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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, 1998
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-10454
UNIVERSAL HEALTH SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-2077891
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
UNIVERSAL CORPORATE CENTER
367 SOUTH GULPH ROAD
KING OF PRUSSIA, PENNSYLVANIA 19406
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(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, 1998:
Class A 2,058,929
Class B 30,410,054
Class C 207,230
Class D 29,926
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Page One of Fourteen Pages
2
UNIVERSAL HEALTH SERVICES, INC.
-------------------------------
I N D E X
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PART I. FINANCIAL INFORMATION..........................................PAGE NO.
--------
Item 1. Financial Statements
Consolidated Statements of Income -
Three and Six Months Ended June 30, 1998 and 1997...................Three
Condensed Consolidated Balance Sheets - June 30, 1998
and December 31, 1997................................................Four
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997..............................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
PART II. OTHER INFORMATION............................................Thirteen
SIGNATURE..............................................................Fourteen
Page Two of Fourteen Pages
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PART I. FINANCIAL INFORMATION
-----------------------------
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(000s omitted except per share amounts)
-------------------------------------
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
----------------------------- -----------------------------
Net revenues $ 474,558 $ 343,826 $ 937,675 $ 683,996
Operating charges:
Operating expenses 195,125 136,412 376,076 266,468
Salaries and wages 165,721 119,138 326,846 238,885
Provision for doubtful accounts 32,990 27,450 70,256 51,113
Depreciation and amortization 26,272 19,815 50,708 38,843
Lease and rental expense 12,172 9,307 23,577 18,428
Interest expense, net 7,083 5,384 13,390 10,340
--------- --------- --------- ---------
439,363 317,506 860,853 624,077
--------- --------- --------- ---------
Income before minority interests and income taxes 35,195 26,320 76,822 59,919
Minority interests in earnings of consolidated entities 3,526 (147) 5,274 (529)
--------- --------- --------- ---------
Income before income taxes 31,669 26,467 71,548 60,448
Provision for income taxes 11,208 9,560 25,437 22,011
--------- --------- --------- ---------
Net income $ 20,461 $ 16,907 $ 46,111 $ 38,437
========= ========= ========= =========
Earnings per common share - basic $ 0.63 $ 0.52 $ 1.42 $ 1.19
========= ========= ========= =========
Earnings per common share - diluted $ 0.61 $ 0.51 $ 1.38 $ 1.16
========= ========= ========= =========
Weighted average number of common shares - basic 32,626 32,318 32,571 32,268
Weighted average number of common share equivalents 874 785 834 767
--------- --------- --------- ---------
Weighted average number of common shares and equiv. - diluted 33,500 33,103 33,405 33,035
========= ========= ========= =========
See accompanying notes to these condensed consolidated financial statements.
Page Three of Fourteen Pages
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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(000's omitted)
---------------
JUNE 30, DECEMBER 31,
-------- ------------
1998 1997
---- ----
(UNAUDITED)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,704 $ 332
Accounts receivable, net 252,530 180,252
Supplies 36,655 28,214
Deferred income taxes 20,224 11,105
Other current assets 11,292 10,119
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Total current assets 323,405 230,022
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Property and equipment 1,131,724 950,961
Less: accumulated depreciation (361,008) (328,881)
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770,716 622,080
Funds restricted for construction 42,197 41,031
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812,913 663,111
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OTHER ASSETS:
Excess of cost over fair value of net
assets acquired 278,700 149,814
Deferred charges 14,686 10,852
Other 29,816 31,550
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323,202 192,216
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$ 1,459,520 $ 1,085,349
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,895 $ 5,655
Accounts payable and accrued liabilities 180,968 153,094
Federal and state taxes ----- 1,707
----------- -----------
Total current liabilities 185,863 160,456
----------- -----------
Other noncurrent liabilities 212,578 125,286
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Long-term debt, net of current maturities 418,435 272,466
----------- -----------
Deferred income taxes 23,638 534
----------- -----------
COMMON STOCKHOLDERS' EQUITY:
Class A Common Stock, 2,058,929 shares
outstanding in 1998, 2,059,929 in 1997 21 21
Class B Common Stock, 30,405,884 shares
outstanding in 1998, 30,122,479 in 1997 304 301
Class C Common Stock, 207,230 shares
outstanding in 1998, 207,230 in 1997 2 2
Class D Common Stock, 30,170 shares
outstanding in 1998, 32,063 in 1997 ----- -----
Capital in excess of par, net of deferred
compensation of $327,000 in 1998
and $295,000 in 1997 246,941 200,656
Retained earnings 371,738 325,627
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619,006 526,607
----------- -----------
$ 1,459,520 $ 1,085,349
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See accompanying notes to these condensed consolidated financial statements.
Page Four of Fourteen Pages
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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(000s omitted - unaudited)
SIX MONTHS ENDED
----------------
JUNE 30,
1998 1997
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46,111 $ 38,437
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization 50,708 38,843
Changes in assets & liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable (16,692) (4,042)
Accrued interest 811 (149)
Accrued and deferred income taxes (3,208) (773)
Other working capital accounts 9,590 10,424
Other assets and deferred charges (4,605) (4,555)
Other 3,866 5,118
Accrued insurance expense, net of commercial premiums paid 4,201 8,874
Payments made in settlement of self-insurance claims (12,551) (12,554)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 78,231 79,623
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions, net (44,447) (66,736)
Proceeds received from partial sale transaction, net 11,185 ----
Acquisition of business (186,080) ----
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (219,342) (66,736)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt ---- (13,751)
Additional borrowings 142,209 ----
Issuance of common stock 1,274 1,198
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 143,483 (12,553)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 2,372 334
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 332 288
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,704 $ 622
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 12,579 $ 10,489
========= =========
Income taxes paid, net of refunds $ 29,083 $ 22,784
========= =========
See accompanying notes to these condensed consolidated financial statements.
Page Five of Fourteen Pages
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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, 1997.
Certain prior year amounts have been reclassified to conform with current year
financial statement presentation.
(2) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" (SFAS 128). SFAS 128 establishes standards for
computing and presenting earnings per share (EPS). Basic earnings per share are
based on the weighted average number of common shares outstanding during the
year. Diluted earnings per share are based on the weighted average number of
common shares outstanding during the year adjusted to give effect to common
stock equivalents. The per share amounts for the three and six months ended June
30, 1997 have been restated to conform to SFAS 128.
(3) OTHER LIABILITIES
Other noncurrent liabilities include the long-term portion of the Company's
professional and general liability and workers' compensation reserves. Effective
January 1, 1998, the Company is covered under commercial insurance policies
which provide for a self-insured retention limit for professional and general
liability claims for most of its subsidiaries up to $1 million per occurrence,
with an average annual aggregate for covered subsidiaries of $4 million through
2001. These subsidiaries maintain excess coverage up to $100 million with major
insurance carriers. The Company's remaining facilities are fully insured under
commercial policies with excess coverage up to $100 million maintained with
major insurance carriers. During 1996 and 1997, most of the Company's
subsidiaries were self-insured for professional and general liability claims up
to $5 million per occurrence, with excess coverage maintained up to $100 million
with major insurance carriers.
(4) 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.
Page Six of Fourteen Pages
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(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.
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 has not yet quantified the impact of adopting Statement 133 on its
financial statements and has not determined the timing of or method of adoption
of Statement 133. However, the Statement could increase the volatility in
earnings and other comprehensive income.
Page Seven of Fourteen Pages
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
- ---------------------
Net revenues increased 38% or $131 million for the three months ended June 30,
1998 and 37% or $254 million for the six months ended June 30, 1998, over the
comparable prior year periods. The increase in net revenues during the three and
six month periods ended June 30, 1998 as compared to the comparable 1997 periods
was due primarily to: (i) the acquisition of an 80% interest in a 501-bed acute
care facility during the third quarter of 1997, the opening of a newly
constructed 148-bed acute care facility which opened during the fourth quarter
of 1997 and the acquisition of three acute care facilities located in Puerto
Rico (one of which opened in April, 1998) and one acute care facility located in
Las Vegas which were acquired during the first quarter of 1998 ($110 million for
the three months ended June 30 and $199 million for the six months ended June
30), and; (ii) revenue growth at acute care and behavioral health care
facilities owned during both periods ($12 million for the three months ended
June 30 and $38 million for the six months ended June 30).
Earnings before interest, income taxes, depreciation, amortization and lease
rental expense (before deducting minority interests in earnings of consolidated
entities) ("EBITDAR") increased 33% or $20 million to $81 million for the three
months ended June 30, 1998 as compared to $61 million during the three months
ended June 30, 1997. For the six months ended June 30, 1998, EBITDAR increased
29% or $37 million to $164 million as compared to $128 million during the six
months ended June 30, 1997.
Overall operating margins were 17.0% and 17.7% for the three month periods ended
June 30, 1998 and 1997 and 17.5% and 18.6% for the six month periods ended June
30, 1998 and 1997, respectively. The decrease in the Company's overall operating
margin during the three and six month periods ended June 30, 1998 as compared to
the comparable prior year periods was due primarily to lower operating margins
at three of the acute care facilities acquired within the last twelve months
(one located in Washington, DC and two located in Puerto Rico) and the opening
of three acute care facilities subsequent to the second quarter of 1997 (located
in Texas, Nevada and Puerto Rico). The lower operating margin experienced during
the second quarter of 1998 was partially due to a delay in Medicare
certification (not received until late May, 1998) at an acute care facility
located in Puerto Rico which was opened in April, 1998.
ACUTE CARE SERVICES
- -------------------
Net revenues from the Company's acute care hospitals, ambulatory treatment
centers and specialized women's health centers accounted for 86% and 84% of
consolidated net revenues for the three months ended June 30, 1998 and 1997 and
87% and 84% of consolidated net revenues for the six months ended June 30, 1998
and 1997, respectively. Net revenues at the Company's acute care facilities
owned in both periods increased 3% and 5% during the three and six months ended
June 30, 1998 as compared to the comparable prior year periods due primarily to
an increase in admissions at these facilities. Inpatient admissions at these
facilities increased 4% and 5% for the three and six months ended June 30,
1998, respectively, as compared to the comparable prior year periods. Despite
the increase in inpatient admissions, patient days at these facilities
decreased 2% during the three months ended June 30, 1998 and remained unchanged
during the six months ended June 30, 1998, as compared to the comparable prior
year periods, due to a decrease in the average length of stay. The average
length of stay decreased 6% to 4.6 days during the three months ended June 30,
1998 as compared to 4.9 days during the three months ended June 30, 1997 and
decreased 5% to 4.7 days during the six months ended June 30, 1998 as compared
to 5.0 days during the six months ended June 30, 1997.
Page Eight of Fourteen Pages
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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. In addition to an increase in inpatient admissions, the
Company's outpatient activity continues to increase as gross outpatient revenues
at acute care facilities owned during both periods increased 12% for the three
and six months ended June 30, 1998 as compared to the comparable 1997 periods
and comprised 26% of the Company's acute care gross patient revenues for the
three and six months ended June 30, 1998 and 1997.
The increase in outpatient revenues is primarily the result of advances in
medical technologies and pharmaceutical improvements, which allow more services
to be provided on an outpatient basis, and increased pressure from Medicare,
Medicaid, health maintenance organizations (HMOs), preferred provided
organizations (PPOs) and insurers to reduce hospital stays and provide services,
where possible, on a less expensive outpatient basis. The hospital industry in
the United States as well as the Company's acute care facilities continue to
have significant unused capacity which has created substantial competition for
patients. Inpatient utilization continues to be negatively affected by
payor-required, pre-admission authorization and by payor pressure to maximize
outpatient and alternative healthcare delivery services for less acutely ill
patients. The Company expects the increased competition, admission constraints
and payor pressures to continue.
BEHAVIORAL HEALTH SERVICES
- --------------------------
Net revenues from the Company's behavioral health facilities accounted for 13%
and 16% of consolidated net revenues for the three months ended June 30, 1998
and 1997 and 13% and 15% of consolidated net revenues for the six months ended
June 30, 1998 and 1997, respectively. Net revenues at the Company's behavioral
health facilities owned in both periods increased 8% during the three and six
month periods ended June 30, 1998 as compared to the comparable prior year
periods due primarily to an increase in inpatient admissions. Inpatient
admissions at these facilities increased 19% and 15% during the three and six
month periods ended June 30, 1998, respectively, as compared to the comparable
prior year periods. Patient days at the Company's behavioral health facilities
owned during both periods increased 10% and 8% during the three and six month
periods ended June 30, 1998, respectively, as compared to the comparable prior
year periods. The average length of stay at the facilities owned in both periods
decreased 8% to 11.5 days during the three month period ended June 30, 1998 from
12.4 days in the comparable prior year period and decreased 6% to 11.3 days
during the six months ended June 30, 1998 as compared to 12.0 days during the
comparable prior year period.
The continued reduction in the average length of stay is a result of changing
practices in the delivery of behavioral health services and continued cost
containment pressures from payors which includes a greater emphasis on the
utilization of outpatient services. Management of the Company has responded to
these trends by continuing to develop and market new outpatient treatment
programs. The shift to outpatient care is reflected in higher revenues from
outpatient services, as gross outpatient revenues at the Company's behavioral
health services facilities owned in both periods increased 20% and 15% during
the three and six months ended June 30, 1998 as compared to the comparable prior
year periods and comprised 21% of behavioral health gross patient revenues for
the three and six month periods ended June 30, 1998 as compared to 20% during
the three and six month periods ended June 30, 1997.
OTHER OPERATING RESULTS
- -----------------------
The Company recorded minority interest expense/(income) in earnings or (losses)
of consolidated entities amounting to $3.5 million and ($147,000) for the three
months ended June 30, 1998 and 1997 and $5.3 million and ($529,000) for the six
month periods ended June 30, 1998 and 1997, respectively. The minority interest
expense recorded during the 1998 three and six month periods consists primarily
Page Nine of Fourteen Pages
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of the minority ownership's share of the net income of four acute care
facilities, three of which are located Las Vegas, Nevada and one located in
Washington, DC.
Depreciation and amortization expense increased 33% or $6 million for the three
months ended June 30, 1998 and 31% or $12 million for the six months ended June
30, 1998 as compared to the comparable prior year periods, due primarily to the
1997 and 1998 acquisitions mentioned above and the opening of the newly
constructed acute care facilities during the third and fourth quarters of 1997.
Interest expense increased 32% or $2 million during the three month period ended
June 30, 1998 and 30% or $3 million during the six month period ended June 30,
1998 as compared to the comparable 1997 periods due primarily to the increased
borrowings used to partially finance the 1997 and 1998 acquisitions mentioned
above.
The effective tax rate was 35.4% and 36.1% for the three months ended June 30,
1998 and 1997, respectively, and 35.6% and 36.4% for the six month periods ended
June 30, 1998 and 1997, respectively.
GENERAL TRENDS
- --------------
An increased proportion of the Company's revenue is derived from fixed payment
services, including Medicare and Medicaid which accounted for 46% and 52% of the
Company's net patient revenues for the three months ended June 30, 1998 and 1997
and 47% and 51% of the Company's net patient revenues for the six months ended
June 30, 1998 and 1997, respectively. The Medicare program reimburses the
Company's hospitals primarily based on established rates by a diagnosis related
group ("DRG") for acute care hospitals and by cost based formula for behavioral
health facilities. Historically, rates paid under Medicare's prospective payment
system ("PPS") for inpatient services have increased, however, these increases
have been less than cost increases. Pursuant to the terms of The Balanced Budget
Act of 1997 (the "1997 Act"), there will be no increases in the rates paid to
hospitals for inpatient care through September 30, 1998. The Company expects
that the modest rate increases that will take effect on October 1, 1998 will be
largely offset by the negative impact of converting reimbursement on skilled
nursing facility patients from a cost reimbursed to a prospective payment system
and from lower DRG payments on certain patient transfers as mandated by the 1997
Act. Reimbursement for bad debt expense and capital costs as well as other items
have been reduced. While the Company is unable to predict what, if any, future
health reform legislation may be enacted at the federal or state level, the
Company expects continuing pressure to limit expenditures by governmental
healthcare programs. Further changes in the Medicare or Medicaid programs and
other proposals to limit healthcare spending could have a material adverse
impact upon the Company and the healthcare industry.
In Texas, a law has been passed which mandates that the state apply for a waiver
from current Medicaid regulations to allow the state to require that certain
Medicaid participants be serviced through managed care providers. The Company is
unable to predict whether Texas will be granted such a waiver or the effect on
the Company's business of such a waiver. Upon meeting certain conditions, and
serving a disproportionately high share of Texas' and South Carolina's low
income patients, three of the Company's facilities located in Texas and one
facility located in South Carolina became eligible and received additional
reimbursements from each state's disproportionate share hospital fund. Included
in the Company's financial results was an aggregate of $8.6 million and $8.3
million for the three months ended June 30, 1998 and 1997 and $17.2 million and
$16.5 million for the six months ended June 30, 1998 and 1997, respectively,
received pursuant to the terms of these programs. These programs, which have
recently been renewed, are scheduled to terminate in the third quarter of 1999
and the Company cannot predict whether these programs will continue beyond their
scheduled termination date. In addition to the Medicare and Medicaid programs,
other payors continue to actively negotiate the amounts they will pay for
services performed. In general, the Company expects the
Page Ten of Fourteen Pages
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percentage of its business from managed care programs, including HMOs and PPOs
to grow. The consequent growth in managed care networks and the resulting impact
of these networks on the operating results of the Company's facilities vary
among the markets in which the Company operates.
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 identify areas of concern and potential
remedies, prioritize needs, estimate costs and begin work either to repair or
replace data processing software and hardware affected by Year 2000 issues. The
cost associated with addressing Year 2000 related problems is not expected to be
material. However, measurement of the costs has not been completed. The
solutions either involve replacement or repair of the affected software,
hardware and equipment. 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 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. Furthermore, the
Company has initiated formal communications with its significant suppliers and
large payors to determine the extent to which the Company's interface systems
are vulnerable to those third parties' failure to remediate their own Year 2000
issues. However, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted and would not have
a material adverse effect on the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $78 million and $80 million for
the six months ended June 30, 1998 and 1997, respectively. The $2 million
decrease during the 1998 six month period as compared to the comparable prior
year period was primarily attributable to a $13 million increase in accounts
receivable (due primarily to the opening of three acute care facilities
subsequent to the second quarter of 1997) and $9 million of other unfavorable
net working capital changes partially offset by a $20 million increase in the
net income plus the addback of depreciation and amortization expense.
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 which was financed with borrowings under the Company's revolving
credit facility. Also during the first quarter of 1998, the Company contributed
substantially all of the assets, liabilities and operations of Valley Hospital
Medical Center, a 417-bed acute care facility, and its newly-constructed
Summerlin Hospital Medical Center, a 148-bed acute care facility in exchange for
a 72.5% interest in a series of newly-formed limited liability companies
("LLCs"). Quorum Health Group, Inc. ("Quorum") holds the remaining 27.5%
interest in the LLCs. Quorum obtained its interest by contributing substantially
all of the assets, liabilities and operations of Desert Springs Hospital, a
241-bed acute care facility and $11 million of net cash to the LLCs. As a result
of this partial sale transaction, the Company recorded a pre-tax gain of
approximately $55 million (approximately $35 million after-tax) that was
recorded as a capital contribution to the Company in accordance with the
Securities and Exchange Commission's Staff Accounting Bulletin No. 51. The
Company does not expect this merger to have a material impact on its 1998
results of operations. Also during the first six months of 1998, the Company
spent
Page Eleven of Fourteen Pages
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approximately $44 million to finance capital expenditures at its existing
hospitals as compared to $67 million in the prior year six month period.
Included in the capital expenditures for the six months ended June 30, 1997 was
$38 million spent on the construction of a new acute care facility located in
Summerlin, Nevada and a new acute care facility located in Edinburg, Texas which
opened in the third and fourth quarters of 1997.
During the second quarter of 1998, the Company amended its revolving credit
agreement to increase the borrowing capacity to $400 million from $300 million.
As of June 30, 1998, the Company had approximately $176 million of unused
borrowing capacity under the terms of its $400 million revolving credit
facility, as amended, which matures in July 2002 and no unused borrowing
capacity under the terms of its $75 million commercial paper credit facility.
The Company expects to finance all capital expenditures and acquisitions with a
combination of internally generated funds and funds raised from outside sources.
Additional funds may be obtained either through refinancing the existing
revolving credit agreement, the commercial paper facility or the issuance of
securities.
FORWARD-LOOKING STATEMENTS
- --------------------------
The matters discussed in this report as well as the news releases issued from
time to time by the Company include certain statements containing the words
"believes", "anticipates", "intends", "expects" and words of similar import,
which constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance achievements of the Company or industry results
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: that the majority of the Company's revenues
are produced by a small number of its total facilities, possible changes in the
levels and terms of reimbursement for the Company's charges by government
programs, including Medicare or Medicaid or other third party payers, the
ability to attract and retain qualified personnel, including physicians, the
ability of the Company to successfully integrate its recent acquisitions and the
Company's ability to finance growth on favorable terms. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. The Company disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future events
or developments.
Page Twelve of Fourteen Pages
13
PART II. OTHER INFORMATION
--------------------------
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
(a) The following information relates to matters submitted to the stockholders
of Universal Health Services, Inc. (the "Company") at the Annual Meeting of
Stockholders held on May 20, 1998.
(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:
Adoption of the Amendment and Restatement of the
Company's 1992 Stock Option Plan
Votes cast in favor 24,562,987
Votes cast against 707,857
Votes abstained 5,656
Broker non-votes 0
Election by Class A & Class C stockholders of one
Class II Director, Anthony Pantaleoni:
Votes cast in favor 2,262,229
Votes withheld 0
Election by Class B and Class D stockholders of one
Class II Director, Robert H. Hotz:
Votes cast in favor 26,837,805
Votes withheld 437,137
(d) Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
10.1 Amendment dated as of June 29, 1998 to the Credit Agreement dated as
of July 8,1997 among UNIVERSAL HEALTH SERVICES, INC., the BANKS party thereto
and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as the Agent.
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 Thirteen of Fourteen Pages
14
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, 1998 /s/ Kirk E. Gorman
-------------------------------
Kirk E. Gorman, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer).
Page Fourteen of Fourteen Pages
1
EXHIBIT 10.1
EXECUTION COPY
AMENDMENT NO. 1 TO CREDIT AGREEMENT
AMENDMENT dated as of June 29, 1998 to the Credit Agreement dated as of
July 8. 1997 (the "CREDIT AGREEMENT") among UNIVERSAL HEALTH SERVICES, INC.
(the "BORROWER"), the BANKS party thereto (the "BANKS") and MORGAN GUARANTY
TRUST COMPANY OF NEW YORK, as the Agent (the "AGENT").
W I T N E S S E T H :
WHEREAS, as contemplated by Section 2.19 of the Credit Agreement, the
Borrower wished to increase the aggregate amount of the Commitments by
$100,000,000 to an aggregate amount of $400,000,000;
WHEREAS, the Banks listed on the signature pages hereof are willing to
increase their respective Commitments to the respective amounts set forth
opposite their names on the signature pages hereof, resulting in an
aggregate increase in their respective Commitments equal to the $100,000,000
increase requested by the Borrower;
WHEREAS, the parties hereto desire to enter into this Amendment to serve
as the agreement contemplated by Section 2.19(d)(i) to memorialize such
increase in the Commitments, and this Amendment is satisfactory in form and
substance to the Agent for such purpose; and
WHEREAS, at the date hereof there are no Loans outstanding under the
Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Defined Terms; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Credit
Agreement has the meaning assigned to such term in the Credit Agreement.
Each reference to "hereof", "hereunder", "herein" and "hereby" and each
similar reference and each reference to "this Agreement" and each similar
reference contained in the Credit Agreement shall, after this Amendment
becomes effective, refer to the Credit Agreement as amended hereby. The term
"Notes" defined in the Agreement shall include from and after the date
hereof the New Notes (as defined below).
2
SECTION 2. Increases in Commitments. With effect from and including the
Amendment Effective Date (as defined in Section 6 below), (i) each Person
listed on the signature pages hereof which is not a party to the Agreement
(a "New Bank") shall become a Bank party to the Agreement and (ii) the
Commitment of each Bank listed on the signature pages hereof shall be the
amount set forth opposite its name on the signature pages hereof, as such
amount may be changed from time to time subsequent to the Amendment
Effective Date pursuant to Section 2.09, 2.11 or 2.06(c) of the Credit
Agreement. Any Bank whose Commitment is changed to zero shall upon such
effectiveness cease to be a Bank party to the Agreement, and all accrued
fees and other amounts payable under the Agreement for the account of such
Bank shall be due and payable on such date; provided that the provisions of
Section 8.03 and 9.03 of the Agreement shall continue to inure to the
benefit of such Bank.
SECTION 3. Representations of Borrower. The Borrower represents and
warrants that (i) the representations and warranties of the Borrower set
forth in Article 4 of the Credit Agreement will be true on and as of the
Amendment Effective Date and (ii) no Default will have occurred and be
continuing on such date.
SECTION 4 Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 5 Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
SECTION 6 Effectiveness. This Amendment shall become effective as of the
date hereof on the date when the following conditions are met (the
"AMENDMENT EFFECTIVE DATE"):
(a) the Agent shall have received from each of the Borrower and the
Banks listed on the signature pages hereof a counterpart hereof signed
by such party or facsimile or other written confirmation (in form
satisfactory to the Agent) that such party has signed a counterpart
hereof;
(b) the Agent shall have received a duly executed Note for the New Bank
( a "New Note"), dated on or before date of effectiveness hereof and
otherwise in compliance with Section 2.05 of the Agreement;
(c) the Agent shall have received an opinion of the General Counsel of
the Borrower, substantially to the effect of paragraphs 2 and 3 of
Exhibit E-2 to the Credit Agreement with reference to this Amendment and
the Credit Agreement as amended hereby; and
2
3
(d) the Agent shall have received a certified copy of action by the
Board of Directors of the Borrower authorizing the increase in the
aggregate amount of the Commitments effected pursuant to this Amendment.
3
4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
UNIVERSAL HEALTH SERVICES, INC
By /s/ Kirk E. Gorman
----------------------
Title: Senior Vice President and
Chief Financial Officer
4
5
Commitments
- -----------
$68,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By
---------------------------------------
Title:
$57,000,000 BANK OF AMERICA NATIONAL
TRUST AND SAVINGS
ASSOCIATION
By
---------------------------------------
Title:
$57,000,000 NATIONSBANK, N.A
By
---------------------------------------
Title:
$45,000,000 FIRST UNION NATIONAL BANK
By
---------------------------------------
Title:
$43,000,000 THE CHASE MANHATTAN BANK
By
---------------------------------------
Title:
5
6
$30,000,000 PNC BANK, N.A.
By
---------------------------------------
Title:
$25,000,000 BANCO POPULAR DE PUERTO RICO
By
---------------------------------------
Title:
By
---------------------------------------
Title:
$25,000,000 THE FIRST NATIONAL BANK,
OF CHICAGO
By
---------------------------------------
Title:
$25,000,000 FLEET NATIONAL BANK
By
---------------------------------------
Title:
$25,000,000 MELLON BANK, N.A.
By
---------------------------------------
Title:
$-0- CORESTATES BANK, N.A.
By
---------------------------------------
Title:
6
5
0000352915
UNIVERSAL HEALTH SERVICES, INC.
1,000
U.S. DOLLARS
3-MOS
DEC-31-1998
JAN-01-1998
JUN-30-1998
1
2,704
0
252,530
0
36,655
323,405
1,173,921
361,008
1,459,520
185,863
418,435
0
0
327
618,679
1,459,520
0
937,675
0
702,922
79,559
70,256
13,390
71,548
25,437
46,111
0
0
0
46,111
1.42
1.38
