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 September 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
------------ ----------
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
(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 October 31, 1998:
Class A 2,058,929
Class B 30,449,993
Class C 207,230
Class D 29,220
Page One of Fifteen Pages
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UNIVERSAL HEALTH SERVICES, INC.
I N D E X
PART I. FINANCIAL INFORMATION..............................................................PAGE NO.
Item 1. Financial Statements
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1998 and 1997................... Three
Condensed Consolidated Balance Sheets - September 30, 1998
and December 31, 1997..................................................... Four
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 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, & Thirteen
PART II. OTHER INFORMATION..................................................... Fourteen
SIGNATURE....................................................................... Fifteen
Page Two of Fifteen 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 Nine Months
Ended September 30, Ended September 30,
--------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
Net revenues $ 456,090 $ 362,377 $ 1,393,765 $ 1,046,373
Operating charges:
Operating expenses 192,055 147,992 568,131 414,460
Salaries and wages 165,547 129,489 492,393 368,374
Provision for doubtful accounts 31,116 29,080 101,372 80,193
Depreciation and amortization 27,160 20,055 77,868 58,898
Lease and rental expense 11,232 10,041 34,809 28,469
Interest expense, net 7,139 4,566 20,529 14,906
----------- ----------- ----------- -----------
434,249 341,223 1,295,102 965,300
----------- ----------- ----------- -----------
Income before minority interests and income taxes 21,841 21,154 98,663 81,073
Minority interests in earnings (losses) of consolidated
entities 1,413 (725) 6,687 (1,254)
----------- ----------- ----------- -----------
Income before income taxes 20,428 21,879 91,976 82,327
Provision for income taxes 7,035 8,060 32,472 30,071
----------- ----------- ----------- -----------
Net income $ 13,393 $ 13,819 $ 59,504 $ 52,256
=========== =========== =========== ===========
Earnings per common share - basic $ 0.41 $ 0.43 $ 1.83 $ 1.62
=========== =========== =========== ===========
Earnings per common share - diluted $ 0.40 $ 0.42 $ 1.78 $ 1.58
=========== =========== =========== ===========
Weighted average number of common shares - basic 32,643 32,346 32,595 32,294
Weighted average number of common share equivalents 690 782 786 772
----------- ----------- ----------- -----------
Weighted average number of common shares and equiv. -
diluted 33,333 33,128 33,381 33,066
=========== =========== =========== ===========
See accompanying notes to these condensed consolidated financial statements.
Page Three of Fifteen Pages
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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000s omitted)
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,340 $ 332
Accounts receivable, net 265,163 180,252
Supplies 37,283 28,214
Deferred income taxes 17,968 11,105
Other current assets 12,153 10,119
----------- -----------
Total current assets 335,907 230,022
----------- -----------
Property and equipment 1,156,881 950,961
Less: accumulated depreciation (380,943) (328,881)
----------- -----------
775,938 622,080
Funds restricted for construction 42,803 41,031
----------- -----------
818,741 663,111
----------- -----------
OTHER ASSETS:
Excess of cost over fair value of net
assets acquired 274,569 149,814
Deferred charges 13,024 10,852
Other 26,851 31,550
----------- -----------
314,444 192,216
----------- -----------
$ 1,469,092 $ 1,085,349
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 4,526 $ 5,655
Accounts payable and accrued liabilities 196,696 153,094
Federal and state taxes -- 1,707
----------- -----------
Total current liabilities 201,222 160,456
----------- -----------
Other noncurrent liabilities 209,961 125,286
----------- -----------
Long-term debt, net of current maturities 405,971 272,466
----------- -----------
Deferred income taxes 25,390 534
----------- -----------
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, 30,306,715 shares
outstanding in 1998, 30,122,479 in 1997 303 301
Class C Common Stock, 207,230 shares
outstanding in 1998, 207,230 in 1997 2 2
Class D Common Stock, 29,269 shares
outstanding in 1998, 32,063 in 1997 -- --
Capital in excess of par, net of deferred
compensation of $238 in 1998
and $295 in 1997 241,091 200,656
Retained earnings 385,131 325,627
----------- -----------
626,548 526,607
----------- -----------
$ 1,469,092 $ 1,085,349
=========== ===========
See accompanying notes to these condensed consolidated financial statements.
Page Four of Fifteen Pages
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UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s omitted - unaudited)
Nine Months Ended
September 30,
-----------------------
1998 1997
---- ----
Cash Flows from Operating Activities:
Net income $ 59,504 $ 52,256
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation & amortization 77,868 58,898
Changes in assets & liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable (28,875) (1,148)
Accrued interest (2,024) (3,179)
Accrued and deferred income taxes 971 7,363
Other working capital accounts 25,765 34,506
Other assets and deferred charges (497) (464)
Other 1,363 5,088
Accrued insurance expense, net of commercial premiums paid 7,688 14,515
Payments made in settlement of self-insurance claims (15,191) (13,652)
--------- ---------
Net cash provided by operating activities 126,572 154,183
--------- ---------
Cash Flows from Investing Activities:
Property and equipment additions, net (71,055) (103,703)
Proceeds received from partial sale transaction, net 10,955 --
Acquisition of business (188,280) (3,218)
Funds restricted for construction related to acquisition of business -- (40,000)
Proceeds received from sale or disposition of assets -- 4,000
--------- ---------
Net cash used in investing activities (248,380) (142,921)
--------- ---------
Cash Flows from Financing Activities:
Reduction of long-term debt -- (5,016)
Additional borrowings 129,376 --
Issuance of common stock 1,487 1,385
Repurchase of common shares (6,047) --
--------- ---------
Net cash provided by (used in) financing activities 124,816 (3,631)
--------- ---------
Increase in cash and cash equivalents 3,008 7,631
Cash and cash equivalents, Beginning of Period 332 288
--------- ---------
Cash and cash equivalents, End of Period $ 3,340 $ 7,919
========= =========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 22,553 $ 18,085
========= =========
Income taxes paid, net of refunds $ 32,025 $ 22,708
========= =========
See accompanying notes to these condensed consolidated financial statements.
Page Five of Fifteen 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 nine months ended
September 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. Prior to January, 1998, most of the Company's
subsidiaries were self-insured for professional and general liability claims up
to $5 million per occurrence, with excess coverage maintained up to $100 million
with major insurance carriers.
(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 Fifteen 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 Fifteen Pages
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Net revenues increased 26% or $94 million for the three months ended September
30, 1998 and 33% or $347 million for the nine months ended September 30, 1998,
over the comparable prior year periods. The increase in net revenues during the
three and nine month periods ended September 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 ($81 million for the three months ended September 30 and $280 million for
the nine months ended September 30), and; (ii) revenue growth at the behavioral
health care facilities owned during both quarters ended September 30, 1998 and
1997 ($4 million) and revenue growth at acute care and behavioral health care
facilities owned during both nine month periods ended September 30, 1998 and
1997 ($41 million).
During the third quarter of 1998, the Company suffered property damage and
curtailed business at its three hospitals in Puerto Rico and its four hospitals
in Louisiana as a result of Hurricane Georges. As a result of the Hurricane, the
Company incurred an estimated adverse pre-tax financial effect of $5.5 million.
The Company can not at this time estimate how much of this expense will be
recovered from its property and business interruption insurance policies. All
electrical power and water service has been restored to all of these hospitals
and each have resumed normal operations.
Including the estimated adverse financial effects of Hurricane Georges, earnings
before interest, income taxes, depreciation, amortization and lease rental
expense (before deducting minority interests in earnings of consolidated
entities) ("EBITDAR") increased 21% or $11 million to $67 million for the three
months ended September 30, 1998 as compared to $56 million during the three
months ended September 30, 1997. For the nine months ended September 30, 1998,
EBITDAR increased 27% or $49 million to $232 million as compared to $183 million
during the nine months ended September 30, 1997.
Excluding the estimated adverse financial effects of Hurricane Georges, earnings
before interest, income taxes, depreciation, amortization and lease rental
expense (before deducting minority interests in earnings of consolidated
entities) increased 31% or $17 million to $73 million for the three months ended
September 30, 1998 and 29% or $54 million to $237 million for the nine months
ended September 30,1998 over the comparable prior year periods.
Including the estimated adverse financial effects of Hurricane Georges, overall
operating margins were 14.8% and 15.4% for the three month periods ended
September 30, 1998 and 1997 and 16.6% and 17.5% for the nine month periods ended
September 30, 1998 and 1997, respectively. Excluding the estimated adverse
financial effects of Hurricane Georges, overall operating margins were 15.9% and
15.4% for the three month periods ended September 30, 1998 and 1997 and 17.0%
and 17.5% for the nine month periods ended September 30, 1998 and 1997,
respectively.
The decrease in the Company's overall operating margin, excluding the effects of
Hurricane Georges, during the nine month period ended September 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).
Page Eight of Fifteen Pages
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ACUTE CARE SERVICES
Net revenues from the Company's acute care hospitals, ambulatory treatment
centers and specialized women's health centers accounted for 87% and 85% of
consolidated net revenues for the three and nine month periods ended September
30, 1998 and 1997, respectively. Net revenues at the Company's acute care
facilities owned in both periods remained relatively unchanged during the three
months ended September 30, 1998 as compared to the comparable prior year period.
During the nine month periods ended September 30, 1998 and 1997, net revenues at
the Company's acute care facilities owned in both periods increased 3% during
the 1998 period as compared to the comparable prior year period. Inpatient
admissions at these facilities increased 3% and 4% for the three and nine months
ended September 30, 1998, respectively, as compared to the comparable prior year
periods. Patient days at these facilities remained unchanged during the three
and nine month periods ended September 30, 1998 as compared to the comparable
prior year periods. The average length of stay at these facilities decreased 3%
to 4.6 days during the three month period ended September 30, 1998 as compared
to 4.7 days during the 1997 third quarter and decreased 4% to 4.7 days during
the nine month period ended September 30, 1998 as compared to 4.9 days in the
comparable prior year period.
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 nine months ended September 30, 1998 as compared to the comparable 1997
periods and comprised 28% and 27% of the Company's acute care gross patient
revenues for the three and nine months ended September 30, 1998, respectively,
and 27% and 26% of the Company's acute care gross patient revenues for the three
and nine month periods ended September 30, 1997, respectively.
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 provider
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 14% of consolidated net revenues during the three month periods ended
September 30, 1998 and 1997 and 13% and 15% of consolidated net revenues for the
nine months ended September 30, 1998 and 1997, respectively. Net revenues at the
Company's behavioral health facilities owned in both periods increased 8% and 9%
during the three and nine month periods ended September 30, 1998, respectively,
as compared to the comparable prior year periods due primarily to an increase in
inpatient admissions. Inpatient admissions at these facilities increased 18% and
16% during the three and nine month periods ended September 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 nine month periods ended September 30, 1998,
respectively, as compared to the comparable prior year periods. The average
length of stay at the facilities owned in both periods decreased 7% to 11.0 days
during the three month period ended
Page Nine of Fifteen Pages
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September 30, 1998 from 11.8 days in the comparable prior year period and
decreased 6% to 11.2 days during the nine months ended September 30, 1998 as
compared to 11.9 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 18% and 16% during
the three and nine months ended September 30, 1998 as compared to the comparable
prior year periods and comprised 20% of behavioral health gross patient revenues
for the three and nine month periods ended September 30, 1998 as compared to 19%
for the three and nine month periods ended September 30, 1997.
OTHER OPERATING RESULTS
The Company recorded minority interest expense/(income) in earnings or (losses)
of consolidated entities amounting to $1.4 million and ($725,000) for the three
months ended September 30, 1998 and 1997 and $6.7 million and ($1.3 million) for
the nine month periods ended September 30, 1998 and 1997, respectively. The
minority interest expense recorded during the 1998 three and nine month 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 35% or $7 million for the three
months ended September 30, 1998 and 32% or $19 million for the nine months ended
September 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 56% or $3 million during the three month period ended
September 30, 1998 and 38% or $6 million during the nine month period ended
September 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 34.4% and 36.8% for the three months ended September
30, 1998 and 1997, respectively, and 35.3% and 36.5% for the nine month periods
ended September 30, 1998 and 1997, respectively. The reduction in the effective
tax rate during the 1998 periods as compared to the comparable prior year
periods was due to a reduction in the effective state income tax rate and
benefits related to wage tax credits.
GENERAL TRENDS
An increased proportion of the Company's revenue is derived from fixed payment
services, including Medicare and Medicaid which accounted for 45% and 49% of the
Company's net patient revenues for the three months ended September 30, 1998 and
1997 and 45% and 50% of the Company's net patient revenues for the nine months
ended September 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 were no increases in the rates paid to hospitals for
inpatient care through September 30, 1998. The Company expects that the modest
rate
Page Ten of Fifteen Pages
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increases that went into 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 $9.2 million and $8.3
million for the three months ended September 30, 1998 and 1997 and $26.4 million
and $24.7 million for the nine months ended September 30, 1998 and 1997,
respectively, received pursuant to the terms of these programs. These programs
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 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.
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 business 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
Company expects to complete the assessment phase of its Year 2000 analysis by
the first quarter of 1999. The Company believes that Year 2000 related
remediation costs incurred through September 30, 1998 have not had a material
impact on its results of operations. However, the Company is not able to
reasonably estimate the total costs to be incurred for completion of its Year
2000 evaluation at this time since measurement of the costs has not yet 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 adverse impact on
the operations of the Company.
Page Eleven of Fifteen Pages
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The Company relies heavily on third parties in operating its business. The
Company is relying on software, hardware (including the Company's major
outsourcing vendor which provides the financial and clinical applications for
the majority of the Company's acute care facilities), 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.
The Company is in the process of developing Year 2000 contingency plans. The
disaster plans of each of the Company's facilities will be reviewed as part of
the Company's 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 as it implements its Year
2000 strategy. The Company can provide no assurances 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 $127 million and $154 million for
the nine months ended September 30, 1998 and 1997, respectively. The $27 million
decrease during the 1998 nine month period as compared to the comparable prior
year period was attributable to a $29 million increase in accounts receivable
due primarily to the opening of three acute care facilities subsequent to the
second quarter of 1997 and a delay in payments due from certain managed care
providers. The Company received approximately $5 million of the past due managed
care payments in early October, 1998. Net income plus the addback of
depreciation and amortization expense increased $26 million during the nine
months ended September 30, 1998 as compared to the comparable prior year period.
This favorable change in cash provided by operating activities was offset by a
$10 million increase in income tax payments, a $7 million unfavorable change in
accrued insurance expense, net of commercial premiums paid and $7 million of
other net unfavorable working capital changes. The unfavorable change in accrued
insurance expense, net of commercial premiums paid, was due to the January, 1998
purchase of commercially insured general and professional liability policies at
most of the Company's subsidiaries. These policies provide for coverage in
excess of $1 million per occurrence, with an average annual aggregate of $4
million through 2001. Prior to January, 1998, most of the Company's subsidiaries
were self-insured for professional and general liability claims up to $5 million
per occurrence, with excess coverage maintained up to $100 million with major
insurance carriers.
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
Page Twelve of Fifteen Pages
13
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 nine months of 1998, the Company spent approximately $71
million to finance capital expenditures at its existing hospitals as compared to
$104 million in the prior year nine month period. Included in the capital
expenditures for the nine months ended September 30, 1997 was $56 million spent
on the construction of a new acute care facilities located in Edinburg, Texas
and Summerlin, Nevada which opened in the third and fourth quarters of 1997,
respectively.
During the third quarter of 1998, the Company amended its commercial paper
credit facility to increase the borrowing capacity to $100 million from $75
million. As of September 30, 1998, the Company had $20 million of unused
borrowing capacity under the terms of its commercial paper credit facility, as
amended, and $192 million of unused borrowing capacity under the terms of its
revolving credit facility which matures in July 2002.
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 services 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 any 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 1997 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.
Page Thirteen of Fifteen Pages
14
PART II. OTHER INFORMATION
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
ITEM 5. OTHER INFORMATION
The following information updates disclosures previously included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Approximately 1,200 of the Company's employees at six of its hospitals are
unionized. At Valley Hospital, unionized employees belong to the Culinary
Workers and Bartenders Union and the International Union of Operating Engineers.
Registered nurses at Auburn Regional Medical Center located in Washington State,
are represented by the United Staff Nurses Union, the technical employees are
represented by the United Food and Commercial Workers, and the service employees
are represented by the Service Employees International Union. At George
Washington University Hospital, unionized employees are represented by the
Service Employees International Union and the Hospital Police Association.
Nurses at Desert Springs Hospital are represented by the Service Employees
International Union. The registered nurses, licensed practical nurses, certain
technicians and therapists, and housekeeping employees at HRI Hospital in Boston
are represented by the Service Employees International Union. The Company
believes that its relations with its employees are satisfactory.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amendment dated as August 31, 1998, to Sale and Servicing Agreements
dated as of various dates between each hospital company and UHS
Receivables Corp.
10.2 Agreement, dated as of August 31, 1998, by and among each hospital
company signatory hereto, UHS Receivables Corp., a Delaware
Corporation, Sheffield Receivables Corporation and U. S. Bank National
Association, as Trustee.
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 Fourteen of Fifteen Pages
15
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: November 11, 1998 /s/ Kirk E. Gorman
-------------------------------------------
Kirk E. Gorman, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer).
Page Fifteen of Fifteen Pages
1
EXHIBIT 10.1
AMENDMENT NO. 2 TO SALE AND SERVICING AGREEMENT
AMENDMENT dated as of August 31, 1998 (this "Amendment"), to Sale and
Servicing Agreements dated as of various dates (as amended, supplemented or
otherwise modified from time to time, the "Sale and Servicing Agreement"),
between each hospital company signing a counterpart of this Amendment (together
with its successors and assigns, the "Hospital") and UHS Receivables Corp., a
Delaware corporation (together with its successors and assigns, "Finco").
W I T N E S S E T H :
WHEREAS, the Hospital and Finco are party to a Sale and Servicing
Agreement; and
WHEREAS, the Hospital and Finco wish to amend the Sale and Servicing
Agreement to provide for a change in the Definitions List incorporated by
reference into the Sale and Servicing Agreement;
NOW THEREFORE, the parties hereto agree as follows:
Section 1. Changed Definition. The Sale and Servicing Agreement is
hereby amended to replace the definition of "Maximum Sheffield Capital"
incorporated by reference from the Definitions List with the following
definition:
Maximum Sheffield Capital: $100,000,000, as such amount may be
increased from time to time in accordance with Section 2.13 of the Pooling
Agreement.
Section 2. Effect of Amendment. The Sale and Servicing Agreement as
modified by this Amendment shall remain in full force and effect, and all
references in the Sale and Servicing Agreement to "this Agreement" shall mean
the Sale and Servicing Agreement as amended hereby unless the meaning requires
otherwise.
Section 3. Counterparts. This Amendment may be executed in any number
of copies, and by the different parties hereto on the same or separate
counterparts, each of which shall be deemed to be an original instrument.
Section 4. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAW OF THE STATE OF
NEW YORK WITHOUT REFERENCE TO CONFLICTS OF LAW RULES OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, each of the Hospital and Finco have caused this
Amendment to be duly executed and delivered by its duly authorized officer on
the date first above written.
NORTHWEST TEXAS HEALTHCARE SYSTEM, INC.
SUMMERLIN HOSPITAL MEDICAL CENTER, LLC
2
VALLEY HEALTH SYSTEM, LLC
d/b/a Desert Springs Hospital
d/b/a Valley Hospital Medical Center
AIKEN REGIONAL MEDICAL CENTERS, INC.
UHS OF NEW ORLEANS, INC.
CHALMETTE MEDICAL CENTER, INC.
AUBURN REGIONAL MEDICAL CENTER, INC.
UHS OF BELMONT, INC.
UHS OF RIVER PARISHES, INC.
DOCTORS HOSPITAL OF SHREVEPORT, INC.
INLAND VALLEY REGIONAL MEDICAL CENTER, INC.
VICTORIA REGIONAL MEDICAL CENTER, INC.
WELLINGTON REGIONAL MEDICAL CENTER
INCORPORATED
By:__________________________________
Kirk E. Gorman
Treasurer
MANATEE MEMORIAL HOSPITAL, L.P.
By: UHS of Manatee, Inc.
General Partner
By:__________________________
Kirk E. Gorman
Treasurer
NORTHERN NEVADA MEDICAL CENTER, L.P. (f/k/a
Sparks Reno Partnership L.P.)
By: Sparks Family Hospital, Inc.,
General Partner
By:___________________________
Kirk E. Gorman
Treasurer
MCALLEN MEDICAL CENTER L.P.
d/b/a Edinburg Hospital
d/b/a McAllen Medical Center
By: McAllen Medical Center, Inc.
General Partner
By:__________________________
Kirk E. Gorman
Treasurer
3
UHS RECEIVABLES CORP.
By:__________________________________
Cheryl K. Ramagano
Vice President and Treasurer
The undersigned hereby consents to this Amendment and agrees that the Guaranty
shall remain in full force and effect notwithstanding the changes effected by
this Amendment.
UNIVERSAL HEALTH SERVICES, INC
By:__________________________________
Kirk E. Gorman
Treasurer
1
EXHIBIT 10.2
AGREEMENT
AGREEMENT, dated as of August 31, 1998 (this "Agreement"), by and
among each hospital company signatory hereto (together with its successors and
assigns, the "Withdrawing Hospital"), UHS Receivables Corp., a Delaware
corporation (together with its successors and assigns, "Finco"), Sheffield
Receivables Corporation ("Sheffield") and U.S. Bank National Association,
formerly known as First Bank National Association, as Trustee (the "Trustee").
W I T N E S S E T H :
WHEREAS, Finco has purchased the Receivables of each Withdrawing
Hospital pursuant to Sale and Servicing Agreements dated as of various dates
(the "Prior Sale and Servicing Agreements" and all capitalized terms used
without definition herein shall have the meanings set forth in or incorporated
by reference into the Prior Sale and Servicing Agreement);
WHEREAS, the parties wish to terminate the Prior Sale and Servicing
Agreement, and in connection therewith the Withdrawing Hospital wishes to
repurchase from Finco, and Finco wishes to resell to the Withdrawing Hospital,
all of the Hospital's Receivables and all related Transferred Property;
WHEREAS, Finco is purchasing the Receivables of certain other hospitals
pursuant to Sale and Servicing Agreements, dated as of the date hereof, between
Finco and each of Northwest Texas Healthcare System, Inc., McAllen Medical
Center L.P., Summerlin Hospital Medical Center, LLC and Valley Health System,
LLC (the "1998 Sale Agreements") and adding such Receivables to its credit
facility with Sheffield pursuant to the Pooling Agreement, dated as of November
16, 1993, as amended, among Finco, Sheffield and the Trustee (the "Pooling
Agreement");
NOW THEREFORE, the parties hereto agree as follows:
1. The Prior Sale and Servicing Agreement between each Withdrawing
Hospital and Finco is hereby terminated effective as of 12:01 a.m.
_____________, 1998 (the "Effective Date"), and shall have no further force or
effect following the Effective Date; provided, however, that (a) all
representations and warranties of the Withdrawing Hospital and Finco under the
respective Prior Sale and Servicing Agreements shall survive the execution and
delivery of this Agreement, (b) all of the rights and obligations of the parties
under Article VII (Indemnification and Expenses) of the Prior Sale and Servicing
Agreement shall survive such termination.
2. Finco does hereby sell, assign, transfer, and convey to each
Withdrawing Hospital all of its right, title, and interest of Finco as of the
Effective Date in and to the Receivables originated by such Withdrawing Hospital
and the related Transferred Property, together with all Collections received
after the Effective Date in respect of such Receivables.
3. In consideration for the sale of the Receivables and the related
Transferred Property, the Withdrawing Hospital hereby agrees to pay Finco the
amount set forth opposite its name on
2
Exhibit A hereto, representing the outstanding balance of the Receivables and
the related Transferred Property as of the Effective Date.
4. Finco hereby releases its security interest in the Receivables and
the related Transferred Property.
5. Finco represents and warrants to Sheffield and the Trustee that upon
giving effect to the 1998 Sale Agreements and this Agreement, it will be in
compliance with the conditions to payments set forth in Section 3.2 of the
Pooling Agreement.
6. Sheffield and the Trustee hereby consent to the termination of the
Prior Sale and Servicing Agreements and the transfer of the applicable
Receivables from Finco to each Withdrawing Hospital.
7. Finco, Sheffield and the Trustee agree to do such further acts and
things and to execute and deliver Uniform Commercial Code financing and
termination statements and such additional assignments, agreements, powers and
instruments as are required by Finco or the Withdrawing Hospital to carry into
effect the purposes of this Agreement or to better assure and confirm unto the
Withdrawing Hospital its rights, powers and remedies hereunder.
8. This Agreement shall be binding upon, and inure to the benefit of,
the parties and their respective heirs, personal representatives, successors and
assigns.
9. This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York, regardless of the laws that
might otherwise govern under applicable principles of law.
10. This Agreement may be signed in two or more counterparts with the
same effect as if the signatures to each counterpart were upon a single
instrument, and all such counterparts together shall be deemed an original of
this Agreement.
3
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
THE ARBOUR, INC.
THE BRIDGEWAY, INC.
DEL AMO HOSPITAL, INC.
FOREST VIEW PSYCHIATRIC HOSPITAL, INC.
UHS OF FULLER, INC.
HRI HOSPITAL, INC.
UHS RECOVERY FOUNDATION, INC.
LA AMISTAD RESIDENTIAL TREATMENT
CENTER, INC.
MERIDELL ACHIEVEMENT CENTER, INC.
THE PAVILION FOUNDATION
RIVER OAKS, INC.
TURNING POINT CARE CENTER, INC.
By:__________________________________
Kirk E. Gorman
Treasurer
UHS RECEIVABLES CORP.
By:__________________________________
Cheryl Ramagano
Vice President and
Treasurer
SHEFFIELD RECEIVABLES CORPORATION
By:__________________________________
U.S. BANK NATIONAL ASSOCIATION,
formerly known as FIRST BANK NATIONAL
ASSOCIATION, as Trustee
By:__________________________________
4
EXHIBIT A
REPURCHASE PRICE OF RECEIVABLES
Hospital Amount
The Arbour, Inc. $
The Bridgeway, Inc. $
Del Amo Hospital, Inc. $
Forest View Psychiatric Hospital, Inc. $
UHS of Fuller, Inc. $
HRI Hospital, Inc. $
UHS Recovery Foundation, Inc. $
La Amistad Residential Treatment Center, Inc. $
Meridell Achievement Center, Inc. $
The Pavilion Foundation $
River Oaks, Inc. $
Turning Point Care Center, Inc. $
5
1,000
U.S. DOLLARS
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
1
3,340
0
265,163
0
37,283
335,907
1,199,684
380,943
1,469,092
201,222
405,971
0
0
326
626,222
1,469,092
0
1,393,765
0
1,060,524
119,364
101,372
20,529
91,976
32,472
59,504
0
0
0
59,504
1.83
1.78
