SEC Filing - Universal Health Services Inc.

1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR (_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ............to.......... Commission file number 1-10765 UNIVERSAL HEALTH SERVICES, INC. (Exact name of registrant as specified in its charter) 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 July 31, 1999: Class A 2,056,929 Class B 29,377,242 Class C 207,230 Class D 25,404 Page One of Seventeen Pages

2 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 Six Months Ended June 30, 1999 and 1998 ................................ Three Condensed Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 ............................................................ Four Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 1999 and 1998 .......................................... Five Notes to Condensed Consolidated Financial Statements ................................ Six, Seven & Eight Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................... Nine, Ten, Eleven, Twelve, Thirteen, Fourteen & Fifteen Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................... Sixteen PART II. OTHER INFORMATION ............................................................ Sixteen SIGNATURE .............................................................................. Seventeen Page Two of Seventeen Pages

3 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, ---------------------- ----------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net revenues ................................................... $ 513,067 $ 474,558 $1,033,162 $ 937,675 Operating charges: Operating expenses ........................................ 204,743 195,125 407,850 376,076 Salaries and wages ........................................ 182,507 165,721 361,141 326,846 Provision for doubtful accounts ........................... 40,145 32,990 81,071 70,256 Depreciation and amortization ............................. 27,197 26,272 54,175 50,708 Lease and rental expense .................................. 12,273 12,172 24,552 23,577 Interest expense, net ..................................... 6,566 7,083 13,048 13,390 ---------- ---------- ---------- ---------- 473,431 439,363 941,837 860,853 ---------- ---------- ---------- ---------- Income before minority interests and income taxes .............. 39,636 35,195 91,325 76,822 Minority interests in earnings of consolidated entities ........ 2,757 3,526 6,751 5,274 ---------- ---------- ---------- ---------- Income before income taxes ..................................... 36,879 31,669 84,574 71,548 Provision for income taxes ..................................... 13,849 11,208 31,522 25,437 ---------- ---------- ---------- ---------- Net income ..................................................... $ 23,030 $ 20,461 $ 53,052 $ 46,111 ========== ========== ========== ========== Earnings per common share - basic .............................. $ 0.73 $ 0.63 $ 1.67 $ 1.42 ========== ========== ========== ========== Earnings per common share - diluted ............................ $ 0.71 $ 0.61 $ 1.63 $ 1.38 ========== ========== ========== ========== Weighted average number of common shares - basic ............... 31,659 32,626 31,833 32,571 Weighted average number of common share equivalents ............ 703 874 692 834 ---------- ---------- ---------- ---------- Weighted average number of common shares and equiv. - diluted .. 32,362 33,500 32,525 33,405 ========== ========== ========== ========== See accompanying notes to these condensed consolidated financial statements. Page Three of Seventeen Pages

4 UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000s omitted) June 30, December 31, 1999 1998 ---- ---- (Unaudited) Assets Current assets: Cash and cash equivalents $ 8,155 $ 1,260 Accounts receivable, net 299,413 256,354 Supplies 38,481 38,842 Deferred income taxes 17,165 10,838 Other current assets 14,195 12,321 ----------- ----------- Total current assets 377,409 319,615 ----------- ----------- Property and equipment 1,149,257 1,161,939 Less: accumulated depreciation (403,309) (396,530) ----------- ----------- 745,948 765,409 Funds restricted for construction 41,924 43,413 ----------- ----------- 787,872 808,822 ----------- ----------- Other assets: Excess of cost over fair value of net assets acquired 292,791 279,141 Deferred charges 12,482 13,533 Other 29,128 26,984 ----------- ----------- 334,401 319,658 ----------- ----------- $ 1,499,682 $ 1,448,095 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Current maturities of long-term debt $ 4,287 $ 4,082 Accounts payable and accrued liabilities 186,374 165,718 Federal and state taxes -- 253 ----------- ----------- Total current liabilities 190,661 170,053 ----------- ----------- Other noncurrent liabilities 91,968 80,172 ----------- ----------- Minority interest 129,208 129,423 ----------- ----------- Long-term debt, net of current maturities 406,096 418,188 ----------- ----------- Deferred income taxes 25,137 23,252 ----------- ----------- Common stockholders' equity: Class A Common Stock, 2,056,929 shares outstanding in 1999, 2,057,929 in 1998 21 21 Class B Common Stock, 29,448,342 shares outstanding in 1999, 29,901,218 in 1998 294 299 Class C Common Stock, 207,230 shares outstanding in 1999, 207,230 in 1998 2 2 Class D Common Stock, 25,504 shares outstanding in 1999, 28,788 in 1998 -- -- Capital in excess of par, net of deferred compensation of $241,000 in 1999 and $185,000 in 1998 198,058 221,500 Retained earnings 458,237 405,185 ----------- ----------- 656,612 627,007 ----------- ----------- $ 1,499,682 $ 1,448,095 =========== =========== See accompanying notes to these condensed consolidated financial statements. Page Four of Seventeen Pages

5 UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (000s omitted - unaudited) Six Months Ended June 30, -------- 1999 1998 --------- --------- Cash Flows from Operating Activities: Net income $ 53,052 $ 46,111 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 54,175 50,708 Earnings of minority partners, net of losses 6,751 5,274 Changes in assets & liabilities, net of effects from acquisitions and dispositions: Accounts receivable (30,077) (16,692) Accrued interest (74) 811 Accrued and deferred income taxes (1,990) (3,208) Other working capital accounts 17,840 9,590 Other assets and deferred charges (3,062) (4,605) Other 2,081 (1,250) Accrued insurance expense, net of commercial premiums paid 4,711 4,201 Payments made in settlement of self-insurance claims (5,719) (12,551) --------- --------- Net cash provided by operating activities 97,688 78,389 --------- --------- Cash Flows from Investing Activities: Property and equipment additions, net (30,296) (44,447) Proceeds received from merger, sale or disposition of assets 15,080 11,185 Acquisition of businesses (31,588) (186,080) --------- --------- Net cash used in investing activities (46,804) (219,342) --------- --------- Cash Flows from Financing Activities: Reduction of long-term debt (12,787) -- Additional borrowings -- 142,209 Distributions to minority partners (5,015) (158) Issuance of common stock 1,500 1,274 Repurchase of common shares (27,687) -- --------- --------- Net cash (used in) provided by financing activities (43,989) 143,325 --------- --------- Increase in cash and cash equivalents 6,895 2,372 Cash and cash equivalents, Beginning of Period 1,260 332 --------- --------- Cash and cash equivalents, End of Period $ 8,155 $ 2,704 ========= ========= Supplemental Disclosures of Cash Flow Information: Interest paid $ 13,121 $ 12,579 ========= ========= Income taxes paid, net of refunds $ 33,603 $ 29,083 ========= ========= See accompanying notes to these condensed consolidated financial statements. Page Five of Seventeen Pages

6 UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) GENERAL The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments which, in the opinion of the Company, are necessary to fairly present results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the accompanying disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements, accounting policies and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Certain prior year amounts have been reclassified to conform with current year financial presentation. (2) OTHER NONCURRENT AND MINORITY INTEREST LIABILITIES Other noncurrent liabilities include the long-term portion of the Company's professional and general liability, compensation reserves, and pension liability. The minority interest liability consists primarily of a 27.5% outside ownership interest in three acute care facilities located in Las Vegas, Nevada and a 20% outside ownership in an acute care facility located in Washington D.C. (3) COMMITMENT AND CONTINGENCIES Under certain agreements, the Company has committed or guaranteed an aggregate of $54 million related principally to the Company's self-insurance programs and as support for various debt instruments and loan guarantees, including a $40 million letter of credit related to the Company's 1997 acquisition of an 80% interest in The George Washington University Hospital. (4) ACQUISITIONS During the second quarter of 1999, the Company acquired three behavioral health facilities located in Illinois, Indiana and New Jersey, for a combined purchase price of $26.6 million in cash plus additional contingent consideration of up to $2.5 million. During the second quarter of 1999, the Company acquired the assets and operations of Doctor's Hospital of Laredo from in exchange for the assets and operations of its Victoria Regional Medical Center. In connection with this transaction, the Company also spent approximately $5 million to purchase additional land in Laredo, Texas on which it expects to construct a replacement hospital scheduled to be completed in 2001. (5) NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which delayed the effective date Page Six of Seventeen Pages

7 of SFAS No. 133 for one year until January 1, 2001. The Registrant does not expect the adoption of this statement to have a material impact on its financial position or results of operations. The Company expects to adopt Statement 133 in January 2001 and has not yet quantified the impact on its financial statements. However, the Statement could increase the volatility in earnings and other comprehensive income. (6) SEGMENT REPORTING (UNAUDITED) The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", in 1998. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's reportable operating segments consist of acute care services and behavioral health care services. The "Other" segment column below includes centralized services including information services, purchasing, reimbursement, accounting, taxation, legal, advertising, design and construction, and patient accounting. Also included are the operating results of the Company's other operating entities including the outpatient surgery and radiation therapy centers and specialized women's health centers. The chief operating decision making group for the Company's acute care services and behavioral health care services is comprised of the Company's President and Chief Executive Officer, and the lead executives of each of the Company's two primary operating segments. The lead executive for each operating segment also manages the profitability of each respective segment's various hospitals. The operating segments are managed separately because each operating segment represents a business unit that offers different types of healthcare services. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. THREE MONTHS ENDED JUNE 30, 1999 -------------------------------------------------------------------------------- BEHAVIORAL ACUTE CARE HEALTH TOTAL SERVICES SERVICES OTHER CONSOLIDATED -------- -------- ----- ------------ (Dollar amount s in thousands) Gross inpatient revenues $ 668,809 $ 107,676 $ 6,428 $ 782,913 Gross outpatient revenues $ 235,755 $ 26,970 $ 26,554 $ 289,279 Total net revenues $ 422,303 $ 70,899 $ 19,865 $ 513,067 EBITDAR (A) $ 79,787 $ 14,166 ($ 8,281) $ 85,672 Total assets as of 6/30/99 $1,221,940 $ 161,029 $ 116,713 $1,499,682 Licensed beds 4,814 1,976 -------- 6,790 Available beds 4,104 1,961 -------- 6,065 Patient days 233,550 116,251 -------- 349,801 Admissions 48,979 9,885 -------- 58,864 Average length of stay 4.8 11.8 -------- 5.9 Page Seven of Seventeen Pages

8 THREE MONTHS ENDED JUNE 30, 1998 ------------------------------------------------------------------------------ BEHAVIORAL ACUTE CARE HEALTH TOTAL SERVICES SERVICES OTHER CONSOLIDATED ---------------- ----------------- ---------------- ------------------ (Dollar amount in thousands) Gross inpatient revenues $600,153 $88,830 $5,246 $694,229 Gross outpatient revenues $213,033 $24,551 $17,848 $255,432 Total net revenues $396,075 $61,565 $16,918 $474,558 EBITDAR (A) $79,141 $11,226 ($9,645) $80,722 Total assets as of 6/30/98 $1,212,285 $132,449 $114,786 $1,459,520 Licensed beds 4,764 1,779 -------- 6,543 Available beds 4,030 1,764 -------- 5,794 Patient days 220,169 94,166 -------- 314,335 Admissions 46,562 8,214 -------- 54,776 Average length of stay 4.7 11.5 -------- 5.7 SIX MONTHS ENDED JUNE 30, 1999 ------------------------------------------------------------------------------- BEHAVIORAL ACUTE CARE HEALTH TOTAL SERVICES SERVICES OTHER CONSOLIDATED ---------------- ----------------- ----------------- ----------------- (Dollar amounts in thousands) Gross inpatient revenues $1,388,946 $196,366 $12,536 $1,597,848 Gross outpatient revenues $473,360 $50,571 $51,614 $575,545 Total net revenues $863,576 $130,537 $39,049 $1,033,162 EBITDAR (A) $176,937 $24,663 ($18,500) $183,100 Total assets as of 6/30/99 $1,221,940 $161,029 $116,713 $1,499,682 Licensed beds 4,820 1,887 -------- 6,707 Available beds 4,107 1,872 -------- 5,979 Patient days 487,880 211,995 -------- 699,875 Admissions 102,166 18,533 -------- 120,699 Average length of stay 4.8 11.4 -------- 5.8 SIX MONTHS ENDED JUNE 30, 1998 ------------------------------------------------------------------------------ BEHAVIORAL ACUTE CARE HEALTH TOTAL SERVICES SERVICES OTHER CONSOLIDATED ---------------- ----------------- ---------------- ------------------ (Dollar amount in thousands) Gross inpatient revenues $1,208,863 $173,103 $10,211 $1,392,177 Gross outpatient revenues $410,896 $46,765 $33,880 $491,541 Total net revenues $789,016 $118,360 $30,299 $937,675 EBITDAR (A) $165,945 $21,032 ($22,480) $164,497 Total assets as of 6/30/98 $1,212,285 $132,449 $114,786 $1,459,520 Licensed beds 4,567 1,779 -------- 6,346 Available beds 3,892 1,764 -------- 5,656 Patient days 438,795 183,594 -------- 622,389 Admissions 91,432 16,307 -------- 107,739 Average length of stay 4.8 11.3 -------- 5.8 (A) EBITDAR - Earnings before interest, income taxes, depreciation, amortization, lease & rental and minority interest expense. Page Eight of Seventeen Pages

9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION FORWARD-LOOKING STATEMENTS The matters discussed in this report as well as the news releases issued from time to time by the Company include certain statements containing the words "believes", "anticipates", "intends", "expects" and words of similar import, which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: that the majority of the Company's revenues are produced by a small number of its total facilities; possible changes in the levels and terms of reimbursement for the Company's charges by government programs, including Medicare or Medicaid or other third party payers; industry capacity; demographic changes; existing laws and government regulations and changes in or failure to comply with laws and governmental regulations; the ability to enter into managed care provider agreements on acceptable terms; liability and other claims asserted against the Company; competition; the loss of significant customers; technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for healthcare; the ability to attract and retain qualified personnel, including physicians, the ability of the Company to successfully integrate its recent acquisitions; the Company's ability to finance growth on favorable terms; the impact of Year 2000 issues; and, other factors referenced in the Company's 1998 Form 10-K or herein. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. RESULTS OF OPERATIONS Net revenues increased 8% or $39 million for the three months ended June 30, 1999 and 10% or $95 million for the six months ended June 30, 1999 over the comparable prior year periods. The $39 million increase during the second quarter of 1999 over the comparable prior year quarter consists primarily of the following: (i) a 4.5% or $21 million increase in net revenues at the Company's acute care and behavioral health care facilities owned during both periods (excluding the favorable $3.1 million prior year net revenue adjustment mentioned below), and; (ii) $10 million of net revenues generated at three behavioral health care facilities located in Illinois, Indiana and New Jersey and an acute care facility located in Laredo, Texas (net of revenues generated at exchanged facility) all of which were acquired during the second quarter of 1999. Operating results for the second quarter of 1999 also included an increase in net revenues of $3.1 million resulting from an adjustment to contractual allowances recorded in the prior year. The $95 million increase in net revenues during the six months ended June 30, 1999 over the comparable prior year period was primarily attributable to: (i) a 5.2% or $47 million increase in net revenues at the Company's acute care and behavioral health care facilities owned during both periods (excluding the favorable $3.1 million net revenue adjustment mentioned above); (ii) $10 million of net revenues generated at three behavioral health care facilities located in Illinois, Indiana and New Jersey and an acute care facility located in Laredo, Texas (net of revenues generated at exchange facility) all of which were acquired during the second quarter of 1999, and; (iii) the acquisition of four acute care facilities located in Puerto Rico and Las Vegas which were acquired during the first quarter of 1998 ($25 million). Earnings before interest, income taxes, depreciation, amortization and lease and rental expense (before deducting minority interests in earnings of consolidated entities) ("EBITDAR") increased to $86 million for the three months ended June 30, 1999 from $81 million in the comparable prior year quarter and $183 million for the six months ended June 30, 1999 as compared to $164 million during the prior year six Page Nine of Seventeen Pages

10 month period. Overall operating margins were 16.7% and 17.0% during the three month periods ended June 30, 1999 and 1998, respectively, and 17.7% and 17.5% during the six month periods ended June 30, 1999 and 1998, respectively. The decrease in the overall operating margin during the second quarter of 1999 as compared to the comparable prior year quarter was primarily due to an decrease in the operating margins at the Company's acute care facilities, as discussed below. ACUTE CARE SERVICES Net revenues from the Company's acute care hospitals, ambulatory treatment centers and specialized women's health centers accounted for 85% and 86% of consolidated net revenues for the three month periods ended June 30, 1999 and 1998, respectively, and 87% of consolidated net revenues in each of the six month periods ended June 30, 1999 and 1998. Net revenues at the Company's acute care facilities owned in both periods increased 4.9% and 5.5% during the three and six month periods ended June 30, 1999 as compared to the comparable prior year periods, respectively, (excluding the favorable $3.1 million net revenue adjustment mentioned above). The 4.9% increase in same facility net revenue during the second quarter of 1999, as compared to the comparable prior year quarter, was due primarily to a 4.2% increase in admissions and a 5.0% increase in patient days at these facilities. During the second quarter of 1999, the average length of stay at the acute care facilities owned during both periods increased slightly to 4.8 days as compared to 4.7 days in the comparable prior year quarter. The 5.5% increase in same facility net revenue during the six month period ended June 30, 1999 as compared to the comparable prior year six month period was due primarily to a 5.8% increase in admissions and a 5.1% increase in patient days at these facilities. During the six month period of 1999, the average length of stay at the acute care facilities owned during both periods remained unchanged from the comparable prior year period at 4.8 days. The increase in net revenues at the Company's acute care facilities was caused primarily by an increase in inpatient admissions and an increase in outpatient activity. Outpatient activity continues to increase as gross outpatient revenues at the Company's acute care facilities owned in both three month periods ended June 30, 1999 and 1998 increased 9% during the three month period ended June 30, 1999 as compared to the comparable prior year quarter and comprised 26% of the Company's acute care gross patient revenue in each of the quarters ended June 30, 1999 and 1998. Gross outpatient revenues at the Company's acute care facilities owned in both six month periods ended June 30, 1999 and 1998 increased 11% during the six month period ended June 30, 1999 as compared to the comparable prior year six month period and comprised 25% of the Company's acute care gross patient revenue in each of the six month periods ended June 30, 1999 and 1998. The increase in outpatient revenues is primarily the result of advances in medical technologies and pharmaceutical improvements, which allow more services to be provided on an outpatient basis, and increased pressure from Medicare, Medicaid, managed care companies and other insurers to reduce hospital stays and provide services, where possible, on a less expensive outpatient basis. The hospital industry in the United States as well as the Company's acute care facilities continue to have significant unused capacity which has created substantial competition for patients. Inpatient utilization continues to be negatively affected by payor-required, pre-admission authorization and by payor pressure to maximize outpatient and alternative healthcare delivery services for less acutely ill patients. The Company expects the increased competition, admission constraints and payor pressures to continue. The Company's ability to maintain its historical rate of net revenue growth and operating margins is dependent upon its ability to successfully respond to these trends as well as reductions in spending on governmental health care programs. Earnings before interest, income taxes, depreciation, amortization and lease and rental expense (before deducting minority interests in earnings of consolidated entities) ("EBITDAR") at the Company's acute care facilities increased to $80 million for the three months ended June 30, 1999 from $79 million in the comparable prior year quarter and $177 million for the six months ended June 30, 1999 as compared to $166 million during the prior year six month period. Operating margins at the Company's acute care Page Ten of Seventeen Pages

11 facilities were 18.9% and 20.0% during the three month periods ended June 30, 1999 and 1998, respectively, and 20.5% and 21.0% during the six month periods ended June 30, 1999 and 1998, respectively. The decrease in the operating margins of the Company's acute care facilities during the three and six month periods of 1999, as compared to the comparable prior year periods, was primarily due to an increase in the provision for doubtful accounts. As a percentage of acute care net revenues, the provision for doubtful accounts for the Company's acute care facilities was 9.0% and 7.4% for the three months ended June 30, 1999 and 1998, respectively, and 8.7% and 8.0% for the six months ended June 30, 1999 and 1998, respectively. The increase in bad debt expense as a percentage of net revenues was due to: (i) a reduction in the reimbursement for Medicare bad debts as mandated by The Balanced Budget Act of 1997; (ii) continued delays in payments from health maintenance organizations, and; (iii) an increase in the number of uninsured patients seeking treatment at the Company's facilities. BEHAVIORAL HEALTH SERVICES Net revenues from the Company's behavioral health services facilities accounted for 14% and 13% of consolidated net revenues for the three month periods ended June 30, 1999 and 1998, respectively, and 13% of consolidated net revenues in each of the six month periods ended June 30, 1999 and 1998. Net revenues at the Company's behavioral health services facilities owned in both periods increased 1.8% and 3.3% for the three and six month periods ended June 30, 1999 as compared to the comparable prior year periods, respectively. The 1.8% increase in same facility net revenue during the second quarter of 1999, as compared to the comparable prior year quarter, was due primarily to a 5.9% increase in admissions and a 6.6% increase in patient days at these facilities. During the second quarter of 1999, the average length of stay at the behavioral health care facilities owned during both periods remained unchanged from the comparable prior year period at 11.5 days. The 3.3% increase in same facility net revenue during the six month period ended June 30, 1999, as compared to the comparable prior year six month period, was due primarily to a 6.4% increase in admissions and a 6.8% increase in patient days at these facilities. During the 1999 six month period, the average length of stay at the behavioral health care facilities owned during both periods remained unchanged from the comparable prior year period at 11.3 days. Although the length of stay at the Company's behavioral health care facilities remained unchanged in the 1999 period as compared to the comparable 1998 periods, the Company's behavioral health care facilities have generally experienced decreases in length of stay during the past few years as a result of continued practice changes in the delivery of behavioral health services and continued cost containment pressures from payors, including managed care companies, which includes a greater emphasis on the utilization of outpatient services. Providers participating in managed care programs agree to provide services to patients for a discount from established rates which generally results in pricing concessions by the providers and lower margins. Additionally, managed care companies generally encourage alternatives to inpatient treatment. Management of the Company has responded to these trends by continuing to develop and market new outpatient treatment programs. Gross outpatient revenues at the Company's behavioral health care facilities owned in both three month periods ended June 30, 1999 and 1998 increased 6% during the three month period ended June 30, 1999 as compared to the comparable prior year quarter and comprised 20% of the Company's behavioral health care gross patient revenue during the 1999 second quarter and 22% during the 1998 second quarter. Gross outpatient revenues at the Company's behavioral health care facilities owned in both six month periods ended June 30, 1999 and 1998 increased 6% during the six month period ended June 30, 1999 as compared to the comparable prior year six month period and comprised 21% of the Company's behavioral health care gross patient revenue in each of the six month periods ended June 30, 1999 and 1998. Earnings before interest, income taxes, depreciation, amortization and lease and rental expense (before deducting minority interests in earnings of consolidated entities) ("EBITDAR") at the Company's behavioral health care facilities increased to $14 million for the three months ended June 30, 1999 from $11 million in the comparable prior year quarter and $25 million for the six months ended June 30, 1999 Page Eleven of Seventeen Pages

12 as compared to $21 million during the prior year six month period. Operating margins at the Company's behavioral health care facilities were 20.0% and 18.2% during the three month periods ended June 30, 1999 and 1998, respectively, and 18.9% and 17.8% during the six month periods ended June 30, 1999 and 1998, respectively. The increase in the operating margins at the Company's behavioral health care facilities was due to a reduction in operating expenses as a percentage of behavioral health care net revenues due to continued operating costs efficiencies and a reduction in the provision for doubtful accounts. OTHER OPERATING RESULTS The Company recorded minority interest expense in the earnings of consolidated entities amounting to $2.8 million and $3.5 million for the three months ended June 30, 1999 and 1998, respectively, and $6.8 million and $5.3 million for the six months ended June 30, 1999 and 1998, respectively. The minority interest expense recorded during both periods consists primarily of the minority ownership's share of the net income of four acute care facilities, three of which are located in Las Vegas, Nevada and one located in Washington, DC. Depreciation and amortization expense increased 4% or $900,000 for the three months ended June 30, 1999 as compared to the comparable prior year quarter and 7% or $3.5 million for the six months ended June 30, 1999 as compared to the comparable prior year six month period. The increases were due primarily to the four acute care hospitals acquired during the first quarter of 1998 (three in Puerto Rico and one in Las Vegas) and three behavioral health care facilities acquired during the second quarter of 1999. Interest expense decreased 7% or $500,000 and 3% or $300,000 during the three and six month periods ended June 30, 1999 as compared to the comparable prior year periods. The effective tax rate was 37.6% and 35.4% for the three months ended June 30, 1999 and 1998, respectively, and 37.3% and 35.6% for the six months ended June 30, 1999 and 1998, respectively. The increase in the effective tax rate during the 1999 periods as compared to the comparable prior year periods was due to a reduction in the tax benefits related to the financing of employee benefit programs. GENERAL TRENDS A significant portion of the Company's revenue is derived from fixed payment services, including Medicare and Medicaid which accounted for 46% and 46% of the Company's net patient revenues during the three month periods ended June 30, 1999 and 1998, respectively, and 45% and 47% of the Company's net patient revenues during the six month periods ended June 30, 1999 and 1998, respectively. The Medicare program reimburses the Company's hospitals primarily based on established rates by a diagnosis related group for acute care hospitals and by cost based formula for behavioral health facilities. Historically, rates paid under Medicare's prospective payment system ("PPS") for inpatient services have increased, however, these increases have been less than cost increases. Pursuant to the terms of The Balanced Budget Act of 1997 (the "1997 Act"), there were no increases in the rates paid to hospitals for inpatient care through September 30, 1998. The Company expects the modest rate increases that became effective on October 1, 1998 will be more than offset by the negative impact of converting reimbursement on skilled nursing facility patients from a cost based reimbursement to a prospective payment system and from lower DRG payments on certain patient transfers mandated by the 1997 Act. Reimbursement for bad debt expense and capital costs as well as other items have been reduced. Outpatient reimbursement for Medicare patients is scheduled to convert to a PPS during the second quarter of 2000. Since final provisions of the outpatient Medicare PPS are not yet available, the Company can not completely estimate the resulting impact on its future results of operations. During the first quarter of 1999, the President submitted a proposal which included additional reductions in Medicare payments to hospitals, nursing homes and other providers amounting to $9.5 billion over a five year period. Approximately $4.5 billion of the proposed Medicare reductions would cut the growth of Medicare payments to hospitals over a five year period. While the Company is unable to predict Page Twelve of Seventeen Pages

13 whether this most recent proposal, or any other future health reform legislation, will ultimately be enacted at the federal or state level, the Company expects continuing pressure to limit expenditures by governmental healthcare programs. Further changes in the Medicare or Medicaid programs and other proposals to limit healthcare spending could have a material adverse impact upon the Company's results of operations and the healthcare industry. The healthcare industry is subject to numerous laws and regulations which include, among other things, matters such as government healthcare participation requirements, various licensure and accreditations, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Recently, government action has increased with respect to investigations and/or allegations concerning possible violations of fraud and abuse and false claims statutes and/or regulations by healthcare providers. Providers that are found to have violated these laws and regulations may be excluded from participating in government healthcare programs, subjected to fines or penalties or required to repay amounts received from government for previously billed patient services. While management of the Company believes its policies, procedures and practices comply with governmental regulations, no assurance can be given that the Company will not be subjected to governmental inquiries or actions. In Texas, a law has been passed which mandates that the state senate apply for a waiver from current Medicaid regulations to allow the state to require that certain Medicaid participants be serviced through managed care providers. The Company is unable to predict whether Texas will be granted such a waiver or the effect on the Company's business of such a waiver. Upon meeting certain conditions, and serving a disproportionately high share of Texas' and South Carolina's low income patients, three of the Company's facilities located in Texas and one facility located in South Carolina became eligible and received additional reimbursement from each state's disproportionate share hospital fund. Included in the Company's financial results was an aggregate of $10.1 million and $8.6 million for the three month periods ended June 30, 1999 and 1998, respectively, and $20.2 million and $17.2 million for the six months ended June 30, 1999 and 1998, respectively. These programs are scheduled to terminate in the third quarter of 1999 and although the Company believes these programs will be renewed, the Company can not completely estimate future reimbursements since final provisions of the programs are not yet available. However, the Company expects its future reimbursements pursuant to the terms of these programs to be reduced by at least $5 million annually. Failure to renew these programs or further reductions in reimbursements could have additional material adverse effects on the Company's future results of operations. In addition to the Medicare and Medicaid programs, other payors, including managed care companies, continue to actively negotiate the amounts they will pay for services performed. In general, the Company expects the percentage of its business from managed care programs, including health maintenance organizations and preferred provider organizations to grow. The consequent growth in managed care networks and the resulting impact of these networks on the operating results of the Company's facilities vary among the markets in which the Company operates. YEAR 2000 ISSUE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company's computer programs, certain building infrastructure components (including elevators, alarm systems and certain HVAC systems) and certain computer aided medical equipment that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruption of operations or medical equipment malfunctions that could affect patient diagnosis and treatment. The Company has undertaken steps to inventory and assess applications and equipment at risk to be affected by Year 2000 issues and to convert, remediate or replace such applications and equipment. The Company has completed its assessment of its major financial, clinical and peripheral software and believes that such software is substantially Year 2000 compliant. The Company also believes its biomedical equipment is substantially Year 2000 compliant and it intends to replace equipment that is not Page Thirteen of Seventeen Pages

14 Year 2000 compliant before the year end . The Company believes that Year 2000 related remediation costs incurred through June 30, 1999 have not had a material impact on its results of operations. Some replacement or upgrade of systems and equipment would take place in the normal course of business. Several systems, key to the Company's operations, have been scheduled to be replaced through vendor supplied systems before Year 2000. The costs of repairing existing systems is expensed as incurred. The Company has allocated a portion of its 1999 capital budget as Year 2000 contingency funds and expects that all of the capital costs can be accommodate within that budget. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose material operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company. The majority of the software used by the Company is purchased from third parties. The Company is relying on software (including the Company's major outsourcing vendor which provides the financial and clinical applications for the majority of the Company's acute care facilities), hardware and other equipment vendors to verify Year 2000 compliance of their products. The Company also depends on: fiscal intermediaries which process claims and make payments for the Medicare program; health maintenance organizations, insurance companies and other private payors; vendors of medical supplies and pharmaceuticals used in patient care; and, providers of utilities such as electricity, water, natural gas and telephone services. As part of its Year 2000 strategy, the Company intends to seek assurances from these parties that their services and products will not be interrupted or malfunction due to the Year 2000 problem. Failure of third parties to resolve their Year 2000 issues could have a material adverse effect on the Company's results of operations and its ability to provide health care services. Each of the Company's hospitals has a disaster plan which will be reviewed as part of the Company's Year 2000 contingency planning process. However, no assurance can be given that the Company will be able to develop contingency plans which will enable each of its facilities to continue to operate in all circumstances. This Year 2000 assessment is based on information currently available to the Company and the Company will revise its assessment at it implements its Year 2000 strategy. The Company can provide no assurance that applications and equipment the Company believes to be Year 2000 compliant will not experience difficulties or that the Company will not experience difficulties obtaining resources needed to make modifications to or replace the Company's affected systems and equipment. Failure by the Company or third parties on which it relies to resolve Year 2000 issues could have a material adverse effect on the Company's results of operations and its ability to provide health care services. Consequently, the Company can give no assurances that issues related to Year 2000 will not have a material adverse effect on the Company's financial condition or results of operations. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $98 million for the six months ended June 30, 1999 as compared to $78 million for the six month period ended June 30, 1998. The $20 million net increase during the 1999 six month period as compared to the comparable prior year period was primarily attributable to: (i) a $10 million favorable increase in net income plus the addback of depreciation and amortization expense; (ii) a $7 million favorable decrease in payments made in settlement of self-insurance claims; (iii) $16 million of other net favorable working capital changes, and; (iv) a $13 million unfavorable increase in accounts receivable. During the first six months of 1999, the Company spent approximately $30 million to finance capital expenditures at its existing hospitals as compared to $44 million in the prior year six month period. During the second quarter of 1999, the Company acquired three behavioral health care facilities located in Illinois, Indiana and New Jersey for a combined purchase price of approximately $27 million. Also during the second quarter of 1999, the Company exchanged the operations and assets of 147-bed acute Page Fourteen of Seventeen Pages

15 care facility located in Victoria, Texas for the assets and operations of a 117-bed acute care facility located in Laredo, Texas. In connection with this transaction, the Company also spent $5 million to purchase additional land in Laredo, Texas on which it expects to construct a replacement hospital scheduled to be completed in 2001. During the six month period ended June 30, 1999, the Company received total proceeds of $15 million for the sale of: (i) the real property of a medical office building; (ii) a minority ownership interest in one of its radiation therapy centers, and; (iii) the operations of two outpatient surgery centers. The net gain/loss resulting from these transactions did not have a material impact on the results of operations for the three or six month periods ended June 30, 1999. During the first quarter of 1998, the Company completed its acquisition of three acute care hospitals located in Puerto Rico for a combined purchase price of $186 million. These acquisitions were financed with funds borrowed under the Company's revolving credit facility. Also during the first quarter of 1998, the Company contributed substantially all of the assets, liabilities and operations of Valley Hospital Medical Center, a 417-bed acute care facility, and Summerlin Hospital Medical Center, a 148-bed acute care facility in exchange for a 72.5% interest in a series of newly-formed limited liability companies ("LLCs"). Quorum Health Group, Inc. ("Quorum") holds the remaining 27.5% interest in the LLCs. Quorum obtained its interest by contributing substantially all of the assets, liabilities and operations of Desert Springs Hospital, a 241-bed acute care facility and $11 million of net cash. During the third quarter of 1998, the Company's Board of Directors approved a stock repurchase program under which the Company is authorized to purchase up to two million shares or approximately 6% of its outstanding Class B Common Stock. Pursuant to the terms of this program, the Company repurchased 675,679 shares at an average repurchase price of approximately $41 per share ($27.7 million in the aggregate) during the six months ended June 30, 1999. Since inception of this program through June 30, 1999, the Company repurchased 1,256,179 shares at an average repurchase price of $41.87 per share ($52.6 million in the aggregate). As of June 30, 1999, the Company had $210 million of unused borrowing capacity under the terms of its $400 million revolving credit agreement which matures in July 2002 and provides for interest at the Company's option at the prime rate, certificate of deposit plus 3/8% to 5/8%, Euro-dollar plus 1/4% to 1/2% or money market. As of June 30, 1999, the Company had no unused borrowing capacity under the terms of its $100 million, annually renewable, commercial paper program. The Company's total debt as a percentage of total capitalization was 38% at June 30, 1999 and 40% at December 31, 1998. The Company expects to finance all capital expenditures and acquisitions with internally generated funds and borrowed funds. Additional borrowed funds may be obtained either through refinancing the existing revolving credit agreement, the commercial paper facility or the issuance of long-term securities. Page Fifteen of Seventeen Pages

16 PART II. OTHER INFORMATION UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the quantitative and qualitative disclosures in 1999. Reference is made to Item 7 in the Annual Report on Form 10-K for the year ended December 31, 1998. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The following information relates to matters submitted to the election of the stockholders of Universal Health Services, Inc. (the "Company") at the Annual Meeting of Stockholders held on May 19, 1999. (b) Not applicable. (c) At the meeting the following proposals, as described in the proxy statement delivered to all the Company's stockholders were approved by the votes indicated: Election by Class A and Class C stockholders of two class III directors ALAN B. MILLER SIDNEY MILLER -------------- ------------- Votes cast in favor 2,260,229 2,260,229 Votes withheld 0 0 Election by Class B and Class D stockholders of one Class II director DR. JOHN F. WILLIAMS -------------------- Votes cast in favor 23,626,965 Votes withheld 0 Adoption of the 1992 Corporate Ownership Program, as Amended Votes cast in favor 25,143,876 Votes cast against 11,812 Votes abstained 36,893 Broker non-votes 0 (d) Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27. Financial Data Schedule (b) Reports on Form 8-K None All other items of this Report are inapplicable. Page Sixteen of Seventeen Pages

17 UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Universal Health Services, Inc. (Registrant) Date: August 12, 1999 /s/ Kirk E. Gorman ----------------------------------------- Kirk E. Gorman, Senior Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer). Page Seventeen of Seventeen Pages `

5 0000352915 UNIVERSAL HEALTH SERVICES, INC. 1,000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 8,155 0 299,413 0 38,481 377,409 1,191,181 403,309 1,499,682 190,661 406,096 0 0 317 656,295 1,499,682 0 1,033,162 0 768,991 85,478 81,071 13,048 84,574 31,522 53,052 0 0 0 53,052 1.67 1.63