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, 1997 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 July 31, 1997: Class A 2,060,929 Class B 30,020,414 Class C 207,230 Class D 33,325 Page One of Twelve 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, 1997 and 1996...............Three Condensed Consolidated Balance Sheets - June 30, 1997 and December 31, 1996............................................Four Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 1997 and 1996..........................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 PART II. OTHER INFORMATION..........................................Eleven SIGNATURE............................................................Twelve Page Two of Twelve Pages
3 PART I. FINANCIAL INFORMATION UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------------- -------------------- 1997 1996 1997 1996 -------------------- -------------------- <S> <C> <C> <C> <C> Net revenues $343,826 $282,072 $683,996 $548,595 Operating charges: Operating expenses 136,265 109,615 265,939 211,950 Salaries and wages 119,138 101,331 238,885 195,831 Provision for doubtful accounts 27,450 19,709 51,113 36,383 Depreciation and amortization 19,815 16,721 38,843 31,504 Lease and rental expense 9,307 9,573 18,428 18,978 Interest expense, net 5,384 5,972 10,340 10,620 -------- -------- -------- -------- 317,359 262,921 623,548 505,266 -------- -------- -------- -------- Income before income taxes 26,467 19,151 60,448 43,329 Provision for income taxes 9,560 6,935 22,011 15,612 -------- -------- -------- -------- Net income $ 16,907 $ 12,216 $ 38,437 $ 27,717 ======== ======== ======== ======== Earnings per common and common share equivalents: $ 0.51 $ 0.42 $ 1.16 $ 0.96 ======== ======== ======== ======== Weighted average number of common shares and equivalents: 33,114 28,958 33,050 28,835 ======== ======== ======== ======== </TABLE> See accompanying notes to these condensed consolidated financial statements. Page Three of Twelve Pages
4 UNIVERSAL HEALTH SERVICES,INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's omitted) <TABLE> JUNE 30, DECEMBER 31, 1997 1996 ----------- ------------ (UNAUDITED) <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ 622 $ 288 Accounts receivable, net 149,406 145,364 Supplies 23,455 22,019 Deferred income taxes 13,067 12,313 Other current assets 14,242 13,969 ----------- ----------- Total current assets 200,792 193,953 ----------- ----------- Property and equipment 904,690 839,564 Less: accumulated depreciation (299,383) (271,936) ----------- ----------- 605,307 567,628 ----------- ----------- OTHER ASSETS: Excess of cost over fair value of net assets acquired 140,667 150,336 Deferred income taxes 11,284 9,993 Deferred charges 10,465 11,237 Other 35,658 32,648 ----------- ----------- 198,074 204,214 ----------- ----------- $ 1,004,173 $ 965,795 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 5,634 $ 6,866 Accounts payable and accrued liabilities 145,293 132,441 Federal and state taxes -- 772 ----------- ----------- Total current liabilities 150,927 140,079 ----------- ----------- Other noncurrent liabilities 94,392 97,102 ----------- ----------- Long-term debt, net of current maturities 263,115 275,634 ----------- ----------- COMMON STOCKHOLDERS' EQUITY: Class A Common Stock, 2,060,929 shares outstanding in 1997, 2,060,929 in 1996 21 21 Class B Common Stock, 30,019,844 shares outstanding in 1997, 29,816,153 in 1996 300 298 Class C Common Stock, 207,230 shares outstanding in 1997, 207,230 in 1996 2 2 Class D Common Stock, 33,495 shares outstanding in 1997, 36,805 in 1996 -- -- Capital in excess of par, net of deferred compensation of $166,000 in 1997 and $377,000 in 1996 198,628 194,308 Retained earnings 296,788 258,351 ----------- ----------- 495,739 452,980 ----------- ----------- $ 1,004,173 $ 965,795 =========== =========== </TABLE> See accompanying notes to these condensed consolidated financial statements Page Four of Twelve Pages
5 UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (000s omitted - unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED ---------------- JUNE 30, -------- 1997 1996 --------- --------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 38,437 $ 27,717 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 38,843 31,504 Provision for self-insurance reserves 8,874 7,401 Changes in assets & liabilities, net of effects from acquisitions and dispositions: Accounts receivable (4,042) 7,466 Accrued interest (149) (491) Accrued and deferred income taxes (773) 4,220 Other working capital accounts 10,424 13,384 Other assets and deferred charges (4,555) (7,141) Other 5,118 327 Payments made in settlement of self-insurance claims (12,554) (5,639) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 79,623 78,748 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment additions, net (66,736) (50,432) Acquisition of business -- (165,142) Notes receivable related to acquisitions -- (10,545) --------- --------- NET CASH USED IN INVESTING ACTIVITIES (66,736) (226,119) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Reduction of long-term debt (13,751) -- Additional borrowings -- 47,330 Issuance of common stock 1,198 100,345 --------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (12,553) 147,675 --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 334 304 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 288 34 ========= ========= CASH AND CASH EQUIVALENTS, END OF PERIOD $ 622 $ 338 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 10,489 $ 11,111 ========= ========= Income taxes paid, net of refunds $ 22,784 $ 11,614 ========= ========= </TABLE> See accompanying notes to these condensed consolidated financial statements. Page Five of Twelve 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, 1996. Prior to 1997, the Company included charity care services as a component of its provision for doubtful accounts. Effective January 1, 1997, in accordance with health care industry practice, the Company began excluding charity care from net revenues, and has reclassified the 1996 amounts to conform with this presentation. The change in presentation has no effect on reported net income. (2) EARNINGS PER SHARE 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. In April 1996, the Company declared a two-for-one stock split in the form of a 100% stock dividend which was paid in May, 1996. All classes of common stock participated on a pro rata basis. The weighted average number of common shares and equivalents and earnings per common and common equivalent share for the three and six months ended June 30, 1996 have been adjusted to reflect the two-for-one stock split. The Financial Accounting Standards Board recently issued Statement 128, Earnings per Share, which is effective for financial statements for periods ending after December 15, 1997. Pursuant to the provisions of Statement 128, the Company's basic earnings per share would have been $.52 and $.43 for the three month periods ended June 30, 1997 and 1996 and $1.19 and $.99 for the six months ended June 30, 1997 and 1996, respectively. The diluted earnings per share would have been $.51 and $.42 for the three month periods ended June 30, 1997 and 1996 and $1.16 and $.96 for the six months ended June 30, 1997 and 1996, respectively. (3) OTHER LIABILITIES Other noncurrent liabilities include the long-term portion of the Company's professional and general liability and workers' compensation reserves. (4) COMMITMENT AND CONTINGENCIES Under certain agreements, the Company has committed or guaranteed an aggregate of $14 million related principally to the Company's self-insurance programs and as support for various debt instruments and loan guarantees. Page Six of Twelve Pages
7 (5) SUBSEQUENT EVENTS Subsequent to the end of the 1997 second quarter, the Company entered into a partnership agreement for the ownership and operation of The George Washington University Hospital, a 501-bed acute care facility located in Washington, D.C. The Company holds an 80% interest in the partnership and The George Washington University holds a 20% interest. The Company also entered into a management agreement, which commenced in April 1997, to manage the operations of the hospital. Pursuant to the terms of the partnership agreement, the Company will provide an immediate commitment of $80 million ($40 million in cash and a $40 million letter of credit) as part of a total intended investment by the partnership of $125 million over the next ten years for enhancement of the hospital's operations. Page Seven of Twelve Pages
8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The matters discussed in this report as well as the news releases issued from time to time by the Company contain certain forward-looking statements that involve risks and uncertainties, including, among other things, that the majority of the Company's revenues are produced by a small number of its total facilities, possible changes in levels and terms of reimbursement for the Company's charges by government programs or other third party payors, the ability of the Company to successfully integrate its recent and proposed acquisitions and the ability to continue to finance its growth on favorable terms. RESULTS OF OPERATIONS Net revenues increased 22% or $62 million for the three months ended June 30, 1997 and 25% or $135 million for the six months ended June 30, 1997, over the comparable prior year periods. Net revenues at hospital facilities owned during both periods increased $33 million or 12% and $47 million or 9% for the three and six months ended June 30, 1997, respectively, over the comparable prior year periods. Also contributing to the increase in net revenues for the three and six month periods was the acquisitions of a 357-bed medical complex located in Amarillo, Texas and four behavioral health centers located in Pennsylvania, all of which were acquired during the second quarter of 1996. Earnings before interest, income taxes, depreciation, amortization and lease and rental expense (EBITDAR) increased 19% or $10 million for the three months ended June 30, 1997 and 23% or $24 million for the six months ended June 30, 1997 as compared to the comparable prior year periods. Overall operating margins were 18% for the three months ended June 30, 1997 and 1996 and 19% for the six months ended June 30, 1997 and 1996. ACUTE CARE SERVICES Net revenues from the Company's acute care hospitals, ambulatory treatment centers and women's center accounted for 85% and 84% of consolidated net revenues for the three month periods ended June 30, 1997 and 1996, and 85% and 86% of consolidated net revenues for the six month periods ended June 30, 1997 and 1996, respectively. Net revenues at the Company's acute care hospitals owned during both periods increased 14% and 10% for the three and six month periods ended June 30, 1997, respectively, over the comparable prior year periods. Inpatient admissions at these facilities increased 7% during the 1997 second quarter over the comparable prior year quarter and 3% for the six month period ended June 30, 1997 as compared to the comparable prior year six month period. Patient days at the Company's acute care facilities owned during both periods increased 8% and 3% for the three and six months ended June 30, 1997, respectively, over the comparable prior year periods. Outpatient activity at the Company's acute care hospitals continues to increase as gross outpatient revenues at the acute care facilities owned during both periods increased 12% for each of the three and six month periods ended June 30, 1997 over the comparable prior year periods. Gross outpatient revenues comprised 27% of the Company's acute care gross patient revenues during the second quarter of 1997 as compared to 26% during the 1996 second quarter and 26% for the six months ended June 30, 1997 as compared to 25% for the prior year six month period. The increase is primarily the result of advances in medical technologies, 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. To accommodate the increased utilization of outpatient services, the Company has expanded or redesigned several of its outpatient facilities and services. Page Eight of Twelve Pages
9 BEHAVIORAL HEALTH SERVICES Net revenues from the Company's behavioral health services facilities accounted for 15% of the Company's consolidated net revenues for the three month periods ended June 30, 1997 and 1996 and 15% and 13% of consolidated net revenues for the six month periods ended June 30, 1997 and 1996, respectively. Net revenues at the Company's behavioral health centers owned during both periods remained relatively unchanged during the 1997 second quarter as compared to the 1996 second quarter and decreased 1% for the six month period ended June 30, 1997 as compared to the comparable 1996 period. Admissions and patient days at the facilities owned during both periods increased 3% during the 1997 second quarter over the 1996 second quarter as the average length of stay remained unchanged at 12.7 days in both three month periods. Admissions at these facilities increased 5% for the six month period ended June 30, 1997 as compared to the comparable prior year period while patient days increased 2% during this period over the comparable prior year period. The average length of stay decreased 4% to 11.9 days during the 1997 six month period as compared to 12.4 days in the comparable prior year period. The relatively flat net revenues at the facilities owned during both periods resulted primarily from continued pressure from payors to reduce the average length of stay at these facilities as a large portion of the Company's behavioral health services' revenues are reimbursed on a per diem basis. The 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 developing and marketing 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 during both periods increased 6% and 9% for the three and six month periods ended June 30, 1997, respectively, over the comparable prior year periods. Gross outpatient revenues comprised 22% of the Company's behavioral health services' net revenues for the three months ended June 30, 1997 as compared to 18% during the 1996 comparable three month period and 20% for the six month period ended June 30, 1997 as compared to 18% in the comparable prior year period. OTHER OPERATING RESULTS Depreciation and amortization expense increased 19% or $3 million for the three months ended June 30, 1997 and 23% or $7 million for the six months ended June 30, 1997, over the comparable prior year periods due primarily to the 1996 acquisitions mentioned above. Interest expense decreased $600,000 or 10% for the three month period ended June 30, 1997 and $300,000 or 3% for the six month period ended June 30, 1997 over the comparable prior year periods due primarily to lower average outstanding borrowings and a slight decrease in rates. In June 1996, the Company issued four million shares of its Class B Common Stock at a price of $26 per share. The total net proceeds of $99.1 million generated from this stock issuance were used to partially finance the 1996 purchase transitions mentioned above. The effective tax rate was 36% for each of the three and six month periods ended June 30, 1997 and 1996. GENERAL TRENDS An increased proportion of the Company's revenue is derived from fixed payment services, including Medicare and Medicaid which accounted for 54% and 52% of the Company's net patient revenues for the three month periods ended June 30, 1997 and 1996 and 52% and 50% for the six month periods ended June 30, 1997 and 1996, respectively. The Company expects the Medicare and Medicaid revenues to continue to increase as a larger portion of the general population qualifies for coverage as a result of the aging of the population and expansion of state Medicaid programs. The Medicare Page Nine of Twelve Pages
10 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. 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. In addition to the trends described above that continue to have an impact on operating results, there are a number of other more general factors affecting the Company's business. In August 1997, a five year budget plan was approved which calls for a $115 billion reduction in the rate of increase in Medicare spending over the next five years. Included in this proposal is a $39 billion reduction in the future rate of increases to payments made to hospitals. The Company is unable to quantify the effect of this plan, and no assurance can be given that the implementation of this plan will not have a material adverse effect on the Company's business. 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 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 in South Carolina became eligible and received additional reimbursement from each state's disproportionate share hospital fund. Included in the Company's financials was an aggregate of $8.3 million and $3.6 million for the three month periods ended June 30, 1997 and 1996 and $16.4 million and $5.4 million for the six months ended June 30, 1997 and 1996, respectively, received pursuant to the terms of these programs. These programs, which terminate in the third quarter of 1997, have been renewed although the Company is uncertain as to the amount of reimbursement to be received pursuant to the terms of these programs. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $80 million for the six months ended June 30, 1997 and $79 million for the six months ended June 30, 1996. The $1 million net increase during the 1997 six month period as compared to the 1996 comparable period was due primarily to a $20 million increase in the net income plus the addback of the non-cash charges (depreciation, amortization and provision for self-insurance reserves) offset by a $11 million increase in income tax payments and a $7 million increase in payments made in settlement of self-insurance reserves. During the first quarter of 1997, the Company spent $67 million to finance capital expenditures including a total of $38 million on the construction of a new medical complex (including a 149-bed acute care facility) in Summerlin, Nevada and a new 130-bed replacement facility in Edinburg, Texas. These facilities are scheduled to open during the third and fourth quarters of 1997. The Company also reduced outstanding debt by $14 million. Subsequent to June 30, 1997, the Company entered into a new revolving credit agreement. The new agreement, which matures in July 2002, provides for up to $300 million of borrowing capacity. During the term of this agreement, the Company has the option to petition the banks to increase the borrowing capacity to $400 million. The agreement 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. A facility fee ranging from 1/8% to 3/8% is required on the total commitment. As of June 30, 1997, the Company had $275 million of unused borrowing capacity available under the terms of its new revolving credit and existing commercial paper facilities. Page Ten of Twelve Pages
11 PART II. OTHER INFORMATION UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The following information relates to matters submitted to the stockholders of Universal Health Services, Inc. (the "Company") at the Annual Meeting of Stockholders held on May 21, 1997. (b) Not applicable. (c) At the meeting the following proposals, as described in the proxy statement delivered to all the Company's stockholders were approved by the votes indicated: Adoption of the Amendment to the Company's Restated Certificate of Incorporation <TABLE> <S> <C> Votes cast in favor 25,334,848 Votes cast against 137,813 Votes abstained 2,722 Broker non-votes 0 </TABLE> Election by Class A & Class C stockholders of Class I Directors, Martin Meyerson and John H. Herrell: <TABLE> <CAPTION> Martin Meyerson John H. Herrell --------------- --------------- <S> <C> <C> Votes cast in favor 2,263,229 2,263,229 Votes withheld 0 0 </TABLE> (d) Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.1 Company's Restated Certificate of Incorporation and Amendments thereto. 10.1 Credit agreement dated as of July 8, 1997 among Universal Health Services, Inc., various banks and Morgan Guaranty Trust Company of New York, as agent. 10.2 Agreement of Limited Partnership of District Hospital Partners, L.P. (a District of Columbia Limited Partnership) by and among UHS of D.C., Inc. and The George Washington University. 10.3 Contribution Agreement between The George Washington University (a congressionally chartered institution in the District of Columbia) and District Hospital Partners, L.P. (a District of Columbia limited partnership). 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 Eleven of Twelve Pages
12 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, 1997 /s/ Kirk E. Gorman ----------------------------------------- Kirk E. Gorman, Senior Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer). Page Twelve of Twelve Pages