<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 1996
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________
Commission file Number: 0-20086
UNIVERSAL HOSPITAL SERVICES, INC.
---------------------------------
(Exact Name of Registrant as specified in its charter)
Minnesota 41-0760940
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1250 Northland Plaza
3800 West 80th Street
Bloomington, Minnesota 55431-4442
----------------------------------
(Address of principal executive offices)
(Zip Code)
612-893-3200
------------
(Registrant's telephone number, including area code)
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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding as of October 31, 1996
----- ----------------------------------
<S> <C>
Common Stock 5,357,218 shares
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL HOSPITAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Equipment rentals $12,350,719 $11,434,730 $37,119,173 $34,030,646
Sales of supplies and equipment 1,262,599 1,563,640 4,204,016 4,952,970
Other 135,827 131,955 452,156 462,386
----------- ----------- ----------- -----------
Total revenues 13,749,145 13,130,325 41,775,345 39,446,002
COSTS AND EXPENSES:
Cost of equipment rentals 3,188,173 2,982,589 9,743,353 8,632,406
Rental equipment depreciation 3,223,202 2,875,000 9,018,202 8,035,000
Cost of supplies and equipment sales 997,344 1,231,933 3,367,240 4,027,550
Selling, general and administrative 4,723,912 4,497,383 14,410,736 13,866,018
Write-down of DPAP inventory 1,030,500
Interest 656,212 512,256 1,690,624 1,295,457
----------- ----------- ----------- -----------
Total costs and expenses 12,788,843 12,099,161 39,260,655 35,856,431
----------- ----------- ----------- -----------
Income before income taxes 960,302 1,031,164 2,514,690 3,589,571
Provision for income taxes:
Current 269,000 267,000 706,000 985,000
Deferred 151,000 170,000 384,000 528,000
----------- ----------- ----------- -----------
420,000 437,000 1,090,000 1,513,000
----------- ----------- ----------- -----------
NET INCOME $ 540,302 $ 594,164 $ 1,424,690 $ 2,076,571
=========== =========== =========== ===========
NET EARNINGS PER SHARE OF COMMON STOCK $0.10 $0.11 $0.26 $0.38
=========== =========== =========== ===========
Weighted average common shares
outstanding 5,459,194 5,515,868 5,512,430 5,489,388
=========== =========== =========== ===========
The accompanying notes are an integral part of the unaudited financial statements.
</TABLE>
2
<PAGE>
UNIVERSAL HOSPITAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 436,958 $ --
Accounts receivable, net 11,316,312 10,588,579
Inventories 2,612,499 2,848,559
Prepaid expenses 917,478 424,634
Deferred income taxes 912,000 520,000
----------- -----------
Total current assets 16,195,247 14,381,772
PROPERTY AND EQUIPMENT:
Rental equipment, net 44,633,524 40,847,236
Property and office equipment, net 3,608,049 3,409,694
----------- -----------
Total property and equipment, net 48,241,573 44,256,930
INTANGIBLE ASSETS, LESS ACCUMULATED AMORTIZATION:
Goodwill, net 15,252,773 8,186,639
Other 871,372 24,131
----------- -----------
Total Assets $80,560,965 $66,849,472
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,977,023 $ 6,284,934
Accrued compensation and pension 1,555,593 2,428,471
Accrued expenses 990,927 609,983
Current portion long-term debt 1,607,743 2,800,000
----------- -----------
Total current liabilities 7,131,286 12,123,388
Accrued compensation and pension 1,607,769 1,426,876
Deferred income taxes 4,576,000 3,800,000
Long-term debt 37,730,438 20,787,667
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized, no shares issued and outstanding
Common Stock, $.01 par value; 10,000,000 shares
authorized, 5,357,218 and 5,445,270 issued and
outstanding at September 30, 1996 and
December 31, 1995 53,572 54,453
Additional paid-in capital 14,765,572 15,385,450
Retained earnings 14,696,328 13,271,638
----------- -----------
Total shareholders' equity 29,515,472 28,711,541
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $80,560,965 $66,849,472
=========== ===========
</TABLE>
The accompanying notes are an integral part of the unaudited financial
statements.
3
<PAGE>
UNIVERSAL HOSPITAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1996 1995
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,424,690 $ 2,076,571
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,898,700 8,734,931
Provision for doubtful accounts 114,773 213,488
Gain on sales of equipment (122,648) (165,392)
Write-down of DPAP inventory 1,030,500
Deferred income taxes 384,000 528,000
Changes in operating assets and liabilities,
net of impact of acquisition:
Accounts receivable 347,047 (1,395,124)
Inventories and other operating assets (1,127,257) (1,696,871)
Accounts payable and accrued expenses (1,525,037) 1,242,947
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,424,768 9,538,550
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Rental equipment purchases (11,261,144) (16,092,862)
Property and office equipment purchases (658,757) (481,328)
Proceeds from sale of equipment 446,920 303,463
Acquisition of BERS, net of cash acquired (12,074,854)
Other (374,095)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (23,921,930) (16,270,727)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of offering costs 106,616 98,844
Repurchase of common stock (727,375) (275,000)
Proceeds under loan agreements 47,419,000 23,327,000
Payments under loan agreements (32,049,338) (16,259,000)
Decrease in book overdraft (814,783) (159,667)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,934,120 6,732,177
NET CHANGE IN CASH AND CASH EQUIVALENTS 436,958 ---
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD --- ---
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 436,958 $ ---
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,531,000 $ 1,211,000
============ ============
Income taxes paid $ 876,000 $ 1,057,000
============ ============
Rental equipment purchases included in accounts payable $ 831,975 $ 946,399
============ ============
</TABLE>
The accompanying notes are an integral part of the unaudited financial
statements.
4
<PAGE>
UNIVERSAL HOSPITAL SERVICES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements included in this Form 10-Q have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. 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. These financial statements
should be read in conjunction with the financial statements and related notes
included in the Company's Form 10-K filing for the year ended December 31,
1995.
The financial statements presented herein as of September 30, 1996, and for
the three and nine months then ended reflect, in the opinion of management,
all adjustments necessary for a fair presentation of financial position and
the results of operations for the periods presented. Except as discussed in
Note 4 below, these adjustments are all of a normal, recurring nature. The
results of operations for any interim period are not necessarily indicative
of results for the full year.
The December 31, 1995 Condensed Balance Sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
2. ACQUISITION OF BIOMEDICAL EQUIPMENT RENTAL AND SALES, INC. (BERS)
On August 13, 1996, the Company acquired BERS pursuant to a Stock Purchase
Agreement among the Company and the shareholders of BERS. Pursuant to the
agreement, the Company acquired all of the outstanding capital stock of BERS
for approximately $11 million paid to shareholders of BERS and repayment of
approximately $1.6 million of outstanding indebtedness of BERS. The
acquisition was accounted for using the purchase method. Accordingly, the
purchase price was allocated to assets acquired based on their estimated fair
values. This treatment resulted in approximately $7.3 million of cost in
excess of net assets acquired, which is being amortized over 15 years. BERS'
operations have been included in the Company's consolidated results of
operations since the date of acquisition.
The following summarized, unaudited pro forma results of operations for the
three months and nine months ended September 30, 1996 and 1995, assume the
acquisition of BERS occurred as of the beginning of the respective periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
TOTAL REVENUES $14,360,536 $14,621,941 $45,332,106 $43,917,415
NET INCOME $ 431,590 $ 550,592 $ 1,115,651 $ 1,823,374
NET EARNINGS PER
COMMON SHARE $ 0.08 $ 0.10 $ 0.20 $ 0.33
</TABLE>
3. LONG TERM DEBT
Effective with the acquisition of BERS, the total credit available under the
bank revolving credit agreement was increased to $20,000,000. Borrowings are
uncollateralized and bear interest at a rate of between 1.50% and 2.25% per
annum over the bank's Reserve Adjusted Certificate of Deposit Rate (RACD) as
defined in the agreement. At September 30, 1996 the Company's interest rate
was 7.43%, based on the bank's RACD of 5.43%.
In September 1996, pursuant to a Note Purchase and Private Shelf Agreement
with an insurance company, $4,000,000 of uncollateralized Series B Notes were
issued by the Company which mature on June 1, 2009 and bear interest at 8.29%
The proceeds of the notes were used to reduce the borrowings under the
revolving credit agreement. The agreement includes certain covenants which
restrict dividend payments and stock repurchases and require, among other
things, that the Company maintain certain working capital and financial
ratios.
5
<PAGE>
UNIVERSAL HOSPITAL SERVICES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS, CONTINUED
4. WRITE-DOWN OF DPAP INVENTORY
During the second quarter of 1996, the Company recorded a $1,030,500 charge
to adjust the carrying value of Demand Positive Airway Pressure device (DPAP)
inventory to its estimated realizable value. The provision was recorded based
on price concessions necessary to liquidate the excess DPAP inventory
resulting from slower than expected market acceptance of DPAP. During the
third quarter of 1996, the Company continued to experience declining sales of
DPAP and has initiated new promotional campaigns in an attempt to accelerate
the reduction of excess DPAP inventory.
5. COMMON SHAREHOLDERS' EQUITY
In July 1996, the Board of Directors of the Company authorized a stock
repurchase program under which up to 300,000 share of the Company's common
stock may be repurchased. Such purchases may be made at the prevailing
prices on the open market, by block purchase or in private transactions at
any time until June 30, 1997. Under this plan, 103,000 shares were
repurchased for $727,375 during the third quarter of 1996
6. SUBSEQUENT EVENT
The Company adopted on November 8, 1996, a shareholder rights plan under
which rights to purchase shares of a new series of preferred stock have been
declared as a dividend at the rate of one right for each share of common
stock held by shareholders of record at the close of business on November 21,
1996. The rights will automatically accompany current shares outstanding and
will trade with them. The distribution is not taxable to shareholders. The
Board of Directors had previously considered a shareholder rights plan at its
October meeting and at that time had scheduled a November 8, 1996 meeting for
the purpose of considering the adoption of the shareholder rights plan.
Each right under the shareholder rights plan will entitle the holder to buy
one 1/100th of a share of a new series of junior preferred stock at a price
of $40.00. The rights will be exercisable only if a person or group acquires
or makes a tender offer for 15% or more of the Company's outstanding common
stock (except in connection with an offer permitted by the Board of
Directors and other limited exceptions). Certificates representing the rights
will be sent to shareholders only if and when they become exercisable. The
rights are redeemable at 1/10th of a cent per right at any time prior to the
acquisition of a 15% position. The rights will expire on November 8, 2006.
If a person or group acquires 15% or more of the Company's common stock
(except in connection with a permitted offer), each right will entitle its
holder to purchase, at the right's then-current exercise price, the Company's
common stock having a market value of twice the right's exercise price. If
the Company is acquired in a merger or sells 50% or more of its assets or
earning power, each right will entitle its holder to purchase, at the rights'
then current exercise price, the acquiring Company's common stock having a
market value of twice the right's exercise price.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the accompanying unaudited
financial statements and notes.
RESULTS OF OPERATIONS
The following table provides information on the percentages of certain items of
selected financial data bear to total revenues and also indicates the percentage
increase or decrease of this information over the prior comparable period:
<TABLE>
<CAPTION>
Percent of Total Revenues Percentage Increase (Decrease)
---------------------------------------------------------- ------------------------------
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, Qtr 3 1996 Nine Months 1996
---------------------------- --------------------------- Over Over
1996 1995 1996 1995 Qtr 3 1995 Nine Months 1995
---- ---- ---- ---- ----------- ----------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Equipment rentals 89.83% 87.09% 88.85% 86.27% 8.01% 9.08%
Sales of supplies and 9.18% 11.91% 10.07% 12.56% -19.25% -15.12%
equipment
Other 0.99% 1.00% 1.08% 1.17% 2.93% -2.21%
------ ------ ------ ------
Total revenues 100.00% 100.00% 100.00% 100.00% 4.71% 5.91%
RENTALS AND SALES COSTS
Cost of equipment 23.19% 22.72% 23.32% 21.88% 6.89% 12.87%
rentals
Rental equipment 23.44% 21.90% 21.59% 20.37% 12.11% 12.24%
depreciation
Cost of supplies and 7.25% 9.38% 8.06% 10.21% -19.04% -16.39%
equipment sales ------ ------ ------ ------
GROSS MARGIN 46.12% 46.00% 47.03% 47.54% 4.96% 4.78%
SELLING, GENERAL AND 34.36% 34.25% 34.49% 35.15% 5.04% 3.93%
ADMINISTRATIVE
WRITE-DOWN OF DPAP 2.47% N/A N/A
INVENTORY
INTEREST 4.77% 3.90% 4.05% 3.29% 28.10% 30.50%
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 6.99% 7.85% 6.02% 9.10% -6.87% -29.94%
------ ------ ------ ------
INCOME TAXES 3.06% 3.32% 2.61% 3.84% -3.89% -27.96%
------ ------ ------ ------
NET INCOME 3.93% 4.53% 3.41% 5.26% -9.06% -31.39%
====== ====== ====== ======
</TABLE>
7
<PAGE>
GENERAL
The following discussion addresses the financial condition of the Company and
its consolidated subsidiary, Biomedical Equipment Rental and Sales, Inc. (BERS)
as of September 30, 1996 and the results of operations for the three and nine
month periods ended September 30, 1996 and 1995. This discussion should be read
in combination with the financial statements included elsewhere herein and the
Management's Discussion and Analysis and Financial Statement sections of the
Company's December 31, 1995 Annual Report on form 10-K.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: Statements in this filing looking forward in time involve risks and
uncertainties, including, but not limited to, the effect of changing economic or
business conditions, the successful reduction of Demand Positive Airway Pressure
devices (DPAP) inventory, increased utilization of the Bazooka bed, the impact
of competition and other risk factors described more fully below under the
captions "Write-Down of DPAP Inventory", "Industry Assessment" and "Rental
Equipment Build Up" and in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 under the caption "Business".
REVENUES
Equipment rental revenues increased during the third quarter of 1996 over the
third quarter of 1995 by $916,000 and increased for the nine months ended
September 30, 1996 over the first nine months of 1995 by $3,089,000. Of the
quarterly rental revenue increase, the acquisition of BERS, completed August 13,
1996, contributed $593,000. Rental revenue growth from the Company's alternate
care customers remains strong, but the rental revenue growth from the Company's
acute care customers was less than anticipated. The Company believes factors
influencing the current downturn in the growth rate of acute care rental
revenues include continuing low census rates, a very cost sensitive market and
consolidations in the acute care sector of the industry. The Company expects the
rental revenue generated from the alternate care market to continue to increase
as the health care environment increases alternate site stays for patients.
Sales of supplies and equipment represent primarily disposable medical supplies
used in connection with the Company's rental equipment. The Company believes
that supplying these products is important to its full service business even
though the commodity-like nature of these products results in substantially
lower gross margins than its rental equipment business. Sales of supplies and
equipment decreased $301,000 and $749,000 during the third quarter of 1996 and
the nine months ended September 30, 1996, respectively, compared to the same
periods in 1995. Sales of DPAP decreased $187,000 from third quarter 1995 to
third quarter 1996. DPAP sales decreased $43,000 for the nine months ended
September 30, 1996 compared to the same period in 1995.
The Company has initiated several new campaigns regarding the DPAP device
intended to increase visibility and accelerate the reduction of excess DPAP
devices. (See "Write-Down of DPAP Inventory" below). The remaining decreases
in total sales reflected a continuing trend by a major vendor of disposables to
market its products directly to some of the Company's larger customers. The
Company expects sales of supplies and equipment to continue to decline as a
percentage of total revenues.
Other revenues, primarily representing net gains on sales of used rental
equipment, remain insignificant. The Company expects that such revenues will
continue to be a small portion of total revenues.
RENTAL COSTS
Cost of equipment rentals represents the direct costs of operating the Company's
district offices including occupancy, fleet operations, equipment repairs and
technical service costs. These costs as a percentage of rental revenues
decreased to 25.8% for the third quarter of 1996 but increased to 26.2% for the
nine months ended September 30, 1996 from 26.1% and 25.4% for the third quarter
and the first nine months of 1995, respectively. Without BERS, the percentage
for the third quarter increased to 26.4%. These increases were primarily due to
the slowdown in rental revenue growth whereas these expenses are generally fixed
in nature and do not fluctuate with changes in equipment rental revenues.
Rental equipment depreciation as a percentage of rental revenues increased to
26.1% for the third quarter of 1996 versus 25.1% for the comparable quarter in
1995. For the nine months ended September 30, 1996, rental equipment
depreciation as a percent of rental revenues increased to 24.3% compared to
23.6% for the same period in 1995. These increases were due to the slowdown in
rental revenue growth and depreciation expense on surplus Bazooka beds (See
"Rental Equipment Build Up" below.)
8
<PAGE>
GROSS PROFIT
Gross margin on rentals represents equipment rental revenues reduced by the cost
of equipment rentals and rental equipment depreciation. Gross margin on rentals
decreased from 48.8% in the third quarter of 1995 to 48.1% in the third quarter
of 1996 and from 51.0% to 49.5% for the nine month periods ended September 30,
1995 and 1996, respectively. The decreases were the result of the previously
discussed lower than expected rental revenues for the first nine months of 1996
and the excess depreciation expense discussed above. In response to these margin
decreases, the Company has begun a program to identify means of minimizing costs
without compromising quality or service, in an effort to enhance efficiencies
and improve margins. (See "Expense Control Initiatives" below).
Sales gross margin as a percentage of sales of supplies and equipment decreased
slightly from 21.2% for the third quarter of 1995 to 21.0% for the same period
in 1996 while it increased from 18.7% for the first nine months of 1995 to 19.9%
for the same period in 1996. During 1996, the sales gross margin increased due
to a vendor selling lower margined products directly to hospitals, which
resulted in a higher margin percentage on a lower volume of total sales and due
to the impact of higher margin DPAP sales as an increasing portion of total
sales. During the second quarter of 1996, sales margins on DPAP dropped
significantly as a result of price concessions in conjunction with the Company's
planned reduction of DPAP inventory. (See "Write-Down of DPAP Inventory"
below.)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of total revenues
remained relatively unchanged from the third quarter of 1995 to the third
quarter of 1996 while decreasing 0.7 % of total revenues from the first nine
months of 1995 to the first nine months of 1996. These changes were the result
of positive leverage gained by the overall growth in rental revenues outpacing
the growth in selling, general and administrative expenses. The growth in
selling, general and administrative expenses continued to slow during the third
quarter of 1996 as compared to the same period in 1995, reflecting, in part, a
decrease in performance based incentive and profit sharing expenses as a result
of the slower than anticipated rental revenue growth. (See "Expense Control
Initiatives" below).
DEFERRAL OF NEW OFFICE OPENINGS
In August 1996, the Company announced the deferral of the opening of the
previously announced offices to be located in Oklahoma City, OK and Nashville,
TN.
EXPENSE CONTROL INITIATIVES
The Company has implemented several expense control initiatives to reduce or
defer costs. In August, the Company announced executive salary cuts and a
moratorium on new hires. In October, the Company announced the elimination of
10 corporate positions by functional consolidation and cutting nonessential
activities and changed the Company's employee benefit program from a total
company-paid plan to a shared-cost program, effective January 1, 1997. The
Company expects the cost reduction in 1997 to be approximately $1 million for
the full year, beginning in the first quarter of 1997. However, there can be no
assurance that these programs will result in decreased total expenses or that
their reduction will materially improve margins.
WRITE-DOWN OF DPAP INVENTORY
Because market acceptance of DPAP did not meet expectations, the Company, during
the second quarter of 1996, recorded a special charge of $1,030,500 to write-
down the carrying value of DPAP inventory to its estimated realizable value. The
Company continues to experience declining sales of DPAP devices and surplus DPAP
inventories and, as a result, has initiated new promotional campaigns in an
attempt to accelerate the reduction of excess DPAP inventories. However, the
value of these assets may still be affected by changes in consumer demand and by
pricing pressure as other distributors of DPAP or competitive products enter the
market.
9
<PAGE>
INTEREST EXPENSE
Interest expense increased by $144,000 from the third quarter of 1995 to the
third quarter of 1996 and $395,000 from the first nine months of 1995 to the
first nine months of 1996, primarily reflecting the carrying costs of surplus
DPAP and Bazooka inventories and incremental borrowings associated with customer
driven capital spending for additions to the Company's rental equipment pool.
The third quarter increase was also affected $137,000 by the BERS acquisition
debt. Average borrowings increased from $23,600,000 in the third quarter of
1995 to $32,100,000 in the third quarter of 1996 and from $20,800,000 in the
first nine months of 1995 to $28,400,000 in the first nine months of 1996.
INCOME TAXES
The Company's effective tax rate increased from 42.1% in the first nine months
of 1995 to 43.3% in the first nine months of 1996.
NET INCOME
Net income decreased $54,000 from the third quarter of 1995 to the third quarter
of 1996 and $652,000 from the first nine months of 1995 to the first nine months
of 1996.
Without the acquisition of BERS and the associated debt of the acquisition, net
income for the third quarter of 1996 would have increased $27,000 from the third
quarter of 1995.
CAPITAL RESOURCES AND LIQUIDITY
As an asset intensive service business, the Company requires continued access to
capital to support the acquisition of equipment for rental to its customers. The
Company expects that rental equipment purchases will approximate $14,500,000 in
1996. The Company has financed its equipment purchases primarily through
internally generated funds and unsecured borrowings.
As of September 30, 1996, these unsecured borrowings were comprised of term
loans and a revolving credit facility available through June 30, 1999.
Effective with the acquisition of BERS, the total credit available under the
bank revolving credit facility was increased to $20,000,000. Borrowings are
uncollateralized and bear interest at a rate of between 1.50% and 2.25% per
annum over the bank's Reserve Adjusted Certificate of Deposit Rate (RACD) as
defined in the agreement.
As of September 30, 1996, approximately $6,900,000 of the $20,000,000 revolving
credit facility was unused.
In September 1996, pursuant to a Note Purchase and Private Shelf Agreement,
$4,000,000 of uncollateralized Series B Notes were issued by the Company which
mature on June 1, 2009 and bear interest at 8.29%. The proceeds of the notes
were used to reduce the borrowings under the revolving line of credit agreement.
The Company believes that net cash flow from operating activities and use of its
existing revolving credit facility will be sufficient to fund working capital
and capital expenditure needs for the foreseeable future. Assuming debt
financing continues to be available at reasonable rates, the Company anticipates
maintaining a ratio of long-term debt to total capitalization in the range of
40% to 60% (57.1% as of September 30, 1996).
The Company does not maintain cash balances at its main banking facility under a
Company policy whereby the net of collected balances and cleared checks at the
Company's option is applied to or drawn from the credit facility on a daily
basis.
10
<PAGE>
COMPLETED ACQUISITION
On August 13, 1996, the Company completed its acquisition of Biomedical
Equipment Rental and Sales, Inc. (BERS) pursuant to a stock purchase agreement
among the Company and the shareholders of BERS. As a result of the acquisition,
the Company acquired all of the outstanding capital stock of BERS, and BERS
became a wholly owned subsidiary of the Company. In connection with the
acquisition, the Company paid approximately $11,000,000 to the shareholders of
BERS and repaid approximately $1,650,000 of outstanding indebtedness of BERS.
INDUSTRY ASSESSMENT
The Company's customers, primarily acute care hospitals and other health care
providers, have been and continue to be faced with cost containment pressures
and uncertainties with respect to health care reform. The Company believes
that, although specific legislation has not been enacted, reform has begun with
movement toward health care related consolidations, managed care and the
formation of Integrated Healthcare Systems. There appears to be an effort by
providers of health care to coordinate all aspects of patient care irrespective
of delivery location. Likely changes in reimbursement methodology, and a
gradual transition toward fixed, per-capita payment systems and other risk-
sharing mechanisms will reward health care providers who improve efficiencies
and effectively manage their costs, while providing care in the most appropriate
setting. Although future reimbursement policies remain uncertain and
unpredictable, the Company believes that the current reform efforts will
continue to focus on cost containment in health care, with universal access to
care and quality of care being important, but nonetheless secondary
considerations.
The Company believes its Pay-Per-Use Equipment Management Programs respond
favorably to the current reform efforts by providing high quality equipment
through programs which help health care providers improve their efficiency while
effectively matching costs to patient needs, wherever that care is being
provided. While the Company's strategic focus appears consistent with the
providers' efforts to contain costs and improve efficiencies, there can be no
assurances as to how health care reform will ultimately evolve and the impact it
will have on the Company.
Because the capital equipment procurement decisions of health care providers are
significantly influenced by the regulatory and political environment for health
care, historically the Company has experienced certain adverse operating trends
in periods when significant health care reform initiatives were under
consideration and uncertainty remained as to their likely outcome. To the
extent general cost containment pressures or health care spending and
reimbursement reform, or uncertainty as to possible reform, causes hospitals and
other health care providers to defer the procurement of medical equipment,
reduce their capital expenditures or change significantly their utilization of
medical equipment, the Company's results of operations could be adversely
affected.
RENTAL EQUIPMENT BUILD UP
The Company acquired it's equipment pools of Bazooka portable specialty beds
under an exclusive agreement which was terminated in March 1996. The Company
does not expect to acquire any additional Bazooka beds. Utilization of Bazooka
beds in the Company's pool is currently below the desired level, resulting in a
temporary product imbalance (approximately $2,600,000 of excess equipment at
September 30, 1996 versus $3,200,000 at June 30, 1996). The Company believes
this supply/demand imbalance will continue to be reduced. However, in the event
that anticipated growth in customer demand for this product does not occur, the
value of these assets owned by the Company and the Company's results of
operations could be adversely affected. The value of these beds may also be
affected as competitive products enter the market.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(4.7) Amendment dated September 19, 1996 to Note Purchase and Private
Shelf Agreement dated July 24, 1996 between the Company and The
Prudential Insurance Company of America, (including form of the
Company's 8.29% Series B Senior Notes Due 2009)
(10.8(a)) Amendment to Universal Hospital Services, Inc. Top
Management Change-In-Control Severance Plan
(11) Schedule of Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K:
Date of Earliest Event Requiring Report: August 13, 1996
Date of Filing: August 21, 1996
Items Reported: Items 2 and 7
Subject: Acquisition of Biomedical
Equipment Rental and
Sales, Inc.
Date of Earliest Event Requiring Report: August 13, 1996
Date of Filing: October 28, 1996
Items Reported: Item 7
Subject: Acquisition of Biomedical
Equipment Rental and
Sales, Inc.
12
<PAGE>
SIGNATURES
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.
Date: November 13, 1996
-----------------
UNIVERSAL HOSPITAL SERVICES, INC.
By /s/ Thomas A. Minner
-------------------------------------
Thomas A. Minner,
President and Chief Executive Officer
By /s/ David E. Dovenberg
-------------------------------------
David E. Dovenberg,
Vice President of Finance and
Chief Financial Officer
13
<PAGE>
UNIVERSAL HOSPITAL SERVICES, INC.
EXHIBIT INDEX TO REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
<S> <C> <C>
4.7 Amendment dated September 19, 1996 to XX
Note Purchase and Private Shelf Agreement
dated July 24, 1996 between the Company and
The Prudential Insurance Company of America,
(including form of the Company's 8.29% Series
B Senior Notes Due 2009)
10.8(a) Amendment to Universal Hospital Services, Inc.
Top Management Change-In-Control Severance Plan XX
11 Schedule of Computation of Per Share Earnings XX
27 Financial Data Schedule Electronically Filed
</TABLE>
<PAGE>
September 19, 1996
VIA TELECOPIER AND AIRBORNE
- ---------------------------
Universal Hospital Services, Inc.
1250 Northland Plaza
Bloomington, Minnesota 55431
Attention: David E. Dovenberg
Re: Amendment No. 1
---------------
Ladies and Gentlemen:
Reference is made to that certain Note Purchase and Private Shelf Agreement
dated as of July 24, 1996 (the "Note Agreement") between Universal Hospital
Services, Inc., a Minnesota corporation (the "Company"), and The Prudential
Insurance Company of America ("Prudential"), pursuant to which (i) the Company
issued and sold and Prudential purchased the Company's 8.10% Series A Senior
Note in the original principal amount of $10,000,000, due July 1, 2007 and (ii)
the Company intends to sell and Prudential, subject to certain terms and
conditions, intends to purchase the Company's 8.29% Series B Senior Note in the
original principal amount of $4,000,000, due June 1, 2009. Capitalized terms
used herein and not otherwise defined herein shall have the meanings assigned to
such terms in the Note Agreement.
Pursuant to the request of the Company and in accordance with the
provisions of paragraph 11C of the Note Agreement, the parties hereto agree as
follows:
SECTION 1. Amendment. From and after the date this letter becomes effective
in accordance with its terms, the Note Agreement is amended as follows:
1.1 Clause (vi) of paragraph 6C(1) of the Note Agreement is hereby
amended to delete in its entirety the reference to "paragraph 6C(1)(vi)"
appearing therein and to substitute therefor a reference to: "paragraph
6C(2)(vi)".
1.2 Clause (vi) of paragraph 6C(2) of the Note Agreement is hereby
deleted in its entirety and the following is hereby substituted therefor:
"(vi) to the extent permitted by clause (i) of paragraph 6A, up to $500,000
of Subsidiary Debt;".
SECTION 2. Conditions Precedent. This letter shall become effective as of
the date first above written upon the return by the Company to Prudential of a
counterpart hereof duly executed by the Company.
<PAGE>
SECTION 3. Reference to and Effect on Note Agreement. Upon the
effectiveness of this letter, each reference to the Note Agreement in any other
document, instrument or agreement shall mean and be a reference to the Note
Agreement as modified by this letter. Except as specifically set forth in
Section 1 hereof, the Note Agreement shall remain in full force and effect and
is hereby ratified and confirmed in all respects.
SECTION 4. Governing Law. THIS LETTER SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO PRINCIPLES
OF CONFLICT OF LAWS OF SUCH STATE.
SECTION 5. Counterparts; Section Titles. This letter may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same
instrument. The section titles contained in this letter are and shall be without
substance, meaning or content of any kind whatsoever and are not a part of the
agreement between the parties hereto.
Very truly yours,
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By: /s/ P. Scott von Fischer
------------------------------------
Vice President
Agreed and accepted:
UNIVERSAL HOSPITAL SERVICES, INC.
By: /s/ David E. Dovenberg
-----------------------------
David E. Dovenberg
Vice President of Finance and
Chief Financial Officer
<PAGE>
UNIVERSAL HOSPITAL SERVICES, INC.
SERIES B SENIOR NOTE
No. 1996 B-1
ORIGINAL PRINCIPAL AMOUNT: $4,000,000
ORIGINAL ISSUE DATE: September 20, 1996
INTEREST RATE: 8.29% per annum
INTEREST PAYMENT DATES: March 1, June 1, September 1 and December 1
FINAL MATURITY DATE: June 1, 2009
PRINCIPAL PREPAYMENT DATES AND AMOUNTS: $200,000 on June 1, 2007; $525,000 on
September 1, 2007 and on each March 1, June 1, September 1 and December 1
thereafter through and including March 1, 2009; unpaid balance due at maturity
FOR VALUE RECEIVED, the undersigned, Universal Hospital Services, Inc.
(herein called the "Company"), a corporation organized and existing under the
laws of the State of Minnesota, hereby promises to pay to The Prudential
Insurance Company of America, or registered assigns, the principal sum of FOUR
MILLION DOLLARS on the Final Maturity Date specified above, payable on the
Principal Prepayment Dates and in the amounts specified above, and on the Final
Maturity Date specified above in an amount equal to the unpaid balance of the
principal hereof, with interest (computed on the basis of a 360-day year--30-day
month) (a) on the unpaid balance thereof at the Interest Rate per annum
specified above, payable on each Interest Payment Date specified above and on
the Final Maturity Date specified above, commencing with the Interest Payment
Date next succeeding the date hereof, until the principal hereof shall have
become due and payable, and (b) on any overdue payment (including any overdue
prepayment) of principal, any overdue payment of Yield Maintenance Amount and
any overdue payment of interest, payable on each Interest Payment Date as
aforesaid (or, at the option of the registered holder hereof, on demand), at a
rate per annum from time to time equal to the greater of (i) 2% over the
Interest Rate specified above or (ii) 2% over the rate of interest publicly
announced by Morgan Guaranty Trust Company of New York from time to time in New
York City as its prime rate.
Payments of principal, Yield Maintenance Amount, if any, and interest are
to be made at the main office of Morgan Guaranty Trust Company of New York in
New York City or at such other place as the holder hereof shall designate to the
Company in writing, in lawful money of the United States of America.
This Note is one of a series of Senior Notes (herein called the "Notes")
issued pursuant to a Note Purchase and Private Shelf Agreement, dated as of July
24, 1996 (herein called the "Agreement"), between the Company, on the one hand,
and The Prudential Insurance Company of America and each Prudential Affiliate
(as defined in the Agreement) which becomes party thereto, on the other hand,
and is entitled to the benefits thereof.
This Note is subject to optional prepayment, in whole or from time to time
in part, on the terms specified in the Agreement.
<PAGE>
This Note is a registered Note and, as provided in the Agreement, upon
surrender of this Note for registration of transfer, duly endorsed, or
accompanied by a written instrument of transfer duly executed, by the registered
holder hereof or such holder's attorney duly authorized in writing, a new Note
for the then outstanding principal amount will be issued to, and registered in
the name of, the transferee. Prior to due presentment for registration of
transfer, the Company may treat the person in whose name this Note is registered
as the owner hereof for the purpose of receiving payment and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
In case an Event of Default shall occur and be continuing, the principal of
this Note may be declared or otherwise become due and payable in the manner and
with the effect provided in the Agreement.
Capitalized terms used and not otherwise defined herein shall have the
meanings (if any) provided in the Agreement.
THIS NOTE SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL
LAW OF THE STATE OF ILLINOIS.
UNIVERSAL HOSPITAL SERVICES, INC.
By: /s/ David E. Dovenberg
--------------------------------------
David E. Dovenberg
Vice President of Finance and
Chief Financial Officer
<PAGE>
AMENDMENT 2
TOP MANAGEMENT
CHANGE-IN-CONTROL SEVERANCE PLAN
The Company adopted a Top Management Change-In-Control Severance Plan effective
January 1, 1994 (the "Plan").
The Top Management Change-In-Control Severance Plan was amended October 29,
1996.
Section 1.2 of the Plan was amended and restated to read in its entirety as
follows:
Term of the Plan. This Plan will commence on the Effective Date and shall
continue in effect for six (6) full years. However, at the end of such six (6)
year period, and at the end of each additional year thereafter, the term of this
Plan shall be extended automatically for one (1) additional year unless the
Committee delivers written notice six (6) months prior to the end of such term,
or extended term, to all Participants that the Plan will not be extended. In
such case, the Plan will terminate at the end of the term, or, extended term,
then in progress.
<PAGE>
UNIVERSAL HOSPITAL SERVICES, INC.
SCHEDULE OF COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
------------------------ ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY:
Net income $ 540,302 $ 594,164 $1,424,690 $2,076,571
========== ========== ========== ==========
Weighted average number of common shares outstanding
during this period 5,427,789 5,429,896 5,439,657 5,427,286
Add common equivalent shares relating to outstanding
options to purchase common stock using the
treasury stock method 31,405 85,972 72,773 62,102
---------- ---------- ---------- ----------
Weighted average number of common and common
equivalent shares outstanding 5,459,194 5,515,868 5,512,430 5,489,388
========== ========== ========== ==========
Primary net earnings per common share $0.10 $0.11 $0.26 $0.38
========== ========== ========== ==========
FULLY DILUTED:
Net income $ 540,302 $ 594,164 $1,424,690 $2,076,571
========== ========== ========== ==========
Weighted average number of common shares outstanding
during this period 5,427,789 5,429,896 5,439,657 5,427,286
Add common equivalent shares relating to outstanding
options to purchase common stock using the
treasury stock method 31,405 85,972 72,773 62,102
---------- ---------- ---------- ----------
Weighted average number of common and common
equivalent shares outstanding 5,459,194 5,515,868 5,512,430 5,489,388
========== ========== ========== ==========
Fully diluted net earnings per common share $0.10 $0.11 $0.26 $0.38
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the Company's Balance Sheets, Statements of Income and Statements of Cash Flows
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 436,958
<SECURITIES> 0
<RECEIVABLES> 11,695,586
<ALLOWANCES> 379,274
<INVENTORY> 2,612,499
<CURRENT-ASSETS> 16,195,247
<PP&E> 112,235,995
<DEPRECIATION> 63,984,422
<TOTAL-ASSETS> 80,560,965
<CURRENT-LIABILITIES> 7,131,286
<BONDS> 0
<COMMON> 53,572
0
0
<OTHER-SE> 29,461,900
<TOTAL-LIABILITY-AND-EQUITY> 80,560,965
<SALES> 4,204,016
<TOTAL-REVENUES> 41,775,345
<CGS> 3,367,240
<TOTAL-COSTS> 22,128,795
<OTHER-EXPENSES> 1,030,500
<LOSS-PROVISION> 114,773
<INTEREST-EXPENSE> 1,690,624
<INCOME-PRETAX> 2,514,690
<INCOME-TAX> 1,090,000
<INCOME-CONTINUING> 1,424,690
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,424,690
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
