4 tothe Trust's Current Report on Form 8-K dated December 24, 1986, is incorporatedherein by reference. 10.6 Corporate Guaranty of Obligations of Subsidiaries Pursuant to Leasesand Contract of Acquisition, dated December 1986, issued by Universal HealthServices, Inc. in favor of the Trust, previously filed as Exhibit 10.5 to theTrust's Current Report on Form 8-K dated December 24, 1986, is incorporatedherein by reference. 10.7 Contract of Acquisition dated August 31, 1988 between the Trust, RehabSystems Company, Inc. and Tri-State Regional Rehabilitation Hospital, Inc.,previously filed as Exhibit 10.2 to the Trust's September 30, 1988 Form 10-Q, isincorporated herein by reference. 10.8 Key Employees' Restricted Share Purchase Plan approved by the Trusteeson December 1, 1988 which authorized the issuance of up to 50,000 common shares,previously filed as Exhibit 10.11 to the Trust's Annual Report on form 10-K forthe year ended December 31, 1988, is incorporated herein by reference. 10.9 Share Compensation Plan for Outside Trustees, previously filed asExhibit 10.12 to the Trust's Annual Report on Form 10-K for the year endedDecember 31, 1991, is incorporated herein by reference. 10.10 1988 Non-Statutory Stock Option Plan, as amended, previously filed asExhibit 10.13 to the Trust's Annual Report on Form 10-K for the year endedDecember 31, 1991, is incorporated herein by reference. 10.11 Lease dated December 22, 1993, between Universal Health Realty IncomeTrust and THC-Chicago, Inc. as lessee, previously filed as Exhibit 10.14 to theTrust's Annual Report on Form 10-K for the year ended December 31, 1993, isincorporated herein by reference. 10.12 Mortgage Modification, Consolidation and Extension Agreement andConsolidated Note dated December 28, 1993 in the amount of $6,500,000 fromCrouse Irving Memorial Properties, Inc. to Universal Health Realty Income Trust,previously filed as Exhibit 10.15 to the Trust's Annual Report on Form 10-K forthe year ended December 31, 1993, is incorporated herein by reference. 21 10.13 Agreement for Purchase and Sale and Repurchase Agreement dated as ofNovember 4, 1994 between Fresno-Herndon Partners, Limited and Universal HealthRealty Income Trust, previously filed as Exhibit 10.16 to the Trust's AnnualReport on Form 10-K for the year ended December 31, 1994, is incorporated hereinby reference. 10.14 Agreement of Purchase and Sale, and Construction Loan Agreement datedas of December 20, 1994 between Turner Adreac, L.C. and Universal Health Realty Income Trust, previously filed as Exhibit 10.17 to the Trust's Annual Report onForm 10-K for the year ended December 31, 1994, is incorporated herein byreference. 10.15 Sale Agreement, dated as of September 1, 1995, by and among UniversalHealth Realty Income Trust and Desert Commercial Properties Limited Partnership,previously filed as Exhibit 10.18 to the Trust's Annual Report on Form 10-K forthe year ended December 31, 1996, is incorporated herein by reference. 10.16 Operating Agreement of DSMB Properties, L.L.C., dated as of September1, 1995, by and among Universal Health Realty Income Trust and Desert CommercialProperties Limited Partnership, previously filed as Exhibit 10.19 to the Trust'sAnnual Report on Form 10-K for the year ended December 31, 1996, is incorporatedherein by reference. 10.17 Agreement and Escrow Instructions, dated as of August 15, 1995, byand between Phase III Desert Samaritan Medical Building Partners and DesertCommercial Properties Limited Partnership, previously filed as Exhibit 10.20 tothe Trust's Annual Report on 10-K for the year ended December 31, 1996, isincorporated herein by reference. 10.18 Amendment to Credit Agreement dated as of September 27, 1996 by andamong Universal Health Realty Income Trust, Corestates Bank, N.A. as agent,NationsBank, N.A, and First Union National Bank, previously filed as Exhibit10.1 to the Trust's Form 10-Q for the quarter ended September 30, 1996, isincorporated herein by reference. 27 Financial Data Schedule 28.1 Dividend Reinvestment Plan for Stockholders, previously filed asExhibit 28.1 to the Trust's Form 10-Q for the quarter ended March 31, 1987, isincorporated herein by reference. 22 SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. Date: March 6, 1997 UNIVERSAL HEALTH REALTY INCOME TRUST (Registrant) By: /s/ Alan B. Miller Alan B. Miller, Chairman of the Board and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this reporthas been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated. Date Signature and Title /s/ Alan B. Miller March 6, 1997 Alan B. Miller, Chairman of the Board and Chief Executive Officer /s/ Kirk E. Gorman March 6, 1997 Kirk E. Gorman, President, Chief Financial Officer, Secretary and Trustee /s/ Peter Linneman March 10, 1997 Peter Linneman, Trustee /s/ Myles H. Tanenbaum March 10, 1997 Myles H. Tanenbaum, Trustee /s/ Michael R. Walker March 10, 1997 Michael R. Walker, Trustee /s/ Daniel M. Cain March 10, 1997 Daniel M. Cain, Trustee /s/ Charles F. Boyle March 7, 1997 Charles F. Boyle, Vice President and Controller /s/ Cheryl K. Ramagano March 7, 1997 Cheryl K. Ramagano, Vice President and Treasurer /s/ Timothy J. Fowler March 10, 1997 Timothy J. Fowler, Vice President, Acquisitions and Development 23 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Page Report of Independent Public Accountants F-2 Consolidated Balance Sheets - December 31, 1996 and December 31, 1995 F-3 Consolidated Statements of Income - Years Ended December 31, 1996, 1995 and 1994 F-4 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1996, 1995 and 1994 F-5 Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 F-6 Notes to Consolidated Financial Statements - December 31, 1996 F-7 Schedule II - Valuation and Qualifying Accounts - Years Ended December 31, 1996, 1995 and 1994 F-17 Schedule III - Real Estate and Accumulated Depreciation - December 31, 1996 F-18 Notes to Schedule III - December 31, 1996 F-19 F-1 Report of Independent Public AccountantsTo The Shareholders and Board of Trustees ofUniversal Health Realty Income Trust:We have audited the accompanying consolidated balance sheets of Universal HealthRealty Income Trust (a Maryland real estate investment trust) as of December 31,1996 and 1995 and the related consolidated statements of income, changes inshareholders' equity and cash flows for each of the three years in the periodended December 31, 1996. These financial statements and the schedules referred to below are the responsibility of the Trust's management. Our responsibility isto express an opinion on these financial statements and schedules based on ouraudits.We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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, inall material respects, the consolidated financial position of Universal HealthRealty Income Trust, as of December 31, 1996 and 1995 and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 1996, in conformity with generally acceptedaccounting principles.Our audits were made for the purpose of forming an opinion on the basicfinancial statements taken as a whole. The schedules listed in the Index toFinancial Statements and Schedules on Page F-1 are presented for the purpose ofcomplying with the Securities and Exchange Commission's rules and are not arequired part of the basic financial statements. These schedules have beensubjected to the auditing procedures applied in our audit of the basic financialstatements and, in our opinion, fairly state in all material respects thefinancial data required to be set forth therein in relation to the basicfinancial statements taken as a whole.Philadelphia, PennsylvaniaJanuary 17, 1997 F-2 Universal Health Realty Income Trust Consolidated Balance Sheets December 31, 1996 1995Assets: Real Estate Investments: Buildings & improvements $138,400,000 $129,961,000 Accumulated depreciation (26,540,000) (22,986,000) ------------- ------------- 111,860,000 106,975,000 Land 19,683,000 17,927,000 Mortgage loans receivable, net 6,405,000 6,444,000 Construction loan receivable 391,000 -- Construction in progress 1,246,000 -- Reserve for investment losses (151,000) (158,000) ------------- ------------- Net Real Estate Investments 139,434,000 131,188,000Other Assets: Cash 137,000 139,000 Bonus rent receivable from UHS 634,000 606,000 Rent receivable from non-related parties 32,000 13,000 Construction and mortgage loan interest receivable 7,000 -- Investments in limited liability corporations 7,932,000 308,000 Deferred charges, net 390,000 516,000 ------------- ------------- $148,566,000 $132,770,000 ============= =============Liabilities and Shareholders' Equity:Liabilities: Bank borrowings $42,000,000 $25,375,000 Note payable to UHS 1,082,000 1,021,000 Accrued interest 234,000 157,000 Accrued expenses & other liabilities 753,000 676,000 Tenant reserves, escrows, deposits and deferred rental 515,000 544,000Commitments and ContingenciesShareholders' Equity: Preferred shares of beneficial interest, $.01 par value; 5,000,000 shares authorized; none outstanding -- -- Common shares, $.01 par value; 95,000,000 shares authorized; issued and outstanding: 8,952,340 shares in 1996 and 8,947,192 shares in 1995 90,000 89,000 Capital in excess of par value 128,643,000 128,643,000 Cumulative net income 98,154,000 83,996,000 Cumulative dividends (122,905,000) (107,731,000) ------------- ------------- Total Shareholders' Equity 103,982,000 104,997,000 ------------- ------------- $148,566,000 $132,770,000 ============= =============The accompanying notes are an integral part of these financial statements F-3 Universal Health Realty Income Trust Consolidated Statements of Income Year ended December 31, 1996 1995 1994Revenues (Note 2): Base rental - UHS facilities $13,731,000 $13,491,000 $13,267,000 Base rental - Non-related parties 4,706,000 3,195,000 2,097,000 Bonus rental 2,735,000 2,773,000 2,629,000 Interest 751,000 958,000 833,000 ------------ ------------ ------------ 21,923,000 20,417,000 18,826,000 ------------ ------------ ------------Expenses: Depreciation & amortization 3,636,000 3,382,000 3,282,000 Interest expense 2,565,000 1,825,000 1,146,000 Advisory fees to UHS (Note 2) 1,044,000 953,000 909,000 Other operating expenses 1,149,000 673,000 411,000 Recovery of investment losses -- -- (1,234,000) ------------ ------------ ------------ 8,394,000 6,833,000 4,514,000 ------------ ------------ ------------ Income before equity in limited liability corporations 13,529,000 13,584,000 14,312,000 Equity in income of limited liability corporations 629,000 -- -- ------------ ------------ ------------ Net Income $14,158,000 $13,584,000 $14,312,000 ============ ============ ============ Net Income Per Share $1.58 $1.52 $1.60 ============ ============ ============ Weighted average number of shares and equivalents 8,960,000 8,947,000 8,947,000 ============ ============ ============The accompanying notes are an integral part of these financial statements. F-4 Universal Health Realty Income Trust Consolidated Statements of Shareholders' Equity For the Years Ended December 31, 1996, 1995 and 1994 Common Shares Capital in Number excess of Cumulative Cumulative of Shares Amount par value net income dividends January 1, 1994 8,947,192 $89,000 $128,643,000 $56,100,000 ($77,802,000) Net Income -- -- -- 14,312,000 --Dividends ($1.665/share) -- -- -- -- (14,897,000)- --------------------------------------------------------------------------------------------------------------January 1, 1995 8,947,192 89,000 128,643,000 70,412,000 (92,699,000)Net Income -- -- -- 13,584,000 --Dividends ($1.68/share) -- -- -- -- (15,032,000)- --------------------------------------------------------------------------------------------------------------January 1, 1996 8,947,192 89,000 128,643,000 83,996,000 (107,731,000)Net Income -- -- -- 14,158,000 --Issuance of shares ofbeneficial interest 5,148 1,000 -- -- --Dividends ($1.695/share) -- -- -- -- (15,174,000)============================================================================================================== December 31, 1996 8,952,340 $90,000 $128,643,000 $98,154,000 ($122,905,000)==============================================================================================================The accompanying notes are an integral part of these financial statements. F-5 Universal Health Realty Income Trust Consolidated Statements of Cash Flows Year ended December 31, 1996 1995 1994 Cash flows from operating activities: Net income $14,158,000 $13,584,000 $14,312,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 3,636,000 3,382,000 3,282,000 Reserve for investment losses 220,000 -- 450,000 Amortization of interest rate cap 125,000 125,000 62,000 Loss on disposal of assets -- -- 15,000 Gain on investment in marketable securities -- -- (184,000) Changes in assets and liabilities: Rent receivable (47,000) 70,000 80,000 Accrued expenses & other liabilities 77,000 (22,000) 57,000 Tenant escrows, deposits & deferred rents (29,000) 180,000 92,000 Construction & mortgage loan interest receivable (7,000) 3,000 11,000 Accrued interest 77,000 40,000 78,000 Reserve for investment losses (227,000) (332,000) (37,000) Deferred charges & other 20,000 43,000 (19,000) ------------ ------------ ------------ Net cash provided by operating activities 18,003,000 17,073,000 18,199,000 ------------ ------------ ------------Cash flows from investing activities: Acquisition of real property (10,195,000) (7,794,000) (6,340,000) Investments in limited liability corporations (7,624,000) (308,000) -- Payments made for construction in progress (1,246,000) -- -- Advances under construction note receivable (391,000) (3,190,000) (1,727,000) Repayments under construction note receivable -- 4,333,000 2,759,000 Proceeds from investments in marketable securities -- -- 184,000 Sale of real property -- -- 40,000 Other -- -- 272,000 ------------ ------------ ------------ Net cash used in investing activities (19,456,000) (6,959,000) (4,812,000) ------------ ------------ ------------Cash flows from financing activities: Additional borrowings, net of financing costs 16,625,000 5,055,000 2,091,000 Purchase of interest rate cap -- -- (623,000) Dividends paid (15,174,000) (15,032,000) (14,897,000) ------------ ------------ ------------ Net cash provided by (used in) financing activities 1,451,000 (9,977,000) (13,429,000) ------------ ------------ ------------ (Decrease) increase in cash (2,000) 137,000 (42,000) Cash, beginning of period 139,000 2,000 44,000 ============ ============ ============ Cash, end of period $137,000 $139,000 $2,000 ============ ============ ============Supplemental disclosures of cash flow information: Interest paid $2,302,000 $1,602,000 $1,012,000 ============ ============ ============Supplemental disclosures of non-cash investing and financing activities: See Notes 3 and 5The accompanying notes are an integral part of these financial statements F-6 Universal Health Realty Income Trust Notes to the Consolidated Financial Statements December 31, 1996(1) Summary of Significant Accounting PoliciesNature of OperationsUniversal Health Realty Income Trust (the "Trust") is organized as a Marylandreal estate investment trust. As of December 31, 1996 the Trust had investmentsin twenty-six facilities located in thirteen states consisting of investments inhealthcare and human service related facilities including acute care hospitals,behavioral healthcare facilities, rehabilitation hospitals, sub-acute carefacilities, surgery centers, childcare centers and medical office buildings,seven of which are leased to subsidiaries of Universal Health Services, Inc.,("UHS").Federal Income TaxesNo provision has been made for Federal income tax purposes since the Trustqualifies as a real estate investment trust under Sections 856 to 860 of theInternal Revenue Code of 1986, and intends to continue to remain so qualified.As such, it is required to distribute at least 95 percent of its real estateinvestment taxable income to its shareholders.The Trust is subject to a Federal excise tax computed on a calendar year basis.The excise tax equals 4% of the excess, if any, of 85% of the Trust's ordinaryincome plus 95% of any capital gain income for the calendar year over cashdistributions during the calendar year, as defined. No provision for excise taxhas been reflected in the financial statements as no tax was due.Earnings and profits, which will determine the taxability of dividends toshareholders, will differ from net income reported for financial reportingpurposes due to the differences for Federal tax purposes in the cost basis ofassets and in the estimated useful lives used to compute depreciation and therecording of provision for investment losses.Real Estate PropertiesThe Trust records acquired real estate at cost and uses the straight-line methodof depreciation for buildings and improvements over estimated useful lives of 25to 45 years.It is the Trust's policy to review the carrying value of long-lived assets forimpairment whenever events or changes in circumstances indicate that thecarrying value of such assets may not be recoverable. In 1995, the FinancialAccounting Standards Board released Statement of Financial Accounting Standards(SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed of." The Statement requires the recognition ofan impairment loss for an asset held for use when the estimate of undiscountedfuture cash flows expected to be generated by the asset is less than itscarrying amount. Measurement of the impairment loss is based on fair value ofthe asset. Generally, fair value will be determined using valuation techniquessuch as the present value of expected future cash flows. The Trust adopted theprovisions of SFAS No. 121 in 1996, however, the adoption of the pronouncementdid not have any effect on its financial statements. F-7The Trust invests primarily in healthcare-related facilities and, therefore, issubject to certain industry risk factors, which directly impact the operatingresults of its lessees. In recent years, an increasing number of legislativeinitiatives have been introduced or proposed in Congress and in statelegislatures that would effect major changes in the healthcare system, either nationally or at the state level. In addition, the healthcare industry has beencharacterized in recent years by increased competition and consolidation.In assessing the carrying value of the Trust's real estate investments forpossible impairment in connection with the adoption of SFAS No. 121 in 1996,management reviewed estimates of future cash flows expected from each of itsfacilities and evaluated the creditworthiness of its lessees based on theircurrent operating performance and on current industry conditions.Management of the Trust is unable to predict the effect, if any, that theindustry factors discussed above will have on the operating results of itslessees or on their ability to meet their obligations under the terms of theirleases with the Trust. In addition, management of the Trust cannot predictwhether any of the leases will be renewed. As a result, management's estimate offuture cash flows from its leased properties could be materially affected in thenear term, if certain of the legislative proposals are adopted or if certain ofthe leases are not renewed at the end of their initial lease terms.Investments in Limited Liability CorporationsThe consolidated financial statements of the Trust include the accounts of itscontrolled investments. In accordance with the American Institute of CertifiedPublic Accountants' Statement of Position 78-9 "Accounting for Investments inReal Estate Ventures", the Trust accounts for its investment in limitedliability corporations which it does not control using the equity method ofaccounting. These investments, which represent 33% to 95% non-controllingownership interests, are recorded initially at the Trust's cost and subsequentlyadjusted for the Trust's net equity in income and cash contributions anddistributions.Per Share DataNet income per share is based on the weighted average number of shares ofbeneficial interest outstanding during the year adjusted to give effect to shareequivalents, consisting of stock options.Statements of Cash FlowsFor purposes of the Consolidated Statements of Cash Flows, the Trust considersall highly liquid investment instruments with original maturities of threemonths or less to be cash equivalents.Interest Rate Protection AgreementsIn managing interest rate exposure, the Trust at times enters into interest rateswap agreements and interest rate cap agreements. When interest rates change,the differential to be paid or received under the Trust's interest rate swapagreements is accrued as interest expense. Premiums paid for purchased interestrate cap agreements are amortized to interest expense over the terms of thecaps. Unamortized premiums are included in deferred charges in the accompanyingbalance sheet. Amounts receivable under the cap agreements is accrued as areduction of interest expense. F-8Use of EstimatesThe preparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.ReclassificationsCertain prior year amounts have been reclassified to conform with current year financial statement presentation.(2) Related Party TransactionsUHS of Delaware, Inc. (the "Advisor"), a wholly-owned subsidiary of UHS, servesas Advisor to the Trust under an Advisory Agreement dated December 24, 1986between the Advisor and the Trust (the "Advisory Agreement"). Under the AdvisoryAgreement, the Advisor is obligated to present an investment program to theTrust, to use its best efforts to obtain investments suitable for such program(although it is not obligated to present any particular investment opportunityto the Trust), to provide administrative services to the Trust and to conductthe Trust's day-to-day affairs. In performing its services under the AdvisoryAgreement, the Advisor may utilize independent professional services, includingaccounting, legal and other services, for which the Advisor is reimburseddirectly by the Trust. The Advisory Agreement expires on December 31 of eachyear; however, it is renewable by the Trust, subject to a determination by theIndependent Trustees that the Advisor's performance has been satisfactory. TheAdvisory Agreement may be terminated for any reason upon sixty days writtennotice by the Trust or the Advisor. The Advisory Agreement has been renewed for1997. All transactions with UHS must be approved by the Independent Trustees.The Advisory Agreement provides that the Advisor is entitled to receive anannual advisory fee equal to .60% of the average invested real estate assets ofthe Trust, as derived from its consolidated balance sheet from time to time. Inaddition, the Advisor is entitled to an annual incentive fee equal to 20% of theamount by which cash available for distribution to shareholders, as defined inthe Advisory Agreement, for each year exceeds 15% of the Trust's equity as shownon its balance sheet, determined in accordance with generally acceptedaccounting principles without reduction for return of capital dividends. Noincentive fees were paid during 1996, 1995 and 1994. The advisory fee is payablequarterly, subject to adjustment at year end based upon audited financialstatements of the Trust.For the years ended December 31, 1996, 1995 and 1994, 74%, 79% and 83%,respectively, of the Trust's gross revenues were earned under the terms of theleases with wholly-owned subsidiaries of UHS. The leases to subsidiaries of UHSare guaranteed by UHS and cross-defaulted with one another.For the year ended December 31, 1996, two of the UHS facilities did not generatesufficient earnings before interest, taxes, depreciation, amortization and leaseand rental expense (EBITDAR) to cover the 1996 rent expense payable to theTrust. The leases on these facilities, which mature in 2000 and 2001, generated18% of the Trust's 1996 rental income. One F-9additional UHS facility had 1996 EBITDAR which was less than 1.5 times the 1996rent payable to the Trust. The lease on this facility, which matures in 2001,generated 10% of the Trust's 1996 rental income. One additional UHS facility had1996 EBITDAR (excluding a favorable prior year net revenue adjustment) which wasless than 2.0 times the 1996 rent expense payable to the Trust. The lease onthis facility, which matures in 1999 generated 6% of the Trust's 1996 rentalincome. All of the Trust's remaining hospital facilities, including thefacilities operated by non-related parties, had a combined 1996 EBITDAR of 7.5times (ranging from 2.1 times to 8.9 times) the 1996 rent expense payable to theTrust.In recent years, an increasing number of legislative initiatives have beenintroduced or proposed in Congress and in state legislatures that would effectmajor changes in the healthcare system, either nationally or at the state level.In addition, the healthcare industry had been characterized in recent years byincreased competition and consolidation. Management of the Trust is unable topredict the effect, if any, these industry factors will have on the operatingresults of its lessees, including the facilities leased to subsidiaries of UHS,or on their ability to meet their obligations under the terms of their leaseswith the Trust. As mentioned above, certain of the Trust's facilities leased tosubsidiaries of UHS have had EBITDAR of less than 1.5 times the rent payable to the Trust. Management of the Trust can not predict whether the leases withsubsidiaries of UHS, which have renewal options at existing lease rates, or anyof the Trust's other leases, will be renewed at the end of their initial leaseterms. If the leases are not renewed at their current rates, the Trust would berequired to find other operators for those facilities and/or enter into leaseson terms potentially less favorable to the Trust than the current leases.For the year ended December 31, 1995, one of the UHS facilities did not generatesufficient earnings before interest, taxes, depreciation, amortization and leaseand rental expense (EBITDAR) to cover the 1995 rent expense payable to theTrust. The lease on this facility, which matures in 2001, generated 12% of theTrust's 1995 rental income. Three additional UHS facilities had 1995 EBITDARwhich was less than 1.5 times the 1995 rent expense payable to the Trust. Theleases on these three facilities, which mature in 1999, 2000 and 2001, generatedon a combined basis, 22% of the Trust's 1995 rental income. All of the Trust'sremaining hospital facilities, including the facilities operated by non-relatedparties, had a combined 1995 EBITDAR of 8.1 times (ranging from 2.8 times to10.5 times) the 1995 rent expense payable to the Trust.Revenues received from UHS and from other non-related parties were as follows: Year Ended December 31, 1996 1995 1994 Base rental - UHS facilities $13,731,000 $13,491,000 $13,267,000Base rental - Non-related parties 4,706,000 3,195,000 2,097,000 ------------ ------------ ------------- Total base rental 18,437,000 16,686,000 15,364,000 ----------- ----------- ------------Bonus rental - UHS facilities 2,506,000 2,552,000 2,414,000Bonus rental - Non-related parties 229,000 221,000 215,000 ------------- -------------- ------------- Total bonus rental 2,735,000 2,773,000 2,629,000 ------------ ----------- ------------Interest - Non-related parties 751,000 958,000 833,000 ------------- ------------ ------------ Total revenues $21,923,000 $20,417,000 $18,826,000 =========== =========== ===========At December 31, 1996, approximately 8% of the Trust's outstanding shares ofbeneficial interest were held by UHS. The Trust has granted UHS the option topurchase Trust shares in the future at fair market value to enable UHS tomaintain a 5% interest in the Trust. F-10The Trust has no salaried employees and the Trust's officers are all employeesof UHS and receive no cash compensation from the Trust.(3) Acquisitions and Dispositions1996 - During 1996 the Trust added eleven new investments to its portfolioconsisting of the following: (i) the purchase of a 50% equity interest in alimited liability corporation ("LLC") which owns three medical office buildingslocated on the campus of Desert Samaritan Hospital in Phoenix, Arizona totalingapproximately 219,000 gross square feet and leased to several tenants ($5.0million); (ii) the purchase of four preschool and child-care centers located insoutheastern, Pennsylvania ($3.9 million); (iii) the acquisition of a 33% equityinterest in a LLC which owns a 94,000 square foot medical office buildinglocated on the campus of Columbia/HCA Healthcare Corporation's 260-bed SuburbanMedical Center in Louisville, Kentucky; (iv) the purchase of a 41,400 squarefoot, multi-tenant medical office building adjacent to the Southern RegionalMedical Center in Riverdale, Georgia ($6.2 million); (v) the purchase of a 50%equity interest in a LLC which owns two medical office buildings on the campusof Maryvale Samaritan Hospital located in Phoenix, Arizona ($1.4 million); (vi) the purchase of a 95% equity interest in a LLC which purchased the Desert ValleyMedical Center, a 54,000 net square foot medical office building located on thecampus of the Columbia Paradise Valley Hospital in Phoenix, Arizona ($4.3million including $2.7 million of long-term, non-recourse debt); (vii) theagreement to provide up to $4.1 million of construction financing to a limitedpartnership, of which the Trust owns a 77% initial equity interest, for theconstruction of Cypresswood Professional Center located in Houston, Texas ($1.2million advanced as of December 31, 1996 including a $343,000 capitalcontribution), and; (viii) the agreement to provide up to $5.1 million ofconstruction financing to a LLC (excluding $525,000 of capital to be contributedby the Trust upon completion of the center in the fourth quarter of 1997), ofwhich the Trust owns a 50% initial equity interest, for the construction ofSamaritan West Valley Medical Center located in Goodyear, Arizona ($391,000advanced as of December 31, 1996). In connection with the Trust's acquisition ofa 33% equity interest in the LLC which owns the medical office building on thecampus of Suburban Medical Center, the Trust posted a $3.5 million standbyletter of credit for the benefit of the lender providing the constructionfinancing. The construction loan matures in November, 1997 and the Trust expectsthe LLC, which owns the medical office building, to arrange for permanentfinancing prior to that date. The Trust expects the construction of theCypresswood Professional Center and the Samaritan West Valley Medical Center tobe completed in the third quarter of 1997 and of the fourth quarter of 1997,respectively.1995 - During the third quarter of 1995, the Trust sold the real estate assetsof Westlake Medical Center ("Westlake") a 126-bed hospital, of which themajority of real estate assets were owned by the Trust and leased to UHS. Inexchange for the real estate assets of Westlake and the termination of thelease, the Trust received substitution properties valued at approximately $19million (the Trust's original purchase price of Westlake) consisting ofadditional real estate assets which were owned by UHS but related to three acutecare facilities, of which the Trust owns the real estate and which are operatedby UHS (McAllen Medical Center, Inland Valley Regional Medical Center andWellington Regional Medical Center). These additional real estate assetsrepresent major additions and expansions made to these facilities by UHS sincethe purchase of the facilities by the Trust from UHS in 1986. The Trust alsopurchased from UHS, additional real estate assets related to McAllen MedicalCenter for approximately $1.9 million in cash. F-11Total annual base rental payments from UHS to the Trust on substitutedproperties will be $2.4 million which equals the total base and bonus rentalearned by the Trust on the Westlake facility during 1994 ($2.1 million base and$300,000 bonus). Total annual base rental payments on the additional real estateassets purchased related to McAllen Medical Center will be approximately$200,000. Bonus rental on the substituted and purchased real estate assets willbe equal to 1% of the growth in revenues, in excess of base year amounts,generated by these additional assets. The guarantee by UHS under the existingleases, as amended to include the additional property, will continue.During the third quarter of 1995, the Trust purchased for $1.6 million, amedical office building located on the campus of a hospital owned byColumbia/HCA Healthcare Corporation located in Shreveport, Louisiana. Themedical office building is currently being leased under the terms of a masterlease agreement with Columbia/HCA Healthcare Corporation.In December of 1994, the Trust agreed to provide construction financing for theProfessional Center at Kings Crossing, of which $1.1 million was advanced during1994 and $3.2 million was advanced during 1995. Interest accrued monthly at amargin over the one month LIBOR. During the fourth quarter of 1995, uponcompletion and occupancy of the properties, the Trust purchased the singletenant and two multi-tenant medical office buildings for the total constructioncost of $4.3 million. The single tenant building consists of 20,000 net squarefeet and is leased to Kelsey-Seybold, a subsidiary of Caremark International,Inc., for an initial term of 10 years. The two multi-tenant buildings total27,535 net square feet and are occupied by tenants consisting primarily of medical professionals.1994 - In November of 1994, the Trust purchased the Fresno-Herndon Medical Plazalocated in Fresno, California, for $6.3 million. The 37,800 square foot medicaloffice building is leased to seven tenants, including an outpatient surgerycenter operated by Columbia/HCA Healthcare Corporation, under the terms ofleases with expiration dates ranging from November, 1999 to March, 2003. TheTrust has granted the seller the option to repurchase the property in November,2001 for $7,250,000.(4) LeasesAll of the Trust's leases are classified as operating leases with initial termsranging from 5 to 15 years with up to six 5-year renewal options. Under theterms of the leases, the Trust earns fixed monthly base rents and may earnperiodic additional rents (see Note 2). The additional rent payments aregenerally computed as a percentage of facility net patient revenue or CPIincrease in excess of a base amount. The base year amount is typically netpatient revenue for the first full year of the lease. F-12Minimum future base rents on noncancelable leases are as follows: 1997 $18,505,000 1998 18,545,000 1999 18,585,000 2000 15,285,000 2001 14,096,000 Later Years 9,795,000 ----------- Total Minimum Base Rents $94,811,000 ===========Under the terms of the hospital leases, the lessees are required to pay alloperating costs of the properties including property insurance and real estatetaxes. Tenants of the medical office buildings are required to pay theirpro-rata share of the property's operating costs above a stipulated amount.(5) DebtThe Trust amended and restated its unsecured non-amortizing revolving creditagreement (the "Agreement") in 1996. The Agreement, which expires on September30, 2001, provides for $70 million in borrowing capacity. The Agreement providesfor interest at the Trust's option, at the certificate of deposit rate plus 3/4%to 1 1/8%, Eurodollar rate plus 5/8% to 1 1/8% or the prime rate. A fee of .15%to .375% is required on the unused portion of this commitment. The margins overthe certificate of deposit rate, Eurodollar rate and the commitment fee arebased upon the Trust's debt to cash flow ratio. At December 31, 1996 theapplicable margin over the certificate of deposit and Eurodollar rates were 7/8%and 3/4% respectively and the commitment fee was .20%. There are no compensatingbalance requirements. The Agreement contains a provision whereby the commitmentswill be reduced by 50% of the proceeds generated from any new equity offering.At December 31, 1996, the Trust had approximately $25 million of availableborrowing capacity.The average amounts outstanding under the revolving credit agreement during1996, 1995 and 1994 were $34,410,000, $21,589,000, and $15,218,000,respectively, with corresponding effective interest rates, including commitmentfees but not including the effect of interest rate swaps of 6.3%, 7.2%, and5.3%. The maximum amounts outstanding at any month end were $42,200,000,$25,375,000 and $20,320,000 during 1996, 1995 and 1994, respectively.Covenants relating to the revolving credit facility require the maintenance of aminimum tangible net worth and specified financial ratios, limit the Trust'sability to incur additional debt, limit the aggregate amount of mortgage receivables and limit the Trust's ability to increase dividends in excess of 95%of cash available for distribution, unless additional distributions are requiredto comply with the applicable section of the Internal Revenue Code and relatedregulations governing real estate investment trusts.The Trust has entered into interest rate swap agreements and an interest ratecap agreement which are designed to reduce the impact of changes in interestrates on its floating rate revolving credit notes. The Trust has threeoutstanding swap agreements, two in the amount of $5 million each which maturein April, 1997, and May, 1999, and another in the amount of $1,580,000 whichmatures May, 2001. These swap agreements effectively fix the interest rate on$11,580,000 of variable rate debt at 7.55%. The interest rate cap, for which theTrust paid $622,750, F-13(unamortized premium of $311,000 at December 31, 1996) matures in June, 1999 andfixes the maximum rate on $15 million of variable rate revolving credit notes at7.75%. The interest rate swap and cap agreements were entered into inanticipation of certain borrowing transactions made by the Trust during 1994,1995 and 1996. The effective rate on the Trust's revolving credit notesincluding commitment fees and interest rate swap expense was 6.8%, 7.5% and 6.7%during 1996, 1995 and 1994, respectively. Additional interest expense recordedas a result of the Trust's hedging activity was $130,000, $69,000 and $109,000in 1996, 1995 and 1994, respectively. The Trust is exposed to credit loss in theevent of nonperformance by the counterparties to the interest rate swap and capagreements. These counterparties are major financial institutions and the Trustdoes not anticipate nonperformance by the counterparties which are rated A orbetter by Moody's Investors Service. Termination of the interest rate swaps atDecember 31, 1996 would have resulted in payments to the counterparties ofapproximately $202,000 and termination of the interest rate cap would haveresulted in a payment to the Trust of approximately $73,000. The fair value ofthe interest rate swap and cap agreements at December 31, 1996 reflects theestimated amounts that the Trust would pay or receive to terminate the contractsand are based on quotes from the counterparties.(6) DividendsDividends of $1.695 per share were declared and paid in 1996, of which $1.622was ordinary income and $.073 was a return of capital distribution. Dividends of$1.68 per share were declared and paid in 1995, of which $1.575 per share wasordinary income and $.105 was a return of capital distribution. Dividends of$1.665 per share were declared and paid in 1994, of which $1.528 was ordinaryincome and $0.137 was a return of capital distribution.(7) FinancingDuring the fourth quarter of 1993, the Trust funded $6.5 million for thepurchase of the real assets of the Madison Irving Medical Center, by CrouseIrving Memorial Properties, located in Syracuse, New York. The loan, which canbe prepaid without penalty at any time, has a fifteen-year repayment term. TheTrust has received prepaid commitment fees related to this mortgage notereceivable totaling $65,000. The unearned portion ($52,000 as of December 31,1996) is being recognized as income over the fifteen-year repayment term. Theloan accrues interest monthly at a margin over the one month LIBOR or at amargin over the five-year Treasury rate. The interest rate is selected at theborrower's option. Interest on the mortgage loan, including amortization ofprepaid commitment fees, accrued at an average rate of 11.3% during 1996 and11.5% during 1995.During 1995, the Trust received free and clear title to Lake Shore Hospital, onwhich the Trust held a mortgage loan receivable. During 1994, the Trust reacheda settlement agreement with Lake Shore Hospital, Inc. and Community CareSystems, Inc. concerning the default of their obligations under the Trust'smortgage loan with Lake Shore Hospital. Under the terms of the settlementagreement, the Trust received $1.5 million in cash payments during 1994, of which $1,050,000 was included in net income as recovery of investment losses and$450,000 was reserved for future expenses related to the settlement of thefacility. The carrying value of this facility was reduced to zero in 1992. TheTrust continues to actively negotiate with third parties interested inpurchasing or leasing the real estate assets of the Lake Shore facility. F-14(8) Incentive PlansDuring 1988, the Trustees approved a Key Employees' Restricted Share PurchasePlan. Under the terms of this plan, which expires in 1998, up to 50,000 shareshave been reserved for issuance to key employees (47,500 shares available forgrant as of December 31, 1996). Eligible employees may purchase shares of theTrust at par value subject to certain restrictions. The restrictions lapse overfour years if the employee remains employed by the Trust.In 1991, the Trustees adopted a share compensation plan for Trustees who areneither employees nor officers of the Trust ("Outside Trustees"). Pursuant tothe plan, each Outside Trustee may elect to receive, in lieu of all or a portionof the quarterly cash compensation for services as a Trustee, shares of theTrust based on the closing price of the shares on the date of issuance. As ofDecember 31, 1996, no shares have been issued under the terms of this plan.During 1992, the Trust amended the 1988 Non-Statutory Stock Option Plan toincrease the number of shares reserved under the plan from 50,000 to 200,000. Asof December 31, 1996, options to purchase 95,000 shares of beneficial interestwere granted, of which 85,000 were granted to officers of the Trust during 1992at an exercise price of $16.875 per share and 10,000 were granted to an officerof the Trust during 1993 at an exercise price of $16.125. During 1996, 36,976options were exercised. As of December 31, 1996 all 58,024 remaining optionswere exercisable at an aggregate purchase price of $973,137.In October 1995, the Financial Accounting Standards Board issued Statement No.123 "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 encourages afair value based method of accounting for employee stock options and similarequity instruments, which generally would result in the recording of additionalcompensation expense in an entity's financial statements. The statement alsoallows an entity to continue to account for stock-based employee compensationusing the intrinsic value for equity instruments using APB Opinion No. 25. TheTrust has adopted the disclosure-only provisions of SFAS 123. Accordingly nocompensation cost has been recognized for the stock option plans. Because theSFAS 123 method of accounting has not been applied to options granted prior toJanuary 1, 1995 and since there were no stock options granted by the Trustduring 1995 or 1996, no pro forma disclosures are required.(9) Summarized Financial Information of Equity AffiliatesThe following table represents summarized unaudited financial information of thelimited liability corporations ("LLC") accounted for by the equity method.Amounts presented include investments in the following LLCs: DSMB Properties,LLC (50%); DVMC Properties, LLC (95%); Parkvale Properties, LLC (50%), and;Suburban Properties, LLC (33%). 1996 (000s) Net property $42,236 Other assets 2,889 Debt (33,302) Other liabilities (962) ---------- Equity $10,861 ========== Revenue $5,371 ========== F-15(10) Sale of Marketable SecuritiesDuring 1994, the Trust received $107,000 related to a class action lawsuitsettlement filed against a real estate investment trust in which the Trust ownedmarketable securities. Also during the year, the Trust sold the remainder of itsinvestment in the marketable securities of the real estate investment trust fortotal net proceeds of $77,000. The entire $184,000 generated from the settlementand sale transactions are included in net income (recovery of investment losses)since the carrying value of this investment was reduced to zero in 1990.(11) Quarterly Results (Unaudited) 1996 First Second Third Fourth Quarter Quarter Quarter Quarter Total Revenues $5,343,000 $5,379,000 $5,611,000 $5,590,000 $21,923,000Net Income $3,583,000 $3,590,000 $3,466,000 $3,519,000 $14,158,000Earnings Per Share $0.40 $0.40 $0.39 $0.39 $1.58 1995 First Second Third Fourth Quarter Quarter Quarter Quarter TotalRevenues $4,914,000 $5,129,000 $5,215,000 $5,159,000 $20,417,000Net Income $3,303,000 $3,452,000 $3,451,000 $3,378,000 $13,584,000Earnings Per Share $0.37 $0.39 $0.38 $0.38 $1.52 F-16 Universal Health Realty Income Trust Schedule II - Valuation and Qualifying Accounts Balance at Charged to Balance beginning costs and at end Description of period expenses Other of periodReserve for Investment Losses: Year ended December 31, 1996 $158,000 $220,000 ($227,000)(a) $151,000 ========= ======== ========= =========Year ended December 31, 1995 $490,000 -- ($332,000)(a) $158,000 ========= ======== ========= =========Year ended December 31, 1994 $77,000 $450,000 ($37,000)(a) $490,000 ========= ======== ========= =========(a) Amounts charged against the reserve. F-17 Schedule III Universal Health Realty Income Trust Real Estate and Accumulated Depreciation - December 31, 1996 (amounts in thousands) Initial Cost to Cost capitalized Gross amount Date of Universal Health subsequent to at which construction Realty Income Trust acquisition carried at Accumulated or most close of period Depreciation recent Average as of significant Deprec- Building Land & Carrying Building Dec. 31, expansion or Date iableDescription Land & Improv. Improv. Costs Land & Improv. Total 1996 renovation Acquired Life Chalmette Medical Centers Virtue Street Campus $1,825 $9,445 -- - $1,770 $9,445 $11,215 $2,704 1975 1986 35 Years Patricia Street Campus 2,000 7,473 -- - 2,000 7,473 9,473 1,925 1981 1988 34 Years Chalmette, LouisianaInland Valley Regional Medical Center Wildomar, California 2,050 10,701 2,868 - 2,050 13,569 15,619 2,506 1986 1986 43 YearsMcAllen Medical Center McAllen, Texas 4,720 31,442 10,188 - 6,281 40,069 46,350 7,371 1994 1986 42 YearsWellington Regional Medical Center West Palm Beach, Florida 1,190 14,652 4,822 - 1,663 19,001 20,664 3,449 1986 1986 42 YearsThe Bridgeway North Little Rock, Arkansas 150 5,395 499 - 150 5,894 6,044 1,665 1983 1986 35 YearsMeridell Achievement Center Austin, Texas 1,350 3,782 4,139 - 1,350 7,921 9,271 2,160 1991 1986 28 YearsTri-State Rehabilitation Hospital Evansville, Indiana 500 6,945 1,062 - 500 8,007 8,507 1,413 1993 1989 40 YearsTHC - Chicago Chicago, Illinois 158 6,404 1,907 - 158 8,311 8,469 2,856 1993 1986 25 YearsFresno-Herndon Medical Plaza Fresno, California 1,073 5,266 24 - 1,073 5,290 6,363 245 1992 1994 45 YearsFamily Doctor's Medical Office Building Shreveport, Louisiana 54 1,526 -- - 54 1,526 1,580 51 1991 1995 45 YearsKelsey-Seybold Clinic at King's Crossing 439 1,618 -- - 439 1,618 2,057 45 1995 1995 45 YearsProfessional Center at King's Crossing 439 1,837 43 - 439 1,880 2,319 45 1995 1995 45 Years Kingwood, TexasChesterbrook Academy Audubon, Pennsylvania -- 996 -- - -- 996 996 15 1996 1996 45 YearsCarefree Learning Center New Britian, Pennsylvania 250 744 -- - 250 744 994 11 1991 1996 45 YearsCarefree Learning Center Uwchlan, Pennsylvania 180 815 -- - 180 815 995 12 1992 1996 45 YearsCarefree Learning Center Newtown, Pennsylvania 195 749 -- - 195 749 944 11 1992 1996 45 YearsThe Southern Crescent Center Riverdale, Georgia 1,130 5,092 -- - 1,131 5,092 6,223 56 1994 1996 45 Years ------- -------- ------- --- ------- ------- -------- ------- TOTALS $17,703 $114,882 $25,552 $-- $19,683 $138,400 $158,083 $26,540 ======= ======== ======= === ======= ======== ======== ======= F-18 Universal Health Realty Income Trust Notes to Schedule III December 31, 1996(1) Reconciliation of Real Estate PropertiesThe following table reconciles the Real Estate Properties from January 1, 1994to December 31, 1996: 1996 1995 1994 Balance at January 1 $147,888,000 $143,069,000 $136,784,000 Acquisitions 10,195,000 7,794,000 6,340,000 Dispositions -- (2,975,000)(a) (55,000) ------------------ ----------------- ------------------ Balance at December 31 $158,083,000 $147,888,000 $143,069,000 ================== ================= ================== (2) Reconciliation of Accumulated DepreciationThe following table reconciles the Accumulated Depreciation from January 1, 1994to December 31, 1996: 1996 1995 1994 Balance at January 1 $22,986,000 $22,646,000 $19,519,000 Current year depreciation expense 3,554,000 3,315,000 3,127,000 Dispositions -- (2,975,000)(a) -- ------------------ ----------------- ------------------ Balance at December 31 $26,540,000 $22,986,000 $22,646,000 ================== ================= ==================(a) The real property of Westlake Medical Center (original cost of approximately$20 million and accumulated depreciation of approximately $3 million) wasexchanged during 1995 for additional real estate assets (valued at approximately$20 million) of three acute care facilities owned by the Trust and operated byUHS. The swapping of these assets was accounted for as an exchange, andtherefore no gain was recognized.The aggregate cost basis and net book value of the properties for Federal incometax purposes at December 31, 1996 are approximately $146,000,000 and$118,000,000, respectively. F-19 INDEX TO EXHIBITS 10.2 Agreement effective January 1, 1997, to renew Advisory Agreement, dated as of December 24, 1986, between Universal Health Realty Income Trust and UHS of Delaware, Inc. 27. Financial Data Schedule January 10, 1997Mr. Alan B. MillerPresidentUHS of Delaware, Inc.367 South Gulph RoadKing of Prussia, PA 19406Dear Alan: The Board of Trustees of Universal Health Realty Income Trust at theirDecember 2, 1996, meeting authorized the renewal of the current AdvisoryAgreement between the Trust and UHS of Delaware, Inc. ("Agreement") upon thesame terms and conditions. This letter constitutes the Trust's offer to renew the Agreement untilDecember 31, 1997, upon the same terms and conditions. Please acknowledge UHS ofDelaware, Inc.'s acceptance of this offer by signing in the space provided belowand returning one copy of this letter to me. Sincerely yours, Kirk E. Gorman President and Secretarycc: Warren J. Nimetz, Esquire Charles BoyleAgreed to and Accepted:UHS OF DELAWARE, INC.By: Alan B. Miller, Presidentj:lashj/letters/miller2.doc 5 0000798783 UNIVERSAL HEALTH REALTY INCOME TRUST 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 137 0 12,469 5,151 0 0 159,329 26,540 148,566 0 43,082 0 0 90 103,892 148,566 0 22,552 0 1,973 3,636 220 2,565 14,158 0 14,158 0 0 0 14,158 1.58 1.58
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