<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 March 31, 1999
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............to..........
Commission file number 1-10765
UNIVERSAL HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2077891
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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 April 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Class A 2,057,929
Class B 29,410,536
Class C 207,230
Class D 27,953
</TABLE>
Page One of Sixteen 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 Months Ended March 31, 1999 and 1998...............................................Three
Condensed Consolidated Balance Sheets - March 31, 1999
and December 31, 1998.....................................................................Four
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998................................................Five
Notes to Condensed Consolidated Financial Statements..................................Six & Seven
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ....................Eight, Nine, Ten, Eleven,
Twelve & Thirteen
Item 3. Quantitative and Qualitative Disclosures About Market Risk .........................Fourteen
PART II. OTHER INFORMATION..................................................................Fifteen
SIGNATURE....................................................................................Sixteen
</TABLE>
Page Two of Sixteen 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
ENDED MARCH 31,
1999 1998
---- ----
<S> <C> <C>
Net revenues $520,095 $463,117
Operating charges:
Operating expenses 203,107 180,951
Salaries and wages 178,634 161,125
Provision for doubtful accounts 40,926 37,266
Depreciation and amortization 26,978 24,436
Lease and rental expense 12,279 11,405
Interest expense, net 6,482 6,307
-------- --------
468,406 421,490
-------- --------
Income before minority interests and income taxes 51,689 41,627
Minority interests in earnings of consolidated entities 3,994 1,748
-------- --------
Income before income taxes 47,695 39,879
Provision for income taxes 17,673 14,229
-------- --------
Net income $ 30,022 $ 25,650
======== ========
Earnings per common share - basic $ 0.94 $ 0.79
======== ========
Earnings per common share - diluted $ 0.92 $ 0.77
======== ========
Weighted average number of common shares - basic 32,007 32,516
Weighted average number of common share equivalents 681 794
-------- --------
Weighted average number of common shares and equivalents - diluted 32,688 33,310
======== ========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
Page Three of Sixteen Pages
<PAGE> 4
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000s omitted)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,508 $ 1,260
Accounts receivable, net 276,506 256,354
Supplies 38,771 38,842
Deferred income taxes 13,302 10,838
Other current assets 13,984 12,321
----------- -----------
Total current assets 353,071 319,615
----------- -----------
Property and equipment 1,171,330 1,161,939
Less: accumulated depreciation (412,962) (396,530)
----------- -----------
758,368 765,409
Funds restricted for construction 42,497 43,413
----------- -----------
800,865 808,822
----------- -----------
OTHER ASSETS:
Excess of cost over fair value of net
assets acquired 274,062 279,141
Deferred charges 13,640 13,533
Other 26,202 26,984
----------- -----------
313,904 319,658
----------- -----------
$ 1,467,840 $ 1,448,095
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,762 $ 4,082
Accounts payable and accrued liabilities 182,061 165,718
Federal and state taxes 18,239 253
----------- -----------
Total current liabilities 204,062 170,053
----------- -----------
Other noncurrent liabilities 83,530 80,172
----------- -----------
Minority interest 128,330 129,423
----------- -----------
Long-term debt, net of current maturities 389,851 418,188
----------- -----------
Deferred Income taxes 24,085 23,252
----------- -----------
COMMON STOCKHOLDERS' EQUITY:
Class A Common Stock, 2,057,929 shares
outstanding in 1999, 2,057,929 in 1998 21 21
Class B Common Stock, 29,503,748 shares
outstanding in 1999, 29,901,218 in 1998 295 299
Class C Common Stock, 207,230 shares
outstanding in 1999, 207,230 in 1998 2 2
Class D Common Stock, 28,062 shares
outstanding in 1999, 28,788 in 1998 -- --
Capital in excess of par, net of deferred
compensation of $304,000 in 1999
and $185,000 in 1998 202,457 221,500
Retained earnings 435,207 405,185
----------- -----------
637,982 627,007
----------- -----------
$ 1,467,840 $ 1,448,095
=========== ===========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
Page Four of Sixteen Pages
<PAGE> 5
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s omitted - unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,022 $ 25,650
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization 26,978 24,436
Changes in assets & liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable (20,152) (23,430)
Accrued interest (2,578) (1,683)
Accrued and deferred income taxes 17,644 10,144
Other working capital accounts 18,233 16,295
Other assets and deferred charges (666) (3,114)
Earnings of minority partners, net of losses 3,994 1,748
Other (73) (3,302)
Accrued insurance expense, net of commercial premiums paid 1,371 1,324
Payments made in settlement of self-insurance claims (1,640) (2,243)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 73,133 45,825
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions, net (12,601) (19,974)
Proceeds received from merger -- 23,084
Acquisition of business -- (186,080)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (12,601) (182,970)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt (28,657) --
Additional borrowings -- 144,144
Distributions to minority partners (2,258) (79)
Issuance of common stock 1,265 1,127
Repurchase of common shares (21,634) --
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (51,284) 145,192
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 9,248 8,047
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,260 332
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,508 $ 8,379
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 9,060 $ 7,990
========= =========
Income taxes paid, net of refunds $ 101 $ 4,085
========= =========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
Page Five of Sixteen 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) SUBSEQUENT EVENTS
Subsequent to the first 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.
Also subsequent to March 31, 1999, the Company signed a definitive agreement to
acquire the assets and operations of Doctor's Hospital of Laredo from
Columbia/HCA Healthcare Corporation in exchange for the assets and operations of
its Victoria Regional Medical Center. Final completion of the exchange is
expected to occur during the second quarter of 1999.
(5) NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Page Six of Sixteen Pages
<PAGE> 7
Statement 133 is effective as of the beginning of fiscal years beginning after
June 15, 1999. A company may also implement the Statement as of the beginning of
any fiscal quarter after the issuance. Statement 133 cannot be applied
retroactively. Statement 133 must be applied to (a) derivative instruments and
(b) certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantially modified after December 31, 1997 ( and at the
company's election, before January 1, 1998).
The Company expects to adopt Statement 133 in January 2000 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 MARCH 31, 1999
----------------------------------------------------------------------
BEHAVIORAL
ACUTE CARE HEALTH TOTAL
SERVICES SERVICES OTHER CONSOLIDATED
----------------------------------------------------------------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Gross inpatient revenues $720,137 $88,690 $6,108 $814,935
Gross outpatient revenues $237,605 $23,601 $25,059 $286,265
Total net revenues $441,273 $59,638 $19,184 $520,095
EBITDAR (A) $97,150 $10,497 ($10,219) $97,428
Total assets $1,236,830 $125,495 $105,515 $1,467,840
Licensed beds 4,824 1,797 -------- 6,621
Available beds 4,109 1,782 -------- 5,891
Patient days 254,330 95,744 -------- 350,074
Admissions 53,187 8,648 -------- 61,835
Average length of stay 4.8 11.1 -------- 5.7
</TABLE>
Page Seven of Sixteen Pages
<PAGE> 8
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
----------------------------------------------------------------------
BEHAVIORAL
ACUTE CARE HEALTH TOTAL
SERVICES SERVICES OTHER CONSOLIDATED
----------------------------------------------------------------------
(Dollar amount in thousands)
<S> <C> <C> <C> <C>
Gross inpatient revenues $608,710 $84,273 $4,965 $697,948
Gross outpatient revenues $197,863 $22,214 $16,032 $236,109
Total net revenues $392,941 $56,795 $13,381 $463,117
EBITDAR (A) $86,804 $9,806 ($12,835) $83,775
Total assets $1,216,675 $132,802 $115,227 $1,464,704
Licensed beds 4,370 1,779 -------- 6,149
Available beds 3,753 1,764 -------- 5,517
Patient days 218,626 89,428 -------- 308,054
Admissions 44,870 8,093 -------- 52,963
Average length of stay 4.9 11.1 -------- 5.8
</TABLE>
(A) EBITDAR - Earnings before interest, income taxes, depreciation,
amortization, lease & rental and minority interest expense.
Page Eight of Sixteen Pages
<PAGE> 9
ITEM 2. 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 12% to $520 million for the three months ended March 31,
1999 as compared to $463 million for the three month period ended March 31,
1998. The $57 million increase in net revenues was due primarily to: (i) a $27
million or 6.0% increase in net revenues at the Company's acute care and
behavioral health care facilities owned during both periods, and; (ii) the
acquisition of four acute care facilities located in Puerto Rico and Las Vegas,
Nevada which were acquired during the first quarter of 1998.
Earnings before interest, income taxes, depreciation, amortization and lease and
rental expense (before deducting minority interests in earnings of consolidated
entities) ("EBITDAR") increased to $97 million for the three month period ended
March 31, 1999 from $84 million in the comparable prior year quarter. Overall
operating margins were 18.7% in the 1999 first quarter as compared to 18.1% in
the 1998 quarter ended March 31, 1998. The increase in the overall operating
margin was primarily due to an increase in the operating margins at the
Company's acute care and behavioral health care facilities owned during both
periods.
ACUTE CARE SERVICES
Net revenues from the Company's acute care hospitals, ambulatory treatment
centers and specialized women's health centers accounted for 88% of consolidated
net revenues in each of the quarters ended March 31, 1999 and 1998. Net revenues
at the Company's acute care facilities owned in both quarters ended March 31,
1999 and 1998 increased 6.1% in the 1999 first quarter as compared to the
comparable 1998 period. The increase in net revenue was due primarily to a 7.4%
increase in admissions and a 5.1% increase in patient days at these facilities.
The average length of stay at the acute care facilities owned during both
periods decreased 2.1% to 4.8 days for the three month period ended March 31,
1999 as compared to 4.9 days in the comparable prior year quarter.
Page Nine of Sixteen Pages
<PAGE> 10
The decrease in the average length of stay at the Company's facilities was due
primarily to improvement in case management of Medicare and Medicaid patients
and an increasing shift of patients into managed care plans which generally have
lower lengths of stay. The increase in net revenues at the Company's acute care
facilities was caused primarily by an increase in inpatient admissions and an
increase in outpatient activity. Outpatient activity continues to increase as
gross outpatient revenues at the Company's acute care facilities owned in both
periods ended March 31, 1999 and 1998 increased 14% during the three month
period ended March 31, 1999 as compared to the comparable prior year quarter and
comprised 26% of the Company's acute care gross patient revenue in the 1999
first quarter as compared to 25% in the quarter ended March 31, 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.
BEHAVIORAL HEALTH SERVICES
Net revenues from the Company's behavioral health services facilities accounted
for 12% of consolidated net revenues in each of the three month periods ended
March 31, 1999 and 1998. Net revenues at the Company's behavioral health
services facilities owned in both periods increased 5.0% for the three month
period ended March 31, 1999 as compared to the comparable prior year quarter.
Admissions and patient days at these facilities increased 6.9% and 7.1%,
respectively, during the three month period ended March 31, 1999 as compared to
the comparable prior year period. The average length of stay at the behavioral
health services facilities owned in both periods increased slightly to 11.1 days
during the 1999 first quarter as compared to 11.0 days in the comparable prior
year period.
Despite the slight increase in the average length of stay during the 1999 first
quarter as compared to the comparable prior year quarter, the Company's
behavioral health 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
services facilities owned in both periods increased 6% in the three month period
ended March 31, 1999 as compared to the comparable prior year period and
comprised 21% of the Company's behavioral health services gross patient revenues
in each of the quarters ended March 31, 1999 and 1998.
OTHER OPERATING RESULTS
The Company recorded minority interest expense in the earnings of consolidated
entities amounting to $4.0 million for the three months ended March 31, 1999 and
$1.7 million for the three month period ended March 31, 1998. 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 (one of which was purchased during the
1998 first quarter) and one located in Washington, DC.
Page Ten of Sixteen Pages
<PAGE> 11
Depreciation and amortization expense increased 10% or $2.5 million for the
three months ended March 31, 1999 as compared to the comparable prior year
quarter. The increase was due primarily to the four acute care hospitals
acquired during the first quarter of 1998 (three in Puerto Rico and one in Las
Vegas). Interest expense increased 3% or $175,000 during the 1999 first quarter
over the comparable prior year period.
The effective tax rate was 37.1% for the three months ended March 31, 1999 as
compared to 35.7% for the three months ended March 31, 1998. The increase in the
effective tax rate during the 1999 first quarter as compared to the prior year
quarter was due to a reduction in the tax benefits related to the financing of
employee benefit programs.
GENERAL TRENDS
An significant portion of the Company's revenue is derived from fixed payment
services, including Medicare and Medicaid which accounted for 43% and 44% of the
Company's net patient revenues during the three month periods ended March 31,
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.
Reimbursements 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 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
Page Eleven of Sixteen Pages
<PAGE> 12
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 for the three
month period ended March 31, 1999 and $8.6 million for the three month period
ended March 31, 1998. These programs are scheduled to terminate in the third
quarter of 1999 and although these programs have been renewed annually in the
past, the Company cannot predict whether these programs will continue beyond
their scheduled termination date. However, failure to renew these programs at
their current levels could have a material adverse effect on the Company's
future results of operations.
In addition to the Medicare and Medicaid programs, other payors, including
managed care companies, continue to actively negotiate the amounts they will pay
for services performed. 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 and clinical software and believes that such
software is substantially Year 2000 compliant. As to certain peripheral
software, the Company has scheduled upgrades to be completed by June, 1999. For
its biomedical equipment, the Company expects to complete the assessment phase
of its Year 2000 analysis by early in the second quarter of 1999. The Company
believes that Year 2000 related remediation costs incurred through March 31,
1999 have not had a material impact on its results of operations. However, the
Company is not able to reasonably estimate the total capital costs to be
incurred for equipment replacement since the equipment analysis phase has not
yet been completed. 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.
Page Twelve of Sixteen Pages
<PAGE> 13
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 $73 million for the three months
ended March 31, 1999 as compared to $46 million for the three month period ended
March 31, 1998. The $27 million net increase during the 1999 first quarter as
compared to the comparable prior year quarter was primarily attributable to: (i)
a $7 million favorable increase in net income plus the addback of depreciation
and amortization expense; (ii) a $4 million favorable decrease in income tax
payments, net of refunds, and; (iii) $16 million of other net favorable working
capital changes.
During the first three months of 1999, the Company spent approximately $13
million to finance capital expenditures at its existing hospitals as compared to
$20 million in the prior year three month period. 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 $187 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 this program, the Company repurchased 520,679 shares at an average
repurchase price of $41.55 per share ($21.6 million in the aggregate) during the
three months ended March 31, 1999. Subsequent to March 31, 1999, the Company
repurchased an additional 155,000 shares at an average repurchase price of
$38.71 per share ($6.0 million in the aggregate). Since inception of this
program through April 30, 1999, the Company repurchased 1,256,179 shares at an
average repurchase price of $41.83 per share ($52.5 million in the aggregate).
As of March 31, 1999, the Company had $222 million of unused borrowing capacity
under the terms of its $400 million revolving credit agreement which matures in
July 2002 and provides for interest at the Company's option at the prime rate,
certificate of deposit plus 3/8% to 5/8%, Euro-dollar plus 1/4% to 1/2% or money
market. As of March 31, 1999, the Company had $5 million of 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 March 31, 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 Thirteen of Sixteen Pages
<PAGE> 14
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.
Page Fourteen of Sixteen Pages
<PAGE> 15
PART II. OTHER INFORMATION
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K
None
11. Statement re computation of per share earnings is set forth on Page six in
Note 2 of the Notes to Condensed Consolidated Financial Statements.
All other items of this Report are inapplicable.
Page Fifteen of Sixteen Pages
<PAGE> 16
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: May 13, 1999 /s/ Kirk E. Gorman
------------------------------------------
Kirk E. Gorman, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer).
Page Sixteen of Sixteen Pages
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