<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
(Mark One)
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] For the fiscal year ended December 31, 1996, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] For the transition period from
________ to _________.
Commission File Number: 0-20086
UNIVERSAL HOSPITAL SERVICES, INC.
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(Exact name of Registrant as specified in its charter)
Minnesota 41-0760940
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1250 Northland Plaza
3800 West 80th Street
Bloomington, Minnesota 55431-4442
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(Address of principal executive offices)
(Zip Code)
(612) 893-3200
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
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
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 28, 1996 was approximately $72,522,000 based upon the
closing bid price as reported by Nasdaq. The number of shares of the issuer's
Common Stock, $.01 par value outstanding as of February 28, 1996 were 5,372,221.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
None.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this Form
10-K. [X]
<PAGE>
FORM 10-K INDEX
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<TABLE>
<CAPTION>
PAGE
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PART I
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ITEM 1 Business 1
ITEM 2 Properties 12
ITEM 3 Legal Proceedings 12
ITEM 4 Submission of Matters to a Vote of Security Holders 12
PART II
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ITEM 5 Market for Registrant's Common Equity and
Related Stockholder Matters 13
ITEM 6 Selected Financial Data 14
ITEM 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
ITEM 8 Financial Statements and Supplementary Data 22
ITEM 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 22
PART III
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ITEM 10 Directors and Executive Officers of the Registrant 23
ITEM 11 Executive Compensation 25
ITEM 12 Security Ownership of Certain Beneficial Owners
and Management 35
ITEM 13 Certain Relationships and Related Transactions 37
PART IV
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ITEM 14 Exhibits, Financial Statements, Schedule and
Reports on Form 8-K 38
</TABLE>
<PAGE>
PART I
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ITEM 1. BUSINESS
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Universal Hospital Services, Inc. provides movable medical equipment to more
than 3,100 hospitals and various other health care providers principally through
Pay-Per-Use/TM/ equipment management programs. The Company believes that Pay-
Per-Use rental is more cost effective than purchase, lease or fixed-term rental
of medical equipment for at least a portion of hospitals' and other health care
providers' medical equipment needs. Under the Company's rental programs, health
care providers may be charged a per use rental fee when equipment is used, based
on daily use per patient, or may be charged under alternative fee arrangements.
The Company's customers also receive a full range of related support services,
including equipment delivery, training, technical and educational support,
inspection, maintenance and documentation. In addition, the Company engages in
the sale of related disposable supplies. Health care providers have access to
the Company's pool of over 52,000 pieces of movable medical equipment in five
primary equipment categories-critical care, monitoring, newborn care,
respiratory therapy and specialty beds. The Company currently operates through
46 district offices and eight regional service centers, serving customers in 50
states and the District of Columbia.
Market Overview
The United States health care system includes approximately 5,200 acute care
community hospitals and a variety of other health care providers such as nursing
homes, surgicenters, subacute care facilities, specialty clinics and home health
care providers. These hospitals and other health care providers normally spend a
substantial sum on obtaining capital equipment, including movable medical
equipment. Hospitals have a number of options in obtaining this equipment,
including purchase, lease and rental. Historically, hospitals have favored the
purchase option in meeting a substantial portion of their movable capital
equipment needs.
The Company believes that a variety of trends favor rental as an alternative
to purchase or lease. Principal among these trends are the substantial cost
containment pressures under which hospitals and other health care providers
currently operate. These pressures have increased greatly during the past decade
as a result of federal regulations that have significantly affected the extent
of reimbursement under Medicare's prospective payment system, and the Company
believes that these pressures will continue to intensify. Changes to the
Medicare program adopted in 1991, and being phased in over a 10-year period, are
resulting in reimbursement for medical equipment costs at rates established by
the Health Care Financing Administration, and these rates may not reflect
hospitals' actual equipment costs. In addition, the Company believes that other
third party payors of medical expenses have followed or will follow the federal
government in limiting reimbursement for medical equipment costs. These would
include, but are not limited to, preferred provider arrangements, discounted fee
arrangements and "capitated" (fixed patient care reimbursement) managed care
arrangements. The Company believes that various current legislative proposals
will continue movement toward health care related consolidations, acceleration
of managed care and the formation of integrated delivery systems. The Company
also believes that the current reform effort will focus on cost containment in
health care and may reduce levels of reimbursement by Medicare as well as other
third party payors. See "Third Party Reimbursement" below.
The Company believes that, as a result of these cost containment pressures,
hospitals and other health care providers will continue to seek to reduce their
capital expenditures, including expenditures on movable capital equipment. These
reductions, however, may mean that health care providers do not have sufficient
equipment to meet peak demands or the capital resources to replace existing
equipment with more current medical technology. In addition, since the Medicare
system is, to an increasing extent, reimbursing health care providers at fixed
rates unrelated to actual capital costs, hospitals and other health care
providers have an incentive to manage their capital costs more efficiently.
Hospitals may better manage their capital costs by replacing fixed capital costs
with variable operating costs. In the case of movable medical equipment, these
fixed costs include equipment acquisition costs and the substantial costs
associated with all services necessary to support the equipment. Consequently,
many of these entities are renting equipment to meet certain of their needs,
rather than incurring the substantial capital related costs associated with
owning or leasing equipment for which they may not be reimbursed during non-use
periods.
1
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In addition, the average hospital "census" (the number of patients filling
the available bed days) has declined in recent years, due to a reduction in
average length of hospital stay. This reduction has resulted from implementation
of the prospective payment system, an increase in "capitated" managed care and
preferred provider arrangements and an increase in the amount of care provided
outside of the acute care hospital setting. The Company believes this census
decrease has not resulted in a proportional decline in hospitals' equipment use,
since the most intensive level of care is generally delivered during the early
days of hospitalization and during outpatient procedures. These factors,
together with routine fluctuations in hospital occupancy, have placed increasing
pressures on hospitals to reduce equipment costs and maximize utilization of
medical equipment. Accordingly, the Company believes that the flexibility
afforded by equipment rental has become increasingly important. Pay-Per-Use
rental also allows hospitals to offer new technology to their physicians and
patients without the investment normally required to purchase or lease and
without the risk of obsolescence.
The Company also believes that the increasing amount of patient care being
provided in "alternate care" settings (any care provided outside of inpatient
hospital care) provides additional opportunities for its equipment management
programs. The Company provides these programs wherever medical equipment is
being used to provide patient care. Alternate care providers, such as nursing
homes, surgicenters, subacute care facilities, outpatient centers, home care
providers and others, are facing the same cost containment pressures and
changing reimbursement programs as hospitals and have the same incentives to
manage their medical equipment costs more efficiently.
As a result of cost, reimbursement, and standardization pressures, and
utilization and obsolescence risks, health care providers are becoming more
sophisticated in their medical equipment procurement decisions. Health care
providers increasingly are seeking ways to reduce costs and to manage equipment
levels at optimum utilization in order to maximize operating margins. In
determining whether to purchase, lease or rent equipment, health care providers
may consider anticipated utilization levels of equipment, the costs of
maintenance and repairs, storage, obsolescence and opportunity costs. The
Company believes that such analyses often show that Pay-Per-Use rental programs
increase the efficiency of equipment utilization, reduce ownership costs and
enhance operating margins.
Business Strategy
The Company's strategy is to achieve continued market penetration and growth
by: (i) increasing business conducted with existing customers and markets; (ii)
establishing additional district offices in new geographic markets; (iii) adding
new product offerings and equipment lines; (iv) developing business with new
customers in the alternate care market; and (v) providing comprehensive total
equipment management programs to its customers.
Increase Business with Existing Customers and Markets. The Company seeks to
increase the amount of business it conducts with existing customers by providing
additional equipment to these customers and reaching additional departments
within its existing hospital base. Because these customers are familiar with the
Company's programs and their benefits, the Company believes that its existing
customer base represents a significant expansion opportunity. The Company also
plans expansion through further penetration of the markets it currently serves
by establishing new relationships with additional hospitals and health care
providers.
Establish New District Offices. The Company intends to establish three to
four new district offices each year over the next several years. In choosing
locations for its district offices, the Company considers the nature and extent
of the customer market, demographics and vendor relationships. While the major
metropolitan areas will remain a primary focus for expansion, regional clusters
of hospitals are also expected to provide attractive expansion opportunities.
The Company completed the acquisition of Biomedical Equipment Rental and
Sales, Inc. (BERS) on August 13, 1996. See "Completed Acquisition" under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
2
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Add New Product Offerings and Equipment Lines. The Company seeks to expand
its business by adding new product categories and equipment lines and is
continually evaluating new products for inclusion in its equipment rental
inventory and for expansion of its product sales offering.
Develop Business with New Customers in the Alternate Care Market. The Company
plans to expand through business development with alternate care providers such
as home care, subacute and long term care facilities, and surgicenters. As the
average length of stay in acute care hospitals has continued to shorten, the
Company believes that growth opportunities exist in those alternate care
settings where patient care is being provided.
Provide Total Equipment Management Programs. The Company intends to offer to
its customers additional total equipment management programs called Asset
Management Partnership Programs ("AMP Programs"). In these programs, the
Company provides, maintains, manages and tracks substantially all, or a
significant portion, of the movable medical equipment within the customer
facility or organization. These total equipment management programs allow health
care providers to improve the quality of their patient care by having all
appropriate medical equipment available when and where it is needed, while
controlling their costs through improved utilization and efficiency.
Equipment Management Programs
The Company seeks to assist hospitals and other health care providers manage
their medical equipment costs more effectively while providing them with movable
medical equipment and related services. The components of the Company's
equipment management programs include:
Pay-Per-Use. The Company principally provides its equipment on a Pay-Per-Use
basis under which customers are charged per daily patient use. The Company
believes that Pay-Per-Use rental is typically more cost effective than purchase,
lease or fixed-term rental of medical equipment. Under Pay-Per-Use rental,
health care providers can gain access to the latest medical equipment without
the large capital outlays and significant costs associated with the purchase and
maintenance of medical equipment and without the risks related to equipment
obsolescence. By using Pay-Per-Use rental rather than purchase, lease or fixed-
term rental, hospitals and other health care providers obtain the cash flow
advantage of paying for medical equipment only when there are corresponding
patient charges.
Full Service. The Company emphasizes the full-service features of its Pay-
Per-Use equipment management programs. The Company's per-use rental fee includes
24-hour-a-day, 365-day-a-year delivery, provision of "patient ready" equipment,
technical support and training in equipment use by qualified personnel. This fee
also includes regular inspections and maintenance of all equipment rented from
the Company, including the documentation of such inspections and maintenance
through the Company's Rental Equipment Documentation System ("REDS") and the
Operator Error Identification System ("OEIS"). The Company maintains a total
service history of any rented equipment, which includes inspection, repair and
modification activities for the entire life of the unit. The Company also offers
an optional software package that allows a particular hospital to track
location, utilization and availability of all equipment rented, owned or leased
by that hospital. Together, these services allow health care providers to
eliminate many of the major overhead costs associated with the ownership or
lease of medical equipment.
Equipment Utilization. The Company's equipment management strategy is to
promote Pay-Per-Use programs as a means of better managing medical equipment
needs while contributing to overall cost containment. The Company seeks to
allocate its pool of rental equipment efficiently among its customers by
continually monitoring customers' equipment utilization levels. The Company
reviews customer utilization routinely and, depending on utilization level, may
adjust the Pay-Per-Use fee or redeploy the equipment. This system benefits
customers by permitting them to obtain a lower per-use rental fee in the event
of higher utilization efficiency and benefits the Company as it attempts to
maximize the utilization of the equipment in inventory. See "Pricing of Pay-Per-
Use Programs" below.
3
<PAGE>
Asset Management Partnership Programs (AMP Programs). The Company has
developed relationships with some of its largest customers to help them achieve
substantially higher utilization rates and levels of efficiency for their
organizations. In some instances, the scope of the relationship has evolved into
comprehensive equipment management programs referred to as AMP Programs. In
these programs, the Company provides, maintains, manages and tracks
substantially all of the movable medical equipment within the customer's
facility or organization. The Company's AMP Programs allow health care providers
to improve the quality of their patient care by having all appropriate medical
equipment available when it is needed, while controlling their costs through
improved utilization and efficiency.
Equipment Selection. The Company seeks equipment that has characteristics
which favor the rental of such equipment, including equipment movability, high
or fluctuating utilization, service intensiveness and obsolescence risk. The
Company purchases what it believes to be state-of-the-art equipment from
manufacturers with a reputation for quality. The Company generally purchases
from a number of different manufacturers to address the diversity of customer
demands with a special emphasis on equipment which lowers patient care costs
while improving quality of care and treatment outcomes. In addition, the
Company's product evaluation committee meets regularly to consider new products
as they become available and, when appropriate, approves new products for
acquisition.
Customer Responsiveness. The Company's operational structure is designed to
enable it to respond quickly to a customer's needs. Through its district
offices, the Company maintains both local inventories of medical equipment and a
system-wide inventory network which are designed to assure access to a broad
range of medical equipment. The Company's district offices are typically located
close enough to the customers they serve to allow equipment to be delivered and
ready for use generally within two hours of a request. The Company emphasizes
long-term customer relationships and seeks to develop and maintain strong
customer loyalty.
Customer Relationship
The Company's equipment management programs are flexible arrangements through
which customers may obtain equipment on a Pay-Per-Use basis when they need it
and pay for equipment only when it is used. Customers may also obtain equipment
under alternative rental fee arrangements, such as on a daily, weekly or monthly
rental basis. When the Company's customers request a piece of equipment, the
Company provides the equipment in "patient-ready" condition. Upon delivery,
each piece of rented equipment is logged into the Company's tracking system as
being placed with the particular customer. The Company provides the customer
with information as to per-use or other rental rates at or prior to delivery of
the equipment, and these rates are generally effective for a three month period.
The Company generally does not use written agreements with its customers but
emphasizes continuous contact and shared information with each customer. Under
the Company's Pay-Per-Use programs, the customer is responsible for keeping a
record of each equipment use and reporting the use to the Company on a monthly
basis. Many customers report equipment utilization in conjunction with their
patient billing procedures. The Company bills each customer monthly based on
this reported usage. The customer is under no obligation to use the equipment
and may request that the Company remove the equipment at any time.
Correspondingly, the Company may remove equipment or raise the per-use rental
fee if it is under-utilized. The Company actively monitors the accounts
receivable performance of its customers.
Acquisition of Equipment Inventory
The Company purchases medical equipment in the areas of critical care,
monitoring, newborn care, respiratory therapy and specialty beds. The Company
generally acquires equipment for its inventory pool having characteristics which
favor the rental of such equipment. Principal among these characteristics are
equipment movability, high or fluctuating utilization levels, service
intensiveness and anticipated obsolescence. Of additional consideration is the
relative safety of and the risks associated with such equipment. The Company
purchases what it believes to be state-of-the-art equipment from manufacturers
with a reputation for quality and functionally tests each piece of medical
equipment added to its inventory to determine that the equipment is working
properly.
4
<PAGE>
Equipment acquisitions may be made to expand the Company's pool of existing
medical equipment or to add new medical equipment technologies to the Company's
existing rental pool mix. The Company considers historical utilization levels,
anticipated customer demand, life cycle phase of the equipment and vendor
relationships before acquiring such equipment in order generally to avoid
speculative purchases. In the case of new technologies, the Company has
established a product evaluation committee to consider new technologies as they
become available. This evaluation process for new products involves many of the
review criteria set forth above as well as an overall evaluation of the
potential market demand for the new product.
As of December 31, 1996, the Company had more than 52,000 pieces of equipment
available for use by its customers. The following is a list of principal types
of medical equipment available to the Company's customers:
<TABLE>
<CAPTION>
Critical Care Monitoring Newborn Care
<S> <C> <C>
Alternating Pressure/Flotation Devices Adult Monitors Blood Pressure Monitors
Ambulatory Infusion Pumps Anesthetic Agent Monitors Fetal Monitors
Anesthesia Machines Apnea Monitors Fetal Monitoring Systems
Blood/Fluid Warmers Blood Pressure Monitors Incubators
Cold Therapy Units Cardiac Care Systems Infant Warmers
Continuous Passive Motion Devices Defibrillators Infusion Pumps
Controllers, Infusion Electrocardiographs Neonatal Monitors
Electrosurgical Generators End Tidal CO\\2\\ Monitors Oximeters
Enteral Infusion Pumps Fetal Monitors Phototherapy Devices
Heat Therapy Units Intensive Care Systems
Hyper-Hypothermia Units Neonatal Monitors Respiratory Therapy
Minimal Invasive Surgical Equipment Oximeters Aerosol Tents
Parenteral Infusion Pumps PO\\2\\/CO\\2\\ Monitors Nebulizers
Patient Controlled Analgesia (PCA) Recorders and Printers Oximeters
Sequential Compression Step-Down Telemetry Systems Oxygen Concentrators
Devices (SCD) Surgical Monitors Ventilators
Suction Devices Telemetry Monitors
Syringe Pumps Urine Output/Temperature Specialty Bed
Ultrasonic Aspirators Monitors Bazooka/R/ Portable Specialty
Volumetric Infusion Vital Signs Monitors Bed/R/
Pumps (Adult/Pediatric)
Wheel Chairs
</TABLE>
The Company currently acquires substantially all of its medical equipment
from approximately 60 suppliers. The Company's five largest suppliers of
medical equipment, which supplied approximately 54.3 percent of the Company's
medical equipment purchases for the year ended December 31, 1996, are: Kendall
Company; Imed Corporation; Baxter Healthcare Corporation; Sims Deltec, Inc.;
and Abbott Laboratories. Although the identity of the top ten suppliers remains
relatively constant from year to year, the relative ranking of suppliers within
this group may vary over time. The Company believes that alternative sources of
medical equipment are available to the Company should they be needed.
The Company seeks to ensure availability of equipment at favorable prices.
Although the Company does not generally enter into long-term fixed price
contracts with suppliers of its equipment, the Company may receive price
discounts related to the volume of its purchases. In order to receive strong
vendor support throughout the areas in which it does business, the Company seeks
to structure its equipment purchases to ensure credit to local representatives
of those vendors.
The purchase price for equipment generally ranges from $1,000 to $25,000,
with some complete monitoring systems costing more than $1,000,000. The Company
finances the acquisition of its medical equipment inventory with internally
generated funds and unsecured borrowings. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
5
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Pricing of Pay-Per-Use Programs
The Company's pricing strategy is designed to generate a pay-back period that
is substantially shorter than the useful life of a particular piece of
equipment, thereby reducing the Company's obsolescence risk on its inventory
pool. The Company seeks to set its Pay-Per-Use or other rental rates to recoup
the equipment's purchase price generally within 15 to 18 months and to recoup
related costs within a specified number of additional months. These related
costs include accessories and service support activities required to maintain
equipment viability (e.g., maintenance, repairs, modifications, back-up support
and inspections). On a customer-specific basis, the Company then develops a per-
usage or other rental rate for a given piece of equipment which takes into
consideration the customer's needs with respect to equipment type, equipment
utilization, length of placement, frequency and extent of support services and
volume of business. This per-usage or other rental rate is designed not only to
recoup costs but also to provide the Company a targeted financial return on its
investment for the particular category of equipment. Service requirements and
Pay-Per-Use rates are generally reviewed on a quarterly basis and rates may be
adjusted as the customer's service needs or utilization levels vary from
expected levels. This evaluation process enables the Company to continuously
monitor actual revenues as compared to targeted return objectives.
Distributor Arrangement with SleepNet Corporation
In January 1994, the Company entered into a distributor agreement with
SleepNet Corporation (the "SleepNet Corporation Agreement") providing the
Company with national distribution rights to two products introduced by SleepNet
Corporation: the Bazooka System, an innovative portable specialty bed providing
low air loss therapy for the treatment of pressure ulcers, and the Demand
Positive Airway Pressure (DPAP), a device designed to treat adult obstructive
sleep apnea. The Bazooka System and the DPAP device are currently the only
products manufactured and marketed by SleepNet Corporation. The Bazooka System
has been included in the Company's equipment rental programs since May 1994, and
the Company began distributing the DPAP device in February 1995. The DPAP device
was not offered as part of the Company's equipment rental programs.
On February 28, 1996, SleepNet Corporation terminated its exclusive
distributor agreement with the Company.
The Company's arrangement with SleepNet Corporation differed from the
Company's usual equipment acquisition methodology in that the Company's
purchases of Bazooka Systems under the SleepNet Corporation Agreement exceeded
the volumes needed by the Company to meet current customer demand. The Company
believes that, as of December 31, 1996, an aggregate of approximately $2.8
million of such equipment exceeded normal levels maintained by the Company.
The Company experienced declining sales of DPAP devices during 1996. Because
market acceptance of the DPAP devices did not meet expectations, the Company's
ongoing quarterly assessment resulted in a right-down of $1,030,500 in the
second quarter and a charge of $1,182,545 in the fourth quarter of 1996 to
write-off the remaining carrying value of DPAP inventory and associated supplies
and demo units. The DPAP devices were disposed of in early 1997.
6
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Sales of Related Disposables/Medical Supplies and Equipment
In order to serve its customers fully, the Company sells disposable medical
supplies used in conjunction with the medical equipment it rents. Examples of
such disposable items include tubing and cassettes for infusion devices. The
Company believes that hospitals purchase disposables from the Company due to the
convenience of obtaining equipment and related supplies from one source and the
anticipated cost-savings resulting from acquiring disposables only on an as-
needed basis. The Company currently acquires substantially all of its rental-
related medical disposables from approximately 50 suppliers. The five largest
current suppliers of disposables to the Company, accounting for over 72 percent
of the Company's disposable purchases for the year ended 1996, are: Gaymar
Industries, Inc; Kendall Healthcare Products Company; Graseby, Inc.; IVAC, Inc;
and Select Medical. The Company believes that alternative purchasing sources of
disposable medical supplies are available to the Company, if necessary.
The Company also sells used medical equipment that is no longer required in
its equipment rental pool, primarily to various non-hospital purchasers.
Inventory Tracking System
The Company tracks the history of each piece of equipment in its inventory
on an IBM AS/400 centralized computer system located at its corporate
headquarters. This system provides immediate access to historical equipment
information by the use of remote terminals located in the corporate headquarters
and in each of the Company's district offices and regional service centers. Data
on length of placement, transfers, modifications, repairs, maintenance and
inspections are included on the system. This information is kept for the life of
the equipment and is used extensively for the establishment of preventative
maintenance and safety testing programs and the improvement of equipment
performance. Information as to a customer's rental equipment is also provided to
the customer through the Company's Rental Equipment Documentation System (REDS)
Program in order to help that customer meet its equipment documentation needs
under applicable standards and regulations. In addition, this system is used to
track the utilization levels of each piece of equipment. By keeping extensive
utilization records, the Company endeavors to maximize the utilization of all
equipment in its inventory.
Maintenance
The Company maintains control over the functional testing and safety of all
equipment through its technical staff. Prior to placing equipment with a
customer, the Company applies testing standards designed to ensure the safety of
all such equipment. The Company conducts regular inspections of the equipment
either at one of the Company's district offices or regional service centers, or
on-site at the hospital. The Company provides all necessary repairs and
maintenance of its equipment. In order to assist hospitals and other health care
providers in meeting their equipment documentation needs for purposes of
applicable standards or regulations, the Company maintains a complete record of
all inspections, maintenance and repairs on its REDS Program. See "Inventory
Tracking System" above and "Regulation of Medical Equipment" below.
The Company's equipment is generally covered by manufacturers' warranties,
which typically warrant repairs for a period of three to twelve months from the
date of purchase. Because the Company employs manufacturer-trained personnel for
the technical support of its equipment, a significant portion of repair and
maintenance of the Company's equipment is conducted by the Company's employees.
7
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Maximization of Useful Life and Disposal of Equipment
The Company seeks to maximize the useful life of its equipment by renting
its older equipment inventory at lower rental rates or bundling such older
equipment with newer equipment in rental programs with price incentives to the
customer. When pieces of the Company's medical equipment inventory are no longer
required or desired, such pieces may be sold.
Marketing
The Company markets its Pay-Per-Use equipment management programs primarily
through its direct sales force, which consisted of 94 promotional sales
representatives as of December 31, 1996. In its marketing efforts to hospitals,
the Company primarily targets key decision makers, such as materials managers,
department heads and directors of purchasing, nursing and central supply, as
well as administrators, chief executive officers and chief financial officers.
In its marketing efforts to other health care providers, the Company also
targets key operational and administrative decision makers. The Company also
promotes its programs and services to hospital and health care provider groups
and associations. The Company develops and provides its direct sales force with
a variety of materials designed to support its promotional efforts. The Company
also uses direct mail advertising to supplement this activity, as well as
specifically targeted trade journal advertising.
From time to time, the Company has developed specific marketing programs
intended to address current market demands. The most significant of such
programs includes the Company's "New Realities" program, which demonstrates
the economic justification for Pay-Per-Use Rentals, the AMP Program, which
presents hospitals with a total management approach to equipment needs, the REDS
Program which responds to the equipment documentation and tracking needs of
health care providers as a result of standards set by the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO) and the Safe Medical Devices
Act of 1990, and the Operator Error Identification System, which responds to
JCAHO requirements regarding equipment operator training. See "Regulation of
Medical Equipment" below.
8
<PAGE>
The Company's District Offices
The Company currently operates through 46 district offices, serving
customers in 50 states and the District of Columbia. District offices are
typically staffed by a district manager, one or more promotional sales
representatives, an administrative assistant and delivery and service personnel
to support customers' needs and district operations. District offices are
responsible for marketing, billing and collection efforts, equipment delivery,
inservice training, and equipment inspection, maintenance and repair work.
Complementing the district offices are eight regional service centers, which
provide more sophisticated maintenance and repair on equipment. The following
table shows each district office location and its opening date:
<TABLE>
<CAPTION>
Year Year
Office Opened Office Opened
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<S> <C> <C> <C>
Minneapolis, MN 1941 San Francisco, CA 1989
Omaha, NE 1972 Seattle, WA 1989
Bismarck, ND 1973 New Orleans, LA 1990
Fargo, ND 1974 Charlotte, NC 1990
Marquette, MI 1975 Detroit, MI 1990
Madison, WI 1975 Anaheim, CA 1990
Duluth, MN 1978 Phoenix, AZ 1990
Kansas City, MO 1978 Pittsburgh, PA 1990
Sioux Falls, SD 1978 Cincinnati, OH 1992
Milwaukee, WI 1980 Pasadena, CA 1992
Dallas, TX 1981 Memphis, TN 1992
San Antonio, TX 1982 Houston, TX 1993
Atlanta, GA 1983 Wichita, KS 1993
St. Louis, MO 1983 Rochester, NY 1993
Tampa, FL 1984 New York, NY 1994
Cleveland, OH 1985 San Diego, CA 1994
Iowa City, IA 1985 Richmond, VA 1994
Chicago, IL 1986 Denver, CO 1995
Boston, MA 1986 Indianapolis, IN 1995
Philadelphia, PA 1986 Jacksonville, FL 1995
Ft. Lauderdale, FL 1987 Sacramento, CA 1995
Baltimore, MD/ Portland, OR 1996
Washington, D.C. 1988 Knoxville, TN 1996
Raleigh, NC 1996
</TABLE>
Regulation of Medical Equipment
The Company's customers are subject to documentation and safety reporting
standards with respect to the medical equipment they use, as established by the
following organizations and laws: the Joint Commission on Accreditation of
Healthcare Organizations; the Association for Advancement of Medical
Instrumentation; and the Safe Medical Devices Act of 1990 ("SMDA"). Some states
and municipalities also have similar regulations. The Company's REDS and OEIS
programs are specifically designed to help customers meet their documentation
and reporting needs under such standards and laws. The Company also monitors
changes in law and accommodates the needs of customers by providing specific
product information and manufacturers' addresses and contacts to these customers
upon their request. Manufacturers of the Company's medical equipment are subject
to regulation by agencies and organizations such as the Food and Drug
Administration ("FDA"), Underwriters Laboratories, the National Fire Protection
Association and the Canadian Standards Association. The Company believes that
all medical equipment it rents conforms to these regulations.
9
<PAGE>
The SMDA expanded the FDA's authority to regulate medical devices. The SMDA
requires manufacturers, distributors and end-users to report information which
"reasonably suggests" the probability that a medical device caused or
contributed to the death, serious injury or serious illness of a patient. The
Company works with its customers to assist them in meeting their reporting
obligations under the SMDA. Although the Company does not believe that it is
subject to the SMDA or its reporting requirements, it is possible that the
Company may be deemed to be a "distributor" of medical equipment under the
SMDA and would then be subject to the reporting obligations and related
liabilities thereunder.
An additional equipment tracking regulation was added to the SMDA on August
29, 1993 which requires the Company to provide information to the manufacturer
regarding the permanent disposal of medical rental equipment and notification of
any change in ownership of certain categories of devices. The Company's medical
tracking systems have been reviewed by the FDA and found to be in substantial
compliance with these regulations.
In July 1995, the FDA published a working draft of the Current Good
Manufacturing Practices ("CGMP") final rules which may become available in 1997.
Under these proposed final rules, the Company may have additional reporting
requirements to the FDA and to original equipment manufacturers relative to the
repair and servicing of the rental equipment it provides. The Company believes
that the tracking systems it utilizes will be sufficient to allow it to conform
to the additional regulations, if they are enacted.
Third Party Reimbursement
The Company's business may be significantly affected by, and the success of
its growth strategies depends on, the availability and nature of reimbursements
to hospitals and other health care providers for their medical equipment costs
under federal programs such as Medicare, and by other third party payors. Under
its prospective payment system adopted in 1983 and later modified in 1991, the
Health Care Financing Administration ("HCFA"), which determines Medicare
reimbursement levels, reimburses hospitals for medical treatment at fixed rates
according to diagnostic related groups ("DRG's") without regard to actual cost.
Under this system of reimbursement, Medicare-related equipment costs are
reimbursed in a single, fixed-rate, per-discharge reimbursement. This system,
and subsequent modifications, is being phased in over a 10 year period. As a
result of the prospective payment system, the manner in which hospitals incur
equipment costs (whether through purchase, lease or rental) does not impact the
extent of hospitals' reimbursement. Since the Medicare system, to an increasing
extent, reimburses health care providers at fixed rates unrelated to actual
equipment costs, hospitals have an incentive to manage their capital costs more
efficiently and effectively. The Company believes that hospitals will continue
to benefit from cost-containment and cost-efficiency measures, such as
converting existing fixed equipment costs to variable costs through Pay-Per-Use
rental and improving efficiency through AMP Programs.
Hospitals and other health care providers are also facing increased cost
containment pressures from public and private insurers and other managed care
providers, such as health maintenance organizations ("HMO's"), preferred
provider organizations ("PPO's") and managed fee-for-service plans, as these
organizations attempt to reduce the cost and utilization of health care
services. The Company believes that these payors have followed or will follow
the federal government in limiting reimbursement for medical equipment costs
through preferred provider contracts, discounted fee arrangements and
"capitated" (fixed patient care reimbursement) managed care arrangements. In
addition to promoting managed care plans, employers are increasingly self
funding their benefit programs and shifting costs to employees through increased
deductibles, copayments and employee contributions. The Company believes that
these cost reduction efforts will place additional pressures on health care
providers' operating margins and will encourage efficient equipment management
practices, such as Pay-Per-Use rental.
10
<PAGE>
Various legislative proposals currently before Congress provide, among other
things, for a reduction in the growth in Medicare and Medicaid spending over the
next several years. If enacted, these proposals may result in reduced payments
to hospitals, physicians and home health care providers (including reimbursement
payments for capital equipment), increased utilization of managed care and
increased Medicare premiums. The Company believes that pending and future health
care initiatives will continue movement toward health care related
consolidations, acceleration of managed care and the formation of integrated
delivery systems. The Company is unable to predict what, if any, additional
government regulations, legislation or initiatives or changes by other third
party payors affecting reimbursement or other matters which influence decisions
to obtain or utilize medical equipment may be enacted or effected and what
impact such regulations, legislation, initiatives or changes may have on the
Company's results of operations.
Liability and Insurance
Although the Company does not manufacture any medical equipment, the
Company's business entails the risk of claims related to the rental and sale of
medical equipment. In addition, the Company's servicing and repair activity with
respect to its rental equipment and its instruction of hospital employees with
respect to the equipment's use are additional sources of potential claims. The
Company has had no recent experience with any significant claims; however, any
such claims, if made, could have an adverse impact on the Company. The Company
maintains general liability coverage, including product liability insurance and
excess liability coverage. Both policies are subject to annual renewal. The
Company believes that its current insurance coverage is adequate. There is no
assurance, however, that claims exceeding such coverage will not be made or that
the Company will be able to continue to obtain liability insurance at acceptable
levels of cost and coverage.
Competition
The Company believes that the strongest competition to its programs is the
purchase alternative for obtaining movable medical equipment. Currently, many
hospitals and health care providers view rental primarily as a means of meeting
short-term or peak supplemental needs, rather than as a long-term alternative to
purchase. Although the Company believes that it can demonstrate the cost-
effectiveness of renting medical equipment on a long-term Pay-Per-Use basis, the
Company believes that many hospitals and health care providers will continue to
purchase a substantial portion of their movable medical equipment.
The Company has one principal competitor in the medical equipment rental
business: Mediq/PRN, a subsidiary of MEDIQ Incorporated, based in Pennsauken,
New Jersey. Other competition consists of smaller regional companies and medical
equipment dealers who rent equipment to augment their medical equipment sales.
The Company believes that it can effectively compete with any of these entities
in the geographic regions in which both the Company and these entities operate.
Service Marks and Trade Names
The Company uses the "UHS" and "Universal Hospital Services" names as trade
names and as service marks in connection with the Company's rental of medical
equipment. The Company has registered these and other marks as service marks
with the United States Patent and Trademark Office.
Employees
As of December 31, 1996, UHS had 384 employees, including 355 full-time and
29 part-time employees. Of such employees, 94 are promotional sales
representatives, 27 are technical support personnel, 74 are employed in the
areas of corporate and marketing and 189 are UHS district office support
personnel.
None of the Company's employees is covered by a collective bargaining
agreement, and the Company has experienced no work stoppages to date.
11
<PAGE>
ITEM 2. PROPERTIES
-------------------
The Company owns its Minneapolis, Minnesota district office facility,
consisting of approximately 26,000 square feet of office, warehouse, processing
and repair shop space and leases its other district offices, averaging 3,500
square feet, and regional service centers. The Company leases its executive
offices, approximately 22,000 square feet, in Bloomington, Minnesota.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
-----------------------------------------
OF SECURITY HOLDERS
-------------------
None.
12
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
--------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
As of March 3, 1997 the Company had approximately 1,435 shareholders.
The Company's Common Stock is traded on the Nasdaq Stock Market under the
symbol UHOS. The following table sets forth, for the periods indicated, the
range of the high and low prices on the Nasdaq Stock Market.
<TABLE>
<CAPTION>
1995 High Low
- ---- ------ -------
<S> <C> <C>
First Quarter 8 1/8 6 1/4
Second Quarter 9 1/8 7 3/4
Third Quarter 10 7/8 7 3/4
Fourth Quarter 10 1/4 8 7/8
1996 High Low
- ---- ------ -------
First Quarter 10 1/2 9
Second Quarter 9 1/2 7 3/4
Third Quarter 9 5 47/64
Fourth Quarter 11 1/8 6 1/4
1997 High Low
- ---- ------ -------
First Quarter (through
February 28, 1997) 17 1/8 10 3/4
</TABLE>
Dividend Policy
The Company has never declared or paid a cash dividend on any class of its
Common Stock. The Company currently intends to retain earnings for use in the
operation and expansion of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future. The Company's loan agreements
contain certain restrictions on the Company's ability to pay cash dividends on
its Common Stock.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
The selected financial data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for and as of each of the years in the
five-year period ended December 31, 1996 are derived from the audited financial
statements of the Company. The selected financial data presented below are
qualified in their entirety by, and should be read in conjunction with, the
financial statements and notes thereto and other financial and statistical
information included elsewhere in this Form 10-K, including the information
contained under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected financial data under the
caption "Operating Data" and "Selected Quarterly Financial Information" has not
been audited.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- -----------
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
<S> <C> <C> <C> <C> <C>
Equipment rentals................... $ 50,743 $ 45,870 $ 38,980 $ 36,162 $ 36,813
Sales of supplies and
equipment.......................... 5,555 6,585 7,826 9,543 11,291
Other............................... 642 581 483 450 410
---------- ---------- ---------- ---------- ----------
Total revenues..................... 56,940 53,036 47,289 46,155 48,514
Costs and expenses:
Cost of equipment rentals........... 13,332 11,841 10,018 9,052 8,064
Rental equipment
depreciation....................... 12,603 10,800 9,527 8,699 8,381
Cost of supplies and
equipment sales.................... 4,422 5,352 6,419 7,872 9,508
Disposal of DPAP
inventories........................ 2,213 --- --- --- ---
Selling, general and
administrative..................... 20,001 18,560 16,561 15,769 14,730
Interest............................ 2,518 1,784 1,268 1,071 2,147
---------- ---------- ---------- ---------- ----------
Total costs and expenses........... 55,089 48,337 43,793 42,463 42,830
---------- ---------- ---------- ---------- ----------
Income before income taxes and
extraordinary loss................ 1,851 4,699 3,496 3,692 5,684
Income taxes......................... 919 1,949 1,499 1,522 2,352
---------- ---------- ---------- ---------- ----------
Income before
extraordinary loss.................. 932 2,750 1,997 2,170 3,332
Extraordinary loss, net of
taxes (1)........................... --- --- --- --- 154
Net income........................... 932 2,750 1,997 2,170 3,178
Redeemable preferred stock
dividends........................... --- --- --- --- 101
Accretion of redemption premium on
redeemable preferred stock.......... --- --- --- --- 92
---------- ---------- ---------- ---------- ----------
Net income available to
common shareholders................. $ 932 $ 2,750 $ 1,997 $ 2,170 $ 2,985
========== ========== ========== ========== ==========
Earnings per common share
before extraordinary loss (2)....... $ .17 $ .50 $ .37 $ .40 $ .70
Extraordinary loss per
common share, net of taxes.......... (.03)
Earnings per common share (2)........ $ .17 $ .50 $ $.37 $ .40 $ .67
Weighted average common
shares outstanding.................. 5,495 5,502 5,449 5,393 4,481
(footnotes on following page)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(in thousands except operating data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital.................. $ 6,812 $ 2,258 $ 3,954 $ 4,493 $ 5,151
Total assets..................... 79,707 66,849 53,184 46,152 44,675
Total long-term debt (excluding
current maturities).......... 35,193 20,788 15,735 12,950 14,707
Common shareholders' equity (3).. $29,128 $28,712 $26,035 $23,883 $21,504
Operating Data: (Unaudited)
Offices (at end of period)....... 46 43 39 36 33
Customers (at end of period)..... 3,152 2,775 2,561 2,224 2,098
</TABLE>
(1) As a result of refinancing and early retirement of debt, the Company wrote
off $153,760 (net of tax benefit of $108,000) of debt placement costs
during 1992.
(2) Earnings per share of common stock is calculated by dividing net income,
less redeemable preferred stock dividends and the increase in the
redeemable preferred stock redemption premium, by the weighted average of
common and common equivalent shares outstanding during the year. Common
equivalent shares include the dilutive effect of stock options. The
increases in the redeemable preferred stock redemption premium and the
amount of redeemable preferred stock dividends were $193,094 for the year
ended December 31, 1992. The redeemable preferred stock was retired during
1992.
(3) No common stock cash dividends have been declared or paid by the Company.
15
<PAGE>
Selected Quarterly Financial Information
(dollars in thousands, except earnings per share)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Year Ended 1996
<S> <C> <C> <C> <C>
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Net revenues $14,392 $13,634 $13,749 $15,166
Gross profit (1) $ 7,020 $ 5,256 $ 6,340 $ 5,755
Gross margin (1) 48.78% 38.55% 46.11% 37.95%
Earnings loss per share (1) $ 0.17 $ (0.01) $ 0.10 $ (0.09)
Net income loss (1) $ 922 $ (38) $ 540 $ (492)
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended 1995
March 31 June 30 September 30 December 31
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues $13,166 $13,150 $13,130 $13,590
Gross profit $ 6,482 $ 6,228 $ 6,041 $ 6,292
Gross margin 49.23% 47.36% 46.01% 46.30%
Earnings per share $ 0.16 $ 0.11 $ 0.11 $ 0.12
Net income $ 859 $ 623 $ 594 $ 674
</TABLE>
(1) Includes expense related to the write-down of DPAP inventories of
$1,030,500 in the second quarter and a charge of $1,182,545 in the fourth
quarter to write-off the remaining carrying value of DPAP inventory and
associated supplies and demo units.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following should be read in conjunction with the accompanying financial
statements and notes.
Results of Operations
- ---------------------
The following table provides information on the percentages 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>
Percentage of Total Revenues Percentage Increase (Decrease)
------------------------------- --------------------------------
Years Ended December 31
------------------------------- Year 1996 Year 1995
1996 1995 1994 Over 1995 Over 1994
--------- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals 89.11% 86.49% 82.43% 10.62% 17.68%
Sales of supplies and equipment 9.76 12.42 16.55 (15.64) (15.86)
Other 1.13 1.09 1.02 10.68 20.29
------ ------ ------
Total revenues 100.00 100.00 100.00 7.36 12.15
Rental and sales costs:
Cost of equipment rentals 23.41 22.33 21.18 12.59 18.20
Rental equipment depreciation 22.13 20.36 20.15 16.70 13.36
Cost of supplies and equipment sales 7.77 10.09 13.58 (17.37) (16.62)
Disposal of DPAP inventories 3.89 N/A N/A
------ ------ ------
Gross margin 42.80 47.22 45.09 (2.68) 17.43
Selling, general and administrative 35.13 35.00 35.02 7.77 12.07
Interest 4.42 3.36 2.68 41.15 40.69
------ ------ ------
Income before taxes 3.25 8.86 7.39 (60.60) 34.41
------ ------ ------
Income taxes 1.61 3.67 3.17 (52.85) 30.02
------ ------ ------
Net income 1.64% 5.19% 4.22% (66.10)% 37.71%
====== ====== ======
</TABLE>
17
<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 December 31, 1996 and the results of operations and cash flows for
the years ended December 31, 1996, 1995 and 1994. This discussion should be read
in conjunction with the financial statements included elsewhere herein and the
Management's Discussion and Analysis and Financial sections of the Company's
previously filed Form 10-Q's.
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, increased utilization of the Bazooka bed, the impact of
competition and other risk factors described more fully below under the captions
"Industry Assessment" and "Rental Equipment Build Up" and the "Business" section
of this Form 10-K.
Revenues
Equipment rental revenues increased $6,890,000 or 17.7% from 1994 to 1995 and
$4,873,000 or 10.6% from 1995 to 1996. The acquisition of BERS, completed August
13, 1996, contributed $1,770,000 to the 1996 rental revenue increase. The
remaining $3,103,000 growth in rental revenues reflects an increase of 6.8%.
This rental revenue increase resulted from continued growth at acute care
hospitals and at established offices with substantially higher growth rates
associated with rental revenues from alternate care customers and at newer
offices. The Company expects rental revenue generated from alternate care to
continue to increase reflecting the continuing trend in health care toward
treating the patient in the most cost effective environment.
Effective February 1, 1997, the Company entered into a two year agreement with
Premier, Inc. (Premier), the nation's largest health care alliance enterprise,
for medical equipment rentals and services. This agreement is expected to
produce significant savings for Premier's 1,750 hospitals and health system
owners and affiliates, as it offers Premier's members special rates, discounts
and incentives on equipment rentals. The Premier agreement and some longer term
commitments the Company has entered into with some of its larger customers have
required some price concessions.
Sales of supplies and equipment, together with the related costs of these
items, 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. During the past 2 years, sales of supplies and
equipment have declined by $1,241,000 from 1994 to 1995 and by $1,030,000 from
1995 to 1996. These decreases primarily reflected a continuing trend by a major
vendor of disposables to market its products directly to some of the Company's
larger customers. Also, in 1996, sales of the DPAP device continued to decline
and, as a result, the Company made a decision to abandon the sleep apnea market.
Sales of DPAP devices were $750,000 in 1995 and $424,000 in 1996. (See "Disposal
of DPAP Inventories" below). The acquisition of BERS contributed $295,000 to
total sales revenue in 1996.
Other revenues, primarily representing net gains on sales of used rental
equipment, remain insignificant throughout the three year period. 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 increased from 25.7% in 1994 to 25.8% in 1995 and 26.3% in 1996.
Without BERS, the percentage for 1996 was 26.6%. Direct rental expenses
reflected planned expense increases, including expenses associated with several
new Asset Management Partnership Programs signed in 1994, 1995 and 1996 and with
the opening of nine new offices from 1994 through 1996 in addition to the
acquisition of BERS.
18
<PAGE>
Rental equipment depreciation as a percentage of rental revenues decreased
from 24.4% in 1994 to 23.5% in 1995. This decrease was the result of increased
rental revenues generated in 1995. Rental equipment depreciation as a percentage
of rental revenues increased to 24.8% in 1996, reflecting a full year's
depreciation on 1995 equipment acquisitions which was not matched by growth in
rental revenues and due to depreciation expense on surplus Bazooka beds (See
"Rental Equipment Build Up" below). Equipment purchases increased from $15.7
million in 1994 to $21.2 million in 1995 but decreased to $12.7 million
(excluding the $4.2 million of equipment acquired in the BERS transaction) in
1996. Rental equipment purchases primarily reflect customer driven demand for
new rental products.
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 increased from 49.9% in 1994 to 50.6% in 1995 and decreased to 48.9% in
1996. The increase from 1994 to 1995 was due to rental revenues increasing at a
faster rate than rental equipment depreciation. The decrease from 1995 to 1996
was the result of increases in the cost of equipment rentals and rental
equipment depreciation expenses discussed above.
Sales gross margin as a percentage of sales of supplies and equipment improved
from 18.0% in 1994 to 18.7% and 20.4% in 1995 and 1996, respectively. Without
BERS, the percentage for 1996 was 19.1%. This increased sales gross margin was
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, in
1995, due to the impact of higher margin DPAP sales. In addition, sales gross
margins were further decreased by the disposal of DPAP inventories. (See
"Disposal of DPAP Inventories" below.)
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1,999,000 from 1994 to
1995 and $1,442,000 from 1995 to 1996. The increase from 1994 to 1995 primarily
reflected performance based incentive and profit sharing accruals, planned
personnel related expenses to support the Company's continuing geographic
expansion, and expenses associated with planned growth in the alternate care
market, including a $175,000 increase in bad debt expense to reserve for the
risks associated with increased business with alternate care customers. The
lower increase between 1995 and 1996 reflects a decrease in performance based
incentive and profit sharing expenses. The 1996 increase includes approximately
$800,000 related to BERS selling, general and administrative expenses and BERS
related goodwill amortization and approximately $300,000 related to professional
fees and Directors' compensation incurred in connection with the Board of
Directors' review of strategic alternatives for enhancing shareholder value.
As a result of the slower than anticipated rental revenue growth and lower
margins discussed above, the Company instituted expense control initiatives
discussed 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 1996, 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 medical 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. No material costs
relating to these expense control initiatives were incurred in 1996, other than
approximately $100,000 in costs relating to a work force reduction and the
closing of one warehouse facility. However, there can be no assurance that these
programs will result in decreased total expenses or that their implementation
will materially improve margins.
19
<PAGE>
Disposal of DPAP Inventories
The Company experienced declining sales of DPAP devices during 1996. Because
market acceptance of the DPAP devices did not meet expectations, the Company's
ongoing quarterly assessment resulted in a write-down of $1,030,500 in the
second quarter and a charge of $1,182,545 in the fourth quarter of 1996 to
write-off the remaining carrying value of DPAP inventory and associated supplies
and demo units. The DPAP devices were disposed of in early 1997.
Interest Expense
Interest expense increased by $516,000 from 1994 to 1995 and by $734,000 from
1995 to 1996, primarily reflecting, in 1996, interest of approximately $410,000
on the BERS acquisition debt and incremental borrowings associated with capital
equipment additions. The 1995 increase resulted from incremental borrowings
associated with a higher level of customer driven capital spending for additions
to the Company's rental equipment pool and increased short term interest rates,
which affected the Company's revolving credit facility. Average borrowings,
which increased from $16.3 million in 1994 to $21.4 million in 1995 and $30.5
million in 1996, were also affected by the carrying cost of surplus Bazooka
inventories and the DPAP inventory.
Income Taxes
The Company's effective tax rate decreased from 42.9% in 1994 to 41.5% in 1995
and increased to 49.6% in 1996. The increase in the effective rate in 1996 was
primarily due to the effect of non-deductible expenses on the Company's lower
taxable income.
Net Income
Net income increased $753,000 from 1994 to 1995, primarily as a result of the
continued trend of quarterly increases in rental revenue, which began in mid
1994. Net income decreased $1,818,000 from 1995 to 1996, primarily as a result
of the disposals of DPAP inventories.
Quarterly Financial Information; Seasonality
Quarterly operating results are typically affected by seasonal factors.
Historically, the Company's first and fourth quarters are the most profitable,
reflecting increased hospital utilization during the fall and winter months.
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, including purchases with
respect to anticipated new district office openings, will approximate $19.0
million in 1997.
The Company has financed its equipment purchases primarily through internally
generated funds and unsecured borrowings. As of December 31, 1996, these
unsecured borrowings were comprised of term loans and a $20 million revolving
credit facility available through June 30, 1999. As of December 31, 1996,
approximately $8.7 million of the revolving credit facility was unused. Net cash
flows from operating activities were $14.7 million, $13.1 million and $11.5
million for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company believes that net cash flow from operating activities and use of
its existing 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%. Such ratio was 56.1% as of December 31, 1996.
20
<PAGE>
The Company does not maintain cash balances at its principal bank under a
Company policy whereby the net of collected balances and cleared checks is, at
the Company's option, applied to or drawn from the credit facility on a daily
basis. At December 31, 1996, BERS held $197,000 of cash in an account which will
be closed in 1997.
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 $10,700,000 to the shareholders of
BERS and repaid approximately $1,650,000 of outstanding indebtedness of BERS.
BERS results are included in the financial statements only from the date of
acquisition.
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.
Pending Sale of the Company
On February 10, 1997, the Company and MEDIQ Incorporated entered into a
definitive agreement for MEDIQ to acquire UHS for $17.50 per UHS share.
Including the assumption of the Company's debt, the total purchase price is
approximately $138,000,000. The transaction is structured as a cash merger that
is expected to close in late March or early April, 1997 and is subject to
approval by a majority of UHS's shareholders and Hart-Scott-Rodino clearance.
21
<PAGE>
Rental Equipment Build Up
The Company acquired its equipment pool 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 $2,816,000 of excess equipment at
December 31, 1996 versus approximately $2,471,000 at December 31, 1995). The
Company has performed an impairment analysis based upon projected income and
cash flows in accordance with current accounting literature and has determined
that these assets are currently fully recoverable. The Company believes this
supply/demand imbalance will be reduced. However, in the event that anticipated
growth in customer demand for this product does not occur, the Company's margin
on the products could be adversely affected.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
The report of Independent Accountants, Financial Statements and Schedules are
set forth on pages 44 to 63 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
22
<PAGE>
PART III.
---------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
Directors of the Registrant
Certain biographical information furnished by the Company's directors and
the directors' respective terms of office are presented below.
Michael W. Bohman (age 47) has been a director of the Company since 1987.
He joined the Company in 1972 and has held various positions with the Company,
including Product Coordinator and District and Divisional Manager. Since 1987,
Mr. Bohman has been the Company's Vice President of Customer Service and Sales.
Mr. Bohman's term as a director expires in 1997.
Terrance D. McGrath (age 71) has been a director of the Company since 1987.
Mr. McGrath retired as co-president of UHS in 1985. Mr. McGrath's term as a
director expires in 1997.
Thomas A. Minner (age 57) has been a director of the Company since 1987. He
joined the Company in 1969 as Director of Finance and has been President since
1985 and Chief Executive Officer and Chairman of the Board of Directors since
1987. Mr. Minner's term as a director expires in 1998.
Paul W. Larsen (age 46) has been a director of the Company since 1987. He
joined the Company in 1975 as a Biomedical Engineer and has held various
positions with the Company, including Administrative Services Manager and
Corporate Planning Director. Since 1987, Mr. Larsen has been the Vice President
of Administrative Services, Secretary and Treasurer of the Company. Mr. Larsen's
term as a director expires in 1998.
Karen M. Bohn (age 43) has been a director of the Company since December
1994. Since June 1995 and from January 1988 to May 1994, Ms. Bohn has served as
the Chief Administrative Officer of Piper Jaffray Companies Inc. ("PJCI"). From
May 1994 to June 1995, Ms. Bohn served as the interim President and Chief
Executive Officer of Piper Trust Company ("Piper Trust"), a full service trust
company. PJCI, through its subsidiaries (including Piper Trust and Piper
Jaffray, Inc.), engages in various aspects of the financial services industry.
Ms. Bohn's term as a director expires in 1999.
Samuel B. Humphries (age 54) has been a director of the Company since 1991.
Since 1991, Mr. Humphries has been President, Chief Executive Officer and a
director of Optical Sensors, Inc., a startup company developing non-invasive
blood gas sensors. Prior to 1991, Mr. Humphries was President and Chief
Executive Officer of American Medical Systems, a division of Pfizer Inc. that
produces medical implants. Mr. Humphries' term as a director expires in 1999.
23
<PAGE>
Executive Officers of the Registrant
Certain biographical information furnished by the Company's executive
officers is present below.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Thomas A. Minner 57 President, Chief Executive Officer and Chairman of the Board
Michael W. Bohman 47 Vice President of Customer Service and Sales
Paul W. Larsen 46 Vice President of Administrative Services, Secretary and Treasurer
David E. Dovenberg 52 Vice President of Finance and Chief Financial Officer
Duane R. Wenell 49 Vice President of Marketing
</TABLE>
Information concerning the background of Messrs. Minner, Bohman and Larsen
is contained herein under the caption "Directors of the Registrant."
Mr. Dovenberg joined the Company in 1988 as Vice President of Finance and
Chief Financial Officer. Prior to joining the Company, Mr. Dovenberg had been
with The Prudential Insurance Company of America since 1969. From 1979 to 1988,
Mr. Dovenberg was a Regional Vice President in the area of corporate investments
in private placements for Prudential Capital Corporation. Mr. Dovenberg has been
a member of the Board of Directors of Lund International Holdings, Inc. since
June 1994.
Mr. Wenell joined the Company in 1972 and has held various positions with
the Company, including Biomedical Instrumentation Representative and Marketing
Manager. Since 1987, Mr. Wenell has been Vice President of Marketing and Special
Services.
The Company's executive officers are appointed by the Board of Directors
and serve until their successors are elected or appointed.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater-than ten percent shareholders are
also required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1996 all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten-percent beneficial owners were satisfied.
24
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------
Report of Compensation Committee on Executive Compensation
Under rules established by the Securities and Exchange Commission, the
Company is required to provide certain data and information in regard to the
compensation and benefits provided to the Company's Chief Executive Officer and
its other executive officers. The disclosure requirements for these individuals
(the "executive officers") include the use of tables and a report explaining the
rationale and considerations that led to fundamental executive compensation
decisions affecting those individuals. In fulfillment of the report requirement,
the Compensation Committee of the Board of Directors (the "Committee"), at the
direction of the Board of Directors, has prepared the following report for
inclusion in this Form 10-K.
Overview
The Committee is responsible for establishing and making certain
recommendations to the Board of Directors concerning executive compensation,
including annual base salaries, bonuses, stock options, long-term incentives and
other benefits. The Committee is composed entirely of independent outside
directors of the Company. The Committee annually reviews and evaluates the
Company's corporate performance, compensation levels and equity ownership of its
executive officers.
The Company's executive compensation policies and programs have been
developed and refined over the past several years. In late 1993, the Committee
and the full Board extensively reviewed the Company's existing executive
compensation and approved additional compensation programs and plans for the
Company's executive officers commencing January 1994. The Committee, with the
aid of an independent consulting firm, sought to bring the Company's executive
compensation in line with comparable companies and to have an appropriate
portion of executive compensation tied to the long-term performance of the
Company. Overall, the outcome of the Committee's review was to establish new
performance-based incentive compensation and to tie a greater proportion of
total compensation to Company performance.
The executive compensation philosophy of the Company is intended to (1)
compensate executive officers in a manner that reinforces the executive
officer's commitment to long-term service with the Company and provides
compensation comparable to other similarly situated companies, thus allowing the
Company to retain talented executives who are critical to the Company's long-
term success; and (2) support a pay for performance policy that motivates
executive officers to achieve overall corporate goals and awards individual
executive officers with compensation based on short- and long-term individual
and corporate performance. In particular, the Company's executive compensation
program provides for a portion of executive compensation to be fixed, maintains
relative equity among executives, offers modest annual cash incentives based on
Company performance and certain subjective factors and offers significant cash
and equity incentives tied to the Company's long-term performance.
Executive Compensation Program
The components of the Company's executive compensation program which are
subject to the discretion of the Committee on an individual basis include cash-
and equity-based compensation. Specifically, these components consist of (1)
base salaries, (2) annual performance-based cash incentives (bonuses), (3) stock
options and (4) long-term performance-based cash incentives. The ultimate
composition of executive compensation reflects the Company's goals of attracting
and retaining highly qualified personnel and supporting a performance-oriented
environment that rewards both corporate and personal performance over the long
term. Most of the executive officers have been with the Company in excess of ten
years, and, together, the executive officers hold a significant portion of the
Common Stock. These factors have caused the Committee to focus more on the need
to retain its current executive officers, rather than attracting new executives,
and to foster continuing loyalty to the Company within the executive officer
group.
25
<PAGE>
Base Salary. Annual base salaries are established as a result of the
Committee's analysis of each executive officer's individual performance during
the prior year, the overall performance of the Company during the prior year and
historical compensation levels within the executive officer group. Generally,
the Committee seeks to set base salaries at a level which is above the average
for companies of comparable revenues and growth history. At the beginning of
1996, base salaries for the year were set to reflect modest merit increases
(4.3%) from the prior year. Subsequently, the executive officers voluntarily
agreed to a salary reduction effective August 1, 1996. Mr. Minner, as President,
agreed to a 15% reduction in salary and the Vice Presidents agreed to a 10%
reduction in salary.
Bonuses. Beginning in fiscal 1994, the Company's executive officers were
eligible for annual cash bonuses under the Company's Annual Incentive Plan (the
"AIP"). The AIP provides the opportunity for executives to earn annual cash
bonuses based on the achievement of predetermined financial objectives. Targeted
bonus amounts are 30% of annual base salary for the Chief Executive Officer and
20% of annual base salary for all other executive officers. All, none or a
portion of these targeted bonus amounts may be paid, based upon the achievement
of three equally-weighted performance goals and application of a formula which
adjusts the targeted bonus amount relative to such achievement. Two of these
performance goals are financial goals approved annually by the Committee and the
Board of Directors and include a pre-tax income objective and a rental revenue
objective. The third performance goal is subjective, permitting the Committee to
acknowledge achievement of individual and Company goals that are nonfinancial in
nature. If certain threshold levels of the specified financial objectives are
not met, none of the applicable portion of the targeted bonus will be paid. In
the event the Company fails to have positive net income for any year, no bonuses
will be paid under the AIP for that year. In addition, to the extent performance
goals are exceeded, targeted bonus amounts may be increased by up to 50%. Thus,
under the AIP, the maximum annual bonus opportunity is 45% of annual base salary
for the Chief Executive Officer and 30% of annual base salary for all other
executive officers.
In 1996, threshold levels of the specified financial objectives were not
achieved, and accordingly no bonuses were awarded based on these two performance
goals. Bonuses to the named executive officers under the AIP for 1996, as set
forth in the "Summary Compensation Table" below, reflect the Committee's belief
that the Company had achieved significant nonfinancial objectives, and such
bonuses were equal to one-half of the targeted nonfinancial bonus amount.
Stock Options. The Company's 1992 Long-Term Incentive and Stock Option Plan
(the "Stock Option Plan") is designed to align a portion of executive and other
senior employee compensation with the long-term interests of shareholders. The
Stock Option Plan permits the granting of several different types of stock-based
awards to a broad range of employees. To date, only stock options have been
awarded. Generally, the Committee will not grant options to purchase more than
100,000 shares of Common Stock in the aggregate in any one year. The stock
options give the holder the right to purchase shares of UHS Common Stock over a
ten-year period at the fair market value per share as of the date the option is
granted.
Long-Term Cash Incentives. Beginning in fiscal 1994, each of the Company's
executive officers received awards under the Company's Long-Term Incentive Plan
(the "LTIP"). Under the LTIP, awards are made to the Company's executive
officers on an annual basis. Each award represents a targeted cash amount that
may be earned by the executive at the end of a three-year period in the event
that specified, cumulative pre-tax income and rental revenue objectives approved
by the Board of Directors and the Committee are achieved during such period. The
pre-tax income objective and the rental revenue objective are weighted equally
in determining whether all, none or a portion of the award will be paid, such
that, if the targeted rental revenue objective is achieved over the three year
period, but the targeted pre-tax income objective is not, the executive is
entitled to be paid one-half of the applicable award amount. Payouts under the
LTIP are targeted at 60% of annual base salary for the Chief Executive Officer
and 30% of annual base salary for all other executive officers. LTIP award
recipients may receive a portion of the targeted payout amount if certain
threshold levels of each of the specified objectives are met. If these
thresholds are not met, none of the applicable portion of the targeted payout
will be made. In addition, to the extent performance goals are exceeded,
targeted bonus amounts may be increased. In addition to annual grants in each of
1994, 1995 and 1996, executive officers received a one-time award upon adoption
of the LTIP.
26
<PAGE>
Compensation of Chief Executive Officer
The Company's Chief Executive Officer is compensated generally in
accordance with the criteria discussed above relating to the executive
compensation program. Compensation for the Chief Executive Officer consists of
the following components: (1) base salary, (2) an annual performance-based cash
bonus, (3) stock options and (4) long-term performance-based cash incentives.
Mr. Minner's base salary is established as a result of the Committee's analysis
of the Chief Executive Officer's individual performance during the prior year,
the overall performance of the Company during the prior year and historical
compensation levels at the chief executive officer level.
At the beginning of 1996, Mr. Minner's base salary for 1996 reflected a
4.3% merit increase over his 1995 base salary. Subsequently, Mr. Minner agreed
to a 15% reduction in salary, effective August 1, 1996. Mr. Minner's 1996 bonus
was determined in accordance with the AIP described above. Although the
Committee considered many factors, the following indicia of personal performance
were particularly important to the Company in determining the amount of Mr.
Minner's salary and the discretionary portion of his bonus: (1) the continuing
growth of the Company despite increased uncertainty in the health care industry,
and (2) the ability of the Company to exceed or meet the level of performance of
its competitors.
Mr. Minner's long-term incentive compensation (stock option grants and LTIP
awards) was consistent with the prior year and was intended to provide a
significant and appropriate tie between overall compensation and the performance
of the Company over the long term. Based on information gathered for the
Committee by the independent consulting firm in late 1993, the Committee
believes that such long-term incentives are comparable to those provided to
chief executives by companies of similar revenue size and growth history.
Section 162(m)
The Company, with the approval of shareholders at the 1994 annual meeting,
amended the Stock Option Plan in order to comply with the proposed guidelines
under Section 162(m) of the Internal Revenue Code of 1986, as amended, relating
to the deductibility of compensation paid to executive officers named in the
"Summary Compensation Table." As a result of this amendment, the Committee
believes that option grants will be considered "qualified performance-based
compensation" not subject to the limitation imposed by such Section. The
Committee does not believe that annual compensation to any of the named
executive officers for purposes of Section 162(m) will exceed $1 million in
fiscal 1997 or for the foreseeable future. The Committee will continue to
monitor this matter and may propose additional changes to the executive
compensation program if warranted.
KAREN M. BOHN and
SAMUEL B. HUMPHRIES,
The Members of the Compensation Committee
27
<PAGE>
Director Compensation
Members of the Board of Directors who are not employees of the Company
receive payments of $14,400 per year and $1,000 per meeting attended for their
services, and all directors are reimbursed for expenses actually incurred in
attending meetings of the Board of Directors and its committees. In connection
with their services on a Special Committee, established by the Board of
Directors to carry out the process of exploring alternatives to enhance
shareholder value ("Special Committee"), Mr. Humphries, Mr. McGrath and Ms.
Bohn, the non-employee directors, received in 1996 through February 1997,
$25,000, $15,000 and $15,000, respectively, plus $1000 for each of the nine
Special Committee meetings attended. Directors employed by the Company receive
no directors' fees.
In addition, non-employee directors are eligible to participate in the
Company's 1992 Directors' Stock Option Plan, as amended (the "Directors' Plan").
Eligible directors are automatically granted an option to purchase 4,000 shares
of Common Stock (an "Initial Grant") on the date they first became a director,
and such options are exercisable six months following the date of grant. On the
date of each annual meeting of shareholders, each eligible director receives an
additional option grant of 2,500 shares of Common Stock which first becomes
exercisable six months after the date of grant. The exercise price of an option
granted under the Directors' Plan is the fair market value (based on the Nasdaq
Stock Market closing price) of the Common Stock on the date the option is
granted. Options to purchase an aggregate of 37,000 shares have been
automatically granted to Mr. Humphries, Mr. McGrath and Ms. Bohn.
Compensation Committee Interlocks and Insider Participation; Certain
Relationships
Ms. Bohn, a director of UHS and member of the Compensation Committee in
1996, is a Managing Director of Piper Jaffray, Inc. ("Piper Jaffray"), and Chief
Administrative Officer of Piper Jaffray Companies, Inc., the parent of Piper
Jaffray. Piper Jaffray has provided from time to time financial advisory
services for the Company. In November 1996, the Company engaged Piper Jaffray to
assist in analyzing its strategic alternatives to enhance shareholder value. In
February 1997, Piper Jaffray, pursuant to an engagement letter dated January 3,
1997, provided the Company with a financial opinion as to the fairness, from a
financial point of view, to the shareholders of a proposed merger with and into
MEDIQ Incorporated, a Delaware corporation. Ms. Bohn has not been and is not
expected to be directly involved in the provision of any such services.
28
<PAGE>
Summary Compensation Table
The following table sets forth the cash and noncash compensation for each
of the last three fiscal years awarded to or earned by the Chief Executive
Officer and the four highest paid executive officers of the Company whose salary
and bonus earned in 1996 exceeded $100,000.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Awards
Stock Payouts All Other
Name and Options LTIP Compen-
Principal Position Year Salary Bonus(1) (Shares)(2) Payouts sation(3)
- --------------------------- ---- -------- ---------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas A. Minner 1996 $268,248 $14,177 21,480 $72,548 $4,500
Chairman, Chief 1995 271,476 69,353 22,400 -- 4,500
Executive Officer 1994 260,913 19,759 25,000 -- 4,500
and President
Michael W. Bohman 1996 186,712 6,462 10,740 25,512 4,500
Vice President of 1995 185,621 31,614 11,200 -- 4,500
Customer Service 1994 178,403 14,953 12,500 -- 4,500
and Sales
Paul W. Larsen 1996 177,499 6,143 10,740 24,250 4,500
Vice President of 1995 176,445 30,051 11,200 -- 4,500
Administrative Services, 1994 169,583 14,214 12,500 -- 4,500
Secretary and Treasurer
David E. Dovenberg 1996 170,279 5,904 10,740 23,306 4,500
Vice President of 1995 169,574 28,881 11,200 -- 4,500
Finance and Chief 1994 162,979 13,660 12,500 -- 4,500
Financial Officer
Duane R. Wenell 1996 162,551 5,624 10,740 22,204 4,500
Vice President of 1995 161,556 27,515 11,200 -- 4,500
Marketing 1994 155,272 13,014 12,500 -- 4,411
</TABLE>
(1) The amounts shown in this column represent bonuses earned for the fiscal
year indicated. Such bonuses are paid shortly after the end of such fiscal
year.
(2) The stock options shown in this column were all granted pursuant to the
Stock Option Plan. For a discussion of the material terms of option grants
under the Stock Option Plan see footnote 1 to the table below entitled
"Option Grants During the Year Ended December 31, 1996." Although the Stock
Option Plan permits grants of certain performance awards, including
restricted stock and freestanding stock appreciation rights, no grants of
those incentives have been made.
(3) The amounts shown in this column represent contributions by the Company for
the named executive officers to the UHS Employees' Thrift and Savings Plan
for the fiscal year indicated.
29
<PAGE>
Employment Contracts and Change in Control Arrangements
None of the Company's executive officers currently has a written employment
agreement.
Effective January 1994, the Company adopted the Top Management Change-in-
Control Severance Plan (the "Severance Plan"). The Severance Plan is designed to
encourage continuity of management in the event of a change of control of the
Company. Under the Severance Plan, each of the Company's executive officers is
eligible to receive a severance payment up to three times his base salary in the
event of a change of control of the Company and termination of such officer
within three years of such change in control for reasons other than death, total
disability or "just cause" and voluntary termination without "good reason" (all
as defined in the Severance Plan). The Severance Plan defines a "change of
control" to occur upon (1) an acquisition by any person of 20% or more of the
Company's combined voting power, if the Board of Directors declares such
acquisition to be a "change in control", (2) an acquisition by any person of 40%
or more of the Company's combined voting power, (3) a majority of directors are
persons other than persons nominated or appointed by the Board of Directors, (4)
a sale of more than 50% of the assets of the Company or the Merger of the
Company into another company or (5) a vote of a majority of the directors that a
change of control will occur and such a change in control does occur within six
months thereafter.
The Company has certain other compensatory arrangements with its executive
officers which will result from a change in control of the Company. To the
extent not already exercisable, options granted to the named executive officers
under the Stock Option Plan generally become exercisable in the event of a
merger in which the Company is not the surviving corporation, a transfer of all
of the Company's stock, a sale of substantially all of the Company's assets or a
dissolution or liquidation of the Company, unless the successor corporation
assumes the outstanding options or substitutes substantially equivalent options.
In addition, under the supplemental pension plan discussed below, the named
executive officers are entitled to receive a lump sum payment equal to the
present value of all benefits accrued under such plan upon any qualifying
termination of such executive officer's employment (as defined under the
Severance Plan) within thirty-six months of a change of control (as defined
under the Severance Plan). In the event of such a change in control, named
executive officers are also entitled to payment of a pro rata portion of all
awards granted under the LTIP based on achievement of performance objectives
during that portion of the performance period elapsed prior to the change in
control.
Stock Options
The following tables summarize option grants during the year ended December
31, 1996 to the Chief Executive Officer and the executive officers named in the
"Summary Compensation Table" above, and the values of the options held by such
persons at December 31, 1996. No options held by named executive officers were
exercised during 1996.
<TABLE>
<CAPTION>
Option Grants During Year Ended December 31, 1996
----------------------------------------------------------------------
Potential
% of Realizable Value
Total at Annual Rates
Options of Stock Price
Granted to Exercise Appreciation for
Employees or Base Option Term (3)
Options in Fiscal Price Expiration -------------------
Name Granted(1) Year 1996 ($/Sh)(2) Date 5% 10%
- -------------------- ---------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Thomas A. Minner 21,480 20.72% $9.37 01/19/06 $126,516 $320,697
Michael W. Bohman 10,740 10.36 9.37 01/19/06 63,258 160,348
Paul W. Larsen 10,740 10.36 9.37 01/19/06 63,258 160,348
David E. Dovenberg 10,740 10.36 9.37 01/19/06 63,258 160,348
Duane R. Wenell 10,740 10.36 9.37 01/19/06 63,258 160,348
</TABLE>
(footnotes continued on following page)
30
<PAGE>
(1) Each option represents the right to purchase one share of Common Stock. The
stock option grants shown in this column were all made on January 19, 1996
pursuant to the Stock Option Plan, and will become exercisable with respect
to one-third of the shares subject to the option on July 19, 1997, 1998 and
1999.
(2) The exercise price is equal to the market price on the date of grant with
respect to each option. The exercise price may be paid in cash, in shares
of Common Stock with a market value as of the date of exercise equal to the
option price or a combination of cash and shares of Common Stock.
(3) The compounding assumes a ten-year exercise period for all option grants.
These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, or stock option exercises are dependent on the future
performance of the underlying Common Stock, and overall stock market
conditions. The amounts reflected in this table may not necessarily be
achieved. If the price of the Common Stock at the date of grant ($9.37)
were to appreciate at 5% and 10%, respectively, compounded annually for ten
years (the term of the option), then the Common Stock would have a closing
price on January 19, 2006 of approximately $15.26 and $24.30 per share,
respectively (assuming no change in the number of outstanding shares of UHS
Common Stock).
<TABLE>
<CAPTION>
Aggregated Option Exercises During Year Ended December 31, 1996
and Value of Options at December 31, 1996
---------------------------------------------------------------
Number of Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired December 31, 1996 December 31, 1996(1)
on Value -------------------------- --------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------ -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas A. Minner 0 -- 43,632 44,748 $160,053 $132,157
Michael W. Bohman 0 -- 27,066 22,374 90,464 66,079
Paul W. Larsen 0 -- 27,066 22,374 90,464 66,079
David E. Dovenberg 0 -- 27,066 22,374 90,464 66,079
Duane R. Wenell 0 -- 27,066 22,374 90,464 66,079
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the closing price of the Company's Common Stock on December 31,
1996 ($10.75).
31
<PAGE>
Long Term Incentive Plan
The following table reflects awards made under the Company's Long-Term
Incentive Plan (the "LTIP") described above during the fiscal year ended
December 31, 1996 to the Chief Executive Officer and the executive officers
named in the Summary Compensation Table above. Any payments earned and made
under the LTIP will be reported in the Summary Compensation Table in the year
paid. The amounts shown in the table are for illustration purposes only and
should not be construed as payouts for the executives listed. Performance
thresholds must be achieved before any payments are made under the LTIP.
<TABLE>
<CAPTION>
Long-Term Incentive Plans--Awards During Year Ended December 31, 1996
---------------------------------------------------------------------
Estimated Future Payouts Under
Performance or Non-Stock Price-Based Plans(3)
Number of Other Period Until ----------------------------------------
Name Units(1) Maturation or Payout (2) Threshold Target Maximum
- ------------------ ------------ ------------------------ --------------- ------------- --------
<S> <C> <C> <C> <C> <C>
Thomas A. Minner 170,137 December 31, 1998 $59,548 $170,137 $280,726
Michael W. Bohman 58,166 December 31, 1998 20,358 58,166 95,974
Paul W. Larsen 55,291 December 31, 1998 19,352 55,291 91,230
David E. Dovenberg 53,138 December 31, 1998 18,598 53,138 87,678
Duane R. Wenell 50,625 December 31, 1998 17,719 50,625 83,531
</TABLE>
(1) Each unit represents one dollar of a targeted cash payment to be made upon
achievement of certain cumulative performance goals over a three-year
period. Performance goals are based on target levels of pre-tax income and
rental revenues, and the payouts are adjusted pursuant to a formula which
adjusts for performance against the target goals.
(2) Each performance period is a three-year period ending on the date
indicated. Payouts, if any, will be made shortly after receipt of audited
financial statements for the applicable period, provided that a pro rata
portion of such payouts may be made earlier upon a "change in control" as
described above under "Employment Contracts and Change in Control
Arrangements."
(3) Unless a threshold level of either or both of the cumulative performance
goals are achieved, there will be no payouts at the end of the performance
period.
32
<PAGE>
Retirement Plan
The following table sets forth various estimated maximum annual pension
benefits under a combination of the Company's qualified non-contributory defined
benefit pension plan and non-qualified supplemental pension plan, maintained for
certain highly compensated employees (together the "Pension Plans"), on a
straight life annuity basis, based upon Social Security benefits now available,
assuming retirement at age 65 at various levels of compensation and specified
remuneration and years of credited service. Amounts shown are subject to Social
Security offset.
<TABLE>
<CAPTION>
Compensation Years of Credited Service
------------ -------------------------
5 10 20 30
------- ------- ------- --------
<S> <C> <C> <C> <C>
$100,000............. $ 6,500 $13,000 $26,000 $ 32,500
125,000............. 8,500 17,000 34,000 42,500
150,000............. 10,500 21,000 42,000 52,500
200,000............. 14,500 29,000 58,000 72,500
300,000............. 22,500 45,000 90,000 112,500
</TABLE>
A participant's remuneration covered by the Pension Plans is his or her
average salary (as reported in the Summary Compensation Table) for the five
consecutive plan years in which the employee received his or her highest average
compensation. The table does not reflect certain limitations on annual benefits
payable imposed by the Internal Revenue Code, because the Company's non-
qualified supplemental pension plan provides for the payment of additional
benefits so that retiring employees may receive, in the aggregate, the benefits
they would have been entitled to receive had such limitations not been imposed.
As of December 31, 1996, Messrs. Minner, Bohman, Larsen, Dovenberg and Wenell
had 27.0, 23.5, 21.3, 8.7 and 25.0 years of credited service, respectively,
under the Pension Plans.
33
<PAGE>
Comparative Stock Performance
The graph below compares the cumulative total shareholder return on UHS
Common Stock with the cumulative total return of the Nasdaq Stock Market Index
(U.S. companies only) and the Nasdaq Health Services Stocks Index over the same
period for the period from June 9, 1992 (the date of the initial public offering
of UHS Common Stock) to December 31, 1996 (assuming the investment in UHS Common
Stock and each index was $100 on June 9, 1992, and that dividends, if any, were
reinvested).
Comparison of Cumulative Total Return Since June 9, 1992 among
Universal Hospital Services, Inc., Nasdaq Market Index (US) and Peer Group Index
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNIVERSAL
Measurement Period HOSPITAL NASDAQ
(Fiscal Year Covered) SERVICES, INC. MARKET INDEX PEER GROUP
- -------------------- -------------- ------------ ----------
<S> <C> <C> <C>
Measurement Pt-
6/9/92 $100.00 $100.00 $100.00
FYE 12/31/92 $109.375 $118.814 $117.897
FYE 12/31/93 $ 71.875 $138.390 $136.025
FYE 12/31/94 $ 78.125 $133.319 $145.944
FYE 12/31/95 $121.875 $188.538 $185.380
FYE 12/31/96 $134.375 $231.918 $185.830
</TABLE>
34
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
--------------------------------------------------
OWNERS AND MANAGEMENT
---------------------
The following table sets forth as of February 15, 1997, information about
the ownership of Common Stock of the Company by each shareholder who is known by
the Company to own beneficially more than 5% of the Common Stock of the Company,
by each director, nominee for election as director and each executive officer,
and by all executive officers and directors as a group. Except as otherwise
indicated, the shareholders listed in the table have sole voting and investment
powers with respect to the shares indicated.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial
Name and Address of Beneficial Owner Ownership(1)(2) Percent
- ------------------------------------ --------------- -------
<S> <C> <C>
Thomas A. Minner(3) 339,183 (4) 6.3%
Michael W. Bohman(3) 253,901 4.7
Paul W. Larsen(3) 198,289 3.7
David E. Dovenberg(3) 198,792 (5) 3.7
Duane R. Wenell(3) 192,364 (6) 3.6
Karen M. Bohn(3) 9,300 *
Samuel B. Humphries(3) 14,000 *
Terrance D. McGrath(3) 89,268 1.7
Peter H. Kamin 425,600 (7) 7.9
Peak Investment Limited Partnership
One Financial Center
Suite 1600
Boston, Massachusetts 02111
Private Capital Management, Inc. 410,800 (8) 7.6
3003 Tamiami Trail North
Naples, Florida 33940
Dimensional Fund Advisors 327,300 (9) 6.1
1299 Ocean Avenue
11th Floor
Santa Monica, California 90401
Wynnefield Partner Small Cap 268,700 (10) 5.0
Value, L.P.
Channel Partnership II
One Penn Plaza, Suite 4720
New York, New York 10119
All directors and executive 1,216,894 21.9
officers as a group (8 persons)
</TABLE>
- ------------------------
* Less than 1%
(footnotes continued on following page)
35
<PAGE>
(1) Beneficial ownership is determined in accordance with rules of the SEC and
includes generally voting power and/or investment power with respect to
securities. Shares of UHS Common Stock subject to options currently
exercisable or exercisable within 60 days of February 15, 1997 are deemed
outstanding for computing the percentage of the person holding such options
but are not deemed outstanding for computing the percentage of any other
person. Except as indicated by footnote, the persons named in the table
above have sole voting and investment power with respect to all shares of
UHS Common Stock shown as beneficially owned by them.
(2) Includes the following number of shares which could be acquired within 60
days of February 15, 1997 through exercise of stock options: Mr. Minner,
43,632 shares; Mr. Bohman, 27,066 shares; Mr. Larsen, 27,066 shares; Mr.
Dovenberg, 27,066 shares; Mr. Wenell, 27,066 shares; Ms. Bohn, 9,000
shares; Mr. Humphries, 14,000 shares; Mr. McGrath, 14,000 shares; and all
executive officers and directors as a group, 188,896 shares.
(3) The address for these individuals is 1250 Northland Plaza, 3800 West 80th
Street, Bloomington, Minnesota 55431-4442.
(4) Includes 100,000 shares held by Mr. Minner's wife.
(5) Includes 63,432 shares held by Mr. Dovenberg's wife.
(6) Includes 85,298 shares held in trust as to which Mr. Wenell has sole voting
and investment power and 80,000 shares held in trust as to which Mr.
Wenell's spouse has sole voting and investment power.
(7) Based on a Schedule 13D Report dated as of November 22, 1996 filed jointly
by Peter H. Kamin and Peak Investment Limited Partnership ("Peak"). Mr.
Kamin has sole voting power over 43,500 shares and share voting power over
382,100 shares, 256,600 over which he shares voting power with Peak. Mr.
Kamin is a director, officer and shareholder and the controlling person of
Peak Management, Inc., the sole general partner of Peak.
(8) In its Schedule 13D Report dated as of October 30, 1996, Private Capital
Management, Inc. ("PCM") has indicated that (a) PCM is an investment
adviser registered under Section 203 of the Investment Advisers Act of
1940; (b) PCM shares dispositive power as to 410,800 of the shares listed
above with Bruce S. Sherman, also an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940; (c) PCM has voting
power with respect to none of the shares listed above; (d) the shares
listed above include 22,000 shares held by Michael J. Seaman; and (e) Mr.
Seaman is an employee of PCM and affiliates thereof and (i) does not
exercise sole or shared dispositive or voting powers with respect to the
shares held by PCM and (ii) disclaims beneficial ownership of shares held
by each other, Mr. Sherman or PCM.
(9) In its Schedule 13G Report dated as of February 5, 1997, Dimensional Fund
Advisors ("DFA") has indicated that (a) DFA is an investment adviser
registered under Section 203 of the Investment Advisers Act of 1940; (b)
DFA has sole voting power with respect to 219,700 of the shares; and (c)
DFA has sole dispositive power as to all of the shares.
(10) Based on a Schedule 13D Report dated as of December 16, 1996 filed jointly
by Wynnefield Partners Small Cap Value, L.P. ("Wynnefield") and Channel
Partnership II ("Channel"). Includes 263,000 shares owned by Wynnefield
and 5,700 shares owed by Channel.
Change in Control
On February 10, 1997, the Company and MEDIQ Incorporated entered into a
definitive agreement for MEDIQ to acquire the Company for $17.50 per UHS share
("MEDIQ Merger"). The transaction is structured as a cash merger that is
expected to close in late March or early April, and is subject to approval by a
majority of the Company's shareholders and Hart-Scott-Rodino clearance.
36
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
Certain Relationships and Related Transactions
Ms. Bohn, a director of UHS and member of the Compensation Committee in
1996, is a Managing Director of Piper Jaffray, Inc. ("Piper Jaffray"), and Chief
Administrative Officer of Piper Jaffray Companies, Inc., the parent of Piper
Jaffray. Piper Jaffray has provided from time to time financial advisory
services for the Company. In November 1996, the Company engaged Piper Jaffray
to assist in analyzing its strategic alternatives to enhance shareholder value.
In February 1997, Piper Jaffray, pursuant to an engagement letter dated January
3, 1997, provided the Company with a financial opinion as to the fairness, from
a financial point of view, to the shareholders of the proposed MEDIQ merger (the
"Piper Jaffray Opinion"). Ms. Bohn has not been and is not expected to be
directly involved in the provision of any such services.
For acting as financial advisor, UHS has agreed to pay Piper Jaffray (i) a
fee of $125,000 due under the initial engagement letter dated November 7, 1996;
(ii) $275,000 in cash upon Piper Jaffray rendering the Piper Jaffray Opinion;
(iii) $25,000 in cash upon Piper Jaffray rendering an update to the Piper
Jaffray Opinion at the time of mailing of a proxy statement relating to the
merger to the UHS shareholders; and (iv) in the event a sale or merger of UHS,
including the proposed merger with MEDIQ, is consummated pursuant to an
agreement or commitment which is entered into before January 3, 2000, a success
fee payable in cash equal to 1.8% of the consideration paid in such transaction
for the equity of UHS, including options, less the fees paid under (i), (ii) and
(iii) above. To date, Piper Jaffray has been paid an aggregate of $400,000 of
fees pursuant to the engagement letter. Whether or not the proposed merger with
MEDIQ is consummated, UHS has also agreed to reimburse Piper Jaffray for its
reasonable out-of-pocket expenses and to indemnify it against certain
liabilities relating to or arising out of services performed by Piper Jaffray as
financial advisor to UHS.
37
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
---------------------------------
Report of Independent Accountants
Balance Sheets as of December 31, 1996 and 1995
Statements of Income for the years ended December 31, 1996, 1995, and
1994
Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995, and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995,
and 1994
Notes to Financial Statements
2. Consolidated Financial Statement Schedule required to be filed by Item 8
------------------------------------------------------------------------
and Paragraph (d) of this Item 14.
----------------------------------
Schedule II - Valuation and Qualifying Accounts and Reserves
All other supplemental financial schedules are omitted as not applicable
or not required under the rules of Regulation S-X or the information is
presented in the financial statements or notes thereto.
3. Exhibits
--------
<TABLE>
<CAPTION>
Exhibit
-------
No. Description Method of Filing
--- ----------- ----------------
<S> <C> <C>
3.1 Restated Articles of Incorporation (1)
of the Company
3.2 Bylaws of the Company (1)
4.1 Form of Certificate for Common Stock (1)
4.3 Note Purchase Agreement dated as of
November 24, 1992 between the Company and
Northwestern National Life Insurance Company,
Northern Life Insurance Company and The North
Atlantic Life Insurance Company of America
(including form of the Company's 7.47% Senior
Note Due 2002) (2)
</TABLE>
38
<PAGE>
4.3(a) Amendment dated December 15, 1993 to Note
Purchase Agreement dated as of
November 24, 1992 between the Company and
Northwestern National Life Insurance Company,
Northern Life Insurance Company and The
North Atlantic Life Insurance Company of
America (including form of the Company's
7.47% Senior Note Due 2002) (4)
4.3(b) Amendment dated February 15, 1995 to Note
Purchase Agreement dated as of November 24, 1992
between the Company and Northwestern National Life
Insurance Company, Northern Life Insurance Company
and the North Atlantic Life Insurance Company of
America (including form of the Company's 7.47%
Senior Note Due 2002) (5)
4.4 Note Purchase Agreement dated as of March 1, 1995
between the Company and Northern Life Insurance
Company (including form of the Company's 9.6%
Senior Note Due 2004) (5)
4.5 Amendment dated June 30, 1996 to Note Purchase
Agreement dated as of November 24, 1992 between
the Company and Northwestern National Life Insurance
Company of America (including form of the Company's
7.47% Senior Note Due 2002) and to Note Purchase
Agreement dated as of March 1, 1995 between the
Company and Northern Life Insurance Company (including
form of the Company's 9.6% Senior Note Due 2004) (7)
4.5(a) Amendment dated February 21, 1997 to Note Purchase
Agreement dated as of November 24, 1992 between
the Company and Northern Life Insurance Company, ReliaStar
Life Insurance Company (formerly Northwestern National Life
Insurance Company) and ReliaStar Bankers Security Life
Insurance Company, successor by merger to the North Atlantic
Life Insurance Company of America (including form of the
Company's 7.47% Senior Note Due 2002) and to Note
Purchase Agreement dated as of March 1, 1995 between
the Company and Northern Life Insurance Company
(including form of the Company's 9.6% Senior Note Due
2007) Filed herewith
4.6 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 8.1% Series A Senior Note Due 2007) (7)
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
Note due 2009) (8)
39
<PAGE>
4.7(a) Amendment dated February 20, 1997 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 8.10% Series
A Senior Note due 2007 and the Company's 8.29% Series
B Senior Note due 2009) Filed herewith
4.8 Rights Agreement dated as of November 8, 1996 between the
Company and Norwest Bank Minnesota, National Association,
as Rights Agent (9)
10.1 Universal Hospital Services, Inc.
1992 Employee Stock Purchase Plan, as amended (5)
10.2* Universal Hospital Services, Inc.
1992 Long-Term Incentive and Stock Option Plan
(including form of Incentive Stock Option Agreement),
as amended (5)
10.3* Universal Hospital Services, Inc. 1992 Directors'
Stock Option Plan, as amended (5)
10.4 Amended and Restated Credit Agreement, with
Amended and Restated Promissory Note, dated
June 30, 1996 between the Company and First
Bank National Association (7)
10.4(a) Amendment dated February 28, 1997 to
Amended and Restated Credit Agreement, with
Amended and Restated Promissory Note, dated
June 30, 1996 between the Company and First
Bank National Association Filed herewith
10.5 Form of Restrictive Agreement, dated
June 23, 1987, between the Company
and certain shareholders of the Company (1)
10.6 Lease, dated June 12, 1992, between
the Company and Hartford Underwriters
Insurance Company (3)
10.7 Intercreditor Agreement, dated July 24, 1996 by
and among Northwestern National Life Insurance
Company, Northern Life Insurance Company, The
North Atlantic Life Insurance Company, The
Prudential Insurance Company of America and
First Bank National Association (7)
10.8 Universal Hospital Services, Inc.
Top Management Change-In-Control
Severance Plan, as amended (6)
10.8(a) Amendment to Universal Hospital Services, Inc.
Top Management Change-In-Control Severance Plan (8)
10.9 Universal Hospital Services, Inc.
Long-Term Incentive Plan, as amended (6)
10.10 Universal Hospital Services, Inc.
Supplemental Pension Plan, as amended (6)
40
<PAGE>
11 Schedule of Computation of Per Share Earnings Filed herewith
23.1 Consent of Coopers & Lybrand L.L.P. Filed herewith
27 Financial Data Schedule Filed herewith
- ---------
* Management compensatory plan filed pursuant to Item 601(b)(10)(iii)(A)
of Regulation S-K
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 33-47220) (the "Registration Statement").
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the period ended December 31, 1992.
(3) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1992.
(4) Incorporated by reference to the Company's Annual Report of Form 10-K
for the period ended December 31, 1993.
(5) Incorporated by reference to the Company's Annual Report of Form 10-K
for the period ended December 31, 1994.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
for the period ended December 31, 1995.
(7) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1996.
(8) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1996.
(9) Incorporated by reference to the Company's Current Report on
Form 8-K, dated November 8, 1996.
(b) Reports on Form 8-K
Form 8-K, dated November 8, 1996, reporting the adoption of a Rights
Agreement dated as of November 8, 1996 between the Company and Norwest
Bank Minnesota, National Association, as Rights Agent.
Form 8-K, dated December 12, 1996, reporting the announcement of the
formation of a Special Committee to investigate alternative methods of
enhancing shareholder value.
Form 8-K, dated December 19, 1996, reporting the announcement of receipt of
four preliminary intentions to acquire the Company.
(c) See Exhibits listed in Item 14 hereof and the Exhibits attached as a
separate section of this report.
(d) The Index to Financial Statements and Supplemental Schedules are included
following the signatures beginning at page 43 of this Report.
41
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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 on March 12, 1997.
UNIVERSAL HOSPITAL SERVICES, INC.
By /s/ Thomas A. Minner
-------------------------
Thomas A. Minner
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated on March 10, 1997.
/s/ Thomas A. Minner President, Chief Executive
---------------------------- Officer and Chairman of the
Thomas A. Minner Board of Directors
(Principal Executive Officer)
/s/ David E. Dovenberg Vice President of Finance and
---------------------------- Chief Financial Officer
David E. Dovenberg (Principal Financial and
Accounting Officer)
/s/ Michael W. Bohman Vice President of Customer Service and
---------------------------- Sales and Director
Michael W. Bohman
/s/ Paul W. Larsen Vice President of Administrative
---------------------------- Services, Secretary and Treasurer and
Paul W. Larsen Director
/s/ Samuel B. Humphries Director
---------------------------
Samuel B. Humphries
/s/ Terrance D. McGrath Director
----------------------------
Terrance D. McGrath
/s/ Karen M. Bohn Director
----------------------------
Karen M. Bohn
42
<PAGE>
UNIVERSAL HOSPITAL SERVICES, INC.
---------------------------------
INDEX TO FINANCIAL STATEMENTS
AND SUPPLEMENTAL SCHEDULES
<TABLE>
<CAPTION>
PAGE REFERENCE
IN REPORT
ON FORM 10-K
-------------
<S> <C>
Report of Independent Accountants 44
Consolidated Financial Statements:
Balance Sheets as of December 31, 1996 and 1995 45
Statements of Income for the years ended
December 31, 1996, 1995 and 1994 46
Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994 47
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 48
Notes to Consolidated Financial Statements 49
Supplemental Schedules:
Report of Independent Accountants on Financial Statement Schedule 62
Schedule II - Valuation and Qualifying Accounts and Reserves 63
</TABLE>
43
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Universal Hospital Services, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Universal
Hospital Services, Inc. and Subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Universal Hospital Services, Inc. and Subsidiary as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
February 19, 1997, except as to
information presented in the last
paragraph of Note 8 for which the
date is February 28, 1997.
44
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 197,422
Accounts receivable, less allowance for doubtful
accounts of $418,000 in 1996 and $410,000 in
1995 12,123,972 $10,588,579
Inventories 1,256,388 2,848,559
Other 1,562,303 424,634
Deferred income taxes 708,000 520,000
----------- -----------
Total current assets 15,848,085 14,381,772
Property and equipment:
Rental equipment, at cost less accumulated
depreciation 44,546,290 40,847,236
Property and office equipment, at cost less
accumulated depreciation 3,497,589 3,409,694
----------- -----------
Total property and equipment, net 48,043,879 44,256,930
Intangible assets:
Goodwill, less accumulated amortization 15,057,516 8,186,639
Other 757,396 24,131
----------- -----------
Total assets $79,706,876 $66,849,472
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,957,743 $ 2,800,000
Accounts payable 3,044,392 5,160,357
Accrued compensation and pension 1,990,640 2,428,471
Accrued expenses 1,184,573 609,983
Book overdrafts 858,364 1,124,577
----------- -----------
Total current liabilities 9,035,712 12,123,388
Deferred compensation and pension 1,772,692 1,426,876
Deferred income taxes 4,578,000 3,800,000
Long-term debt 35,192,589 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, 5,371,921 and 5,445,270 shares issued
and outstanding at December 31, 1996 and 1995,
respectively 53,719 54,453
Additional paid-in capital 14,870,153 15,385,450
Retained earnings 14,204,011 13,271,638
----------- -----------
Total shareholders' equity 29,127,883 28,711,541
----------- -----------
Total liabilities and shareholders' equity $79,706,876 $66,849,472
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
45
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Consolidated Statements of Income
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Equipment rentals $50,742,774 $45,869,789 $38,980,411
Sales of supplies and equipment 5,555,173 6,585,373 7,825,686
Other 642,653 580,632 483,329
----------- ----------- -----------
Total revenues 56,940,600 53,035,794 47,289,426
----------- ----------- -----------
Cost and expenses:
Cost of equipment rentals 13,331,864 11,841,142 10,017,671
Rental equipment depreciation 12,602,442 10,799,372 9,527,243
Cost of supplies and equipment sales 4,422,441 5,352,163 6,419,012
Disposal of DPAP inventories 2,213,045
Selling, general and administrative 20,001,105 18,559,504 16,561,038
Interest 2,518,330 1,784,141 1,268,519
----------- ----------- -----------
Total costs and expenses 55,089,227 48,336,322 43,793,483
----------- ----------- -----------
Income before provision for income taxes 1,851,373 4,699,472 3,495,943
Provision for income taxes:
Current 329,000 1,454,000 1,467,000
Deferred 590,000 495,000 32,000
----------- ----------- -----------
919,000 1,949,000 1,499,000
----------- ----------- -----------
Net income $ 932,373 $ 2,750,472 $ 1,996,943
=========== =========== ===========
Earnings per common share $.17 $.50 $.37
=========== =========== ===========
Weighted average common shares outstanding 5,494,510 5,502,258 5,449,116
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
46
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Shareholders'
------------------ Capital Earnings Equity
Common Class B
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $37,504 $16,684 $15,304,299 $ 8,524,223 $23,882,710
Sale of 37,901 shares of common stock to employees under
stock purchase plan 379 187,956 188,335
Repurchase of 5,000 shares of common stock
under stock repurchase plan (50) (32,450) (32,500)
Net income 1,996,943 1,996,943
------- ------- ----------- ----------- -----------
Balance, December 31, 1994 37,833 16,684 15,459,805 10,521,166 26,035,488
Sale of 33,311 shares of common stock to employees under
stock purchase plan 333 197,848 198,181
Repurchase of 40,000 shares of common stock under (400) (274,600) (275,000)
stock repurchase plan
Conversion of 1,668,353 shares of Class B common stock to
1,668,353 shares of common stock 16,684 (16,684)
Issuance of stock pursuant to exercise of stock options,
300 shares 3 2,397 2,400
Net income 2,750,472 2,750,472
------- ------- ----------- ----------- -----------
Balance, December 31, 1995 54,453 - 15,385,450 13,271,638 28,711,541
Sale of 24,668 shares of common stock to employees under
stock purchase plan 247 178,103 178,350
Repurchase of 103,000 shares of common stock under
stock repurchase plan (1,030) (726,345) (727,375)
Issuance of stock pursuant to exercise of stock options,
4,983 shares 49 32,945 32,994
Net income 932,373 932,373
------- ------- ----------- ----------- -----------
Balance, December 31, 1996 $53,719 $ - $14,870,153 $14,204,011 $29,127,883
======= ======= =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
47
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 932,373 $ 2,750,472 $ 1,996,943
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,896,586 11,763,390 10,395,841
Provision for doubtful accounts 317,805 297,123 40,685
Gain on sales of equipment (229,548) (291,644) (230,053)
Disposal of DPAP inventories 2,213,045
Deferred income taxes 590,000 495,000 32,000
Changes in operating assets and liabilities,
net of impact of acquisition:
Accounts receivable (663,645) (2,136,984) (1,049,999)
Inventories and other operating assets (1,438,516) (1,569,796) 19,198
Accounts payable and accrued expenses (961,120) 1,763,219 344,957
------------ ------------ ------------
Net cash provided by operating activities 14,656,980 13,070,780 11,549,572
------------ ------------ ------------
Cash flows from investing activities:
Rental equipment purchases (14,466,057) (19,244,437) (15,167,893)
Property and office equipment purchases (744,110) (666,526) (753,520)
Proceeds from sale of equipment 716,110 529,973 387,550
Acquisition of BERS, net of cash acquired (12,074,854)
Other (290,216) (343,654)
------------ ------------ ------------
Net cash used in investing activities (26,859,127) (19,724,644) (15,533,863)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 211,344 200,581 188,335
Repurchase of common stock (727,375) (275,000) (32,500)
Proceeds under loan agreements 52,158,000 35,055,000 20,345,000
Payments under loan agreements (38,976,187) (28,602,333) (16,860,000)
(Decrease) increase in book overdraft (266,213) 275,616 343,456
------------ ------------ ------------
Net cash provided by financing activities 12,399,569 6,653,864 3,984,291
------------ ------------ ------------
Net change in cash and cash equivalents 197,422 - -
Cash and cash equivalents at beginning of period - - -
------------ ------------ ------------
Cash and cash equivalents at end of period $ 197,422 $ - $ -
============ ============ ============
Supplemental cash flow information:
Interest paid $ 2,329,000 $ 1,766,000 $ 1,278,000
============ ============ ============
Income taxes paid $ 1,388,000 $ 1,347,000 $ 1,550,000
============ ============ ============
Rental equipment purchases included in accounts
payable $ 1,438,837 $ 3,217,757 $ 1,218,954
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
48
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Description of Business:
Universal Hospital Services, Inc. (the Company or UHS) is a leading
provider of movable medical equipment, service programs and products to
healthcare providers in both the acute and alternate care markets. The
consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Biomedical Equipment Rental and Sales
Incorporated (BERS) since August 1996 (see Note 4). Through a national
network of UHS district offices, providers have access to the Company's
pool of medical devices through the unique Pay-Per-Use/TM/ equipment
management program. This program charges customers only when equipment is
in use on a patient, and is supported by a full range of services including
delivery, training, technical and educational support, inspection and
maintenance. The Company also sells medical products not used in its rental
pool and disposable medical products used in conjunction with the medical
equipment it rents.
2. Pending Sale of the Company:
On February 10, 1997, the Company and MEDIQ Incorporated (MEDIQ) entered
into a definitive agreement for MEDIQ to acquire 100% of UHS outstanding
common stock for $17.50 per share. Including the assumption of the
Company's debt, the total purchase price is expected to be approximately
$138,000,000. The transaction is to be structured as a cash merger that is
expected to close in late March or early April 1997, subject to approval by
a majority of the Company's shareholders and regulatory clearances.
3. Significant Accounting Policies:
Basis of Consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Inventories:
Inventories consist of supplies and equipment held for resale and are
valued at the lower of cost (first-in, first-out method) or market.
Rental Equipment:
Depreciation of rental equipment is provided on the straight-line method
over the equipments' estimated useful lives of five to seven years. The
cost and accumulated depreciation of rental equipment, retired or sold, is
eliminated from their respective accounts and the resulting gain or loss is
recorded in income.
49
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
3. Significant Accounting Policies, continued:
Property and Office Equipment:
Property and office equipment includes land, buildings, leasehold
improvements and shop and office equipment.
Depreciation of property and office equipment is provided on the straight-
line method over estimated useful lives of thirty years for buildings,
remaining lease term for leasehold improvements, and three to ten years for
shop and office equipment. The cost and accumulated depreciation of
property and equipment, retired or sold, is eliminated from their
respective accounts and the resulting gain or loss is recorded in income.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents. The
Company's cash and cash equivalents are deposited with two financial
institutions.
Goodwill:
Goodwill represents the excess purchase cost of acquired assets over the
tangible and identifiable intangible assets' estimated fair market values
at the date of acquisition and is being amortized on a straight-line basis
over 15 to 40 years. Accumulated amortization was $2,646,315 and $2,168,203
as of December 31, 1996 and 1995, respectively.
Long-Lived Assets:
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of". The adoption of
SFAS No. 121 did not have a significant impact on the Company's financial
position or results of operations.
The Company periodically assesses the recoverability of long-lived assets
principally rental equipment and goodwill based on projected income and
related cash flows on an undiscounted basis.
Revenues:
Equipment is generally rented on a short-term basis and rentals are
recorded in income as earned. Supply and equipment sales are recorded at
the time of shipment.
Income Taxes:
Deferred income taxes are computed using the asset and liability method,
such that deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between financial
reporting amounts and the tax bases of existing assets and liabilities
based on currently enacted tax laws and tax rates.
Earnings Per Share of Common Stock:
Earnings per share of common stock is calculated by dividing net income by
the weighted average common and common equivalent shares outstanding during
the year. Common equivalent shares include the dilutive effect of stock
options.
50
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
3. Significant Accounting Policies, continued:
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The most significant management estimates relate to the
determination of the allowance for uncollectible accounts receivable and
obsolete inventories, estimation of the useful lives of rental equipment
for computing depreciation, assessment of the recoverability of long-lived
assets, self-insured medical reserves and determination of pension plan
actuarial assumptions.
4. 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 $10.7 million 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 and liabilities acquired based on their estimated fair
values. This treatment resulted in approximately $7.3 million of cost in
excess of net tangible assets acquired (goodwill), which is being amortized
on a straight-line basis over 15 years. The estimated fair values of assets
and liabilities acquired are as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 217,000
Accounts receivable 949,000
Rental equipment 4,221,000
Goodwill 7,349,000
Other assets 852,000
Accounts payable and other liabilities 1,296,000
-----------
$12,292,000
===========
</TABLE>
BERS' operations have been included in the Company's consolidated results
of operations since the date of acquisition.
51
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
4. Acquisition of Biomedical Equipment Rental and Sales, Inc. (BERS),
continued:
The following summarized, unaudited pro forma results of operations for the
year ended December 31, 1996 and 1995, assume the acquisition of BERS
occurred as of the beginning of the respective periods.
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Total revenues $60,497,000 $58,977,000
Net income $ 651,000 $ 2,457,000
Net earnings per common share $ .12 $ .45
</TABLE>
5. Disposal of DPAP Inventories:
The Company experienced declining sales of Demand Positive Airway Pressure
(DPAP) devices during 1996. Because market acceptance of the DPAP devices
did not meet expectations, the Company's ongoing quarterly assessments
resulted in a write-down of $1,030,500 in the second quarter and a charge
of $1,182,545 in the fourth quarter of 1996 to write-off the remaining
carrying value of DPAP inventory and associated supplies and demo units.
The DPAP devices were disposed of in early 1997.
6. Book Overdrafts:
The Company does not maintain cash balances at its principal bank under a
policy whereby the net of collected balances and cleared checks is, at the
Company's option, applied to or drawn from the revolving credit facility on
a daily basis. At December 31, 1996 and 1995, the Company had book
overdrafts of $858,364 and $1,124,577, respectively.
52
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
7. Property and Equipment:
Property and equipment at December 31, consists of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Rental equipment $107,441,784 $94,935,050
Less accumulated depreciation 62,895,494 54,087,814
------------ -----------
Rental equipment, net 44,546,290 40,847,236
------------ -----------
Land 120,000 120,000
Buildings and leasehold improvements 1,356,042 1,195,272
Office equipment 5,473,317 5,065,317
------------ -----------
6,949,359 6,380,589
Less accumulated depreciation 3,451,770 2,970,895
------------ -----------
Property and office equipment, net 3,497,589 3,409,694
------------ -----------
Total property and equipment, net $ 48,043,879 $44,256,930
============ ===========
</TABLE>
8. Long-Term Debt:
Long-term debt at December 31, consists of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
8.10% Series A notes, payable in varying
quarterly installments beginning
September 1, 1997, with the remaining
balance due in 2007, uncollateralized $ 10,000,000
7.47% senior note payable, due in quarterly
installments of $350,000, with the
remaining balance due in 2002,
uncollateralized 8,500,000 $ 9,900,000
8.29% Series B notes, payable in varying
quarterly installments beginning
June 1, 2007, with the remaining balance
due in 2009, uncollateralized 4,000,000
9.60% senior note payable, due in quarterly
installments of $375,000
beginning March 1, 2003, uncollateralized 3,000,000 3,000,000
Term loan agreement at 2% per annum over the
bank's reference rate, repaid during 1996 6,766,667
Revolving credit agreement, uncollateralized 11,337,000 3,921,000
Other 313,332
------------ -----------
37,150,332 23,587,667
Less current portion of long-term debt (1,957,743) (2,800,000)
------------ -----------
Total long-term debt $ 35,192,589 $20,787,667
============ ===========
</TABLE>
53
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
8. Long-Term Debt, continued:
Under the revolving credit agreement with a bank, the Company may borrow up
to $20,000,000 with a maturity date of June 30, 1999. Borrowings 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 December 31, 1996, the Company's interest rate was 7.60%,
based on the bank's RACD of 5.60%.
The fair value of long-term debt, based on discounted cash flow analysis
using current market interest rates for the same or similar issues of debt
as of December 31, 1996 would be approximately $38,500,000.
At December 31, 1996, aggregate long-term repayment requirements are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 1,957,743
1998 2,205,589
1999 2,100,000
2000 2,100,000
2001 2,100,000
Thereafter 26,687,000
-----------
Total long-term debt $37,150,332
===========
</TABLE>
The long-term debt agreements restrict dividend payments in excess of
approximately $1,700,000, and stock repurchases require, among other
things, that the Company maintain certain working capital and other
financial ratios.
9. Commitments and Contingencies:
Rental expenses were approximately $3,500,000, $3,300,000 and $2,600,000
for the years ended December 31, 1996, 1995 and 1994, respectively. The
Company is committed under various noncancellable operating leases for
regional sales and service offices and vehicles with minimum annual rental
commitments of approximately the following:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 2,144,000
1998 1,577,000
1999 1,048,000
2000 641,000
2001 361,000
Thereafter 210,000
-----------
Total $ 5,981,000
===========
</TABLE>
The Company in the ordinary course of business could be subject to
liability claims related to the equipment that it rents and services. The
Company believes that its liability insurance is adequate to meet any
present or future liability claims.
54
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
10. Employee Benefit Plans:
The Company sponsors a noncontributory defined benefit pension plan that
covers substantially all of its employees. Plan benefits are to be paid to
eligible employees at retirement based primarily on years of credited
service and on participants' compensation. Plan assets consist primarily
of U.S. Government securities and common stocks.
Pension expense, in thousands, for the years ended December 31, included
the following components:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service cost of the current year $ 348 $ 273 $ 332
Interest cost on projected benefit obligation 598 538 520
Actual return on assets held in the plan (864) (1,441) (84)
Net amortization and deferral 348 951 (348)
----- ------- -----
Pension expense $ 430 $ 321 $ 420
===== ======= =====
</TABLE>
The funded status of the plan and the amounts shown in the accompanying
consolidated balance sheet, in thousands, at December 31, consist of the
following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $5,677 $5,519
Nonvested benefit obligation 263 299
------ ------
Accumulated benefit obligation $5,940 $5,818
====== ======
Projected benefit obligation $7,902 $7,959
Fair value of assets held in plan 7,661 6,466
------ ------
Unfunded excess of projected benefit obligations
over plan assets 241 1,493
Net unrecognized (gain) loss from past assumption
experience differences 903 (211)
------ ------
Pension liability included in the consolidated
balance sheet $1,144 $1,282
====== ======
</TABLE>
The following assumptions were used to determine the projected benefit
obligation at December 31:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Discount rate 7.75% 7.25% 8.25%
Projected compensation increases 4.50% 5.00% 5.50%
Expected return on assets 8.50% 8.50% 8.50%
</TABLE>
55
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
10. Employee Benefit Plans, continued:
Effective January 1, 1994, the Company adopted a supplemental executive
retirement plan (SERP) designed to make up the shortfall in retirement
benefits caused by limitations specified by the Omnibus Budget
Reconciliation Act of 1993. This plan provides supplemental pension
benefits to the executive officers of the Company in addition to the
amounts received under the Company's defined benefit plan described above.
This combination of benefits is equivalent to those benefits which would
have been paid under the Company's qualified defined benefit pension plan
without regard to the Internal Revenue Service statutory limitation on
qualifying wages. Such benefits will be paid from the Company's assets. The
unfunded accumulated benefit obligation under the plan at December 31, 1996
and 1995 was $315,000 and $248,000, respectively. The projected benefit
obligation under the plan at December 31, 1996 and 1995 was $1,057,000 and
$1,185,000, respectively. Assumptions used to calculate the benefit
obligations were consistent with the Company's defined benefit pension
plan, except that projected compensation increases were assumed to be 5.5%
in 1996 and 1995. The pension expense for the years ended December 31,
1996, 1995 and 1994 related to this plan was $44,000, $138,000 and $132,000
respectively.
The Company also sponsors a defined contribution plan, which qualifies
under Section 401(a) of the Internal Revenue Code and covers substantially
all of the Company's employees. Employees contribute up to 6% of their
earnings as a thrift contribution, subject to IRS limitations, and up to
10% as a voluntary contribution. The Company matches 50% of employee thrift
contributions. The Plan was amended and restated on December 6, 1994 to add
a 401(k) provision that allows employees to contribute annually up to 6% of
their base compensation before tax, subject to IRS limitations, and up to
6% as an after-tax contribution. Under the amended and restated plan, the
Company matches 50% of the first 6% of base compensation that a participant
contributes to the Plan. The effective date of the 401(k) provision was
July 1, 1995. For the years ended December 31, 1996, 1995 and 1994,
approximately $279,000, $234,000 and $211,000, respectively, was expensed
as contributions to the plan.
The Company is self-insured for employee health care costs. The Company is
liable for claims up to $83,250 per family per plan year and aggregate
claims up to 125% of expected claims per plan year. Self-insurance costs
are accrued based upon the aggregate of the liability for reported claims
and an actuarially determined estimated liability for claims incurred but
not reported.
56
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
11. Income Taxes:
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Currently payable:
Federal $228,000 $1,153,000 $1,176,000
State 101,000 301,000 291,000
-------- ---------- ----------
329,000 1,454,000 1,467,000
-------- ---------- ----------
Deferred:
Federal 445,000 414,000 22,000
State 145,000 81,000 10,000
-------- ---------- ----------
590,000 495,000 32,000
-------- ---------- ----------
$919,000 $1,949,000 $1,499,000
======== ========== ==========
</TABLE>
Reconciliations between the Company's effective income tax rate and the U.S.
statutory rate for each of the three years ended December 31 follow:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Statutory U.S. Federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of U.S. Federal
income tax benefit 8.7 5.2 5.5
Goodwill amortization 4.6 1.8 2.4
Other 2.3 .5 1.0
---- ---- ----
Effective income tax rate 49.6% 41.5% 42.9%
==== ==== ====
</TABLE>
57
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
11. Income Taxes, continued:
The components of the Company's overall net deferred tax liability at
December 31, 1996 and 1995 are as follows:
<TABLE>
1996 1995
<S> <C> <C>
Deferred tax assets:
Accounts receivable $ 131,000 $ 162,000
Accrued and deferred compensation and pension 1,025,000 828,000
Inventory reserve 72,000 85,000
Other assets 47,000 47,000
Alternative Minimum Tax (AMT) credit 150,000
---------- ----------
Total deferred tax asset 1,425,000 1,122,000
---------- ----------
Deferred tax liabilities:
Accelerated depreciation 5,269,000 4,351,000
Other 26,000 51,000
---------- ----------
Total deferred tax liability 5,295,000 4,402,000
---------- ----------
Net deferred tax liability $3,870,000 $3,280,000
========== ==========
</TABLE>
The Company has not recorded a valuation allowance as of December 31, 1996
and 1995 related to the deferred tax assets, as management believes the
future reversing taxable temporary differences will be sufficient to
recover the total deferred tax asset.
12. Shareholders' Equity:
Each outstanding share of common stock is entitled to one vote.
In December 1995, each share of the Class B common stock was converted to
one share of common stock through a secondary offering. No proceeds of the
offering were received by the Company.
In December 1994, the Board of Directors authorized a stock repurchase
program under which up to 500,000 shares of the Company's common stock
could have been repurchased. Such purchases could have been made at
prevailing prices on the open market, by block purchase or in private
transactions at any time until June 30, 1996. A total of 45,000 shares have
been purchased in the open market pursuant to these authorizations. In July
1996, an additional 300,000 shares were authorized by the Board of
Directors for repurchase. Such purchases can be made at any time until June
30, 1997. A total 103,000 have been purchased pursuant to these
authorizations.
58
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
12. Shareholders' Equity, continued:
In November 1996 the Company adopted 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. 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. 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). The rights are
redeemable at 1/10th of a cent per right at any time prior to the
acquisition of a 15% position. The acquisition described in Note 2 is
expected to meet the criteria of a permitted offer. As such, the rights
will expire upon closing of the agreement.
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 right's then-current exercise price, the acquiring Company's common
stock having a market value of twice the right's exercise price.
13. Stock Option and Stock Purchase Plans:
During 1992 and as amended in 1994, the Company adopted a Long-Term
Incentive and Stock Option Plan, a Director's Stock Option Plan and an
Employee Stock Purchase Plan. Under the Long-Term Incentive and Stock
Option Plan (Incentive and Stock Option Plan), the Company may grant
incentive stock options, stock options and performance awards to the
Company's employees. A total of 600,000 shares of common stock are reserved
for issuance under the Incentive and Stock Option Plan. The Incentive and
Stock Option Plan expires in 2002. These options become exercisable in
increments over a 3-1/2 year period, expiring 10 years after the grant
date.
The Director's Stock Option Plan (Director Plan) covers nonemployee
directors. Options may be granted annually to eligible directors. Under the
Director Plan, the Company has reserved 75,000 shares of common stock for
issuance. Options under the Director Plan become exercisable six months
subsequent to date of grant, expiring five years after the grant date.
All options were granted at fair market value at date of grant.
59
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
13. Stock Option and Stock Purchase Plans, continued:
Stock option activity with respect to the Incentive and Stock Option Plan
and Director Plan is as follows:
<TABLE>
<CAPTION>
Incentive and Stock Option Plan Director Plan
------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares 1996 1995 1994 1996 1995 1994
Granted 113,650 108,150 120,800 7,500 7,500 9,000
Exercisable (4,983) (300)
Terminated (300) (1,800) (15,550)
---------- -------- -------- -------- -------- --------
December 31:
Outstanding 504,667 396,300 290,250 37,000 29,500 22,000
========== ======== ======== ======== ======== ========
Exercisable 278,640 178,273 83,630 37,000 29,500 18,000
Weighted Average
Exercise Price Per Share
Granted $9.12 $6.88 $5.38 $8.75 $8.25 $6.56
Exercised $6.62 $8.00
Terminated $8.00 $8.00 $8.26
December 31:
Outstanding $7.42 $7.12 $7.21 $7.95 $7.75 $7.58
</TABLE>
Stock options outstanding at December 31, 1996 for the Incentive and Stock
Option Plan and Director Plan had a range of exercise prices of $5.38 to $9.38
and $6.00 and $8.75, respectively, and an average remaining life of 6.56 and
2.48 years, respectively.
Under the Employee Stock Purchase Plan, an eligible employee may purchase shares
of common stock from the Company through payroll deductions of up to 10% of
their base compensation at a price share equal to 85% of the lesser of the fair
market value of the Company's common stock as of the first or last day of each
six-month offering period. A total of 225,000 shares are reserved for issuance
under this plan. During 1996 and 1995, respectively, 57,979 and 33,311 shares
were purchased by employees under this plan, leaving 37,147 available for
purchase at December 31, 1996.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, a new standard of accounting and
reporting for stock-based compensation plans. The Company has adopted the new
standard in 1996. The Company has continued to measure compensation cost for its
incentive and stock option plan, director plan and employee stock purchase plan,
using the intrinsic value method of accounting it has historically used and,
therefore, the new standard has no effect on the Company's operating results.
60
<PAGE>
Universal Hospital Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
13. Stock Option and Stock Purchase Plans, continued:
Had the Company used the fair value-based method of accounting for its
incentive and stock option plan, director plan and employee stock purchase
plan beginning in 1995 and charged compensation cost against income, over
the vesting period, based on the fair value of options at the date of
grant, net income and net income per share for the years ended December 31,
1996 and 1995 would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net income $ 709,168 $2,622,340
Net income per share $ .13 $ .48
</TABLE>
The weighted-average grant-date fair value of options granted during 1996
and 1995 was $5.28 and $4.13, respectively. The weighted-average grant-date
fair value of options was determined separately for each grant under the
Company's various plans by using the fair value of each option grant on the
date of grant, utilizing the Black-Scholes option-pricing model and the
following key assumptions:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Risk-free interest rates 5.1% to 6.9% 5.6% to 7.8%
Expected life .5 to 8 years .5 to 8 years
Expected volatility 53.2% to 59.4% 31.1% to 59.4%
Expected dividends None None
</TABLE>
61
<PAGE>
To the Board of Directors and Shareholders of
Universal Hospital Services, Inc.:
Our report on the consolidated financial statements of Universal Hospital
Services, Inc. and subsidiary is included on page 44 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page 43 of this
Form 10-K.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
February 19, 1997, except as
to information presented in
the last paragraph of Note 8
for which the date is February 28, 1997.
62
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
UNIVERSAL HOSPITAL SERVICES, INC.
- --------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------------------------------
Additions
----------------------
Balance at Charged to Charged to Deductions Balance at
Beginning Costs and Other From End
Description of Period Expense Accounts Reserves of Period
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for Doubtful Accounts:
Year Ended December 31, 1996 $410,000 $ 317,805 $103,416 $ 413,221 $418,000
Year Ended December 31, 1995 $235,000 $ 297,123 $ 4,450 $ 126,573 $410,000
Year Ended December 31, 1994 $175,000 $ 40,685 $ 85,667 $ 66,352 $235,000
Reserve for Inventory Obsolescence:
Year Ended December 31, 1996 $162,664 $2,322,121 $ 0 $2,280,225 $204,560
Year Ended December 31, 1995 $168,000 $ 100,650 $ 0 $ 105,986 $162,664
Year Ended December 31, 1994 $168,000 $ 74,663 $ 0 $ 74,663 $168,000
</TABLE>
63
<PAGE>
EXHIBIT INDEX
-------------
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
4.5(a) Amendment dated February 21, 1997 to Note Purchase
Agreement dated as of November 24, 1992 between the
Company and Northern Life Insurance Company, ReliaStar
Life Insurance Company (formerly Northwestern National
Life Insurance Company) and ReliaStar Bankers Security
Life Insurance Company, successor by merger to the
North Atlantic Life Insurance Company of America
(including form of the Company's 7.47% Senior Note
Due 2002) and to Note Purchase Agreement dated as of
March 1, 1995 between the Company and Northern Life
Insurance Company (including form of the Company's
9.6% Senior Note Due 2004)
4.7(a) Amendment dated February 20, 1997 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 8.10% Series
A Senior Note due 2007 and the Company's 8.29%
Series B Senior Note due 2009)
10.4(a) Amendment dated February 28, 1997 to
Amended and Restated Credit Agreement, with
Amended and Restated Promissory Note, dated
June 30, 1996 between the Company and First
Bank National Association
11 Schedule of Computation of Per Share Earnings
23.1 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
64
<PAGE>
Exhibit 4.5(a)
February 21, 1997
Mr David Dovenberg, Chief Financial Officer
Universal Hospital Services, Inc.
1250 Northland Plaza
3800 West 80th Street
Bloomington, MN 55431
Dear David,
ReliaStar Investment Research, Inc. as Investment Advisor to Northern Life
Insurance Company, ReliaStar Life Insurance Company, (formerly Northwestern
National Life Insurance Company), and ReliaStar Bankers Security Life Insurance
Company, successor by merger to the North Atlantic Life Insurance Company of
America; herewith amends the fixed charge coverage, covenant (6 a ii) of those
Note Purchase Agreements between the above companies and Universal Hospital
Services, Inc., so that the minimum fixed charge coverage level for the periods
ended 12/31/96 and 3/31/37 shall be 1.5X. Thereafter, the required coverage
level will remain as it is currently stated.
I understand that the fixed charge coverage has declined primarily due to the
write-down of DPAP inventory. Please let me know if there are any other issues
which require a waiver or amendment.
Sincerely,
/s/ Frank P. Pintens
- -----------------------------------
Frank P. Pintens
Vice President
Reliastar Investment Research, Inc.
<PAGE>
Exhibit 4.7(a)
February 20, 1997
VIA TELECOPIER AND AIRBORNE
Universal Hospital Services, Inc.
1250 Northland Plaza
Bloomington, Minnesota 55431
Attention: David E. Dovenberg
Re: Amendment No.2
Ladies and Gentlemen:
Reference is made to that certain Note Purchase and Private Shelf
Agreement dated as of July 24, 1996 (as amended from time to time, the
"Note Agreement") between Universal Hospital Services, Inc., a Minnesota
corporation (the "Company"), and The Prudential Insurance Company of
America ("Prudential"), pursuant to which the Company issued and sold and
Prudential purchased (i) 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'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 1lC 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 (ii) of paragraph 6A of the Note Agreement is hereby
deleted in its entirety and the following is hereby substituted therefor:
"(ii) (a) as of the end of any fiscal quarter ended on or before
March 31, 1997, Consolidated Net Income Available for Fixed Charges
for the immediately preceding twelve month period to be less than
1.50 times Fixed Charges for any such twelve month period, (b) as of
the end of any fiscal quarter ended after April 1, 1997 through and
including March 31, 1998, Consolidated Net Income Available for
Fixed Charges for the immediately preceding twelve month period to
be less than 2.00 times Fixed Charges for any such period, and (c)
as of the end of any fiscal quarter ending after April 1, 1998,
Consolidated Net Income Available for Fixed Charges for the
immediately preceding twelve month period to be less than 2.50 times
Fixed Charges for any such twelve month period."
<PAGE>
Universal Hospital Services, Inc.
February 20, 1997
Page 2
SECTION 2. Conditions Precedent. This letter shall become effective
as of the date first above written upon the return by the Company to
Prudential (attention: Wiley S. Adams) of a counterpart hereof duly
executed by the Company and Prudential.
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
----------------------------
Senior 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>
Exhibit 10.4(a)
AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
--------------------------------------------------
THIS AMENDMENT is entered into as of February 28, 1997 by the between
Universal Hospital Services Inc., a Minnesota corporation (the "Borrower"), and
First Bank National Association (the "Bank"). In consideration of the mutual
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged by the parties, at the
Borrower's request the Borrower and the Bank agree as follows:
1. Effective December 31, 1996, Sections 5.07 and 5.08 of the Amended and
Restated Credit Agreement dated June 30, 1996 by and between the Borrower and
the Bank (the "Credit Agreement"), are amended to read as follows:
Section 5.07 Liens. The Borrower shall not, and shall not permit any
Subsidiary to, create, incur or permit to exist in favor of any person
other than the Bank any mortgage, deed of trust, security interest or
other lien on any of its property now owned or hereafter acquired,
except:
(a) liens for taxes not yet due, if such reserve or other appropriate
provision, if my, as shall be required by generally accepted accounting
principles shall have been made therefor;
(b) other liens, charges, or encumbrances incidental to the conduct of
the Borrower's or such Subsidiary's business or the ownership of the
Borrower's or such Subsidiary's property which were not incurred in
connection with borrowing of money or the obtaining of advances or credit
or the acquisition of property and which do not in the aggregate
materially detract from the value of the Borrower's or such Subsidiary's
property or materially impair the use thereof in the operation of the
Borrower's or Subsidiary's business;
(c) liens imposed by law in favor of materialmen, mechanics, carriers,
warehousemen, landlords and other like persons for sums not yet due or
which are being contested in good faith by appropriate proceedings
promptly initiated and diligently conducted by the Borrower or such
Subsidiary, if such reserve or other appropriate provision, if any, as
required by generally accepted accounting principles shall been made
therefor;
(d) one or more capital leases between the Borrower and Baxter Healthcare
Corporation covering 250 Flo Gard infusion pumps, which lease was booked
by the Borrower as of December 31, 1996 at a present value of
$507,000.00;
(e) for a period not exceeding 90 days after the BERS Acquisition, a
security interest in BERS' equipment, leases, accounts and proceeds in
favor of Centura Bank securing indebtedness permitted by Section 5.08(d);
and
<PAGE>
(f) capital leases between BERS and Abbott Laboratories Hospital
Products Division covering equipment subleased by BERS to Rex
Hospital, and all amendments, extensions, renewals and replacements
thereof, provided the aggregate amount of BERS' obligations under
such capital leases shall not exceed $500,000.00 at any time
outstanding.
Section 5.08 Permitted Indebtedness. The Borrower shall not, and
shall not permit any Subsidiary to, borrow money, issue any
evidences of indebtedness, or create, assume, guarantee, become
contingently liable for or suffer or permit to exist any
indebtedness of the Borrower or any Subsidiary in addition to
indebtedness to the Bank (including, without limitation, as
indebtedness Capitalized Lease Obligations), except:
(a) Unsecured Funded Debt of the Borrower to Prudential in a
principal amount not exceeding $10,000,000.00 before the BERS
Acquisition and in a principal amount not exceeding $14,000,000.00
after the BERS Acquisition, provided that all such Funded Debt shall
be repaid in accordance with its terms and schedule, shall not be
prepaid, and shall not be extended, renewed, or otherwise modified:
(b) Unsecured trade debt of the Borrower and the Subsidiaries, other
than Adjusted Funded Debt, incurred or arising in the ordinary
course of business;
(c) Unsecured Current Debt of the Borrower to banks and other
institutional lenders, provided that the aggregate amount of such
Current debt at any time outstanding shall not exceed $2,000,000.00;
(d) For a period of 90 days after the BERS Acquisition, indebtedness
of BERS to Centura Bank in an aggregate amount not exceeding
$1,858,973.00, provided that such indebtedness shall not be
extended, renewed or otherwise modified;
(e) One or more capital leases described in Section 5.07(d):
(f) Capital leases between BERS and Abbott Laboratories Hospital
Products Division covering equipment subleased by BERS to Rex
Hospital, and all amendments, extensions, renewals and replacements
thereof, provided the aggregate amount of BERS' obligations under
such capital leases shall not exceed $500,000.00 at any time
outstanding; and
(g) Existing Unsecured Current Debt and Unsecured Funded Debt of the
Borrower not otherwise permitted by this Section 5.08, which is
listed in the Certificate of Indebtedness and Liens, provided that
all such Current Debt and Funded Debt shall be repaid in accordance
with its terms and the schedule set forth in the Certificate of
Indebtedness and Liens, shall not be prepaid, and shall not be
extended, renewed, or otherwise modified.
<PAGE>
2. The Bank waives the Borrower's failure to comply with Sections
5.07 and 5.08 of the Credit Agreement solely during the period before the
date of this Amendment as a result of the one or more capital leases with
Baxter Healthcare Corporation described above.
3. In the event that ReliaStar Life Insurance Company, Northern
Life Insurance Company, ReliaStar Bankers Security Life Insurance Company
and The Prudential Life Insurance Company of America amend their respective
agreements with the Borrower in order to change the fixed charge coverage
covenants and also waive the Borrower's failure to comply with its
agreements as a result of one or more capital leases with Baxter Healthcare
Corporation described above, then the Bank waives the Borrower's failure to
comply with such fixed charge coverage covenants and such provisions
relating to such capital leases solely during the period before the date of
this Amendment.
4. Such waivers by the Bank are limited as expressly set forth
above, and Sections 5.07 and 5.08 of the Credit Agreement, as amended
herein and all other sections of the Credit Agreement and all other
agreements of the parties remain in full force and effect.
5. No provision of this Amendment can be amended, modified, waived
or terminated, except by a writing executed by the Borrower and the Bank.
The Borrower shall pay to the Bank on demand all of the Bank's costs and
expenses including but not limited to reasonable attorneys' fees and legal
expenses, in connection with this Amendment, the writings executed herewith
and the transactions described herein and therein. This Amendment shall
bind and benefit the parties and their respective successors and assigns,
provided the Borrower shall not assign any of its rights or obligations
under this Amendment without the prior written consent of the Bank and any
assignment in violation of this sentence shall be null and void. This
Amendment shall be governed by and construed in accordance with the laws of
the State of Minnesota
Executed as of the date first above written.
UNIVERSAL HOSPITAL SERVICES, INC.
By /s/ David E. Dovenberg
-------------------------------
Title CFO
-------------------------------
FIRST BANK NATIONAL ASSOCIATION
By /s/ Richard G. Trembley
-------------------------------
Title Assistant Vice President
-------------------------------
<PAGE>
Exhibit 11
Universal Hospital Services, Inc.
SCHEDULE OF COMPUTATION OF PER SHARE EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Primary:
Net income $ 932,373 $2,750,472 $1,996,943
========== ========== ==========
Weighted average number of common
shares outstanding during this
period 5,419,749 5,427,980 5,429,198
Add common equivalent shares relating
to outstanding options to purchase
common stock using the treasury
stock method 74,761 74,278 19,918
---------- ---------- ----------
Weighted average number of common
and common equivalent shares
outstanding 5,494,510 5,502,258 5,449,116
========== ========== ==========
Primary net earnings per common
share $ 0.17 $ 0.50 $ 0.37
========== ========== ==========
Fully Diluted:
Net income $ 932,373 $2,750,472 $1,996,943
========== ========== ==========
Weighted average number of common
shares outstanding during this
period 5,419,749 5,427,980 5,429,198
Add common equivalent shares
relating to outstanding options
to purchase common stock using
the treasury stock method 74,761 74,278 19,918
---------- ---------- ----------
Weighted average number of common
and common equivalent shares
outstanding 5,494,510 5,502,258 5,449,116
========== ========== ==========
Fully diluted net earnings per
common share $ 0.17 $ 0.50 $ 0.37
========== ========== ==========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Form S-8 registration
statement, dated June 30, 1992, (File No. 33-49080) of Universal Hospital
Services, Inc. and Subsidiary for its Director's Stock Option Plan, Employee
Stock Option Plan and Employee Stock Purchase Plan, of our reports dated
February 19, 1997, except as to the information presented in the last paragraph
of Note 8 for which the date is February 28, 1997, on our audits of the
consolidated financial statements and consolidated financial statement schedule
of Universal Hospital Services, Inc. and Subsidiary as of December 31, 1996 and
1995, and for the years ended December 31, 1996, 1995, and 1994, which reports
are included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
March 10, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Company's Consolidated 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 197,422
<SECURITIES> 0
<RECEIVABLES> 12,541,972
<ALLOWANCES> 418,000
<INVENTORY> 1,256,388
<CURRENT-ASSETS> 15,848,085
<PP&E> 114,391,143
<DEPRECIATION> 66,347,264
<TOTAL-ASSETS> 79,706,876
<CURRENT-LIABILITIES> 9,035,712
<BONDS> 0
<COMMON> 53,719
0
0
<OTHER-SE> 29,074,164
<TOTAL-LIABILITY-AND-EQUITY> 79,706,876
<SALES> 5,555,173
<TOTAL-REVENUES> 56,940,600
<CGS> 4,422,441
<TOTAL-COSTS> 30,356,747
<OTHER-EXPENSES> 2,213,045
<LOSS-PROVISION> 317,805
<INTEREST-EXPENSE> 2,518,330
<INCOME-PRETAX> 1,851,373
<INCOME-TAX> 919,000
<INCOME-CONTINUING> 932,373
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 932,373
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
