================================================================================ 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, 2000 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, 2000: Class A 2,023,566 Class B 27,620,311 Class C 204,593 Class D 23,434 Page One of Nineteen Pages ================================================================================
UNIVERSAL HEALTH SERVICES, INC. ------------------------------- I N D E X --------- PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Condensed Consolidated Statements of Income - Three and Six Months Ended June 30, 2000 and 1999............... .Three Condensed Consolidated Balance Sheets - June 30, 2000 and December 31, 1999............................................. Four Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2000 and 1999........................... Five Notes to Condensed Consolidated Financial Statements........... Six, Seven, Eight & Nine Item 2. Management's Discussion and Analysis of Operations and Financial Condition.............................. Ten, Eleven, Twelve, Thirteen, Fourteen & Fifteen PART II. OTHER INFORMATION................................ Sixteen, Seventeen & Eighteen SIGNATURE........................................................... Nineteen Page Two of Nineteen Pages
PART I. FINANCIAL INFORMATION UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (000s omitted except per share amounts) (unaudited) <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30, ----------------------------- ---------------------------- 2000 1999 2000 1999 ----------------------------- ---------------------------- <S> <C> <C> <C> <C> Net revenues $ 524,828 $ 513,067 $ 1,065,832 $ 1,033,162 Operating charges: Salaries, wages and benefits 202,668 199,579 413,531 395,249 Other operating expenses 120,609 115,336 237,546 231,242 Supplies expense 72,603 72,335 146,515 142,500 Provision for doubtful accounts 41,883 40,145 86,863 81,071 Depreciation and amortization 28,159 27,197 55,803 54,175 Lease and rental expense 11,920 12,273 23,869 24,552 Interest expense, net 7,192 6,566 14,520 13,048 ------------- ------------- ------------- ------------- 485,034 473,431 978,647 941,837 ------------- ------------- ------------- ------------- Income before minority interests and income taxes 39,794 39,636 87,185 91,325 Minority interests in earnings of consolidated entities 3,371 2,757 6,514 6,751 ------------- ------------- ------------- ------------- Income before income taxes 36,423 36,879 80,671 84,574 Provision for income taxes 13,114 13,849 28,733 31,522 ------------- ------------- ------------- ------------- Net income $ 23,309 $ 23,030 $ 51,938 $ 53,052 ============= ============= ============= ============= Earnings per common share - basic $0.77 $0.73 $1.71 $1.67 ============= ============= ============= ============= Earnings per common share - diluted $0.76 $0.71 $1.68 $1.63 ============= ============= ============= ============= Weighted average number of common shares - basic 30,119 31,659 30,355 31,833 Weighted average number of common share equivalents 1,020 703 742 692 ------------- ------------- ------------- ------------- Weighted average number of common shares and equivalents - diluted 31,139 32,362 31,097 32,525 ============= ============= ============= ============= </TABLE> See accompanying notes to these condensed consolidated financial statements. Page Three of Nineteen Pages
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000s omitted, unaudited) <TABLE> <CAPTION> June 30, December 31, 2000 1999 ------------ ------------ Assets <S> <C> <C> Current assets: Cash and cash equivalents $ 5,552 $ 6,181 Accounts receivable, net 313,566 307,294 Supplies 40,166 41,173 Deferred income taxes 27,352 26,768 Other current assets 22,289 21,833 -------------- -------------- Total current assets 408,925 403,249 -------------- -------------- Property and equipment 1,213,953 1,173,427 Less: accumulated depreciation (474,806) (437,837) -------------- -------------- 739,147 735,590 Funds restricted for construction 41,202 41,463 -------------- -------------- 780,349 777,053 -------------- -------------- Other assets: Excess of cost over fair value of net assets acquired 269,382 276,031 Deferred charges 16,605 10,870 Other 49,830 30,770 -------------- -------------- 335,817 317,671 -------------- -------------- $ 1,525,091 $ 1,497,973 ============== ============== Liabilities and Stockholders' Equity Current liabilities: Current maturities of long-term debt $ 1,309 $ 3,506 Accounts payable and accrued liabilities 207,698 213,694 Federal and state taxes 593 ----- -------------- -------------- Total current liabilities 209,600 217,200 -------------- -------------- Other noncurrent liabilities 75,521 73,705 -------------- -------------- Minority interest 120,197 115,635 -------------- -------------- Long-term debt, net of current maturities 404,203 419,203 -------------- -------------- Deferred income taxes 35,617 30,619 -------------- -------------- Common stockholders' equity: Class A Common Stock, 2,023,566 shares outstanding in 2000, 2,030,566 in 1999 20 20 Class B Common Stock, 27,865,334 shares outstanding in 2000, 28,392,100 in 1999 279 284 Class C Common Stock, 204,593 shares outstanding in 2000, 204,593 in 1999 2 2 Class D Common Stock, 23,609 shares outstanding in 2000, 24,857 in 1999 ----- ----- Capital in excess of par, net of deferred compensation of $711 in 2000 and $116 in 1999 144,754 158,345 Retained earnings 534,898 482,960 ------------- -------------- 679,953 641,611 ------------- -------------- $ 1,525,091 $ 1,497,973 ============= ============== </TABLE> See accompanying notes to these condensed consolidated financial statements. Page Four of Nineteen Pages
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (000s omitted - unaudited) <TABLE> <CAPTION> Six Months Ended June 30, 2000 1999 ------------ ------------ <S> <C> <C> Cash Flows from Operating Activities: Net income $51,938 $53,052 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 55,803 54,175 Minority interests in earnings of consolidated entities 6,514 6,751 Changes in assets & liabilities, net of effects from acquisitions and dispositions: Accounts receivable (7,758) (30,077) Accrued interest (1,722) (74) Accrued and deferred income taxes 7,627 (1,990) Other working capital accounts (1,868) 17,840 Other assets and deferred charges (8,996) (3,062) Other (2,980) 2,081 Accrued insurance expense, net of commercial premiums paid 4,103 4,711 Payments made in settlement of self-insurance claims (5,477) (5,719) ------------ ------------ Net cash provided by operating activities 97,184 97,688 ------------ ------------ Cash Flows from Investing Activities: Property and equipment additions, net (46,191) (30,296) Investment in business and costs related to pending acquisitions (15,123) ---- Proceeds received from divestitures, net 5,753 15,080 Acquisition of businesses ---- (31,588) ------------ ------------ Net cash used in investing activities (55,561) (46,804) ------------ ------------ Cash Flows from Financing Activities: Additional borrowings, net of financing costs 243,126 ---- Reduction of long-term debt (268,036) (12,787) Distributions to minority partners (665) (5,015) Issuance of common stock 2,665 1,500 Repurchase of common shares (19,342) (27,687) ------------ ------------ Net cash used in financing activities (42,252) (43,989) ------------ ------------ (Decrease) Increase in cash and cash equivalents (629) 6,895 Cash and cash equivalents, Beginning of Period 6,181 1,260 ------------ ------------ Cash and cash equivalents, End of Period $5,552 $8,155 ============ ============ Supplemental Disclosures of Cash Flow Information: Interest paid $15,897 $13,121 ============ ============ Income taxes paid, net of refunds $21,133 $33,603 ============ ============ </TABLE> See accompanying notes to these condensed consolidated financial statements. Page Five of Nineteen Pages
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, 1999. 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) Commitments and Contingencies Under certain agreements, the Company has committed or guaranteed an aggregate of $56 million related principally to the Company's self-insurance programs and as support for various debt instruments and loan guarantees, including a $40 million surety bond related to the Company's 1997 acquisition of an 80% interest in The George Washington University Hospital. During the fourth quarter of 1999, the Company made a decision to close/sell one of its specialized women's centers and in January of 2000, a temporary injunction was issued preventing closure until a trial on the merits which is scheduled for October, 2000. The Company is involved in litigation with respect to this facility in which the plaintiffs are seeking monetary damages as well as specific performance of a lease agreement. During the fourth quarter of 1999, the Company recorded a $5.3 million charge to reduce the carrying value of the facility to its estimated realizable value of approximately $9 million, based on an independent appraisal, and may incur additional charges in the event it is unable to close or sell the facility for a significant period of time or suffers an unfavorable outcome from this litigation. (4) Acquisitions During the second quarter of 2000, the U.S. Bankruptcy Court for the District of Delaware approved the Company's agreement to purchase 11 behavioral health facilities with approximately 1,400 licensed beds from Charter Behavioral Health Systems, LLC. The Company has also reached an agreement in principle with Crescent Real Estate Funding VII LP to acquire the real estate assets associated with these businesses plus one additional behavioral health property. The Company expects these purchase transactions, which will have a combined approximate purchase price of $105 million including expected working capital contributions, to be completed during the third quarter of 2000. Page Six of Nineteen Pages
During the second quarter of 2000, Meridell Achievement Center, Inc., a subsidiary of the Company, exercised its option pursuant to its lease with Universal Health Realty Income Trust, to purchase the leased property upon the December 31, 2000 expiration of the initial lease term. The purchase price, which is based on the fair market value of the property as defined in the lease, will be $5,450,000. Subsequent to the end of the second quarter of 2000, the Company acquired the assets and operations of a 277-bed acute care facility located in Enid, Oklahoma for a total cost of acquisition, including expected working capital, of $43 million. Also subsequent to the end of the second quarter of 2000, the Company executed a definitive agreement to purchase a 77-bed acute care facility located in Eagle Pass, Texas. Subject to the terms of the agreement, the Company expects to build a replacement hospital within five years. The Company expects the purchase transaction to be completed during the third quarter of 2000. (5) New Accounting Pronouncement In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of SFAS No. 133", which deferred the effective date of SFAS No. 133 for one year. 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 the transactions that receive hedge accounting. The Company will be required to adopt SFAS No. 133 effective as of January 1, 2001 and has not yet quantified the impact of adopting this statement on its financial statements. Further, the Company has not determined the method of adoption of SFAS No. 133. However, SFAS No. 133 could increase the volatility in earnings and other comprehensive income. (6) Segment Reporting 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. Page Seven of Nineteen Pages
<TABLE> <CAPTION> Three Months Ended June 30, 2000 ----------------------------------------------------------------------- Behavioral Acute Care Health Total Services Services Other Consolidated ---------------- ----------------- ----------------- ------------------ (Dollar amounts in thousands) <S> <C> <C> <C> <C> Gross inpatient revenues $734,532 $121,442 $4,812 $860,786 Gross outpatient revenues $270,591 $18,897 $29,131 $318,619 Total net revenues $430,775 $75,386 $18,667 $524,828 EBITDAR (A) $79,903 $15,386 ($8,224) $87,065 Total assets as of 6/30/00 $1,226,382 $146,444 $152,265 $1,525,091 Licensed beds 4,843 2,044 -------- 6,887 Available beds 4,150 2,029 -------- 6,179 Patient days 241,221 122,878 -------- 364,099 Admissions 51,564 10,133 -------- 61,697 Average length of stay 4.7 12.1 -------- 5.9 </TABLE> <TABLE> <CAPTION> Three Months Ended June 30, 1999 ---------------------------------------------------------------------- Behavioral Acute Care Health Total Services Services Other Consolidated ---------------- ----------------- ---------------- ------------------ (Dollar amounts in thousands) <S> <C> <C> <C> <C> 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 </TABLE> <TABLE> <CAPTION> Six Months Ended June 30, 2000 ---------------------------------------------------------------------- Behavioral Acute Care Health Total Services Services Other Consolidated ---------------- ----------------- ----------------- ----------------- (Dollar amounts in thousands) <S> <C> <C> <C> <C> Gross inpatient revenues $1,532,775 $237,632 $11,345 $1,781,752 Gross outpatient revenues $530,993 $44,265 $59,279 $634,537 Total net revenues $880,735 $149,051 $36,046 $1,065,832 EBITDAR (A) $169,211 $28,868 ($16,702) $181,377 Total assets as of 6/30/00 $1,226,382 $146,444 $152,265 $1,525,091 Licensed beds 4,832 2,051 -------- 6,883 Available beds 4,130 2,036 -------- 6,166 Patient days 508,566 243,755 -------- 752,321 Admissions 106,967 20,736 -------- 127,703 Average length of stay 4.8 11.8 -------- 5.9 </TABLE> Page Eight of Nineteen Pages
<TABLE> <CAPTION> Six Months Ended June 30, 1999 ---------------------------------------------------------------------- Behavioral Acute Care Health Total Services Services Other Consolidated ---------------- ----------------- ---------------- ------------------ (Dollar amounts in thousands) <S> <C> <C> <C> <C> 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 </TABLE> (A) EBITDAR - Earnings before interest, income taxes, depreciation, amortization, lease & rental and minority interest expense. (7) Earnings Per Share Data ("EPS") The following table sets forth the computation of basic and diluted earnings per share for the periods indicated. <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, --------------------------------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- In thousands, except per share data <S> <C> <C> <C> <C> Basic: Net income $23,309 $23,030 $51,938 $53,052 Average shares outstanding 30,119 31,659 30,355 31,833 ------- ------- ------- ------- Basic EPS $ 0.77 $ 0.73 $ 1.71 $ 1.67 ======= ====== ====== ====== Diluted: Net income $23,309 $23,030 $51,938 $53,052 Add discounted convertible debenture interest, net of income tax effect 238 ------- 238 ------- ------- ------- ------- ------- Totals $23,547 $23,030 $52,176 $53,052 ======= ======= ======= ======= Average shares outstanding 30,119 31,659 30,355 31,833 Net effect of dilutive stock options and grants based on the treasury stock method 622 703 543 692 Assumed conversion of discounted convertible debentures 398 ------- 199 ------- ------- ------- ------- ------- Totals 31,139 32,362 31,097 32,525 ------- ------- ------- ------- Diluted EPS $ 0.76 $ 0.71 $ 1.68 $ 1.63 ======== ======= ====== ======= </TABLE> Page Nine of Nineteen Pages
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION Forward-Looking Statements - -------------------------- The matters discussed in this report as well as the news releases issued from time to time by the Company include certain statements containing the words "believes", "anticipates", "intends", "expects" and words of similar import, which constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: that the majority of the Company's revenues are produced by a small number of its total facilities; possible changes in the levels and terms of reimbursement for the Company's charges by government programs, including Medicare or Medicaid or other third party payers; industry capacity; demographic changes; existing laws and government regulations and changes in or failure to comply with laws and governmental regulations; the ability to enter into managed care provider agreements on acceptable terms; liability and other claims asserted against the Company; competition; the loss of significant customers; technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for healthcare; the ability to attract and retain qualified personnel, including physicians, the ability of the Company to successfully integrate its recent acquisitions; the Company's ability to finance growth on favorable terms and, other factors referenced in the Company's 1999 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 2% to $525 million for the three months ended June 30, 2000 as compared to $513 million in the same prior year period and increased 3% to $1.066 billion for the six months ended June 30, 2000 as compared to $1.033 billion during the comparable 1999 six month period. Earnings before interest, income taxes, depreciation, amortization and lease and rental expense (before deducting minority interests in earnings of consolidated entities) ("EBITDAR") increased 2% to $87 million for the three month period ended June 30, 2000 from $86 million in the comparable prior year quarter and decreased 1% to $181 million during the six month period ended June 30, 2000 as compared to $183 million during the comparable 1999 six month period. Overall operating margins were 16.6% in the 2000 second quarter as compared to 16.7% in the 1999 second quarter and were 17.0% for the six month period ended June 30, 2000 as compared to 17.7% during the six month period ended June 30, 1999. Acute Care Services - ------------------- Net revenues from the Company's acute care hospitals, ambulatory treatment centers and specialized women's health centers accounted for 85% of consolidated net revenues for each of the quarters ended June 30, 2000 and 1999 and 86% and 87% for the six month periods ended June 30, 2000 and 1999, respectively. Net revenues at the Company's acute care facilities owned in both quarters ended June 30, 2000 and 1999 increased 2% in the 2000 second quarter as compared to the comparable 1999 period. Admissions to the Company's acute care facilities owned in both quarters increased 4% during the quarter ended June 30, 2000 over the comparable 1999 quarter and patient days at these facilities increased 3% for the three months ended June 30, 2000 as compared to the comparable prior year quarter. The average length of stay at the acute care facilities owned during both periods decreased 2% to 4.7 days for the three month period ended June 30, 2000 as compared to 4.8 days in the comparable prior year quarter. Page Ten of Nineteen Pages
Net revenues at the Company's acute care facilities owned in both six month periods ended June 30, 2000 and 1999 increased 2% in the 2000 six month period as compared to the comparable 1999 period. Admissions to the Company's acute care facilities owned in both six month periods increased 4% during the six month period ended June 30, 2000 over the comparable 1999 period and patient days at these facilities increased 3% for the six month ended June 30, 2000 as compared to the comparable prior year period. The average length of stay at the acute care facilities owned during both six month periods remained unchanged at 4.8 days. The Company's facilities have experienced an increase in inpatient acuity and intensity of services as less intensive services shift from an inpatient basis to an outpatient basis due to technological and pharmaceutical improvements and continued pressures by payors, including Medicare, Medicaid and managed care companies to reduce admissions and lengths of stay. To accommodate the increased utilization of outpatient services, the Company has expanded or redesigned several of its outpatient facilities and services. Gross outpatient revenues at the Company's acute care facilities owned during the three month periods ending June 30, 2000 and 1999 increased 14% in the second quarter of 2000 as compared to the comparable 1999 quarter and comprised 27% of the Company's acute care gross patient revenue in the second quarter of 2000 as compared to 26% during the 1999 comparable quarter. Gross outpatient revenues at these facilities increased 11% during the six month period ended June 30, 2000 as compared to the comparable prior year period and comprised 26% of the Company's acute care gross patient revenue during the six months ended June 30, 2000 as compared to 25% during the comparable prior year period. Despite the increase in patient volume at the Company's facilities, 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. Additionally, 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. The Company expects the increased competition, admission constraints and payor pressures to continue. The increase in net revenue as discussed above includes the effect of lower payments from the government under the Medicare program as a result of the Balanced Budget Act of 1997 ("BBA-97") and increased discounts to insurance and managed care companies (see General Trends for additional disclosure). The Company anticipates that the percentage of its revenue from managed care business will continue to increase in the future. The Company generally receives lower payments per patient from managed care payors than it does from traditional indemnity insurers. At the Company's acute care facilities, operating expenses, (salaries, wages and benefits, other operating expenses, supplies expense and provision for doubtful accounts) as a percentage of net revenues were 81.5% and 81.1% for the three months ended June 30, 2000 and 1999, respectively, and 80.8% and 79.5% for the six months ended June 30, 2000 and 1999, respectively. Operating margins (EBITDAR) at these facilities were 18.5% and 18.9% during the quarters ended June 30, 2000 and 1999, respectively, and 19.2% and 20.5% during the six month periods ended June 30, 2000 and 1999, respectively. Included in the operating margins for the three and six months ended June 30, 1999 was a $3.1 million favorable Medicare adjustment resulting from an adjustment to contractual allowances recorded in 1998. As a result of reductions stemming from BBA-97 and Medicaid program redesigns by Texas and South Carolina, the Company's Medicaid disproportionate share reimbursements have been reduced by approximately $11 million annually, on a prospective basis, beginning in the third quarter of 1999. Also contributing to the decline in the Company's acute care operating margins for the three and six month periods ended June 30, 2000, as compared to the comparable prior year periods, was a decline in the operating margins at an acute care facility located in Amarillo, Texas caused by reduced levels of business in a few high margin services and higher than anticipated indigent care costs as well as weakened operating performance at an acute care facility located in Las Vegas, Nevada. Additionally, the Company's acute care division continues to experience earnings pressure due to government reimbursement reductions and continued increases in the provision for doubtful accounts. Pressure on operating margins may continue due to, among other things, the changes in the Medicare payments mandated by BBA-97 which became effective on October 1, 1997, reductions in Medicaid disproportionate share reimbursements and the industry-wide trend towards managed care which limits the Company's ability to increase its prices. Page Eleven of Nineteen Pages
Behavioral Health Services - -------------------------- Net revenues from the Company's behavioral health services facilities accounted for 14% of consolidated net revenues for each of the three month periods ended June 30, 2000 and 1999 and 14% for the six month period ended June 30, 2000 as compared to 13% for the comparable prior year six month period. Net revenues at the Company's behavioral health services facilities owned in both periods increased 4% during the three month period ended June 30, 2000 as compared to the comparable prior year quarter. Admissions and patient days at these facilities increased 1% and 3%, respectively, during the three month period ended June 30, 2000 as compared to the comparable prior year quarter. The average length of stay at the behavioral health services facilities owned in both periods increased 3% to 12.0 days during the 2000 second quarter as compared to 11.7 days in the comparable prior year period. Net revenues at the Company's behavioral health services facilities owned in both six month periods increased 5% during the six month period ended June 30, 2000 as compared to the comparable prior year period. Admissions and patient days at these facilities increased 4% and 4%, respectively, during the six month period ended June 30, 2000 as compared to the comparable prior year period. The average length of stay at the behavioral health services facilities owned in both periods increased 1% to 11.5 days during the 2000 six month period as compared to 11.4 days in the comparable prior year period. At the Company's behavioral health care facilities, operating expenses (salaries, wages and benefits, other operating expenses, supplies expense and provision for doubtful accounts) as a percentage of net revenues were 79.6% and 80.0% for the three month periods ended June 30, 2000 and 1999, respectively, and 80.6% and 81.1% for the six month periods ended June 30, 2000 and 1999, respectively. Operating margins (EBITDAR) at these facilities were 20.4% and 20.0% during the three months periods ended June 30, 2000 and 1999, respectively, and 19.4% and 18.9% during the six month periods ended June 30, 2000 and 1999, respectively Other Operating Results - ----------------------- The Company recorded minority interest expense in the earnings of consolidated entities amounting to $3.4 million and $2.8 million for the three months ended June 30, 2000 and 1999, respectively, and $6.5 million and $6.8 million for the six month periods ended June 30, 2000 and 1999, 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, D.C. Interest expense increased 10% or $626,000 for the three months ended June 30, 2000 and 11% or $1.5 million for the six months ended June 30, 2000, over the comparable prior year periods, due primarily to an increase in the net average cost of borrowings on the Company's floating rate debt and increased borrowings used to finance the various repurchases of the Company's common stock during 1999 and the six months of 2000. The effective tax rate was 36% and 38% for the three months ended June 30, 2000 and 1999, respectively, and 36% and 37% for the six month periods ended June 30, 2000 and 1999, respectively. The decrease in the effective tax rate during the 2000 three and six month periods as compared to the comparable prior year periods was due to a reduction in the effective state income tax rate and a reduction in non-deductible amortization expense. General Trends - -------------- A significant portion of the Company's revenue is derived from fixed payment services, including Medicare and Medicaid which accounted for 44% and 46% of the Company's net patient revenues during the three month periods ended June 30, 2000 and 1999, respectively, and 44% and 45% of the Company's net patient revenues during the six month periods ended June 30, 2000 and 1999, 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 a 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 Page Twelve of Nineteen Pages
to the terms of BBA-97, there were no increases in the rates paid to hospitals for inpatient care through September 30, 1998 and reimbursement for bad debt expenses and capital costs as well as other items have been reduced. Inpatient operating payment rates increased 0.5% for the period of October 1, 1998 through September 30, 1999, however, the modest rate increase was less than inflation and was 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 BBA-97. Inpatient operating payment rates were increased 1.1% for the period of October 1, 1999 through September 30, 2000, however, the modest increase was less than inflation and is expected to be more than offset by the negative impact of increasing the qualification threshold for additional payments for treating costly inpatient cases (outliers). Payments for Medicare outpatient services historically have been paid based on costs, subject to certain adjustments and limits. BBA-97 requires that payment for those services be converted to PPS, which was implemented on August 1, 2000. The Company does not expect the implementation of outpatient PPS, which can not be completely estimated at this time, to have a material effect on its future results of operations. 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. 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, four 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. Beginning in the third quarter of 1999, as a result of reductions stemming from BBA-97 and program redesigns by the two states, the Company's Medicaid disproportionate share reimbursements have been reduced by approximately $11 million annually, on a prospective basis. Included in the Company's financial results was an aggregate of $7.7 million and $10.4 million for the three month periods ended June 30, 2000 and 1999, respectively, and $15.4 million and $20.5 million for the six month periods ended June 30, 2000 and 1999, respectively, recorded in conection with these programs. Failure to renew these programs, which are scheduled to terminate in the third quarter of 2000, or further reduction in reimbursements, could have a material adverse effect on the Company's future results of operations. In addition to the Medicare and Medicaid programs, other payors, including managed care companies, continue to actively negotiate the amounts they will pay for services performed. Approximately 34% and 30% of the Company's net patient revenues for the three month periods ended June 30, 2000 and 1999, respectively, and 33% and 29% of the Company's net patient revenues for the six month periods ended June 30, 2000 and 1999, respectively, were generated from managed care companies, which includes health maintenance organizations and preferred provider organizations. In general, the Company expects the percentage of its business from managed care programs 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. Page Thirteen of Nineteen Pages
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 - ----------------------------------------------------------- Regulations related to the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") are expected to impact the Company and others in the healthcare industry by: . Establishing standardized code sets for financial and clinical electronic data interchange ("EDI") transactions to enable more efficient flow of information. Currently there is no common standard for the transfer of information between the constituents in healthcare and therefore providers have had to conform to each standard utilized by every party with which they interact. The goal of HIPAA is to create one common national standard for EDI and once the HIPAA regulation takes effect, payors will be required to accept the national standard employed by providers. . Mandating the adoption of security standards to preserve the confidentiality of health information that identifies individuals. Currently there is no recognized healthcare standard that includes all the necessary components to protect the data integrity and confidentiality of a patient's personal health record. The Department of Health and Human Services, with assistance from standard development organizations and business interests, is currently developing the standard. . Creating unique identifiers for the four constituents in healthcare: payors, providers, patients and employers. HIPAA will mandate the need for the unique identifiers for healthcare providers in an effort to ease the administrative challenge of maintaining and transmitting clinical data across disparate episodes of patient care. The Secretary of the Department of Health and Human Services is expected to issue new HIPAA regulations (expected to be released in the third quarter of 2000) related to administrative simplification with the requirement that these guidelines be implemented within two years of their release. Non-compliance may result in fines, loss of accreditation and/or threat of civil litigation. This HIPAA assessment is based on information currently available to the Company and the Company has begun preliminary planning for implementation of the necessary changes required pursuant to the terms of HIPAA. However, the Company can not currently estimate the implementation cost of the HIPAA related modifications and consequently can give no assurance that issues related to HIPAA 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 $97 million during the six months ended June 30, 2000 and $98 million during the comparable prior year period. Included in the net $1 million decrease during the 2000 six month period as compared to the 1999 comparable period was a $22 million favorable change in accounts receivable, offset by $23 million of unfavorable changes in other working capital accounts. The unfavorable change in other working capital accounts was due primarily to unfavorable timing of accrued compensation and accounts payable disbursements during the first six months of 2000 as compared to the comparable prior year period. During the first six months of 2000, the Company spent approximately $46 million to finance capital expenditures as compared to $30 million in the prior year's comparable period. In addition, the Company spent $12 million to acquire a minority ownership equity interest in Broadlane, an e-commerce marketplace for the purchase and sale of health care supplies, equipment and services to the healthcare industry. Also during the first six months of 2000, the Company received net proceeds of $6 million resulting from: (i) the divestiture of a 49% equity interest in a limited liability company that operated a specialized women's health center in Oklahoma, (ii) its ownership interest in two physician practices located in Oklahoma, and; (iii) the divestiture of the real estate assets of a behavioral health facility located in Florida. Page Fourteen of Nineteen Pages
During 1998 and 1999, the Company's Board of Directors approved stock purchase programs authorizing the Company to purchase up to six million shares of its outstanding Class B Common Stock on the open market at prevailing market prices or in negotiated transactions off the market. Pursuant to the terms of these programs, the Company purchased 580,500 shares at an average purchase price of $42.90 per share ($24.9 million in the aggregate) during 1998, 2,028,379 shares at an average purchase price of $35.10 per share ($71.2 million in the aggregate) during 1999 and 670,000 shares at an average purchase price of $28.87 per share ($19.3 million in the aggregate) during the first six months of 2000. Since inception of the stock purchase program in 1998 through June 30, 2000, the Company purchased a total of 3,278,879 shares at an average purchase price of $35.21 per share ($115.4 million in the aggregate). In conjunction with the Company's stock repurchase program, the Company sold European style put options which entitle the holder to sell shares of the Company's Class B Common Stock to the Company at a specified price. The Company also purchased European style call options which entitles the Company to purchase shares of the Company's Class B Common Stock at a specified price. As of June 30, 2000 put options totaling 778,500 shares, with an average strike price of $31.44 per share, were outstanding with various expiration dates in the third quarter of 2000. As of June 30, 2000 call options totaling 534,000 shares, with an average strike price of $31.44 per share were outstanding with various expiration dates in the third quarter of 2000. During the second quarter of 2000, the Company issued discounted convertible debentures that are due in 2020 ("Debentures"). The Debentures, which had an aggregate issue price of $250 million or $587 million aggregate principal amount at maturity, were issued at a price of $425.90 per $1,000 principal amount of Debenture. The Debentures will pay cash interest on the principal amount at the rate of 0.426% per annum, resulting in a yield to maturity of 5.0%. The Debentures will be convertible at the option of the holders thereof into 5.6024 shares of the Company's Common Stock per $1,000 face amount of Debenture (equivalent at issuance to $76.02 per share of common stock). The securities were not registered or required to be registered under the Securities Act of 1933 (the "Securities Act") and were sold in the United States in a private placement under Rule 144A under the Securities Act, and were not offered or sold in the United States absent registration or an applicable exemption from registration requirements. The Company used the net proceeds generated from the Debenture issuance to repay debt which will then be reborrowed to finance previously disclosed acquisitions, (see Note 4 to the Condensed Consolidated Financial Statements) and for other general corporate purposes. As of June 30, 2000, the Company had $393 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. A facility fee ranging from 1/8% to 3/8% is required on the total commitment. The margins over the certificate of deposit, the Euro-dollar rates and the facility fee are based upon the Company's leverage ratio. As of June 30, 2000, the Company had $100 million of unused borrowing capacity under the terms of its $100 million, annually renewable, commercial paper program. A large portion of the Company's accounts receivable are pledged as collateral to secure this program. This annually renewable program, which began in 1993, is scheduled to expire or be renewed on October 30th of each year. The Company's total debt as a percentage of total capitalization was 37% at June 30, 2000 and 40% at December 31, 1999. The Company expects to finance all capital expenditures and acquisitions with internally generated funds, borrowed funds and issuance of securities. 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 Nineteen Pages
PART II. OTHER INFORMATION UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES ------------------------------------------------ Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- (a) Not applicable. (b) Not applicable (c) On June 23, 2000, the Company raised approximately $243.1 million in cash from the sale of $586,992,000 aggregate principal amount at maturity of the Company's convertible debentures due 2020 (the "Debentures"). The Debentures were issued through a private offering exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), and Rule 144A thereto, to the initial purchasers, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., UBS Warburg LLC and Banc of America Securities LLC, at a discount of $11.71 per $1,000 principal amount at maturity of the Debentures and an aggregate discount of approximately $6,873,676, for resale to certain qualified institutional buyers (as defined in Rule 144A) and institutional "accredited investors" (as defined in Rule 501(a) (1), (2), (3) and (7) under the Securities Act). The Company will pay interest on the Debentures semiannually in arrears on June 23 and December 23 of each year, beginning December 23, 2000, at the rate of .426% per year on the principal amount at maturity. The rate of cash interest and accrual of original issue discount represent a yield to maturity of 5% per year. Each $1,000 Debenture may be converted at any time on or before the maturity date into 5.6024 shares of the Company's class B common stock. The conversion rate is subject to adjustment, but may not be adjusted for accrued original issue discount or accrued cash interest. The holders of the Debentures may require the Company to purchase all or a portion of their Debentures at a price of $543.41 on June 23, 2006, $643.48 on June 23, 2010 and $799.84 on June 23, 2015, plus accrued and unpaid cash interest to each purchase date. The Company may choose to pay the purchase price in cash or class B common stock or a combination of cash and class B common stock. In addition, each holder may require the Company to repurchase all or a portion of such holder's Debentures upon a change in control occurring on or before June 23, 2006. The Company may redeem all or a portion of the debentures at any time on or after June 23, 2006. The proceeds from the sale of the Debentures were used to pay down borrowings under the Company's revolving credit facility and commercial paper credit facility which will then be reborrowed to finance previously disclosed acquisitions, (see Note 4 to the Condensed Consolidated Financial Statements) and for other general corporate purposes. Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- There are no material changes in quantitative and qualitative disclosures in 2000 other than the changes as described below. Reference is made to Item 7 in the Annual Report on Form 10-K for the year ended December 31, 1999. During the second quarter of 2000, the Company entered into a five year interest rate swap having a notional principal amount of $135 million whereby the Company pays a floating rate and the counter-party pays the Company a fixed rate of 8.75%. The counter-party has the right to cancel the swap at any time during the swap term with thirty days notice. Simultaneously, the Company entered into a fixed rate swap having a notional principal amount of $135 million whereby the Company pays a fixed rate of 6.76% and receives a floating rate from the counter-party. The Company also reduced the maturity date of interest rate swaps totaling $75 million notional principal from August, 2010 to August, 2005. The table box below presents updated information about the Trust's interest rate swap agreements as of June 30, 2000, including the swap agreements with a notional principal amount of $75 million, which became effective subsequent to the end of the second quarter of 2000. Page Sixteen of Nineteen Pages
Maturity Date, Fiscal Year Ending December 31 --------------------------------------------- <TABLE> <CAPTION> (Dollars in thousands) 2001 2002 2003 2004 2005 Total ---- ---- ---- ---- ---- ----- <S> <C> <C> Interest rate swaps: Pay fixed/receive variable notional amount $135,000 $135,000 Average pay rate 6.761% Average receive rate 3 Month LIBOR Pay variable/receive fixed notional amounts $135,000(a) $135,000 Average pay rate 3 Month LIBOR & spread Average receive rate 8.75% Pay fixed/receive variable notional amounts $75,000 $75,000 Average pay rate 6.70% Average receive rate 3 Month LIBOR </TABLE> (a) Counter party has the right to cancel at any time within 30 days notice. 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 17, 2000. (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 I Directors John H. Herrell Leatrice Ducat --------------- -------------- Votes cast in favor 22,373,066 22,373,066 Votes withheld 0 0 Adoption of the Amendment to the 1992 Stock Option Plan Votes cast in favor 24,601,864 Votes cast against 417,934 Votes abstained 6,736 Broker non-votes 0 (d) Not applicable Page Seventeen of Nineteen Pages
Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits: 10.1 INDENTURE dated as of June 23, 2000 between UNIVERSAL HEALTH SERVICES, INC., a Delaware corporation (the "Company"), and BANK ONE TRUST COMPANY, N.A., a national banking association (the "Trustee"). 27. Financial Data Schedule (b) Report on Form 8-K dated June 13, 2000 reporting under Item 5. Report on Form 8-K dated June 20, 2000 reporting under Item 5. All other items of this Report are inapplicable. Page Eighteen of Nineteen Pages
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 11, 2000 /s/ Kirk E. Gorman ------------------------------------------ Kirk E. Gorman, Senior Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer). Page Nineteen of Nineteen Pages