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, 1994 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, 1994. Class A 1,090,527 Class B 13,062,174 Class C 109,622 Class D 23,506 ============================================================================= 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 Condensed Consolidated Statements of Income - Three Months Ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . Three Six Months Ended June 30, 1994 and 1993 Condensed Consolidated Balance Sheets - June 30, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Four Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . Five Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . Six & Seven Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . . . . . . . . . . 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 (000's omitted except per share amounts) (unaudited) THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------------- -------------------------- 1994 1993 1994 1993 ------------------------- -------------------------- Net revenues $ 192,199 $ 187,453 $ 386,631 $ 382,758 Operating charges: Operating expenses 158,665 157,944 316,070 320,017 Depreciation and amortization 10,316 9,196 20,236 18,327 Lease and rental expense 8,505 8,480 16,996 16,826 Interest expense 1,356 2,098 3,178 4,733 ----------- ----------- ----------- ----------- 178,842 177,718 356,480 359,903 ----------- ----------- ----------- ----------- Income before income taxes 13,357 9,735 30,151 22,855 Provision for income taxes 5,204 3,257 11,711 7,766 ----------- ----------- ----------- ----------- NET INCOME $ 8,153 $ 6,478 $ 18,440 $ 15,089 =========== =========== =========== =========== Earnings per common and common equivalent share: $ 0.57 $ 0.46 $ 1.29 $ 1.06 =========== =========== =========== =========== Weighted average number of common shares and equivalents: 14,395 14,862 14,578 14,875 =========== =========== =========== =========== See accompanying notes to condensed consolidated financia Page Three of Twelve Pages 4 UNIVERSAL HEALTH SERVICES,INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (000's omitted) JUNE 30, DECEMBER 31, -------- ----------- 1994 1993 ---- ----- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,658 $ 569 Accounts receivable, net 77,979 78,605 Supplies 13,370 12,617 Deferred income taxes 14,424 7,733 Other current assets 2,799 2,475 ------------- ------------- Total current assets 112,230 101,999 ------------- ------------- Property and equipment 559,076 533,941 Less: accumulated depreciation (248,563) (231,509) ------------- ------------- 310,513 302,432 ------------- ------------- OTHER ASSETS: Excess of cost over fair value of net assets acquired 36,021 38,089 Deferred charges 1,449 1,697 Other 20,787 16,205 ------------- ------------- 58,257 55,991 ------------- ------------- $ 481,000 $ 460,422 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 4,940 $ 4,313 Accounts payable and accrued liabilities 82,297 79,639 Federal and state taxes 0 2,547 ------------- ------------- Total current liabilities 87,237 86,499 ------------- ------------- Deferred income taxes 3,863 3,863 ------------- ------------- Other noncurrent liabilities 72,284 70,491 ------------- ------------- Long-term debt, net of current maturities 54,884 75,081 ------------- ------------- COMMON STOCKHOLDERS' EQUITY: Class A Common Stock, 1,090,527 shares outstanding in 1994, 1,139,123 in 1993 11 11 Class B Common Stock, 13,091,284 shares outstanding in 1994, 12,171,454 in 1993 131 122 Class C Common Stock, 109,622 shares outstanding in 1994, 114,482 in 1993 1 1 Class D Common Stock, 23,697 shares outstanding in 1994, 26,223 in 1993 0 0 Capital in excess of par, net of deferred compensation of $554,000 in 1994 and $291,000 in 1993 100,673 80,878 Retained earnings 161,916 143,476 ------------- ------------- 262,732 224,488 ------------- ------------- $ 481,000 $ 460,422 ============== ============= See accompanying notes to consolidated financial statements. Page Four of Twelve Pages 5 UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED ---------------- JUNE 30, -------- (000'S UNAUDITED) ------------------- 1994 1993 ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $18,440 $15,089 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization 20,236 18,327 Provision for self-insurance reserves 5,857 12,050 Reserve for loss on disposition of businesses 0 2,929 Changes in assets & liabilities, net of effects from acquisitions and dispositions: Accounts receivable 661 4,265 Accrued interest (2,107) (1,593) Accrued and deferred income taxes (9,238) (6,944) Other working capital accounts 5,507 8,214 Other assets and deferred charges (924) (3,283) Other 3,468 484 Payments made in settlement of self-insurance claims (6,724) (5,643) ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 35,176 43,895 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment additions (21,358) (23,735) Acquisition of property previously leased 0 (3,218) Acquisition of businesses (1,898) (668) Advances under long-term notes receivable (4,147) 0 Disposition of assets 500 3,500 ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (26,903) (24,121) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Additional borrowings 10,614 0 Reduction of long-term debt (16,195) (25,407) Issuance of common stock 397 68 Repurchase of common shares 0 (701) ---------- ---------- NET CASH USED IN FINANCING ACTIVITIES (5,184) (26,040) ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,089 (6,266) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 569 6,686 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $3,658 $420 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $5,285 $6,326 ========== ========== Income taxes paid, net of refunds $20,949 $14,710 ========== ========== See accompanying notes to consolidated financial statements. Page Five of Twelve Pages 6 UNIVERSAL HEALTH SERVICES, INC. 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, 1993. (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 of 1994, the Company called for the redemption of the $29.9 million, 7 1/2% convertible bonds, of which $10.6 million were redeemed at par for cash and $19.3 million were converted to 820,103 newly issued shares of the Company's Class B Common Stock. The bond redemption reduced the Company's fully diluted number of shares outstanding by 451,233. Prior to this redemption, the earnings per share were historically adjusted to reflect the assumed conversion of the Company's convertible debentures. Accordingly, the earnings per share for the first three months of the six month period ended June 30, 1994 and the three and six months ended June 30, 1993 have been adjusted to reflect the assumed conversion of the Company's convertible debentures. (3) 1994 AND 1993 UNUSUAL ITEMS Included in net revenues for the three month period ended June 30, 1994 is $3.0 million of additional revenues received from special Medicaid reimbursement programs. Included in operating expenses for the three months ended June 30, 1994 is a $2.8 million write-down recorded against the book value of the real property of a psychiatric hospital owned by the Company and leased to an unaffiliated third party, which is currently in default under the terms of the lease. Also included in operating expenses during the second quarter of 1994 is a $1.1 million favorable adjustment made to reduce the Company's worker's compensation reserves. Included in net revenues for the three month period ended June 30, 1993 is $4.6 million of additional revenues received from special Medicaid reimbursement programs. Included in operating expenses for the three months ended June 30, 1993 is a $3.2 million increase in the reserves for the Company's professional and general liability self-insurance reserves. Included in net revenues for the six month period ended June 30, 1994 is $6.0 of additional revenues received from special Medicaid reimbursement programs. Included in operating expenses for the six months ended June 30, 1994 is the $2.8 million property write-down and the $1.1 million favorable adjustment made to reduce the Company's workers' compensation reserves, as mentioned above, and $2.5 million of expenses related to the disposition of businesses. Included in net revenues for the six month period ended June 30, 1993 is $9.2 million of additional revenues received from a special Medicaid reimbursement program. Included in operating expenses for the six months ended June 30, 1993 is approximately $4.1 million of expense related to the disposition of ancillary businesses and a $3.2 million increase in the reserves for the Company's general and professional self-insurance reserves. Page Six of Twelve Pages 7 (4) OTHER LIABILITIES Other noncurrent liabilities include the long-term portion of the Company's professional and general liability and workers' compensation reserves. (5) COMMITMENTS AND CONTINGENCIES Under certain agreements, the Company has committed or guaranteed an aggregate of $24,000,000 related principally to the Company's self- insurance programs and as support for various debt instruments and loan guarantees. (6) ACQUISITIONS During the second quarter of 1994, the Company acquired majority interests in partnerships which own and operate two radiation therapy centers located in Indiana for $1.9 million in cash. One of these centers is currently operating and the other center, which is currently under construction, is scheduled to commence operations during the third quarter of 1994. Also during the second quarter, the Company advanced $4.1 million in loans and entered into contractual arrangements to manage, (with the intent of acquiring majority interest in partnerships which will own and operate), four radiation therapy centers located in Kentucky. Two of these centers are currently operating and the other two, which are currently being constructed, are scheduled to commence operations during the fourth quarter of 1994 and the first quarter of 1995. (7) SUBSEQUENT EVENTS Subsequent to June 30, 1994, the Company agreed to acquire a 112 bed acute care hospital for approximately $14 million and invest up to an additional $20 million to $30 million to renovate the existing facility and construct an additional facility in Edinburg, Texas. This acquisition is expected to be finalized during the third or fourth quarter of 1994. The Company also purchased a majority interest in a partnership which will own and operate an ambulatory surgery center in California. Additionally, the Company merged the operations of an additional ambulatory surgery center into its majority owned partnership which owns and operates an existing ambulatory surgery center located in California. Page Seven of Twelve Pages 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net revenues for the three and six months ended June 30, 1994 increased 11% and 9%, respectively, over the comparable 1993 periods at facilities owned during both years after excluding the effects of additional revenues received from special Medicaid reimbursement programs. Despite the continued shift in the delivery of healthcare services to outpatient care, the Company's acute care hospitals owned during both periods experienced a 13% and 11% increase in net revenues resulting from an 11% and 10% increase in admissions and an 8% increase in patient days during the three and six month period ended June 30, 1994 as compared to the comparable 1993 periods, respectively, due to the expansion of service lines at many of its hospitals and additional capacity at two of the Company's larger facilities. Gross outpatient revenues at the Company's acute care hospitals owned during both periods increased 13% for the three months ended June 30, 1994 and 16% for the six month period ended June 30, 1994 over the comparable prior year periods and continues to comprise 24% of gross patient revenues for the three months ended June 30, 1994 and 1993 and 23% for the six months ended June 30, 1994 and 1993. Advances in medical technologies permit more services to be provided on an outpatient basis, and there is increased pressure from Medicare, Medicaid, health maintenance organizations (HMOs), preferred provider organizations (PPOs) and insurers to reduce hospital stays and provide services, when possible, on a less expensive outpatient basis. To take advantage of the trend toward increased outpatient services, the Company has continued to invest in the acquisition and development of outpatient surgery and radiation therapy centers. The Company currently operates or manages fifteen ambulatory treatment centers, which have contributed to the increase in the Company's outpatient revenue. The Company expects the growth in outpatient services to continue, although the rate of growth may be moderated in the future. Net revenues at the Company's psychiatric hospitals decreased approximately 4% and 7%, for the three and six months ended June 30, 1994 as compared to the comparable 1993 periods, respectively. These decreases were primarily due to a 2% and 5% decrease in patient days at the Company's psychiatric hospitals for the three and six months ended June 30, 1994 as compared to the comparable 1993 periods, respectively. Although admissions at the Company's psychiatric facilities increased 16% and 12% for the three and six months ended June 30, 1994 over the comparable 1993 periods, the average length of stay at these facilities decreased 15% in both of the 1994 periods as compared to the comparable 1993 periods due to increased emphasis on outpatient treatment programs. The shift to outpatient care was reflected in higher revenues from outpatient services, as gross outpatient revenues at the Company's psychiatric hospitals increased 19% for the three months ended June 30, 1994 and 17% for the six month period ended June 30, 1994 over the comparable prior year periods and now comprise 15% and 14% of gross psychiatric patient revenues for the three and six months ended June 30, 1994, respectively, as compared to 14% and 13% in the comparable 1993 periods, respectively. The trend in outpatient treatment for psychiatric patients is expected to continue as a result of advances in patient care and continued cost containment pressures from payors. The Company received $3.0 million and $4.5 million for the three months ended June 30, 1994 and 1993 and $6.0 million and $9.1 million for the six months ended June 30, 1994 and 1993, respectively, from the special Medicaid reimbursement programs mentioned above. These programs are scheduled to terminate in August, 1994 and the Company cannot predict whether these programs will continue beyond the scheduled termination date. An increased proportion of the Company's revenue is derived from fixed payment services, including Medicare and Medicaid which accounted for 46% and 40% of the Company's net patient revenues for the three months ended June 30, 1994 and 1993, respectively and 44% and 40% of the Company's net patient revenues for the six months ended June 30, 1994 and 1993, respectively, excluding the additional Page Eight of Twelve Pages 9 revenues received from special Medicaid reimbursement programs. The Company expects Medicare and Medicaid revenues to continue to increase due to the general aging of the population and expansion of state Medicaid programs. 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 continue 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. Excluding the effects of the unusual revenue items describe above and the unusual expense items included in the three and six month periods ended June 30, 1994 and 1993 described below, operating expenses as a percentage of net revenues decreased to 83% and 82% for the three and six months ended June 30, 1994 as compared to 85% and 84% for the three and six months ended June 30, 1993. Included in operating expenses for the three and six months ended June 30, 1994 is a $2.8 million write-down recorded against the book value of the real property of a psychiatric hospital owned by the Company and leased to an unaffiliated third party, which is currently in default under the terms of the lease, and a $1.1 million favorable adjustment made to reduce the Company's workers' compensation reserves. Also included in operating expenses for the six months ended June 30, 1994 is approximately $2.5 million of expenses related to the disposition of businesses. Included in operating expenses for the three and six months ended June 30, 1993 is a $3.2 million increase in the reserves for the Company's professional and general liability self-insurance reserves and also included in operating expenses for the six months ended June 30, 1993 is approximately $4.1 million of expenses related to the disposition of ancillary businesses. The increase in the operating margin for the three and six months ended June 30, 1994 over the comparable 1993 periods is partially due to the sale of two low margin hospitals during 1993 and lower insurance costs in 1994. Although the rate of inflation has not had a significant impact on the results of operations, pressure on operating margins is expected to continue because, while Medicare fixed payment rates are indexed for inflation annually, the increases have historically lagged behind actual inflation. 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. The Company and the healthcare industry as a whole face increased uncertainty with respect to the level of payor payments because of national and state efforts to reform healthcare. These efforts include proposals at all levels of government to contain healthcare costs while making quality, affordable health services available to more Americans. The Company is unable to predict which proposals will be adopted or the resulting implications for providers at this time. However, the Company believes that the delivery of primary care, emergency care, obstetrical and psychiatric services will be an integral component of any strategy for controlling healthcare costs and it also believes it is well positioned to provide these services. Interest expense decreased 35% and 33% for the three and six months ended June 30, 1994 as compared to the comparable 1993 periods due to lower average outstanding borrowings. Depreciation and amortization expense increased 12% and 10% for the three and six months ended June 30, 1994 as compared to the comparable 1993 periods due primarily to increased depreciation and amortization expense related to the Company's acquisitions of ambulatory treatment centers. The effective tax rate was 39.0% and 33.5% for the three months ended June 30, 1994 and 1993, respectively, and 38.8% and 34.0% for the six months ended June 30, 1994 and 1993, respectively. The increase in the effective rate during the 1994 periods as compared to the 1993 periods was due primarily to the 1993 periods including a reduction in the state tax provision. LIQUIDITY AND CAPITAL RESOURCES During the first six months of 1994, net cash provided by operating activities was $35.2 million as compared to $43.9 million in the comparable 1993 period. The decrease during the 1994 period as compared to the 1993 period was primarily due to a $3.2 million decrease in the revenues from special Medicaid reimbursement programs, and a $6.2 million increase in income tax payments. Page Nine of Twelve Pages 10 During the first six months of 1994, the Company used $21.4 million of its operating cash flow to finance capital expenditures, $4.1 million to advance loans to its managed radiation therapy centers located in Kentucky, $1.9 million to acquire majority interest in partnerships which own and operate ambulatory treatment centers and $5.6 million to reduce outstanding debt. Subsequent to June 30, 1994, the Company replaced its existing $72.4 million revolving credit agreement with a new $125 million revolving credit agreement. The new agreement, which expires in August of 1999, provides for interest, at the Company's option, at the prime rate, the certificate of deposit rate plus 5/8% to 1 1/8% or the Euro-dollar rate plus 1/2% to 1%. The margins over the certificate of deposit and the Euro-dollar rates are based upon certain leverage and coverage ratios. A commitment fee ranging from 1/8% to 3/8% is required on the unused portion of this commitment. At June 30, 1994, the Company had approximately $10 million of unused borrowing capacity under its commercial paper program and $123 million of unused borrowing capacity under the terms of its new $125 million revolving credit facility. 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 18, 1994. (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 1989 Non-Employee Director Stock Option Plan Votes cast in favor 13,644,098 Votes cast against 24,815 Votes abstained 2,324 Broker non-votes 0 Adoption of the Company's 1994 Executive Incentive Plan: Votes cast in favor 13,621,936 Votes cast against 44,467 Votes abstained 4,834 Broker non-votes 0 Election by Class A & Class C stockholders of Class I Directors, Dr. Martin Meyerson and Mr. John H. Herrell: Martin Meyerson John H. Herrell --------------- --------------- Votes cast in favor 1,251,140 1,251,140 Votes withheld 0 0 (d) Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit: 10.1 Credit Agreement dated as of August 2, 1994 among Universal Health Services, Inc., Certain Participating Banks and Morgan Guaranty Trust Company of New York, as Agent. 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 11, 1994 /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 13 EXHIBIT INDEX Exhibit No. Description - ------- ----------- 10.1 Credit Agreement dated as of August 2, 1994 among Universal Health Services, Inc., Certain Participating Banks and Morgan Guaranty Trust Company of New York, as Agent.