<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............to..........
Commission file number 1-10765
UNIVERSAL HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 23-2077891
-------- ----------
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
UNIVERSAL CORPORATE CENTER
367 SOUTH GULPH ROAD
KING OF PRUSSIA, PENNSYLVANIA 19406
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (610) 768-3300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common shares outstanding, as
of July 31, 1999:
<TABLE>
<S> <C>
Class A 2,056,929
Class B 29,377,242
Class C 207,230
Class D 25,404
</TABLE>
Page One of Seventeen Pages
<PAGE> 2
UNIVERSAL HEALTH SERVICES, INC.
I N D E X
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION ......................................................... PAGE NO.
Item 1. Financial Statements
Consolidated Statements of Income -
Three and Six Months Ended June 30, 1999 and 1998 ................................ Three
Condensed Consolidated Balance Sheets - June 30, 1999
and December 31, 1998 ............................................................ Four
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 .......................................... Five
Notes to Condensed Consolidated Financial Statements ................................ Six, Seven & Eight
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................... Nine, Ten, Eleven, Twelve,
Thirteen, Fourteen & Fifteen
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................... Sixteen
PART II. OTHER INFORMATION ............................................................ Sixteen
SIGNATURE .............................................................................. Seventeen
</TABLE>
Page Two of Seventeen Pages
<PAGE> 3
PART I. FINANCIAL INFORMATION
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(000s omitted except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues ................................................... $ 513,067 $ 474,558 $1,033,162 $ 937,675
Operating charges:
Operating expenses ........................................ 204,743 195,125 407,850 376,076
Salaries and wages ........................................ 182,507 165,721 361,141 326,846
Provision for doubtful accounts ........................... 40,145 32,990 81,071 70,256
Depreciation and amortization ............................. 27,197 26,272 54,175 50,708
Lease and rental expense .................................. 12,273 12,172 24,552 23,577
Interest expense, net ..................................... 6,566 7,083 13,048 13,390
---------- ---------- ---------- ----------
473,431 439,363 941,837 860,853
---------- ---------- ---------- ----------
Income before minority interests and income taxes .............. 39,636 35,195 91,325 76,822
Minority interests in earnings of consolidated entities ........ 2,757 3,526 6,751 5,274
---------- ---------- ---------- ----------
Income before income taxes ..................................... 36,879 31,669 84,574 71,548
Provision for income taxes ..................................... 13,849 11,208 31,522 25,437
---------- ---------- ---------- ----------
Net income ..................................................... $ 23,030 $ 20,461 $ 53,052 $ 46,111
========== ========== ========== ==========
Earnings per common share - basic .............................. $ 0.73 $ 0.63 $ 1.67 $ 1.42
========== ========== ========== ==========
Earnings per common share - diluted ............................ $ 0.71 $ 0.61 $ 1.63 $ 1.38
========== ========== ========== ==========
Weighted average number of common shares - basic ............... 31,659 32,626 31,833 32,571
Weighted average number of common share equivalents ............ 703 874 692 834
---------- ---------- ---------- ----------
Weighted average number of common shares and equiv. - diluted .. 32,362 33,500 32,525 33,405
========== ========== ========== ==========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
Page Three of Seventeen Pages
<PAGE> 4
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000s omitted)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,155 $ 1,260
Accounts receivable, net 299,413 256,354
Supplies 38,481 38,842
Deferred income taxes 17,165 10,838
Other current assets 14,195 12,321
----------- -----------
Total current assets 377,409 319,615
----------- -----------
Property and equipment 1,149,257 1,161,939
Less: accumulated depreciation (403,309) (396,530)
----------- -----------
745,948 765,409
Funds restricted for construction 41,924 43,413
----------- -----------
787,872 808,822
----------- -----------
Other assets:
Excess of cost over fair value of net
assets acquired 292,791 279,141
Deferred charges 12,482 13,533
Other 29,128 26,984
----------- -----------
334,401 319,658
----------- -----------
$ 1,499,682 $ 1,448,095
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 4,287 $ 4,082
Accounts payable and accrued liabilities 186,374 165,718
Federal and state taxes -- 253
----------- -----------
Total current liabilities 190,661 170,053
----------- -----------
Other noncurrent liabilities 91,968 80,172
----------- -----------
Minority interest 129,208 129,423
----------- -----------
Long-term debt, net of current maturities 406,096 418,188
----------- -----------
Deferred income taxes 25,137 23,252
----------- -----------
Common stockholders' equity:
Class A Common Stock, 2,056,929 shares
outstanding in 1999, 2,057,929 in 1998 21 21
Class B Common Stock, 29,448,342 shares
outstanding in 1999, 29,901,218 in 1998 294 299
Class C Common Stock, 207,230 shares
outstanding in 1999, 207,230 in 1998 2 2
Class D Common Stock, 25,504 shares
outstanding in 1999, 28,788 in 1998 -- --
Capital in excess of par, net of deferred
compensation of $241,000 in 1999
and $185,000 in 1998 198,058 221,500
Retained earnings 458,237 405,185
----------- -----------
656,612 627,007
----------- -----------
$ 1,499,682 $ 1,448,095
=========== ===========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
Page Four of Seventeen Pages
<PAGE> 5
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s omitted - unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1999 1998
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 53,052 $ 46,111
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization 54,175 50,708
Earnings of minority partners, net of losses 6,751 5,274
Changes in assets & liabilities, net of effects from acquisitions and
dispositions:
Accounts receivable (30,077) (16,692)
Accrued interest (74) 811
Accrued and deferred income taxes (1,990) (3,208)
Other working capital accounts 17,840 9,590
Other assets and deferred charges (3,062) (4,605)
Other 2,081 (1,250)
Accrued insurance expense, net of commercial premiums paid 4,711 4,201
Payments made in settlement of self-insurance claims (5,719) (12,551)
--------- ---------
Net cash provided by operating activities 97,688 78,389
--------- ---------
Cash Flows from Investing Activities:
Property and equipment additions, net (30,296) (44,447)
Proceeds received from merger, sale or disposition of assets 15,080 11,185
Acquisition of businesses (31,588) (186,080)
--------- ---------
Net cash used in investing activities (46,804) (219,342)
--------- ---------
Cash Flows from Financing Activities:
Reduction of long-term debt (12,787) --
Additional borrowings -- 142,209
Distributions to minority partners (5,015) (158)
Issuance of common stock 1,500 1,274
Repurchase of common shares (27,687) --
--------- ---------
Net cash (used in) provided by financing activities (43,989) 143,325
--------- ---------
Increase in cash and cash equivalents 6,895 2,372
Cash and cash equivalents, Beginning of Period 1,260 332
--------- ---------
Cash and cash equivalents, End of Period $ 8,155 $ 2,704
========= =========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 13,121 $ 12,579
========= =========
Income taxes paid, net of refunds $ 33,603 $ 29,083
========= =========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
Page Five of Seventeen Pages
<PAGE> 6
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission and reflect all adjustments which, in the opinion of the
Company, are necessary to fairly present results for the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the accompanying disclosures are adequate to make the
information presented not misleading. It is suggested that these financial
statements be read in conjunction with the financial statements, accounting
policies and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
Certain prior year amounts have been reclassified to conform with current year
financial presentation.
(2) OTHER NONCURRENT AND MINORITY INTEREST LIABILITIES
Other noncurrent liabilities include the long-term portion of the Company's
professional and general liability, compensation reserves, and pension
liability.
The minority interest liability consists primarily of a 27.5% outside ownership
interest in three acute care facilities located in Las Vegas, Nevada and a 20%
outside ownership in an acute care facility located in Washington D.C.
(3) COMMITMENT AND CONTINGENCIES
Under certain agreements, the Company has committed or guaranteed an aggregate
of $54 million related principally to the Company's self-insurance programs and
as support for various debt instruments and loan guarantees, including a $40
million letter of credit related to the Company's 1997 acquisition of an 80%
interest in The George Washington University Hospital.
(4) ACQUISITIONS
During the second quarter of 1999, the Company acquired three behavioral health
facilities located in Illinois, Indiana and New Jersey, for a combined purchase
price of $26.6 million in cash plus additional contingent consideration of up to
$2.5 million.
During the second quarter of 1999, the Company acquired the assets and
operations of Doctor's Hospital of Laredo from in exchange for the assets and
operations of its Victoria Regional Medical Center. In connection with this
transaction, the Company also spent approximately $5 million to purchase
additional land in Laredo, Texas on which it expects to construct a replacement
hospital scheduled to be completed in 2001.
(5) NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," which delayed the effective date
Page Six of Seventeen Pages
<PAGE> 7
of SFAS No. 133 for one year until January 1, 2001. The Registrant does not
expect the adoption of this statement to have a material impact on its financial
position or results of operations.
The Company expects to adopt Statement 133 in January 2001 and has not yet
quantified the impact on its financial statements. However, the Statement could
increase the volatility in earnings and other comprehensive income.
(6) SEGMENT REPORTING (UNAUDITED)
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", in 1998. SFAS No. 131 established standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to stockholders. Operating segments are defined as components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance.
The Company's reportable operating segments consist of acute care services and
behavioral health care services. The "Other" segment column below includes
centralized services including information services, purchasing, reimbursement,
accounting, taxation, legal, advertising, design and construction, and patient
accounting. Also included are the operating results of the Company's other
operating entities including the outpatient surgery and radiation therapy
centers and specialized women's health centers. The chief operating decision
making group for the Company's acute care services and behavioral health care
services is comprised of the Company's President and Chief Executive Officer,
and the lead executives of each of the Company's two primary operating segments.
The lead executive for each operating segment also manages the profitability of
each respective segment's various hospitals. The operating segments are managed
separately because each operating segment represents a business unit that offers
different types of healthcare services. The accounting policies of the operating
segments are the same as those described in the summary of significant
accounting policies.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
--------------------------------------------------------------------------------
BEHAVIORAL
ACUTE CARE HEALTH TOTAL
SERVICES SERVICES OTHER CONSOLIDATED
-------- -------- ----- ------------
(Dollar amount s in thousands)
<S> <C> <C> <C> <C>
Gross inpatient revenues $ 668,809 $ 107,676 $ 6,428 $ 782,913
Gross outpatient revenues $ 235,755 $ 26,970 $ 26,554 $ 289,279
Total net revenues $ 422,303 $ 70,899 $ 19,865 $ 513,067
EBITDAR (A) $ 79,787 $ 14,166 ($ 8,281) $ 85,672
Total assets as of 6/30/99 $1,221,940 $ 161,029 $ 116,713 $1,499,682
Licensed beds 4,814 1,976 -------- 6,790
Available beds 4,104 1,961 -------- 6,065
Patient days 233,550 116,251 -------- 349,801
Admissions 48,979 9,885 -------- 58,864
Average length of stay 4.8 11.8 -------- 5.9
</TABLE>
Page Seven of Seventeen Pages
<PAGE> 8
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
------------------------------------------------------------------------------
BEHAVIORAL
ACUTE CARE HEALTH TOTAL
SERVICES SERVICES OTHER CONSOLIDATED
---------------- ----------------- ---------------- ------------------
(Dollar amount in thousands)
<S> <C> <C> <C> <C>
Gross inpatient revenues $600,153 $88,830 $5,246 $694,229
Gross outpatient revenues $213,033 $24,551 $17,848 $255,432
Total net revenues $396,075 $61,565 $16,918 $474,558
EBITDAR (A) $79,141 $11,226 ($9,645) $80,722
Total assets as of 6/30/98 $1,212,285 $132,449 $114,786 $1,459,520
Licensed beds 4,764 1,779 -------- 6,543
Available beds 4,030 1,764 -------- 5,794
Patient days 220,169 94,166 -------- 314,335
Admissions 46,562 8,214 -------- 54,776
Average length of stay 4.7 11.5 -------- 5.7
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------------------------
BEHAVIORAL
ACUTE CARE HEALTH TOTAL
SERVICES SERVICES OTHER CONSOLIDATED
---------------- ----------------- ----------------- -----------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Gross inpatient revenues $1,388,946 $196,366 $12,536 $1,597,848
Gross outpatient revenues $473,360 $50,571 $51,614 $575,545
Total net revenues $863,576 $130,537 $39,049 $1,033,162
EBITDAR (A) $176,937 $24,663 ($18,500) $183,100
Total assets as of 6/30/99 $1,221,940 $161,029 $116,713 $1,499,682
Licensed beds 4,820 1,887 -------- 6,707
Available beds 4,107 1,872 -------- 5,979
Patient days 487,880 211,995 -------- 699,875
Admissions 102,166 18,533 -------- 120,699
Average length of stay 4.8 11.4 -------- 5.8
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------------------------------------------
BEHAVIORAL
ACUTE CARE HEALTH TOTAL
SERVICES SERVICES OTHER CONSOLIDATED
---------------- ----------------- ---------------- ------------------
(Dollar amount in thousands)
<S> <C> <C> <C> <C>
Gross inpatient revenues $1,208,863 $173,103 $10,211 $1,392,177
Gross outpatient revenues $410,896 $46,765 $33,880 $491,541
Total net revenues $789,016 $118,360 $30,299 $937,675
EBITDAR (A) $165,945 $21,032 ($22,480) $164,497
Total assets as of 6/30/98 $1,212,285 $132,449 $114,786 $1,459,520
Licensed beds 4,567 1,779 -------- 6,346
Available beds 3,892 1,764 -------- 5,656
Patient days 438,795 183,594 -------- 622,389
Admissions 91,432 16,307 -------- 107,739
Average length of stay 4.8 11.3 -------- 5.8
</TABLE>
(A) EBITDAR - Earnings before interest, income taxes, depreciation,
amortization, lease & rental and minority interest expense.
Page Eight of Seventeen Pages
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
The matters discussed in this report as well as the news releases issued from
time to time by the Company include certain statements containing the words
"believes", "anticipates", "intends", "expects" and words of similar import,
which constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance achievements of the Company or industry results
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: that the majority of the Company's revenues
are produced by a small number of its total facilities; possible changes in the
levels and terms of reimbursement for the Company's charges by government
programs, including Medicare or Medicaid or other third party payers; industry
capacity; demographic changes; existing laws and government regulations and
changes in or failure to comply with laws and governmental regulations; the
ability to enter into managed care provider agreements on acceptable terms;
liability and other claims asserted against the Company; competition; the loss
of significant customers; technological and pharmaceutical improvements that
increase the cost of providing, or reduce the demand for healthcare; the ability
to attract and retain qualified personnel, including physicians, the ability of
the Company to successfully integrate its recent acquisitions; the Company's
ability to finance growth on favorable terms; the impact of Year 2000 issues;
and, other factors referenced in the Company's 1998 Form 10-K or herein. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
RESULTS OF OPERATIONS
Net revenues increased 8% or $39 million for the three months ended June 30,
1999 and 10% or $95 million for the six months ended June 30, 1999 over the
comparable prior year periods. The $39 million increase during the second
quarter of 1999 over the comparable prior year quarter consists primarily of the
following: (i) a 4.5% or $21 million increase in net revenues at the Company's
acute care and behavioral health care facilities owned during both periods
(excluding the favorable $3.1 million prior year net revenue adjustment
mentioned below), and; (ii) $10 million of net revenues generated at three
behavioral health care facilities located in Illinois, Indiana and New Jersey
and an acute care facility located in Laredo, Texas (net of revenues generated
at exchanged facility) all of which were acquired during the second quarter of
1999. Operating results for the second quarter of 1999 also included an increase
in net revenues of $3.1 million resulting from an adjustment to contractual
allowances recorded in the prior year.
The $95 million increase in net revenues during the six months ended June 30,
1999 over the comparable prior year period was primarily attributable to: (i) a
5.2% or $47 million increase in net revenues at the Company's acute care and
behavioral health care facilities owned during both periods (excluding the
favorable $3.1 million net revenue adjustment mentioned above); (ii) $10 million
of net revenues generated at three behavioral health care facilities located in
Illinois, Indiana and New Jersey and an acute care facility located in Laredo,
Texas (net of revenues generated at exchange facility) all of which were
acquired during the second quarter of 1999, and; (iii) the acquisition of four
acute care facilities located in Puerto Rico and Las Vegas which were acquired
during the first quarter of 1998 ($25 million).
Earnings before interest, income taxes, depreciation, amortization and lease and
rental expense (before deducting minority interests in earnings of consolidated
entities) ("EBITDAR") increased to $86 million for the three months ended June
30, 1999 from $81 million in the comparable prior year quarter and $183 million
for the six months ended June 30, 1999 as compared to $164 million during the
prior year six
Page Nine of Seventeen Pages
<PAGE> 10
month period. Overall operating margins were 16.7% and 17.0% during the three
month periods ended June 30, 1999 and 1998, respectively, and 17.7% and 17.5%
during the six month periods ended June 30, 1999 and 1998, respectively. The
decrease in the overall operating margin during the second quarter of 1999 as
compared to the comparable prior year quarter was primarily due to an decrease
in the operating margins at the Company's acute care facilities, as discussed
below.
ACUTE CARE SERVICES
Net revenues from the Company's acute care hospitals, ambulatory treatment
centers and specialized women's health centers accounted for 85% and 86% of
consolidated net revenues for the three month periods ended June 30, 1999 and
1998, respectively, and 87% of consolidated net revenues in each of the six
month periods ended June 30, 1999 and 1998. Net revenues at the Company's acute
care facilities owned in both periods increased 4.9% and 5.5% during the three
and six month periods ended June 30, 1999 as compared to the comparable prior
year periods, respectively, (excluding the favorable $3.1 million net
revenue adjustment mentioned above). The 4.9% increase in same facility net
revenue during the second quarter of 1999, as compared to the comparable prior
year quarter, was due primarily to a 4.2% increase in admissions and a 5.0%
increase in patient days at these facilities. During the second quarter of 1999,
the average length of stay at the acute care facilities owned during both
periods increased slightly to 4.8 days as compared to 4.7 days in the comparable
prior year quarter. The 5.5% increase in same facility net revenue during the
six month period ended June 30, 1999 as compared to the comparable prior year
six month period was due primarily to a 5.8% increase in admissions and a 5.1%
increase in patient days at these facilities. During the six month period of
1999, the average length of stay at the acute care facilities owned during both
periods remained unchanged from the comparable prior year period at 4.8 days.
The increase in net revenues at the Company's acute care facilities was caused
primarily by an increase in inpatient admissions and an increase in outpatient
activity. Outpatient activity continues to increase as gross outpatient revenues
at the Company's acute care facilities owned in both three month periods ended
June 30, 1999 and 1998 increased 9% during the three month period ended June 30,
1999 as compared to the comparable prior year quarter and comprised 26% of the
Company's acute care gross patient revenue in each of the quarters ended June
30, 1999 and 1998. Gross outpatient revenues at the Company's acute care
facilities owned in both six month periods ended June 30, 1999 and 1998
increased 11% during the six month period ended June 30, 1999 as compared to the
comparable prior year six month period and comprised 25% of the Company's acute
care gross patient revenue in each of the six month periods ended June 30, 1999
and 1998.
The increase in outpatient revenues is primarily the result of advances in
medical technologies and pharmaceutical improvements, which allow more services
to be provided on an outpatient basis, and increased pressure from Medicare,
Medicaid, managed care companies and other insurers to reduce hospital stays and
provide services, where possible, on a less expensive outpatient basis. The
hospital industry in the United States as well as the Company's acute care
facilities continue to have significant unused capacity which has created
substantial competition for patients. Inpatient utilization continues to be
negatively affected by payor-required, pre-admission authorization and by payor
pressure to maximize outpatient and alternative healthcare delivery services for
less acutely ill patients. The Company expects the increased competition,
admission constraints and payor pressures to continue. The Company's ability to
maintain its historical rate of net revenue growth and operating margins is
dependent upon its ability to successfully respond to these trends as well as
reductions in spending on governmental health care programs.
Earnings before interest, income taxes, depreciation, amortization and lease and
rental expense (before deducting minority interests in earnings of consolidated
entities) ("EBITDAR") at the Company's acute care facilities increased to $80
million for the three months ended June 30, 1999 from $79 million in the
comparable prior year quarter and $177 million for the six months ended June 30,
1999 as compared to $166 million during the prior year six month period.
Operating margins at the Company's acute care
Page Ten of Seventeen Pages
<PAGE> 11
facilities were 18.9% and 20.0% during the three month periods ended June 30,
1999 and 1998, respectively, and 20.5% and 21.0% during the six month periods
ended June 30, 1999 and 1998, respectively. The decrease in the operating
margins of the Company's acute care facilities during the three and six month
periods of 1999, as compared to the comparable prior year periods, was primarily
due to an increase in the provision for doubtful accounts. As a percentage of
acute care net revenues, the provision for doubtful accounts for the Company's
acute care facilities was 9.0% and 7.4% for the three months ended June 30, 1999
and 1998, respectively, and 8.7% and 8.0% for the six months ended June 30, 1999
and 1998, respectively. The increase in bad debt expense as a percentage of net
revenues was due to: (i) a reduction in the reimbursement for Medicare bad debts
as mandated by The Balanced Budget Act of 1997; (ii) continued delays in
payments from health maintenance organizations, and; (iii) an increase in the
number of uninsured patients seeking treatment at the Company's facilities.
BEHAVIORAL HEALTH SERVICES
Net revenues from the Company's behavioral health services facilities accounted
for 14% and 13% of consolidated net revenues for the three month periods ended
June 30, 1999 and 1998, respectively, and 13% of consolidated net revenues in
each of the six month periods ended June 30, 1999 and 1998. Net revenues at the
Company's behavioral health services facilities owned in both periods increased
1.8% and 3.3% for the three and six month periods ended June 30, 1999 as
compared to the comparable prior year periods, respectively. The 1.8% increase
in same facility net revenue during the second quarter of 1999, as compared to
the comparable prior year quarter, was due primarily to a 5.9% increase in
admissions and a 6.6% increase in patient days at these facilities. During the
second quarter of 1999, the average length of stay at the behavioral health care
facilities owned during both periods remained unchanged from the comparable
prior year period at 11.5 days. The 3.3% increase in same facility net revenue
during the six month period ended June 30, 1999, as compared to the comparable
prior year six month period, was due primarily to a 6.4% increase in admissions
and a 6.8% increase in patient days at these facilities. During the 1999 six
month period, the average length of stay at the behavioral health care
facilities owned during both periods remained unchanged from the comparable
prior year period at 11.3 days.
Although the length of stay at the Company's behavioral health care facilities
remained unchanged in the 1999 period as compared to the comparable 1998
periods, the Company's behavioral health care facilities have generally
experienced decreases in length of stay during the past few years as a result of
continued practice changes in the delivery of behavioral health services and
continued cost containment pressures from payors, including managed care
companies, which includes a greater emphasis on the utilization of outpatient
services. Providers participating in managed care programs agree to provide
services to patients for a discount from established rates which generally
results in pricing concessions by the providers and lower margins. Additionally,
managed care companies generally encourage alternatives to inpatient treatment.
Management of the Company has responded to these trends by continuing to develop
and market new outpatient treatment programs. Gross outpatient revenues at the
Company's behavioral health care facilities owned in both three month periods
ended June 30, 1999 and 1998 increased 6% during the three month period ended
June 30, 1999 as compared to the comparable prior year quarter and comprised 20%
of the Company's behavioral health care gross patient revenue during the 1999
second quarter and 22% during the 1998 second quarter. Gross outpatient revenues
at the Company's behavioral health care facilities owned in both six month
periods ended June 30, 1999 and 1998 increased 6% during the six month period
ended June 30, 1999 as compared to the comparable prior year six month period
and comprised 21% of the Company's behavioral health care gross patient revenue
in each of the six month periods ended June 30, 1999 and 1998.
Earnings before interest, income taxes, depreciation, amortization and lease and
rental expense (before deducting minority interests in earnings of consolidated
entities) ("EBITDAR") at the Company's behavioral health care facilities
increased to $14 million for the three months ended June 30, 1999 from $11
million in the comparable prior year quarter and $25 million for the six months
ended June 30, 1999
Page Eleven of Seventeen Pages
<PAGE> 12
as compared to $21 million during the prior year six month period. Operating
margins at the Company's behavioral health care facilities were 20.0% and 18.2%
during the three month periods ended June 30, 1999 and 1998, respectively, and
18.9% and 17.8% during the six month periods ended June 30, 1999 and 1998,
respectively. The increase in the operating margins at the Company's behavioral
health care facilities was due to a reduction in operating expenses as a
percentage of behavioral health care net revenues due to continued operating
costs efficiencies and a reduction in the provision for doubtful accounts.
OTHER OPERATING RESULTS
The Company recorded minority interest expense in the earnings of consolidated
entities amounting to $2.8 million and $3.5 million for the three months ended
June 30, 1999 and 1998, respectively, and $6.8 million and $5.3 million for the
six months ended June 30, 1999 and 1998, respectively. The minority interest
expense recorded during both periods consists primarily of the minority
ownership's share of the net income of four acute care facilities, three of
which are located in Las Vegas, Nevada and one located in Washington, DC.
Depreciation and amortization expense increased 4% or $900,000 for the three
months ended June 30, 1999 as compared to the comparable prior year quarter and
7% or $3.5 million for the six months ended June 30, 1999 as compared to the
comparable prior year six month period. The increases were due primarily to the
four acute care hospitals acquired during the first quarter of 1998 (three in
Puerto Rico and one in Las Vegas) and three behavioral health care facilities
acquired during the second quarter of 1999.
Interest expense decreased 7% or $500,000 and 3% or $300,000 during the three
and six month periods ended June 30, 1999 as compared to the comparable prior
year periods.
The effective tax rate was 37.6% and 35.4% for the three months ended June 30,
1999 and 1998, respectively, and 37.3% and 35.6% for the six months ended June
30, 1999 and 1998, respectively. The increase in the effective tax rate during
the 1999 periods as compared to the comparable prior year periods was due to a
reduction in the tax benefits related to the financing of employee benefit
programs.
GENERAL TRENDS
A significant portion of the Company's revenue is derived from fixed payment
services, including Medicare and Medicaid which accounted for 46% and 46% of the
Company's net patient revenues during the three month periods ended June 30,
1999 and 1998, respectively, and 45% and 47% of the Company's net patient
revenues during the six month periods ended June 30, 1999 and 1998,
respectively. The Medicare program reimburses the Company's hospitals primarily
based on established rates by a diagnosis related group for acute care hospitals
and by cost based formula for behavioral health facilities. Historically, rates
paid under Medicare's prospective payment system ("PPS") for inpatient services
have increased, however, these increases have been less than cost increases.
Pursuant to the terms of The Balanced Budget Act of 1997 (the "1997 Act"), there
were no increases in the rates paid to hospitals for inpatient care through
September 30, 1998. The Company expects the modest rate increases that became
effective on October 1, 1998 will be more than offset by the negative impact of
converting reimbursement on skilled nursing facility patients from a cost based
reimbursement to a prospective payment system and from lower DRG payments on
certain patient transfers mandated by the 1997 Act. Reimbursement for bad debt
expense and capital costs as well as other items have been reduced. Outpatient
reimbursement for Medicare patients is scheduled to convert to a PPS during the
second quarter of 2000. Since final provisions of the outpatient Medicare PPS
are not yet available, the Company can not completely estimate the resulting
impact on its future results of operations.
During the first quarter of 1999, the President submitted a proposal which
included additional reductions in Medicare payments to hospitals, nursing homes
and other providers amounting to $9.5 billion over a five year period.
Approximately $4.5 billion of the proposed Medicare reductions would cut the
growth of Medicare payments to hospitals over a five year period.
While the Company is unable to predict
Page Twelve of Seventeen Pages
<PAGE> 13
whether this most recent proposal, or any other future health reform
legislation, will ultimately be enacted at the federal or state level, the
Company expects continuing pressure to limit expenditures by governmental
healthcare programs. Further changes in the Medicare or Medicaid programs and
other proposals to limit healthcare spending could have a material adverse
impact upon the Company's results of operations and the healthcare industry.
The healthcare industry is subject to numerous laws and regulations which
include, among other things, matters such as government healthcare participation
requirements, various licensure and accreditations, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government action
has increased with respect to investigations and/or allegations concerning
possible violations of fraud and abuse and false claims statutes and/or
regulations by healthcare providers. Providers that are found to have violated
these laws and regulations may be excluded from participating in government
healthcare programs, subjected to fines or penalties or required to repay
amounts received from government for previously billed patient services. While
management of the Company believes its policies, procedures and practices comply
with governmental regulations, no assurance can be given that the Company will
not be subjected to governmental inquiries or actions.
In Texas, a law has been passed which mandates that the state senate apply for a
waiver from current Medicaid regulations to allow the state to require that
certain Medicaid participants be serviced through managed care providers. The
Company is unable to predict whether Texas will be granted such a waiver or the
effect on the Company's business of such a waiver. Upon meeting certain
conditions, and serving a disproportionately high share of Texas' and South
Carolina's low income patients, three of the Company's facilities located in
Texas and one facility located in South Carolina became eligible and received
additional reimbursement from each state's disproportionate share hospital fund.
Included in the Company's financial results was an aggregate of $10.1 million
and $8.6 million for the three month periods ended June 30, 1999 and 1998,
respectively, and $20.2 million and $17.2 million for the six months ended June
30, 1999 and 1998, respectively. These programs are scheduled to terminate in
the third quarter of 1999 and although the Company believes these programs will
be renewed, the Company can not completely estimate future reimbursements since
final provisions of the programs are not yet available. However, the Company
expects its future reimbursements pursuant to the terms of these programs to be
reduced by at least $5 million annually. Failure to renew these programs or
further reductions in reimbursements could have additional material adverse
effects on the Company's future results of operations.
In addition to the Medicare and Medicaid programs, other payors, including
managed care companies, continue to actively negotiate the amounts they will pay
for services performed. In general, the Company expects the percentage of its
business from managed care programs, including health maintenance organizations
and preferred provider organizations to grow. The consequent growth in managed
care networks and the resulting impact of these networks on the operating
results of the Company's facilities vary among the markets in which the Company
operates.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
programs, certain building infrastructure components (including elevators, alarm
systems and certain HVAC systems) and certain computer aided medical equipment
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruption of operations or medical equipment
malfunctions that could affect patient diagnosis and treatment.
The Company has undertaken steps to inventory and assess applications and
equipment at risk to be affected by Year 2000 issues and to convert, remediate
or replace such applications and equipment. The Company has completed its
assessment of its major financial, clinical and peripheral software and believes
that such software is substantially Year 2000 compliant. The Company also
believes its biomedical equipment is substantially Year 2000 compliant and it
intends to replace equipment that is not
Page Thirteen of Seventeen Pages
<PAGE> 14
Year 2000 compliant before the year end . The Company believes that Year 2000
related remediation costs incurred through June 30, 1999 have not had a material
impact on its results of operations. Some replacement or upgrade of systems and
equipment would take place in the normal course of business. Several systems,
key to the Company's operations, have been scheduled to be replaced through
vendor supplied systems before Year 2000. The costs of repairing existing
systems is expensed as incurred. The Company has allocated a portion of its 1999
capital budget as Year 2000 contingency funds and expects that all of the
capital costs can be accommodate within that budget. The Company presently
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose material operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company.
The majority of the software used by the Company is purchased from third
parties. The Company is relying on software (including the Company's major
outsourcing vendor which provides the financial and clinical applications for
the majority of the Company's acute care facilities), hardware and other
equipment vendors to verify Year 2000 compliance of their products. The Company
also depends on: fiscal intermediaries which process claims and make payments
for the Medicare program; health maintenance organizations, insurance companies
and other private payors; vendors of medical supplies and pharmaceuticals used
in patient care; and, providers of utilities such as electricity, water, natural
gas and telephone services. As part of its Year 2000 strategy, the Company
intends to seek assurances from these parties that their services and products
will not be interrupted or malfunction due to the Year 2000 problem. Failure of
third parties to resolve their Year 2000 issues could have a material adverse
effect on the Company's results of operations and its ability to provide health
care services.
Each of the Company's hospitals has a disaster plan which will be reviewed as
part of the Company's Year 2000 contingency planning process. However, no
assurance can be given that the Company will be able to develop contingency
plans which will enable each of its facilities to continue to operate in all
circumstances.
This Year 2000 assessment is based on information currently available to the
Company and the Company will revise its assessment at it implements its Year
2000 strategy. The Company can provide no assurance that applications and
equipment the Company believes to be Year 2000 compliant will not experience
difficulties or that the Company will not experience difficulties obtaining
resources needed to make modifications to or replace the Company's affected
systems and equipment. Failure by the Company or third parties on which it
relies to resolve Year 2000 issues could have a material adverse effect on the
Company's results of operations and its ability to provide health care services.
Consequently, the Company can give no assurances that issues related to Year
2000 will not have a material adverse effect on the Company's financial
condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $98 million for the six months
ended June 30, 1999 as compared to $78 million for the six month period ended
June 30, 1998. The $20 million net increase during the 1999 six month period as
compared to the comparable prior year period was primarily attributable to: (i)
a $10 million favorable increase in net income plus the addback of depreciation
and amortization expense; (ii) a $7 million favorable decrease in payments made
in settlement of self-insurance claims; (iii) $16 million of other net favorable
working capital changes, and; (iv) a $13 million unfavorable increase in
accounts receivable.
During the first six months of 1999, the Company spent approximately $30 million
to finance capital expenditures at its existing hospitals as compared to $44
million in the prior year six month period. During the second quarter of 1999,
the Company acquired three behavioral health care facilities located in
Illinois, Indiana and New Jersey for a combined purchase price of approximately
$27 million. Also during the second quarter of 1999, the Company exchanged the
operations and assets of 147-bed acute
Page Fourteen of Seventeen Pages
<PAGE> 15
care facility located in Victoria, Texas for the assets and operations of a
117-bed acute care facility located in Laredo, Texas. In connection with this
transaction, the Company also spent $5 million to purchase additional land in
Laredo, Texas on which it expects to construct a replacement hospital scheduled
to be completed in 2001. During the six month period ended June 30, 1999, the
Company received total proceeds of $15 million for the sale of: (i) the real
property of a medical office building; (ii) a minority ownership interest in one
of its radiation therapy centers, and; (iii) the operations of two outpatient
surgery centers. The net gain/loss resulting from these transactions did not
have a material impact on the results of operations for the three or six month
periods ended June 30, 1999.
During the first quarter of 1998, the Company completed its acquisition of three
acute care hospitals located in Puerto Rico for a combined purchase price of
$186 million. These acquisitions were financed with funds borrowed under the
Company's revolving credit facility. Also during the first quarter of 1998, the
Company contributed substantially all of the assets, liabilities and operations
of Valley Hospital Medical Center, a 417-bed acute care facility, and Summerlin
Hospital Medical Center, a 148-bed acute care facility in exchange for a 72.5%
interest in a series of newly-formed limited liability companies ("LLCs").
Quorum Health Group, Inc. ("Quorum") holds the remaining 27.5% interest in the
LLCs. Quorum obtained its interest by contributing substantially all of the
assets, liabilities and operations of Desert Springs Hospital, a 241-bed acute
care facility and $11 million of net cash.
During the third quarter of 1998, the Company's Board of Directors approved a
stock repurchase program under which the Company is authorized to purchase up to
two million shares or approximately 6% of its outstanding Class B Common Stock.
Pursuant to the terms of this program, the Company repurchased 675,679 shares at
an average repurchase price of approximately $41 per share ($27.7 million in the
aggregate) during the six months ended June 30, 1999. Since inception of this
program through June 30, 1999, the Company repurchased 1,256,179 shares at an
average repurchase price of $41.87 per share ($52.6 million in the aggregate).
As of June 30, 1999, the Company had $210 million of unused borrowing capacity
under the terms of its $400 million revolving credit agreement which matures in
July 2002 and provides for interest at the Company's option at the prime rate,
certificate of deposit plus 3/8% to 5/8%, Euro-dollar plus 1/4% to 1/2% or money
market. As of June 30, 1999, the Company had no unused borrowing capacity under
the terms of its $100 million, annually renewable, commercial paper program. The
Company's total debt as a percentage of total capitalization was 38% at June 30,
1999 and 40% at December 31, 1998.
The Company expects to finance all capital expenditures and acquisitions with
internally generated funds and borrowed funds. Additional borrowed funds may be
obtained either through refinancing the existing revolving credit agreement, the
commercial paper facility or the issuance of long-term securities.
Page Fifteen of Seventeen Pages
<PAGE> 16
PART II. OTHER INFORMATION
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the quantitative and qualitative
disclosures in 1999. Reference is made to Item 7 in the Annual Report on Form
10-K for the year ended December 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The following information relates to matters submitted to the election
of the stockholders of Universal Health Services, Inc. (the "Company")
at the Annual Meeting of Stockholders held on May 19, 1999.
(b) Not applicable.
(c) At the meeting the following proposals, as described in the proxy
statement delivered to all the Company's stockholders were approved by
the votes indicated:
Election by Class A and Class C stockholders of two class III directors
<TABLE>
<CAPTION>
ALAN B. MILLER SIDNEY MILLER
-------------- -------------
<S> <C> <C>
Votes cast in favor 2,260,229 2,260,229
Votes withheld 0 0
</TABLE>
Election by Class B and Class D stockholders of one Class II director
<TABLE>
<CAPTION>
DR. JOHN F. WILLIAMS
--------------------
<S> <C>
Votes cast in favor 23,626,965
Votes withheld 0
</TABLE>
Adoption of the 1992 Corporate Ownership Program, as Amended
<TABLE>
<CAPTION>
<S> <C>
Votes cast in favor 25,143,876
Votes cast against 11,812
Votes abstained 36,893
Broker non-votes 0
</TABLE>
(d) Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K
None
All other items of this Report are inapplicable.
Page Sixteen of Seventeen Pages
<PAGE> 17
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Universal Health Services, Inc.
(Registrant)
Date: August 12, 1999 /s/ Kirk E. Gorman
-----------------------------------------
Kirk E. Gorman, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer).
Page Seventeen of Seventeen Pages
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