<PAGE>
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
UNIVERSAL HOSPITAL SERVICES, INC.
(Name of Registrant as Specified in its Charter)
UNIVERSAL HOSPITAL SERVICES, INC.
---------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ___________________________________________________
(2) Form, Schedule or Registration Statement No.: _____________________________
(3) Filing Party: _____________________________________________________________
(4) Date Filed: _______________________________________________________________
<PAGE>
[UHS Letterhead]
March 19, 1997
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Universal Hospital Services, Inc. ("UHS"), to be held on Friday, April 4, 1997
at the Radisson South, 7800 Normandale Boulevard, Bloomington, Minnesota,
commencing at 9:00 a.m., Central Time (the "Special Meeting").
At the Special Meeting, you will be asked to consider and vote on a
proposal to approve the merger (the "Merger") of UHS with a newly formed wholly-
owned indirect subsidiary of MEDIQ Incorporated ("MEDIQ"), in which UHS will
become a wholly-owned indirect subsidiary of MEDIQ and shareholders of UHS will
receive $17.50 per share in cash in exchange for their UHS common stock
(together with the associated Rights (as defined in the accompanying Proxy
Statement) other than (i) shares as to which dissenters' rights are perfected as
described in the Proxy Statement and (ii) any shares owned directly or
indirectly by MEDIQ).
The Special Committee of the Board of Directors of UHS (the "Special
Committee") has unanimously adopted and approved the Merger and unanimously
recommends that you vote in favor of the Merger at the Special Meeting. The
Special Committee has received a written opinion from Piper Jaffray Inc., its
financial advisor, to the effect that the merger consideration of $17.50 per
share to be paid to the UHS shareholders is fair from a financial point of view
as of March 18, 1997.
The Merger and certain related matters are described in detail in the
accompanying Proxy Statement. See "THE MERGER" in the Proxy Statement. A copy of
the Agreement and Plan of Merger is attached as Appendix A to the Proxy
Statement.
Approval of the matters related to the Merger to be voted on at the Special
Meeting requires the affirmative vote of the holders of a majority of the
outstanding shares of UHS common stock. Accordingly, failure to vote or
abstentions will have the effect of a vote against the Merger for the purpose of
determining whether approval by the holders of a majority of the outstanding
shares of UHS common stock is obtained. Moreover, brokers cannot vote at the
Special Meeting without instructions from shareholders entitled to vote at the
Special Meeting. Shareholders whose shares are held in brokerage accounts
("street names") are urged to instruct their brokers to vote their shares in
favor of the Merger.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING. WE
URGE YOU TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AT YOUR
EARLIEST CONVENIENCE IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE, WHETHER OR NOT
YOU PLAN TO ATTEND THE SPECIAL MEETING. YOUR SHARES OF UHS COMMON STOCK WILL BE
VOTED IN ACCORDANCE WITH THE INSTRUCTIONS YOU HAVE GIVEN IN YOUR PROXY. IF NO
INSTRUCTIONS ARE GIVEN ON YOUR PROXY, THE SHARES REPRESENTED BY THE PROXY WILL
BE VOTED AT THE SPECIAL MEETING FOR APPROVAL OF THE MERGER AND IN ACCORDANCE
WITH THE PROXY STATEMENT ON ANY OTHER BUSINESS THAT MAY PROPERLY COME BEFORE THE
SPECIAL MEETING OR ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF. IF YOU DO NOT
RETURN THE ACCOMPANYING FORM OF PROXY, YOUR SHARES WILL NOT BE VOTED IN FAVOR OF
APPROVAL OF THE MERGER AND WILL HAVE THE SAME EFFECT AS A NO VOTE. IF YOU ATTEND
THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY CARD. YOUR PROMPT COOPERATION WILL BE GREATLY
APPRECIATED.
Thomas A. Minner
Chairman of the Board and Chief
Executive Officer
<PAGE>
UNIVERSAL HOSPITAL SERVICES, INC.
1250 Northland Plaza
3800 West 80th Street
Bloomington, Minnesota 55431-4442
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on Friday, April 4, 1997
To the Shareholders of Universal Hospital Services, Inc.:
Notice is hereby given that a Special Meeting of the shareholders of
Universal Hospital Services, Inc. ("UHS") will be held at 9:00 a.m., Central
Time, on Friday, April 4, 1997, at the Radisson Hotel South, 7800 Normandale
Boulevard, Bloomington, Minnesota, for the following purposes:
(1) to consider and vote upon a proposal to approve an Agreement and
Plan of Merger, dated as of February 10, 1997 (the "Merger Agreement") in
which (a) PRN Merger Corporation ("Merger Sub"), a Minnesota corporation
and a wholly-owned indirect subsidiary of MEDIQ Incorporated, a Delaware
corporation ("MEDIQ"), will be merged with and into UHS (the "Merger"), and
(b) each outstanding share of UHS's common stock, $.01 par value per share
("UHS Common Stock"), together with the associated Rights (as defined in
the accompanying Proxy Statement) (other than (i) shares as to which
dissenters' rights are perfected and (ii) any shares owned directly or
indirectly by MEDIQ), will be converted into the right to receive $17.50
per share in cash (the "Merger Consideration"); and
(2) to transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
A copy of the Proxy Statement relating to the Special Meeting (which
includes as Appendix A thereto a copy of the Merger Agreement) is attached to
this Notice and incorporated herein by reference.
Only holders of record of UHS Common Stock at the close of business on
February 26, 1997 are entitled to notice of, and to vote at, the Special
Meeting or any adjournments or postponements thereof. The affirmative vote of
the holders of a majority of the outstanding shares of UHS Common Stock is
necessary to approve the Merger.
THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS AND THE FULL BOARD OF
DIRECTORS OF UHS EACH UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
APPROVAL OF THE MERGER.
Holders of UHS Common Stock who do not vote their shares in favor of the
Merger Agreement and who strictly comply with Sections 302A.471 and 302A.473 of
the Minnesota Business Corporation Act (the "MBCA") have the right to dissent
from the Merger Agreement and make written demand for payment of the "fair
value" of their shares ("Dissenting Shares"). For a description of the rights of
holders of Dissenting Shares, see Section 302A.471 of the MBCA, a copy of which
is included in Appendix C to the accompanying Proxy Statement. In addition, a
description of the procedures to be followed in order to obtain payment for
Dissenting Shares is set forth under the caption "RIGHTS OF DISSENTING
SHAREHOLDERS" in the Proxy Statement.
Your attention is directed to the Proxy Statement and the Appendices for
more complete information regarding the Merger Agreement and UHS.
By Order of the Board of Directors,
/s/ Paul W. Larsen
Paul W. Larsen
Secretary
March 19, 1997
YOUR VOTE IS IMPORTANT. ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND
THE SPECIAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE MARK, SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOU MAY
NEVERTHELESS VOTE IN PERSON IF YOU ATTEND THE SPECIAL MEETING.
<PAGE>
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
To Be Held on Friday, April 4, 1997
This Proxy Statement is being furnished to the shareholders of Universal
Hospital Services, Inc. ("UHS" or the "Company") in connection with a special
meeting of shareholders of UHS (the "Special Meeting") to be held on Friday,
April 4, 1997 at 9:00 a.m., Central Time, at the Radisson Hotel South, 7800
Normandale Boulevard, Bloomington, Minnesota. The accompanying proxy is being
solicited by UHS's Board of Directors and is to be voted at the Special Meeting
or at any adjournments or postponements thereof.
At the Special Meeting, holders of shares of common stock of UHS, $.01 par
value per share ("UHS Common Stock"), will consider and vote upon a proposal to
approve and adopt an Agreement and Plan of Merger, dated as of February 10, 1997
(the "Merger Agreement"), by and among UHS, MEDIQ Incorporated, a Delaware
corporation ("MEDIQ"), and PRN Merger Corporation, a Minnesota corporation and a
wholly-owned indirect subsidiary of MEDIQ ("Merger Sub"), which approval and
adoption will also constitute approval of the transactions contemplated thereby.
A copy of the Merger Agreement is attached as Appendix A to this Proxy
Statement.
The Merger Agreement provides that Merger Sub will be merged with and into
UHS (the "Merger"), with UHS being the surviving corporation after the Merger.
In the Merger, each outstanding share of UHS Common Stock (together with the
associated Rights (as defined herein) and other than (i) shares to which
dissenters' rights are perfected and (ii) any shares owned directly or
indirectly by MEDIQ) will be converted into the right to receive a cash payment
of $17.50 (the "Merger Consideration"). As a result of the Merger, UHS will
become a wholly-owned indirect subsidiary of MEDIQ, and the UHS shareholders who
do not perfect dissenters' rights shall receive the Merger Consideration,
without interest, in exchange for their shares of UHS Common Stock.
Approval of the matters related to the Merger to be voted on at the Special
Meeting requires the affirmative vote of the holders of a majority of the
outstanding shares of UHS Common Stock. Accordingly, failure to vote or
abstentions will have the effect of a vote against the Merger for the purpose of
determining whether approval by the holders of a majority of the outstanding
shares of UHS Common Stock is obtained. Moreover, brokers cannot vote at the
Special Meeting without instructions from shareholders entitled to vote at the
Special Meeting. Shareholders whose shares are held in brokerage accounts
("street names") are urged to instruct their brokers to vote their shares in
favor of the Merger. Certain members of UHS management, who collectively own
approximately 16.0% of the outstanding shares of UHS Common Stock, have agreed
to vote all of their shares in favor of the Merger at the Special Meeting.
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HOLDERS OF UHS COMMON STOCK WHO COMPLY WITH THE REQUIREMENTS OF SECTIONS
302A.471 AND 302A.473 OF THE MINNESOTA BUSINESS CORPORATION ACT (THE "MBCA") ARE
ENTITLED TO ASSERT DISSENTERS' RIGHTS WITH RESPECT TO THE PROPOSED MERGER AND TO
OBTAIN PAYMENT OF THE FAIR VALUE OF THEIR SHARES IF THE PROPOSED MERGER IS
CONSUMMATED. IN ORDER TO PERFECT DISSENTERS' RIGHTS, A SHAREHOLDER MUST SEND A
NOTICE TO THE CORPORATION BEFORE THE DATE OF THE VOTE AND MUST NOT VOTE IN FAVOR
OF THE MERGER BY PROXY OR OTHERWISE. A COPY OF SECTIONS 302A.471 AND 302A.473 OF
THE MBCA IS ATTACHED TO THE PROXY STATEMENT AS APPENDIX C. SEE "RIGHTS OF
DISSENTING SHAREHOLDERS."
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY UHS OR
MEDIQ. THIS PROXY STATEMENT DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY IN
ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF UHS OR MEDIQ SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. NEITHER UHS NOR
MEDIQ UNDERTAKES ANY OBLIGATION TO UPDATE THE INFORMATION CONTAINED HEREIN
SUBSEQUENT TO THE DATE HEREOF.
On February 10, 1997, the high and low sales prices for UHS Common Stock as
reported on the Nasdaq Stock Market were $12.50 and $12.00, respectively, and
the closing price on such date was $12.38 per share.
Only holders of record of UHS Common Stock at the close of business on
February 26, 1997 are entitled to notice of and to vote at the Special
Meeting. At the close of business on February 26, 1997, a total of 5,372,421
shares of UHS Common Stock were outstanding, each being entitled to one vote.
This Proxy Statement is first being sent to shareholders on or about March 19,
1997.
Officers, directors and regular employees of the Company, who will receive
no extra compensation for their services, may solicit proxies by telephone or in
person. The Company has also retained Morrow & Co., Inc. to solicit proxies, by
mail, in person or by telephone, at an estimated cost of $5,000 plus
reimbursement of reasonable out-of-pocket expenses. Expenses in connection with
the solicitation of proxies will be paid by the Company.
THE DATE OF THIS PROXY STATEMENT IS MARCH 19, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
SUMMARY................................................................. 1
Universal Hospital Services, Inc..................................... 1
MEDIQ Incorporated; PRN Merger Corporation........................... 1
Matters to be Considered at the Special Meeting; Vote Required....... 1
The Special Meeting; Record Date; Quorum............................. 1
Structure of the Merger.............................................. 2
Recommendation of the Special Committee and
the Board of Directors........................................... 2
Opinion of UHS Financial Advisor..................................... 2
Reasons of UHS for the Merger........................................ 2
Reasons of MEDIQ and Merger Sub for the Merger....................... 3
Certain Effects of the Merger........................................ 3
Conduct of Business if the Merger is Not Consummated................. 3
Interests of Certain Persons in the Merger........................... 4
The Support/Voting Agreements........................................ 4
Dissenters' Rights................................................... 4
Certain Federal Income Tax Consequences of the Merger................ 4
Effective Time of the Merger......................................... 4
Conditions to Consummation of the Merger............................. 4
Termination of the Merger Agreement.................................. 5
Regulatory Approvals................................................. 5
Market Price for UHS Common Stock.................................... 5
Payment Agent; Surrender of Stock Certificates....................... 6
Accounting Treatment................................................. 6
SELECTED FINANCIAL DATA................................................. 7
THE SPECIAL MEETING..................................................... 8
Introduction......................................................... 8
Matters to be Considered at the Meeting.............................. 8
Voting Information................................................... 8
Solicitation, Revocation and Use of Proxies.......................... 9
THE MERGER.............................................................. 9
Background of the Merger............................................. 9
Reasons for the Merger and Recommendation of the
Special Committee and Board of Directors......................... 13
Opinion of UHS Financial Advisor..................................... 14
THE MERGER AGREEMENT.................................................... 19
General.............................................................. 19
Effective Time....................................................... 19
Consideration to be Received by Shareholders......................... 20
Payment for Shares................................................... 20
Payment of Stock Options and Rights.................................. 21
Representations and Warranties....................................... 21
Operations of UHS Prior to the Merger................................ 22
Restriction on Solicitation.......................................... 24
Conditions to Consummation of the Merger............................. 24
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Employment Matters................................................... 25
Indemnification of Officers and Directors............................ 25
Termination.......................................................... 26
Expenses............................................................. 26
CERTAIN EFFECTS OF THE MERGER........................................... 27
REGULATORY APPROVALS.................................................... 27
ACCOUNTING TREATMENT.................................................... 28
INTERESTS OF CERTAIN PERSONS IN THE MERGER.............................. 28
UHS Stock Options.................................................... 28
Employee Stock Purchase Plan......................................... 28
Change in Control Agreements......................................... 29
Indemnification of Officers and Directors............................ 29
Certain Relationships................................................ 29
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................. 30
RIGHTS OF DISSENTING SHAREHOLDERS....................................... 31
FINANCING THE MERGER.................................................... 34
UHS FINANCIAL PROJECTIONS............................................... 35
THE SUPPORT/VOTING AGREEMENTS........................................... 37
STOCK OWNERSHIP OF MANAGEMENT AND
CERTAIN BENEFICIAL OWNERS............................................ 37
MARKET PRICE AND DIVIDEND INFORMATION
FOR UHS COMMON STOCK................................................. 39
DESCRIPTION OF UHS CAPITAL STOCK........................................ 40
UHS Common Stock..................................................... 40
Undesignated Preferred Stock......................................... 40
Provisions of the Company's Restated Articles and Bylaws
and the Minnesota Business Corporation Act...................... 40
Rights and Junior Preferred Shares................................... 41
Transfer Agent and Registrar......................................... 42
SHAREHOLDER PROPOSALS................................................... 42
OTHER MATTERS........................................................... 42
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934................................................. 42
INDEPENDENT ACCOUNTANTS................................................. 42
AVAILABLE INFORMATION................................................... 43
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
DOCUMENTS INCLUDED IN APPENDIX D........................................ 43
APPENDIX A--Agreement and Plan of Merger................................ A-1
APPENDIX B--Opinion of Piper Jaffray Inc................................ B-1
APPENDIX C--Sections 302A.471 and 302A.473 of the Minnesota Business
Corporation Act--Dissenters' Appraisal Rights............. C-1
APPENDIX D--Universal Hospital Services, Inc. Annual Report on
Form 10-K for the year ended December 31, 1996............ D-1
</TABLE>
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SUMMARY
The following is a summary of certain information contained in this Proxy
Statement. This summary is not intended to be complete and is qualified in its
entirety by the more detailed information and financial data appearing elsewhere
in this Proxy Statement and the appendices hereto. Shareholders are urged to
review carefully the entire Proxy Statement and the appendices hereto.
Universal Hospital Services, Inc.
UHS is a Minnesota corporation with its principal offices at 1250 Northland
Plaza, 3800 West 80th Street, Bloomington, Minnesota 55431-4442. UHS provides
movable medical equipment to hospitals and other healthcare providers through
equipment management programs utilizing Pay-Per-Use/TM/ as the system for
charging customers only for actual equipment usage.
MEDIQ Incorporated; PRN Merger Corporation
MEDIQ is a Delaware corporation. Its principal executive offices are
located at One MEDIQ Plaza, Pennsauken, New Jersey 08110-1460. MEDIQ, through
its wholly-owned subsidiary, MEDIQ/PRN Life Support Services, Inc., operates the
largest moveable critical care and life support medical equipment rental
business in the United States. MEDIQ is a public company whose stock is traded
on the American Stock Exchange under the symbol "MED."
PRN Merger Corporation ("Merger Sub") was organized under the laws of the
state of Minnesota on February 6, 1997 as a wholly-owned indirect subsidiary of
MEDIQ for the purposes of entering into the Merger Agreement and effecting the
Merger. Merger Sub has conducted no business. Its principal executive offices
are located at One MEDIQ Plaza, Pennsauken, New Jersey 08110-1460.
Matters to be Considered at the Special Meeting; Vote Required
At the Special Meeting, shareholders will be asked to consider and vote on
a proposal to approve the Merger Agreement, a copy of which is attached as
Appendix A to this Proxy Statement and is incorporated herein by reference.
Approval of the Merger Agreement requires the affirmative vote of the holders of
a majority of the outstanding shares of UHS Common Stock. See "THE SPECIAL
MEETING-Matters to be Considered at the Meeting" and "-Voting Information."
The Special Meeting; Record Date; Quorum
The Special Meeting of Shareholders of UHS will be held on April 4, 1997,
9:00 a.m., Central Time, at the Radisson Hotel South, 7800 Normandale
Boulevard, Bloomington, Minnesota. Only holders of record of UHS Stock at the
close of business on February 26, 1997 (the "Record Date") are entitled to
notice of, and to vote at, the Special Meeting. On that date, there were
5,372,421 shares of UHS Common Stock outstanding, with each share entitled to
cast one vote. The presence (in person or by proxy) of the holders of a majority
of the outstanding shares of UHS Common Stock is necessary to constitute a
quorum at the Special Meeting. Abstentions and broker nonvotes are counted for
purposes of determining whether a quorum exists at the Special Meeting. However,
abstentions, broker nonvotes and proxies that are not returned will have the
same effect as a "no" vote with respect to the Merger because approval by the
holders of a majority of the outstanding shares is required to appr ove the
Merger Agreement. See "THE SPECIAL MEETING-Voting Information."
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Structure of the Merger
Pursuant to the Merger Agreement, Merger Sub will merge with and into UHS,
with UHS being the surviving corporation after the Merger (the "Surviving
Corporation"). Each outstanding share of UHS Common Stock, together with the
associated Rights (other than (i) shares as to which dissenters rights are
perfected and (ii) any shares owned directly or indirectly by MEDIQ) will be
converted into the right to receive the Merger Consideration, without interest.
Each outstanding share of common stock of Merger Sub will be exchanged for one
share of the stock of the Surviving Corporation. See "THE MERGER AGREEMENT-
General," "-Consideration to be Received by Shareholders" and "-Payment for
Shares."
Recommendation of the Special Committee and the Board of Directors
The Special Committee of the UHS Board of Directors (the "Special
Committee"), as well as the full Board of Directors of UHS, each has unanimously
determined, based upon factors it deemed relevant, that the terms of the Merger
Agreement are fair to, and in the best interests of, UHS and its shareholders,
and each has unanimously approved and adopted the Merger Agreement and
unanimously recommends that the UHS shareholders vote FOR the proposal to
approve and adopt the Merger Agreement. See "THE MERGER-Background of the
Merger" and "-Reasons for the Merger and Recommendation of the Special Committee
and Board of Directors."
Opinion of UHS Financial Advisor
Piper Jaffray, Inc. ("Piper Jaffray"), an investment banking firm, has
rendered a written opinion to the Special Committee to the effect that as of the
effective date of such opinion, and subject to the assumptions, factors and
limitations set forth therein, the Merger Consideration is fair to the UHS
shareholders from a financial point of view. The full text of the written
opinion of Piper Jaffray, which sets forth the assumptions made, procedures
followed, matters considered and limits of review, is attached as Appendix B to
this Proxy Statement. SHAREHOLDERS ARE URGED TO AND SHOULD READ THE OPINION OF
PIPER JAFFRAY CAREFULLY. See "THE MERGER-Opinion of UHS Financial Advisor."
Reasons of UHS for the Merger
The decision of the Special Committee and the Board of Directors to approve
and recommend the Merger Agreement was the product of the Special Committee's
lengthy evaluation process described under "THE MERGER-Background of the
Merger." This process involved (a) consideration of the alternatives available
to the Company; (b) the implementation of a controlled auction process
coordinated by Piper Jaffray to generate the highest, bona fide acquisition
proposals for the Company and review of such proposals by the Special Committee
with the assistance of its financial and legal advisors; and (c) numerous
meetings of the Special Committee at which the Special Committee considered
various acquisition proposals and strategic alternatives with the advice and
assistance of its outside financial and legal advisors.
In determining to approve and recommend the Merger Agreement, the Special
Committee considered a number of factors, including the following: (a) the fact
that the Merger Consideration represents a substantial premium over trading
prices for the UHS Common Stock during the months preceding the announcement of
the Merger; (b) the Special Committee's review of strategic alternatives to
enhance shareholder value and the Special Committee's belief that the Merger
presents the best opportunity to achieve such objective; (c) the unlikelihood
that any other bidder would emerge to make a superior offer; (d) information
with respect to the financial condition, results of operations, business and
prospects of the Company; (e) the terms and conditions of the Merger Agreement,
which terms and conditions the Special Committee believed increased the
likelihood that the Merger would be
2
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consummated; (f) the presentations of Piper Jaffray at numerous meetings of the
Special Committee and the opinion of Piper Jaffray as of February 10, 1997 that
the Merger Consideration is fair, from a financial point of view, to the
Company's shareholders; and (g) that the Merger Agreement permits the Company to
terminate the Merger Agreement in response to an unsolicited Superior Proposal
(as defined herein) provided that UHS pays a $3,000,000 Break-Up Fee (as defined
in the Merger Agreement). See "THE MERGER-Reasons for the Merger and
Recommendation of the Special Committee and Board of Directors."
Reasons of MEDIQ and Merger Sub for the Merger
MEDIQ has determined that the Merger is in its best interests because it
expects to be able to take advantage of the synergies and economies of scale
that are expected to result from combining and consolidating the field
operations of MEDIQ and UHS, together with the savings that are expected to
result from the elimination of duplicate administrative expenses. In addition,
MEDIQ expects to be able to reduce capital expenditures through the
consolidation of the equipment rental pools of MEDIQ and UHS. Finally, MEDIQ
expects the combination of MEDIQ and UHS to result in an expansion of MEDIQ's
customer base.
Certain Effects of the Merger
As a result of the Merger, UHS will become a wholly-owned indirect
subsidiary of MEDIQ, and the current shareholders of UHS will no longer have any
continuing interest in UHS. As of the Effective Time, UHS Common Stock will no
longer be traded on the Nasdaq Stock Market, and the registration of UHS Common
Stock under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
will be terminated.
After the Merger, UHS's Board of Directors will be composed of individuals
designated by MEDIQ, and the officers of Merger Sub at the effective time of the
Merger (the "Effective Time") will be the initial officers of UHS after the
Merger until their respective successors are duly appointed or elected and
qualified.
Upon consummation of the Merger, the maturity date of certain UHS
indebtedness will be accelerated. See "CERTAIN EFFECTS OF THE MERGER."
Conduct of Business if the Merger is Not Consummated
If the Merger does not occur, UHS will continue its current operations.
However, for the reasons discussed under the caption "THE MERGER-Background of
the Merger," UHS may continue to explore strategic alternatives, including a
business combination or sale of UHS.
If the Merger is not consummated, MEDIQ may, with the consent of UHS,
purchase UHS Common Stock from time to time subject to availability at prices
deemed acceptable to MEDIQ, pursuant to a merger transaction, tender offer, open
market or privately negotiated transactions or otherwise on terms more or less
favorable to UHS shareholders than the terms of the Merger. However, MEDIQ has
made no determination as to any future transactions if the Merger is not
consummated. See "THE MERGER-Conduct of Business if the Merger is Not
Consummated."
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Interests of Certain Persons in the Merger
In considering the recommendation of the Special Committee of the Board of
Directors of UHS with respect to the Merger Agreement, the shareholders of UHS
should be aware that certain members of UHS's management and Board of Directors
have interests in the Merger that are different from, or in addition to, the
interests of UHS shareholders generally, including, but not limited to, rights
to severance payments in the event of employment termination under certain
circumstances. See "INTERESTS OF CERTAIN PERSONS IN THE MERGER."
The Support/Voting Agreements
MEDIQ has entered into Support/Voting Agreements with certain members of
UHS management, specifically, Thomas A. Minner, Paul W. Larsen, Michael W.
Bohman, and Duane R. Wenell (collectively, the "Supporting Stockholders"),
pursuant to which they have agreed to vote all of their shares in favor of the
Merger. As of the Record Date, the Supporting Stockholders beneficially owned in
the aggregate 858,907 shares of UHS Common Stock, or approximately 16.0% of the
shares outstanding as of the Record Date. See "THE SPECIAL MEETING-Voting
Information."
Dissenters' Rights
Under the Minnesota Business Corporation Act (the "MBCA"), any holder of
UHS Common Stock who does not vote in favor of the Merger and who strictly
complies with the procedural requirements of Section 302A.473 of the MBCA, the
full text of which is included in Appendix C to this Proxy Statement, will have
the right to dissent to the Merger Agreement and make written demand for the
payment of "fair value" of such holder's shares of UHS Common Stock. See "RIGHTS
OF DISSENTING SHAREHOLDERS."
Certain Federal Income Tax Consequences of the Merger
The receipt of cash for UHS Common Stock in the Merger will be a taxable
transaction for federal income tax purposes under the Internal Revenue Code of
1986, as amended, and also may be a taxable transaction under applicable state,
local, foreign and other tax laws. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES."
Effective Time of the Merger
The Merger will become effective upon the filing of Articles of Merger with
the Secretary of State of the State of Minnesota. The filing will occur promptly
after all conditions to the Merger contained in the Merger Agreement have been
satisfied or waived, which UHS and MEDIQ currently contemplate will occur on or
about April 4, 1997. See "THE MERGER AGREEMENT-General" and "-Effective
Time."
Conditions to Consummation of the Merger
The Merger is subject to various closing conditions, including the
expiration of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the
requisite approval of UHS shareholders. See "THE MERGER AGREEMENT-Conditions to
Consummation of the Merger."
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Termination of the Merger Agreement
The Merger Agreement may, under specified circumstances, be terminated and
the Merger abandoned at any time prior to filing Articles of Merger with the
Minnesota Secretary of State, notwithstanding approval of the Merger Agreement
by the shareholders of UHS.
The Merger Agreement may be terminated by UHS upon approval by the UHS
Board of Directors of a Superior Proposal (as defined in the Merger Agreement)
and payment by UHS to MEDIQ of the $3,000,000 Break-Up Fee. In addition, UHS is
required to pay the $3,000,000 Break-Up Fee to MEDIQ upon termination of the
Merger Agreement by MEDIQ if the UHS Board of Directors or the Special Committee
(i) has withdrawn, modified or changed its recommendation regarding the approval
of the Merger Agreement or the Merger in a manner adverse to MEDIQ; (ii) has
recommended to the UHS shareholders any Acquisition Proposal (as defined in the
Merger Agreement); (iii) has taken any action under the Rights Agreement (as
defined herein) to exclude any person or entity (other than MEDIQ, Merger Sub or
their affiliates) from the definition of "Acquiring Person" (as defined in the
Rights Agreement) or to redeem the Rights; (iv) has taken any action under
Section 302A.673 of the MBCA to approve any "business combination" (as defined
in the MBCA) with an "interested shareholder" (as defined in the MBCA) (other
than MEDIQ, Merger Sub or their affiliates) prior to such shareholder's "share
acquisition date" (as defined in the MBCA) or the acquisition of shares by such
shareholder; (v) has taken any action to provide that an Acquisition Proposal
(as defined herein) shall be exempt from the provisions of Section 302A.671 of
the MBCA; or (vi) has resolved to do any of the foregoing.
UHS is also obligated to pay the $3,000,000 Break-Up Fee to MEDIQ if (i)
the Merger Agreement is terminated because of a failure to receive the requisite
shareholder approval of the Merger and, prior to the Special Meeting, UHS had
entered into discussions or negotiations with any other person or entity with
respect to an Acquisition Proposal and the Board of Directors of UHS had not
reaffirmed its Merger recommendation to the UHS shareholders by the time of the
Special Meeting or (ii) the Merger Agreement is terminated because of a wilful
breach by UHS of its obligations under the Merger Agreement and within twelve
months after such termination, a merger, consolidation or other business
combination involving UHS or an acquisition of 50% or more of an equity interest
in UHS is consummated with any other person or entity. See "THE MERGER
AGREEMENT-Termination."
Regulatory Approvals
Under the HSR Act, the Merger may not be consummated unless notice has been
given and certain information has been furnished to the Antitrust Division of
the United States Department of Justice and the Federal Trade Commission. UHS
and MEDIQ submitted the filings required under the HSR Act on or before March
11, 1997 and such filings are currently pending. See "REGULATORY APPROVALS."
Market Price for UHS Common Stock
On February 10, 1997, the last full trading day prior to the public
announcement of the Merger Agreement, the high and low sales prices reported for
shares of UHS Common Stock on the Nasdaq Stock Market were $12.50 and $12.00,
respectively, and the closing price was $12.38. On March 18, 1997, the closing
price for shares of UHS Common Stock, as reported on the Nasdaq Stock Market,
was $17.125. See "MARKET PRICE AND DIVIDEND INFORMATION FOR UHS COMMON STOCK."
SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THEIR SHARES
OF UHS COMMON STOCK.
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Payment Agent; Surrender of Stock Certificates
Norwest Bank Minnesota, N.A. (161 North Concord Exchange, South St. Paul,
Minnesota 55075 ((612) 450-4064) will act as the payment agent (the "Payment
Agent") for the Merger. Promptly after the Effective Time, but in no event later
than five business days thereafter, the Payment Agent will send to each UHS
shareholder (other than those shareholders holding shares as to which
dissenters' rights have been perfected) a letter of transmittal advising as to
the procedures for surrendering certificates representing shares of UHS Common
Stock in exchange for the Merger Consideration. Certificates should not be
surrendered until the letter of transmittal is received. As soon as practicable
following receipt from the shareholder of a duly executed letter of transmittal,
together with certificates formerly representing UHS Common Stock and any other
items specified by the letter of transmittal, the Payment Agent will pay the
Merger Consideration to such shareholder, by check or draft less any amount
required to be withheld under applicable federal income tax regulations. See
"THE MERGER AGREEMENT-Payment for Shares."
Accounting Treatment
MEDIQ will account for the Merger under the "purchase" method of
accounting, in accordance with generally accepted accounting principles.
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<PAGE>
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 UHS. The financial statements as of December 31, 1996
and 1995 and for the years ended December 31, 1996, 1995 and 1994 are included
elsewhere herein. 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 information included herein.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------- ------- -------
Statement of Operations Data: (in thousands, except per share and operating data)
<S> <C> <C> <C> <C> <C>
Revenues:
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 inventory............ 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).......... $ 0.17 $ 0.50 $ .37 $ .40 $ .70
Extraordinary loss per common
share, net of taxes................... - - - - (.03)
Earnings per common share(2).......... $ 0.17 $ 0.50 $ .37 $ .40 $ .67
======= ======= ======= ======= =======
Weighted average common
shares outstanding................... 5,495 5,502 5,449 5,393 4,481
======= ======= ======= ======= =======
Balance Sheet Data (at period end):
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 (at period end):
Offices................................ 46 43 39 36 33
Customers.............................. 3,152 2,775 2,561 2,224 2,098
</TABLE>
(Footnotes on following page)
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(1) As a result of refinancing and early retirement of debt, UHS wrote off
$153,760 (net of tax benefit of $108,000) of deferred debt placement costs
during 1992.
(2) Earnings per share of UHS 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 and $1,063,270
for the years ended December 31, 1992 and 1991, respectively. The
redeemable preferred stock was retired during 1992.
(3) No UHS Common Stock cash dividends have been declared or paid by UHS.
THE SPECIAL MEETING
Introduction
This Proxy Statement is being furnished to the shareholders of UHS in
connection with the solicitation of proxies by the Board of Directors of UHS for
use at the Special Meeting to be held on April 4, 1997 at 9:00 a.m., Central
Time, at the Radisson Hotel South, 7800 Normandale Boulevard, Bloomington,
Minnesota, and at any adjournments or postponements thereof.
Matters to be Considered at the Meeting
At the Special Meeting, the shareholders of UHS will be asked to consider and
vote on a proposal to approve the Merger Agreement, as well as any other matters
that may properly come before the Special Meeting and any postponements or
adjournments thereof. In addition to approval of the Merger Agreement,
shareholders may be asked to approve a proposal to adjourn the Special Meeting
to permit further solicitation of proxies if there are not sufficient
affirmative votes at the time of the Special Meeting to approve the Merger
Agreement. A proxy voting against the proposal to approve the Merger Agreement
will not be voted to approve a proposal to adjourn the Special Meeting. It is
not anticipated that any other matters will be brought before the Special
Meeting. However, if other matters should properly come before the Special
Meeting, it is intended that the holders of proxies solicited hereby will vote
thereon in their discretion, unless such authority is withheld.
Voting Information
Holders of record of UHS Common Stock at the close of business on February
26, 1997 are entitled to vote at the Special Meeting. On that date, 5,372,421
shares of UHS Common Stock were outstanding and held by approximately 1,200
shareholders. Each outstanding share of UHS Common Stock is entitled to one
vote. The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of UHS Common Stock entitled to vote at the Special Meeting
is necessary to constitute a quorum for the transaction of business at such
meeting. Abstentions and broker nonvotes are counted for purposes of
determining whether a quorum exists at the Special Meeting. However, proxies
that reflect abstentions and broker nonvotes and proxies that are not returned
will have the same effect as a "no" vote with respect to the Merger because the
affirmative vote of the holders of a majority of the outstanding shares of UHS
Common Stock is required to approve the Merger Agreement.
As of February 26, 1997, 5,372,421 shares of UHS Common Stock were
outstanding. Accordingly, the affirmative vote of at least 2,686,211 shares of
UHS Common Stock is a condition to the consummation of the Merger. Certain
members of the management of UHS (the "Supporting Shareholders") owning in the
aggregate 858,907 shares of UHS Common Stock have agreed, pursuant to
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<PAGE>
Support/Voting Agreements dated as of February 17, 1997 between MEDIQ and each
such management person, to vote such shares of UHS Common Stock in favor of the
Merger and the Merger Agreement. See "THE MERGER-Background of the Merger."
Solicitation, Revocation and Use of Proxies
UHS will pay the costs of soliciting proxies from its shareholders and the
costs of reporting and mailing this Proxy Statement, the enclosed proxy and any
other material furnished to its shareholders in connection with the Special
Meeting. In addition to the solicitation of proxies by mail, certain UHS
directors, officers and employees may solicit proxies by telephone, telecopy and
personal contact, without separate compensation for such activities. Copies of
solicitation materials will be furnished to fiduciaries, custodians and
brokerage houses for forwarding to beneficial owners of UHS Common Stock, and
such persons will be reimbursed for their reasonable out-of-pocket expenses
incurred in connection therewith. The Company has also retained Morrow & Co.,
Inc. to solicit proxies, by mail, in person or by telephone, at an estimated
cost of $5,000 plus reimbursement of reasonable out-of-pocket expenses.
Any person giving a proxy in the form accompanying this Proxy Statement has
the power to revoke it at any time before it is exercised. The proxy may be
revoked by filing with the Secretary of UHS an instrument of revocation or a
duly executed proxy bearing a later date. Such filing must be made to the
attention of the Secretary of UHS by mailing or delivering such filing to the
principal executive offices of UHS located at 1250 Northland Plaza, 3800 West
80th Street, Bloomington, Minnesota 55431-4442, Attention: Secretary. The proxy
may also be revoked by affirmatively electing to vote in person while attending
the meeting. However, a shareholder who attends the meeting need not revoke his
or her proxy and vote in person unless he or she wishes to do so. All valid
proxies will be voted at the meeting in accordance with the instructions given.
If no instructions are given, the shares represented by the proxy will be voted
at the Special Meeting FOR approval of the Merger Agreement and in accordance
with this Proxy Statement on any other business that may properly come before
the Special Meeting and any postponements or adjournments thereof.
THE MERGER
At a special meeting held on February 10, 1997, the Special Committee
unanimously determined that the Merger is fair to, and in the best interests of,
the shareholders of UHS, approved the Merger Agreement and the transactions
contemplated thereby, and determined to recommend to the UHS shareholders that
they vote for approval and adoption of the Merger Agreement. Thereafter, at a
special meeting of the full Board of Directors of UHS, the Board unanimously
ratified the actions of the Special Committee and approved the Merger Agreement
and such transactions. Following these meetings, on February 10, 1997, UHS,
MEDIQ and Merger Sub entered into the Merger Agreement. The following discussion
sets forth certain information relating to the background of the discussions and
meetings leading up to the Merger.
Background of the Merger
Since the Company's initial public offering in 1992, the Board of Directors
and management of the Company have evaluated and considered various alternatives
for enhancing shareholder value. Over the last few years the Board of Directors
has generally believed that the trading prices of the UHS Common Stock have not
reflected the potential value of the Company. The Company believes that the
market price for the UHS Common Stock has been adversely affected by several
factors. First, the number of shares of UHS Common Stock in the public float has
historically been relatively limited. Second, the average daily trading volume
of the UHS Common Stock, which is traded on the Nasdaq Stock Market, has been
low historically, restricting the level of interest in the UHS Common Stock.
Third, since the initial public offering in 1992, the Company has had a very
limited number of market makers and investment banking firms preparing research
reports with respect to the Company. Fourth, the Company believes that its
medical equipment rental business does not fit squarely within any
9
<PAGE>
particular investment sector (i.e., either the healthcare or financial services
segment) and that there are very few comparable public companies engaged in
similar businesses in relation to which investors may assess the Company's
performance. Fifth, the Company experienced a number of earnings disappointments
over the last several years due to the effect on the Company's business of
customer uncertainty over healthcare reform and the resulting deferral by those
customers of medical equipment procurement decisions.
In recent years, UHS has initiated or explored a number of efforts aimed at
enhancing shareholder value, such as strategic partnerships with medical
equipment manufacturers, acquisitions and, more recently, measures aimed at
improving operating margins, such as salary and work force reductions and
deferral of new office openings. To date, the Company does not believe that
these efforts have had any significant positive effect on improving share price.
In addition, although the secondary offering in late 1995 by a selling
shareholder of shares representing approximately 30% of the outstanding UHS
Common Stock increased the public float of the UHS Common Stock, the UHS Common
Stock has remained thinly traded.
As a result of these factors and the actions of certain of the Company's
investors described below, the Company intensified its efforts to explore
strategic alternatives to enhance shareholder value during the second half of
1996. During this period, a number of the Company's significant shareholders
expressed their concerns that the then current market prices for UHS Common
Stock did not reflect the intrinsic value of the Company and indicated their
belief that the Company should take immediate steps to enhance shareholder
value. On October 7, 1996, Peter H. Kamin and Peak Investment Limited
Partnership (together, "Peak") filed a Schedule 13D reporting that Peak had
acquired shares of UHS Common Stock representing 7.8% of the Company's reported
outstanding UHS Common Stock, that Peak intended to review its investment and
that Peak may propose one or more actions to enhance shareholder value or to
effect a change of control of the Company. During September 1996, members of the
Company's management met with representatives of Piper Jaffray to discuss ways
to enhance shareholder value.
At the October 29, 1996 regular meeting of the Board of Directors the
concerns of the Company's investors were discussed. Based upon preliminary
discussions between members of the Company's management and representatives of
Piper Jaffray in September 1996, the Company asked Piper Jaffray to make a
presentation to its full Board of Directors. At the October 29, 1996 meeting,
the Board met with Piper Jaffray to discuss in general terms ways to enhance
shareholder value and the possible engagement of Piper Jaffray to assist in the
Company's efforts. In addition, representatives of each of Piper Jaffray and
outside counsel to the Company presented certain information to the Company
regarding the potential benefits of adopting a shareholder rights plan in order
to provide the Board of Directors the opportunity to adequately review the
Company's strategic alternatives. At the October 29, 1996 Board meeting the
directors determined to schedule a November 8, 1996 meeting to further discuss
the benefits of adopting a shareholder rights plan.
On October 30, 1996, Private Capital Management (together with its
affiliates, "PCM"), a significant shareholder of UHS which had previously
reported in a Schedule 13G that it had acquired shares of UHS Common Stock for
investment purposes, filed a Schedule 13D stating that it believed that the then
current market price of UHS Common Stock did not reflect the intrinsic value of
the Company, that the Company should consider taking proactive steps to enhance
shareholder value (including, among other things, a possible business
combination with a strategic or financial buyer), and that PCM intended to
review its investment in the Company on a continuing basis and may consider
taking such actions as it believed would facilitate the enhancement of
shareholder value.
On October 31, 1996, Thomas A. Minner, the Company's Chief Executive
Officer, received a telephone call from Thomas E. Carroll, President of MEDIQ
indicating MEDIQ's interest in acquiring the Company. On that occasion, Mr.
Minner indicated to Mr. Carroll that the Company was not currently for sale, but
that he would inform the Company's Board of Directors of MEDIQ's interest.
10
<PAGE>
On November 5, 1996, the Company received a letter from MEDIQ indicating
MEDIQ's interest in acquiring the Company for an unspecified consideration "in
the range of" $10.50 per share.
On November 7, 1996, the Company engaged Piper Jaffray to assist the
Company in analyzing its strategic alternatives and to assist the Board of
Directors in evaluating, and potentially implementing, a shareholder rights
plan. Karen M. Bohn, a director of UHS, is a Managing Director and Chief
Administrative Officer of Piper Jaffray Companies, Inc., the parent of Piper
Jaffray. See "INTERESTS OF CERTAIN PERSONS IN THE MERGER-Certain Relationships."
On November 8, 1996, the Board of Directors of UHS met with Piper Jaffray
and the Company's outside counsel to discuss the process of exploring
alternatives to enhance shareholder value and the merits of implementing a
shareholder rights plan during such a process. Representatives of Piper Jaffray
and outside counsel to the Company made presentations regarding shareholder
rights plans generally and the proposed form of rights agreement to be adopted
by the Company. At that meeting, after a thorough discussion and analysis, the
Board of Directors approved the Rights Agreement dated as of November 8, 1996
(the "Rights Agreement") between the Company and Norwest Bank Minnesota, N.A.,
as rights agent. Under the Rights Agreement, rights to purchase shares of Series
A Junior Participating Preferred Stock of UHS (the "Rights") were distributed as
a dividend to shareholders of record of UHS Common Stock as of the close of
business on November 21, 1996. For a description of the terms of the Rights see
"DESCRIPTION OF UHS CAPITAL STOCK-Rights" below.
At the November 8, 1996 Board meeting, the Board also authorized Piper
Jaffray to initiate a process of exploring its strategic alternatives, including
the possible sale of the Company or continuing to operate the Company as an
independent entity, and to contact potential buyers. On November 11, 1996, the
Company issued a press release announcing the initiation of this process, the
engagement of Piper Jaffray, the receipt of the letter referred to above from
MEDIQ (without naming MEDIQ or the price range set forth in the letter), and the
Company's adoption of the Rights Agreement.
Thereafter, the Company and Piper Jaffray received calls from the
representatives of various entities interested in an acquisition of the Company.
During the course of the next several weeks, Piper Jaffray also initiated
contact with a number of potential acquirors of the Company, some of whom had
informally expressed a possible interest in such a transaction prior to November
1996. Over the course of its engagement, Piper Jaffray contacted a total of 30
potentially interested parties representing both strategic and financial buyers
for purposes of soliciting proposals for potential acquisitions, mergers or
other strategic alliances. Piper Jaffray and the Company prepared a confidential
information memorandum and distributed the memorandum to 23 interested parties,
each of whom each signed a confidentiality agreement.
On November 22, 1996, representatives of Smith Barney Inc., on behalf of
MEDIQ, met with representatives of Piper Jaffray to discuss the process
announced by the Company and to express again the strong interest of MEDIQ in
acquiring the Company. No price or other specific terms of a transaction were
discussed.
At a December 9, 1996 special meeting of the Board of Directors, the Board
established a special committee (the "Special Committee") comprised of the
Company's non-employee directors to carry out the process of exploring
alternatives to enhance shareholder value and to make a recommendation to the
full Board of Directors. On December 12, 1996, the Company announced the
establishment of the Special Committee.
In response to a request from Piper Jaffray for preliminary proposals, on
or prior to December 13, 1996 the Company received eight preliminary indications
of interest. Of the eight indications of interest, five expressed interest in a
purchase of the Company, one proposed a strategic alliance between the Company
and a major medical products company, one proposed the sale to UHS of a
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<PAGE>
subsidiary of another company and one proposed financing a self-tender by the
Company for a portion of its shares which would be accompanied by a change in
management of the Company. All of the five acquisition proposals (including a
proposal from MEDIQ) involved a cash acquisition of all of the UHS Common Stock
with cash consideration to the Company's shareholders in the range of $11.50 to
$14.00 per share. David E. Dovenberg, the Company's Chief Financial Officer, was
participating in two of the acquisition proposals.
On December 18, 1996, the Special Committee held a meeting to review each
of these indications of interest as well as the other strategic alternatives
that were being evaluated. At this meeting, the Special Committee's legal
advisors and Piper Jaffray reviewed the process by which the proposals had been
solicited and the terms of each of the proposals received. Piper Jaffray also
analyzed other strategic alternatives available to the Company such as pursuing
a strategy of growth through acquisitions, the declaration of a special dividend
and the self-tender proposal. Based on this review, the Special Committee
determined that each of the five acquisition proposals should be given further
consideration by the Company. In addition, the Special Committee requested that
Piper Jaffray, together with certain members of the Company's management,
continue to assist the Special Committee in further assessing the strategic
alliance proposal. Based on the presentations and analysis of its financial and
legal advisors, the Special Committee determined that it would not then pursue
further the self-tender proposal, the proposed acquisition by the Company of the
subsidiary of another company, the strategy of pursuing growth through
acquisitions generally or the declaration of a special dividend. On December 19,
1996, the Company issued a press release announcing that it had received at
least four preliminary indications of interest from qualified parties and a
preliminary indication of interest from a major healthcare company concerning a
possible a strategic alliance.
Over the next six weeks, Piper Jaffray and senior management of the Company
met with representatives of the five potential acquirors referred to above
(including MEDIQ) and engaged in a telephone conference with representatives of
the healthcare company that submitted the strategic alliance proposal. Piper
Jaffray and the Company's senior management assisted these potential acquirors
in their conduct of a due diligence review of the Company.
On or before January 27, 1997, four of the five potential acquirors of the
Company (including MEDIQ) submitted revised proposals to acquire the Company,
including their changes to a form of acquisition agreement supplied by the
Company. All four of the second round proposals involved a cash acquisition
(through tender offer or merger) of all of the UHS Common Stock. Two of the
proposals involved a price per share of $14.00 and two of the proposals involved
a price per share of $15.00.
On January 30, 1997, the Special Committee held a meeting to review each of
these four proposals as well as the strategic alliance alternative. At this
meeting, the Special Committee's legal advisors and Piper Jaffray reviewed the
process by which the proposals had been solicited and the terms of each of the
proposals received. Piper Jaffray again provided the Special Committee with its
valuation analysis of the Company as an independent publicly-traded company,
which analysis had not materially changed from its presentations at prior
meetings. (For a discussion of the valuation analysis of Piper Jaffray, see "THE
MERGER-Opinion of UHS Financial Advisor" below.) The Special Committee concluded
that each of the four second round proposals compared favorably to Piper
Jaffray's valuation analysis. In addition, the Special Committee, together with
its legal and financial advisors, reviewed the strategic alliance proposal, an
analysis of the impact such an alliance would have on the financial performance
of the Company, the time such an alliance would take to be implemented and the
uncertainty regarding the future potential of such an alliance. Based on these
factors, the Special Committee concluded that the second round acquisition
proposals appeared to present a greater opportunity to enhance shareholder
value.
After evaluating the alternatives for enhancing shareholder value, in
consultation with its legal and financial advisors, the Special Committee
determined to recommend to the Board of Directors of the Company that the
Company pursue a sale of the Company on terms acceptable to the
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<PAGE>
Company and its shareholders. Immediately following the meeting of the Special
Committee, on January 30, 1997, the Board of Directors met and reviewed this
recommendation of the Special Committee. The full Board of Directors unanimously
ratified and approved the recommendation of the Special Committee and further
authorized the Special Committee to proceed with the negotiation and approval of
a sale of the Company on terms approved by the Special Committee.
Thereafter, three of the four bidders modified their proposals. On February
5, 1997, the Special Committee met and, together with its financial and legal
advisors, reviewed the three third round proposals, which proposals all
continued to involve a cash acquisition of all of the UHS Common Stock with a
per share price in the range of $14.50 to $17.50. Based on this review, the
Special Committee concluded that the proposal from MEDIQ (which offered a
transaction priced at $17.50 per share of UHS Common Stock) provided price and
other terms sufficiently more favorable to the Company and its shareholders than
any other proposal. The Special Committee authorized its financial advisors and
legal counsel (including legal counsel to the Company) to negotiate a sale of
the Company to MEDIQ on substantially the terms outlined in MEDIQ's third round
bid.
Following the February 5, 1997 meeting of the Special Committee,
representatives of the Company and of MEDIQ continued their discussions and
negotiations regarding the terms of the Merger Agreement. These further
discussions and negotiations continued throughout the period from February 5 to
February 10, 1997. The Merger Agreement in substantially its definitive form was
discussed with members of the Special Committee at a telephonic meeting on
February 9, 1997. The definitive Merger Agreement was approved by both the
Special Committee and the Board of Directors of the Company at a special meeting
held on February 10, 1997, and was signed by the Company and MEDIQ on
February 10, 1997.
Reasons for the Merger and Recommendation of the Special Committee and Board of
Directors
The Special Committee, at a special meeting held on February 10, 1997,
unanimously approved the Merger Agreement and the transactions contemplated
thereby, including the Merger. The Board of Directors, at a special meeting held
immediately thereafter, ratified the actions of the Special Committee and also
unanimously approved the Merger Agreement and the transactions contemplated
thereby, including the Merger. The Special Committee and the Board of Directors
have determined that the Merger Agreement is in the best interest of the
shareholders of the Company and recommend that the Company's shareholders vote
FOR the authorization and adoption of the Merger Agreement.
The decision of the Special Committee and the full Board to approve and
recommend the Merger Agreement was the product of the Special Committee's
lengthy evaluation process described under "THE MERGER-Background of the
Merger." This process involved (a) consideration of the alternatives available
to the Company, namely (i) a sale of the Company, (ii) pursuing other strategic
alternatives such as a strategic alliance with a major healthcare company,
pursuing a strategy of growth through acquisitions, engaging in a self-tender or
declaring a special dividend, and (iii) the maintenance of the operations of the
Company as an independent public company; (b) the implementation of a controlled
auction process coordinated by Piper Jaffray to generate the highest, bona fide
acquisition proposals for the Company and review of such proposals by the
Special Committee with the assistance of its legal and financial advisors; and
(c) numerous meetings of the Special Committee held from mid-December through
early February, at which the Special Committee considered the various
acquisition proposals and strategic alternatives with the advice and assistance
of its outside financial and legal advisors.
In determining to approve and recommend the Merger Agreement, the Special
Committee considered a number of factors, including the following:
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<PAGE>
(a) the fact that the Merger Consideration of $17.50 per share
represents a premium of approximately 125.8% over the $7.75 closing price
per share on November 8, 1996 (the trading day prior to the announcement by
the Company that it had retained Piper Jaffray as financial advisor to
assist the Board in evaluating strategic alternatives, including the
possible sale of the Company) and a premium of approximately 41.4% over the
closing sales price of $12.38 per share for the UHS Common Stock as
reported on the Nasdaq Stock Market on February 10, 1997 (the last full
trading day prior to the announcement of the execution of the Merger
Agreement);
(b) the Special Committee's review of the potential strategic
alternatives to enhance shareholder value and the Special Committee's
belief that the Merger presents the best opportunity to achieve such
objective (see "THE MERGER-Background of the Merger");
(c) that the Company had publicly announced that it was potentially
for sale, that the execution of the Merger Agreement followed a controlled
auction process and, in light of the process that had been followed, the
unlikelihood that any other bidder would emerge to make a superior offer;
(d) information with respect to the financial condition, results of
operations, business and prospects of the Company, including the prospects
of the Company if it were to remain independent, and current industry,
economic and market conditions;
(e) the terms and conditions of the Merger Agreement, including that
the Merger Agreement does not include a financing condition to the
obligations of MEDIQ and Merger Sub to consummate the Merger, which terms
and conditions the Special Committee believed increased the likelihood that
the Merger would be consummated;
(f) the presentations of Piper Jaffray at numerous meetings of the
Special Committee and the opinion as of February 10, 1997 of Piper Jaffray
that the Merger Consideration is fair, from a financial point of view, to
the Company's shareholders (see "THE MERGER-Background of the Merger" and
"--Opinion of UHS Financial Advisor"); and
(g) that the Merger Agreement permits the Company to terminate the
Merger Agreement or take certain other actions in response to an
unsolicited Acquisition Proposal if the Board, in the exercise of its
fiduciary obligations (as determined in good faith by the Board based on
the advice of its outside counsel), determines that such Acquisition
Proposal is a Superior Proposal and pays the $3,000,000 Break-Up Fee (see
"THE MERGER AGREEMENT-Restriction on Solicitation" and "-Termination").
In view of the wide variety of factors considered in connection with its
evaluation of the terms of the Merger, the Company's Board of Directors did not
find it practicable to, and did not, quantify or otherwise attempt to assign
relative weights to the specific factors considered in reaching its conclusions.
The Special Committee evaluated the factors described above in light of
their knowledge of the business and operations of the Company, and their
business judgment, and concluded that the $17.50 per share in cash as Merger
Consideration was in the best interests of the Company and its shareholders.
Opinion of UHS Financial Advisor
Pursuant to engagement letters dated November 7 and 13, 1996, the Board of
Directors of UHS retained Piper Jaffray to review and analyze a variety of
strategic alternatives available to UHS to enhance shareholder value. On
December 12, 1996, the UHS Board of Directors announced the formation and
appointment of the Special Committee to consider UHS's strategic alternatives.
Pursuant to an engagement letter dated January 3, 1997 (the "Engagement
Letter"), the Special
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Committee retained Piper Jaffray to act as financial advisor to the Special
Committee and, if requested, to render an opinion as to the fairness, from a
financial point of view, to UHS shareholders of the consideration to be received
by such shareholders in any proposed transaction.
At a meeting of the Special Committee on January 30, 1997, Piper Jaffray
made a presentation summarizing the process by which proposals to acquire UHS
had been solicited, summarizing and comparing the four second-round proposals to
acquire UHS and analyzing the proposals (in a manner similar to that summarized
below) and summarizing and analyzing the proposal concerning a strategic
alliance. At a meeting of the Special Committee on February 10, 1997, Piper
Jaffray delivered its written opinion to the Special Committee to the effect
that, as of such date, and subject to the assumptions, factors and limitations
set forth therein, the consideration to be received by the UHS shareholders
pursuant to the Merger Agreement is fair, from a financial point of view, to the
UHS shareholders. On March 18, 1997, in connection with the mailing of the Proxy
Statement, Piper Jaffray reaffirmed its opinion as of such date. A copy of Piper
Jaffray's written opinion dated March 18, 1997, which sets forth the assumptions
made, matters considered and limits on the review taken, is attached as Appendix
B to this Proxy Statement and is incorporated herein by reference (the "Piper
Jaffray Opinion"). The February 10, 1997 opinion of Piper Jaffray is
substantially identical to the Piper Jaffray Opinion attached as Appendix B. UHS
shareholders are urged to read the Piper Jaffray Opinion in its entirety. The
description of the Piper Jaffray Opinion set forth herein is qualified in its
entirety by reference to the full text of such opinion. The Piper Jaffray
Opinion is directed only to the financial terms of the Merger Agreement and does
not constitute a recommendation to any UHS shareholder as to how such
shareholder should vote at the UHS Special Meeting.
In arriving at its opinion, Piper Jaffray reviewed and analyzed, among
other things, (i) the Merger Agreement; (ii) certain publicly available
information concerning UHS; (iii) certain financial forecasts and projections
prepared by UHS's management; (iv) the historical stock prices and trading
volumes of UHS Common Stock; (v) publicly available financial data of publicly
held companies which it deemed generally comparable to UHS; and (vi) the
financial terms of certain other recent business combinations, which it deemed
generally relevant. In addition, Piper Jaffray held discussions with members of
the management of UHS concerning the financial condition, current operating
results and business outlook for UHS and the background and rationale of the
proposed Merger. Piper Jaffray visited UHS's headquarters and Minneapolis
district office, and performed such other studies, analyses, inquiries and
investigations as it deemed appropriate.
In connection with its review, Piper Jaffray relied upon and assumed the
accuracy and completeness of the financial and other information provided to it
by UHS or otherwise made available to Piper Jaffray, and did not attempt
independently to verify such information. Piper Jaffray assumed, in reliance
upon the assurances of the management of UHS, that the information provided to
Piper Jaffray by UHS was prepared on a reasonable basis in accordance with
industry practice and, with respect to financial planning data, reflected the
best currently available estimates and judgments of UHS's management as to the
expected future financial performance of UHS, and that the management of UHS was
not aware of any information or facts that would make the information provided
to Piper Jaffray incomplete or misleading. Piper Jaffray also assumed that there
were no material changes in UHS's assets, financial condition, results of
operations, business or prospects since the date of the last financial
statements made available to Piper Jaffray. In addition, Piper Jaffray did not
assume responsibility for performing any appraisals or valuations of specific
assets or liabilities of UHS and was not furnished with any such appraisals or
valuations. Further, the Piper Jaffray Opinion was based on economic, monetary
and market conditions existing on, and the information made available to Piper
Jaffray as of, March 18, 1997.
Set forth below is a summary of selected analyses Piper Jaffray relied upon
in rendering its opinion:
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<PAGE>
Stock Trading History
Piper Jaffray reviewed the stock trading history of UHS Common Stock. Piper
Jaffray presented the following stock price data for UHS relative to specified
periods before and after announcement that the Board had determined to review
strategic alternatives, including a possible sale of the Company, and relative
to prices since the announcement:
<TABLE>
<CAPTION>
<S> <C>
1 day prior to announcement (11/8/96) $ 7.75
30 trading day pre-announcement average
(10/8/96 to 11/8/96) 7.16
60 trading day pre-announcement average
(9/8/96 to 11/8/96) 7.06
52 week (11/8/95 to 11/8/96)
high 10.50
low 5.73
Initial public offering price (IPO) (6/9/92) 8.00
Since IPO (6/9/92 to 11/8/96)
high 10.75
low 5.00
30 trading day average 12/30/96 to 2/7/97 11.39
</TABLE>
Piper Jaffray also presented stock price and volume performance data for
UHS Common Stock for specified periods, and the relationship between movements
in the trading prices of UHS Common Stock and movements in trading prices of
MEDIQ common stock and the Standard & Poor's 500 Composite Index and Nasdaq
Composite Index.
Comparable Transaction Analysis
Piper Jaffray reviewed and analyzed certain financial data from a group of
five selected mergers and acquisitions in the medical equipment rental business
completed between June 1987 and September 1996 and deemed comparable to the
Merger. For these transactions, Piper Jaffray analyzed the ratio of target
company value (market capitalization plus debt less cash) to target latest
twelve months ("LTM") sales; target company value to LTM earnings before
interest, taxes, depreciation and amortization ("EBITDA"); and target equity
value (market capitalization) to LTM net income. For these transactions, this
analysis showed that the ratio of target company value to target LTM sales
ranged from 1.3 to 2.3, with a mean of 1.6 and median of 1.4, compared with a
multiple of 2.3 for UHS based on the Merger Consideration; the ratio of target
company value to LTM EBITDA ranged from 4.1 to 7.2, with a mean of 5.0 and a
median of 4.8, compared with a multiple of 6.3 for UHS based on the Merger
Consideration; and the ratio of target equity value to LTM net income ranged
from 13.5 to 26.5, with a mean of 19.2 and a median of 17.6, compared with a
multiple of 46.0 for UHS based on the Merger Consideration. All LTM numbers for
UHS were pro forma numbers as of September 30, 1996 adjusted to reflect the
acquisition by UHS of Biomedical Equipment Rentals & Sales, Inc. ("BERS") as if
it had occurred on October 1, 1995 and adding back an inventory write down of
$1.03 million.
Premiums Paid Analysis
Piper Jaffray also reviewed and analyzed the premiums paid in recent
acquisitions of a group of publicly held companies. The analysis examined the
difference between the proposed acquisition offer price and the target's price
per share at various times prior to the announcement of a possible transaction.
In selecting comparable transactions for the premiums paid analysis, Piper
Jaffray only included cash transactions in which 100% of the target's shares
were acquired, transactions with a value between $35 million and $300 million,
and transactions completed between January 1, 1996 and January 27, 1997. This
analysis revealed 32 completed transactions that Piper Jaffray deemed to be
comparable. For these transactions, the implied premiums paid, based on the
target share price four
16
<PAGE>
weeks prior to the announcement of a possible transaction compared with the
proposed acquisition offer price, ranged from (-17.5%) to 148.3%, with a mean of
39.1% and a median of 31.8%, compared with a premium of 150.0% for this
transaction; based on the target share price one week prior to announcement
compared with the proposed acquisition offer price, ranged from (-30.5%) to
125.0%, with a mean of 35.2% and a median of 27.2%, compared with a premium of
129.5% for this transaction; and based on the target share price one day prior
to announcement compared with the proposed acquisition offer price, ranged from
(-26.7%) to 132.3%, with a mean of 26.1% and a median of 22.4%, compared with a
premium of 125.8% for this transaction. For purposes of its analysis, Piper
Jaffray assumed an announcement date for this transaction of November 11, 1996.
On that date, UHS announced that it had received an acquisition proposal from
another company, that it had hired Piper Jaffray to explore strategic
alternatives and that it was implementing a shareholder rights plan.
Discounted Cash Flow Analysis
Using a discounted cash flow analysis, Piper Jaffray calculated a range of
theoretical per share values for UHS, based on the net present value of implied
future cash flows of UHS and a terminal value assuming UHS is sold in 2001 at a
multiple of EBITDA. Piper Jaffray used internal financial planning data
prepared by management of UHS for 1997 through 2001 that reflect UHS as a
standalone entity. From 1993, the first full year after the initial public
offering, through 1996, UHS's cash flow grew at a compounded annual rate of
2.73%. From 1997 through 2001, the projected years used in the discounted cash
flow analysis, UHS's implied future cash flow was projected by management in its
internal planning data to grow at a compounded annual rate of 33.7%. Piper
Jaffray calculated the range of net present values for UHS based on a range of
discount rates of 15% to 19% and a range of terminal value multiples of
forecasted 2001 EBITDA of 4.0x to 6.0x. This analysis yielded a range of
estimated present values for UHS of between $8.33 per share and $17.70 per
share.
Comparable Company Analysis
Piper Jaffray compared selected financial data and ratios for UHS to the
corresponding data and ratios for two groups of companies deemed comparable to
UHS, all of which are publicly traded companies whose primary business is small
equipment rental, with the first comparable group of two companies healthcare
related, and the second group of eight companies non-healthcare related. The
financial data and ratios compared as part of this analysis included the stock
price as a percentage of the 52-week high; the multiple of company value to LTM
EBITDA; the multiple of market price to LTM earnings per share; the multiple of
market price to estimated 1996 earnings per share; the multiple of market price
to estimated 1997 earnings per share; EBITDA margin (LTM); EBIT margin (LTM);
net margin (LTM); and three-year historical revenue growth.
This analysis showed that this group of equipment rental companies had a
stock price as a percentage of the 52-week high ranging from 75.6% to 98.2% for
healthcare related companies (72.9% to 99.5% for non-healthcare related
companies), with a mean of 86.9% and a median of 86.9% for healthcare related
companies (88.7% and 90.2%, respectively, for non-healthcare related companies);
a multiple of company value to LTM EBITDA ranging from 4.9 to 6.6 for healthcare
related companies (2.8 to 11.0 for non-healthcare related companies), with a
mean of 5.8 and a median of 5.8 for healthcare related companies (5.5 and 5.3,
respectively, for non-healthcare related companies); a multiple of market price
to LTM earnings per share ranging from 18.9 to 19.6 for healthcare related
companies (12.0 to 25.6 for non-healthcare related companies), with a mean of
19.2 and a median of 19.2 for healthcare related companies (17.2 and 15.9,
respectively, for non-healthcare related companies); a multiple of market price
to estimated 1996 earnings per share ranging from 17.3 to 19.6 for healthcare
related companies (12.1 to 26.6 for non-healthcare related companies), with a
mean of 18.4 and a median of 18.4 for healthcare related companies (18.3 and
16.8, respectively, for non-healthcare related companies); a multiple of market
price to estimated 1997 earnings per share ranging from 13.8 to 18.3 for
healthcare related companies (9.7 to 22.2 for non-healthcare related companies),
with a mean of 16.0 and a median of 16.0 for healthcare related companies (15.5
and 15.2, respectively, for
17
<PAGE>
non-healthcare related companies); EBITDA margin (LTM) ranging from 8.7% to
42.5% for healthcare related companies (21.5% to 90.9% for non-healthcare
related companies), with a mean of 25.6% and a median of 25.6% for healthcare
related companies (51.5% and 54.8%, respectively, for non-healthcare related
companies); EBIT margin (LTM) ranging from 5.2% to 20.3% for healthcare related
companies (11.6% to 33.8% for non-healthcare related companies), with a mean of
12.8% and a median of 12.8% for healthcare related companies (22.5% and 22.0%,
respectively, for non-healthcare related companies); net margin (LTM) ranging
from 1.7% to 6.8% for healthcare related companies (4.7% to 18.5% for non-
healthcare related companies), with a mean of 4.3% and a median of 4.3% for
healthcare related companies (9.5% and 7.3%, respectively, for non-healthcare
related companies); and three-year historical revenue growth ranging from 6.8%
to 29.2% for healthcare related companies (1.9% to 33.4% for non-healthcare
related companies), with a mean of 18.0% and a median of 18.0% for healthcare
related companies (14.7% and 12.1%, respectively, for non-healthcare related
companies).
By comparison, Piper Jaffray determined that the transaction price
represented by the Merger Consideration yielded a stock price as a percentage of
the 52-week high of 167%; a ratio of company value to LTM EBITDA of 6.3 for UHS;
a multiple of market price to LTM earnings per share for UHS of 46.0; a multiple
of market price to estimated 1996 earnings per share for UHS of 39.8; a multiple
of market price to estimated 1997 earnings per share for UHS of 27.8; EBITDA
margin (LTM) for UHS of 36.3%; EBIT margin (LTM) for UHS was 11.4%; net margin
(LTM) for UHS of 3.6%; and three-year historical revenue growth for UHS of 7.2%.
All LTM numbers for UHS were pro forma numbers as of September 30, 1996 adjusted
to reflect the acquisition of BERS as if it had occurred on October 1, 1995 and
adding back an inventory write down of $1.03 million.
Although the summary set forth above does not purport to be a complete
description of the analyses performed by Piper Jaffray, the material analyses
performed by Piper Jaffray in rendering its opinion have been summarized above.
The preparation of a fairness opinion is not, however, necessarily susceptible
to partial analysis or summary description. Piper Jaffray believes that its
analyses and the summary set forth above must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, or
selecting part or all of the above summary, without considering all factors and
analyses, would create an incomplete view of the processes underlying the
analyses set forth in the Piper Jaffray Opinion. In addition, Piper Jaffray may
have given various analyses more or less weight than other analyses but no
analysis was given materially more weight than any other analysis. The fact
that any specific analysis has been referred to in the summary above is not
meant to indicate that such analysis was given greater weight than any other
analysis.
In performing its analyses, Piper Jaffray made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of UHS. The analyses
performed by Piper Jaffray are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of Piper
Jaffray's analysis of the fairness of the consideration to be paid in connection
with the Merger to UHS shareholders. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold or
the prices at which any securities may trade at the present time or at any time
in the future. In addition, as described above, the Piper Jaffray Opinion was
one of many factors taken into consideration by the Special Committee in making
its determination to approve the Merger Agreement.
Piper Jaffray was selected by UHS on the basis of its experience in valuing
securities in connection with mergers and acquisitions and its knowledge of UHS.
Piper Jaffray is a nationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, underwritings and secondary
distributions of securities, private placements and valuations for estate,
corporate and other purposes. Piper Jaffray was initially retained to act as
financial advisor to the Board of Directors, and since January 3, 1997 has acted
as financial advisor to the Special Committee. Although Piper Jaffray assisted
the Special Committee in certain of the negotiations leading to the Merger
Agreement, Piper Jaffray was not asked to, and did
18
<PAGE>
not, propose the specific Merger Consideration. The Merger Consideration was
determined by arms-length negotiations between UHS and MEDIQ after consultation
by each of the parties with their respective financial advisors as to various
matters, including preliminary ranges of value.
Piper Jaffray has from time to time issued research reports and
recommendations on the UHS Common Stock and, in the ordinary course of business,
has acted as a market maker in UHS Common Stock. Karen M. Bohn, a Managing
Director and the Chief Administrative Officer of Piper Jaffray Companies, Inc.,
the parent of Piper Jaffray Inc., is a director of UHS and a member of the
Special Committee.
Pursuant to the Engagement Letter, for acting as financial advisor to the
Special Committee, 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 an opinion to the Special Committee as to the
fairness, from a financial point of view, of the consideration to be received by
UHS shareholders in connection with a transaction such as the Merger; (iii)
$25,000 in cash upon Piper Jaffray rendering an updated opinion at the time of
mailing of this Proxy Statement to the UHS shareholders; and (iv) in the event a
sale or merger of UHS, including the Merger, 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 $425,000 of
fees pursuant to the Engagement Letter. Whether or not the Merger 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.
THE MERGER AGREEMENT
The description of the Merger Agreement contained in this Proxy Statement
does not purport to be complete and is qualified in its entirety by, and made
subject to, the more complete information set forth in the Merger Agreement, a
copy of which is attached as Appendix A to this Proxy Statement and incorporated
herein by reference.
General
UHS, MEDIQ and Merger Sub entered into the Merger Agreement as of
February 10, 1997. If the shareholders of UHS approve the Merger Agreement,
Merger Sub will be merged with and into UHS, and the separate corporate
existence of Merger Sub will then cease. UHS will be the Surviving Corporation
and will become an indirect wholly-owned subsidiary of MEDIQ. At the Effective
Time, the UHS Common Stock will be converted automatically into the right to
receive the Merger Consideration, as described below. See "THE MERGER AGREEMENT-
Payment for Shares" and " -Payment of Stock Options and Rights." The shares of
UHS Common Stock will no longer be listed or traded on the Nasdaq Stock Market,
and the registration of the UHS Common Stock under the Exchange Act will be
terminated.
Effective Time
If the Merger Agreement is adopted by the requisite vote of UHS
shareholders, the Merger will be consummated and become effective upon the
filing of articles of merger with the Secretary of State of the State of
Minnesota. It is currently contemplated that the Effective Time will occur on or
about April 4, 1997, subject to satisfaction of all conditions to the Merger,
including receipt of all required regulatory approvals as of such date. There
can be no assurance that all conditions to the Merger will be satisfied. See
"THE MERGER AGREEMENT-Conditions to Consummation of the Merger."
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<PAGE>
Consideration to be Received by Shareholders
In connection with the Merger, each share of UHS Common Stock outstanding
immediately prior to the Effective Time (other than (i) dissenting shares and
(ii) any shares owned directly or indirectly by MEDIQ), together with the
associated Rights, will be converted into the right to receive $17.50 in cash,
without interest (the cash consideration to be paid to UHS's shareholders in the
Merger being sometimes referred to herein as the "Merger Consideration").
Dissenting shares will be converted to cash in the manner described under the
caption "RIGHTS OF DISSENTING SHAREHOLDERS."
Payment for Shares
Norwest Bank Minnesota, N.A. (the "Payment Agent") will act as the agent
for payment of the Merger Consideration to the holders of UHS Common Stock.
Instructions with regard to the surrender of certificates formerly representing
shares of UHS Common Stock, together with the letter of transmittal to be used
for that purpose, will be mailed to shareholders as soon as practicable after
the Effective Time, but in no event later than five business days thereafter. As
soon as practicable following receipt from the shareholder of a duly executed
letter of transmittal, together with certificates formerly representing UHS
Common Stock and any other items specified by the letter of transmittal, the
Payment Agent will pay the Merger Consideration to such shareholder, by check or
draft less any amount required to be withheld under applicable federal income
tax regulations.
After the Effective Time, the holder of a certificate formerly representing
UHS Common Stock will cease to have any rights as a shareholder of UHS, and such
holder's sole right will be to receive the Merger Consideration with respect to
such shares (or, in the case of dissenting shares, the statutorily determined
"fair value"). If payment is to be made to a person other than the person in
whose name the surrendered certificate is registered, it will be a condition of
payment that the certificates so surrendered be properly endorsed or otherwise
be in proper form for transfer and that the person requesting such payment pays
any transfer or other taxes required by reason of such payment or establishes to
the satisfaction of the Payment Agent that such taxes have been paid or are not
applicable. No transfer of shares of UHS Common Stock outstanding immediately
prior to the Effective Time will be made on the stock transfer books of the
Surviving Corporation after the Effective Time. Other than as described above,
no service charges, brokerage commissions or transfer taxes will be payable by
UHS shareholders in connection with the surrender of their shares of UHS Common
Stock.
To the extent permitted by law, the appointment of the Payment Agent will
be terminated after 12 months following the Effective Time. Any portion of the
Merger Consideration remaining undistributed upon termination of the Payment
Agent's appointment will be returned to the Surviving Corporation, and any
holders of theretofore unsurrendered UHS Common Stock certificates may
thereafter surrender to the Surviving Corporation such stock certificates and
(subject to abandoned property, escheat or similar laws) receive in exchange
therefor the Merger Consideration to which they are entitled.
In no event will holders of shares of UHS Common Stock be entitled to
receive payment of any interest on the Merger Consideration.
SHAREHOLDERS OF UHS SHOULD NOT FORWARD THEIR STOCK CERTIFICATES TO THE
PAYMENT AGENT WITHOUT A LETTER OF TRANSMITTAL, AND SHOULD NOT RETURN THEIR STOCK
CERTIFICATES WITH THE ENCLOSED PROXY.
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<PAGE>
Payment of Stock Options and Rights
Upon the consummation of the Merger, each option to acquire shares of UHS
Common Stock outstanding immediately prior to the Effective Time under UHS's
1992 Long-Term Incentive and Stock Option Plan, as amended (the "ISO Plan"), and
UHS's 1992 Directors' Stock Option Plan, as amended (the "Directors' Plan"),
whether vested or unvested (each, an "Option," and collectively, the "Options")
will automatically become immediately vested and exercisable and each holder of
an Option will have the right to receive from MEDIQ a cash payment (less
applicable withholding taxes) in an aggregate amount equal to the difference
between the Merger Consideration and the exercise price per share applicable to
such Option for all shares subject to the Option as expressly stated in the
applicable stock option agreement or other agreement (the "Option
Consideration"). Under the Merger Agreement, UHS has agreed to take such actions
as are necessary to fully advise holders of Options of their rights under the
Merger Agreement and the Options. After the Effective Time, no holder of an
Option shall have any rights other than to receive payment for such holder's
Options equal to the Option Consideration. See "INTERESTS OF CERTAIN PERSONS IN
THE MERGER-UHS Stock Options."
Under the Merger Agreement, any outstanding purchase rights under UHS's
1992 Employee Stock Purchase Plan, as amended (the "ESPP"), will be exercised
upon the earlier of the next scheduled purchase date under the ESPP or
immediately before the Effective Time. If immediately before the Effective Time
any purchase right is still outstanding, such rights will be exercised
immediately. At that time, each participant in the ESPP will be issued shares
which shall be canceled at the Effective Time and converted into the right to
receive the Merger Consideration. The ESPP shall terminate with such exercise
date, and no purchase rights shall be subsequently granted or exercised under
the ESPP. See "INTERESTS OF CERTAIN PERSONS IN THE MERGER-Employee Stock
Purchase Plan."
Representations and Warranties
The Merger Agreement contains various representations and warranties of UHS
and its subsidiary, Biomedical Equipment Rentals & Sales, Inc. (the
"Subsidiary"), relating to, among other things, the following matters (which
representations and warranties are subject, in certain cases, to specific
exceptions and generally apply only to facts and circumstances existing as of
February 10, 1997, the date of the Merger Agreement): (i) the due organization,
power, authority and good standing of UHS and the Subsidiary; (ii) the
governmental authorizations, certificates, licenses, consents and approvals
required to carry on the business of UHS and the Subsidiary; (iii) the absence
of direct or indirect beneficial ownership of any other business association or
entity; (iv) the absence of any voting trusts, proxies or similar agreements to
which UHS or the Subsidiary are a party; (v) the due authorization of the Merger
Agreement by the Board of Directors of UHS and the due execution and delivery of
the Merger Agreement by UHS; (vi) the validity and enforceability of the Merger
Agreement; (vii) the capital structure of UHS and the Subsidiary, including but
not limited to the valid issuance of the capital stock of UHS and the
Subsidiary; (viii) the absence of any violation of the articles of incorporation
and bylaws of UHS and the Subsidiary or any applicable law; (ix) except for
requirements under the HSR Act, the MBCA, the state securities or "Blue Sky"
laws or regulations (the "Blue Sky laws"), the Nasdaq Stock Market or the
Exchange Act, the absence of any other consent, approval, order or authorization
to be obtained in order to consummate the Merger; (x) the completeness and
accuracy of annual reports and proxy statements of UHS filed pursuant to the
Exchange Act; (xi) the preparation and presentation of the financial statements
of UHS and the Subsidiary; (xii) the absence of certain changes or events having
a material adverse effect on the assets, financial position, results of
operations, prospects or business of UHS or the Subsidiary; (xiii) the conduct
of the business in the ordinary course and in a manner consistent with past
practice; (xiv) the absence of pending or threatened litigation; (xv) the
absence of any declaration or payment of dividends with respect to capital
stock; (xvi) the receipt of a fairness opinion from Piper Jaffray; (xvii)
certain tax matters; (xviii) the absence of undisclosed liabilities which are
material to the business, assets, operations, prospects or financial condition
of UHS; (xix) compliance with all applicable laws and regulations
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including environmental laws and regulations; (xx) certain contracts to which
UHS or the Subsidiary is a party; (xxi) the absence of any broker's or finder's
fees in connection with the transactions contemplated by the Merger Agreement;
(xxii) the employee benefits plans of UHS and the Subsidiary; (xxiii) absence of
rights which could be triggered by the Merger; (xxiv) the absence of any untrue
statement of material fact in the representations and warranties contained in
the Merger Agreement or of any omission to state a material fact necessary to
make a statement in such representations or warranties not misleading; (xxv)
compliance with Minnesota state takeover laws; (xxvi) intellectual property;
(xxvii) the absence of unlawful contributions or payments; (xxviii) insurance
policies; (xxix) condition of property owned or leased; (xxx) the vote of UHS
shareholders required to approve the Merger; and (xxxi) the accuracy of
information relating to the Proxy Statement.
The Merger Agreement contains various representations and warranties of
MEDIQ and the Merger Sub relating to, among other things, the following matters
(which representations and warranties are subject, in certain cases, to specific
exceptions and generally apply only to facts and circumstances existing as of
February 10, 1997, the date of the Merger Agreement): (i) the due organization,
power, authority and good standing of MEDIQ and the Merger Sub; (ii) the
governmental authorizations, certificates, licenses, consents and approvals
required to carry on the business of MEDIQ and the Merger Sub; (iii) the due
authorization of the Merger Agreement by the Board of Directors of MEDIQ and the
due execution and delivery of the Merger Agreement by MEDIQ; (iv) the validity
and enforceability of the Merger Agreement; (v) the capital structure of MEDIQ
and the Merger Sub, including but not limited to the valid issuance of the
capital stock of MEDIQ and the Merger Sub; (vi) the absence of any violation of
its certificate of incorporation and bylaws or any applicable law; (vii) except
for requirements under the HSR Act, the MBCA, the Blue Sky laws, the Nasdaq
Stock Market or the Exchange Act, the absence of any other consent, approval,
order or authorization to be obtained to consummate the Merger; (viii) the
completeness and accuracy of annual reports and proxy statements of MEDIQ filed
pursuant to the Exchange Act; (ix) the absence of certain changes or events
having a material adverse effect on the assets, financial position, results of
operations or business of MEDIQ and the Merger Sub; (x) the absence of pending
or threatened litigation; (xi) the existence of adequate financing to consummate
the Merger; (xii) the absence of any untrue statement of material fact in the
representations and warranties contained in the Merger Agreement or of any
omission to state a material fact necessary to make a statement in such
representations or warranties not misleading; and (xiii) the accuracy of
information supplied by MEDIQ specifically for inclusion in the Proxy Statement.
Operations of UHS Prior to the Merger
Under the Merger Agreement, UHS has agreed that, prior to the Effective
Time, the business of UHS and the Subsidiary will be conducted in accordance
with certain restrictions set forth in the Merger Agreement. Among other things,
UHS has agreed that UHS and the Subsidiary will operate only in the ordinary
course of business in substantially the same manner as the business of each has
historically been conducted, and UHS will, and will cause the Subsidiary to: (a)
maintain insurance coverage and its books, accounts and records in the usual
manner consistent with prior practices; (b) comply in all material respects with
all laws, ordinances and regulations of governmental entities applicable to UHS
and its Subsidiary; (c) maintain and keep its properties and equipment in good
repair, working order and condition, ordinary wear and tear excepted; and
(d) perform in all material respects its obligations under all contracts and
commitments to which it is a party or by which it is bound, in each case other
than where the failure to so maintain, comply or perform, either individually or
in the aggregate, would result in a material adverse effect on UHS.
Under the Merger Agreement, UHS has agreed that UHS and the Subsidiary will
not do any of the following without MEDIQ's prior written consent prior to the
Effective Time: (a) sell or pledge or agree to sell or pledge any capital stock
owned by it in the Subsidiary; (b) amend its articles of incorporation or
bylaws; (c) split, combine or reclassify its outstanding capital stock or issue
or authorize or propose the issuance of any other securities in respect of, in
lieu of, or in substitution for shares of, capital stock of UHS, or declare, set
aside or pay any dividend or other distribution payable
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in cash, stock or property; (d) directly and/or indirectly redeem, purchase or
otherwise acquire or agree to redeem, purchase or otherwise acquire any shares
of UHS's capital stock; (e) except as required by the Merger Agreement and
pursuant to option agreements outstanding on the date of the Merger Agreement or
under the ESPP as in effect on the date of the Merger Agreement, issue, deliver
or sell or agree to issue, deliver or sell any additional shares of, or rights
of any kind to acquire any shares of, its capital stock of any class, any
indebtedness or any options, rights or warrants to acquire, or securities
convertible into, shares of capital stock; (f) acquire, lease or dispose or
agree to acquire, lease or dispose of any capital assets or any other assets
other than in the ordinary course of business; (g) incur additional indebtedness
or encumber or grant a security interest in any asset or enter into any other
material transaction other than in each case in the ordinary course of business
(and in the case of incurring additional indebtedness, in any event in an amount
not more than $600,000 in excess of the amount reflected on the latest balance
sheet, as provided pursuant to the Merger Agreement) in the aggregate; (h)
acquire or agree to acquire by merging or consolidating with, or by purchasing
an equity interest in, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets of any other person (other than
the purchase or lease of assets from suppliers or vendors in the ordinary course
of business consistent with past practice); (i) enter into or amend any
agreements pursuant to which any other party is granted exclusive marketing,
distribution or manufacturing rights of any type or scope for any period
extending beyond the Effective Time with respect to any products or services of
UHS or the Subsidiary; (j) release any third party from its obligations under
any existing standstill agreement or arrangement relating to any Acquisition
Proposal or otherwise under any confidentiality, non-competition or other
similar agreement; (k) change any of its methods of accounting in effect at
December 31, 1995; (l) make or rescind any express or deemed election relating
to and federal, state, county, local or foreign tax or make any election
relating to such tax, or change any of its methods of reporting income or
deductions for federal income tax purposes from those employed in the
preparation of the federal income tax returns for the taxable year ending
December 31, 1995, (except, in the case of clause (k) or clause (l), as may be
required by law or generally accepted accounting principles); (m) settle or
compromise any material claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy; or (n) enter into any
contract, agreement, commitment, arrangement or understanding to do any of the
things described in clauses (a) through (m) above.
In addition to the above restrictions, except for certain permitted
exceptions described in the Merger Agreement, UHS has agreed that UHS and the
Subsidiary will not do any of the following (except as required to comply with
applicable law): (a) adopt, enter into, terminate or amend any bonus, profit
sharing, compensation, severance, termination, stock option, pension,
retirement, deferred compensation, employment or other employee benefit plan,
agreement, trust, fund or other arrangement for the benefit or welfare of any
director, officer or current or former employee; (b) increase in any manner the
compensation or fringe benefit of any director, officer or employee (except for
normal increases in the ordinary course of business that are consistent with
past practice and that, in the aggregate, do not result in a material increase
in such employee's benefits or compensation relative to the level in effect
prior to such amendment); (c) pay any benefit not provided under any existing
plan or arrangement; (d) grant any awards under any bonus, incentive,
performance or other compensation plan or arrangement or employee benefit plan
(including, without limitation, the grant of stock options, stock appreciation
rights, stock based or stock related awards, performance units or restricted
stock, or the removal of existing restrictions in any benefit plans or
agreements or awards made thereunder) (other than such plans and arrangements
which are made in the ordinary course of business consistent with past
practice); (e) take any action to fund or in any other way secure the payment of
compensation or benefits under any employee plan, agreement, contract or
arrangement or employee benefit plan other than in the ordinary course of
business consistent with past practice; or (f) adopt, enter into, amend or
terminate any contract, agreement, commitment or arrangement to do any of the
foregoing.
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Restriction on Solicitation
UHS has agreed that, prior to the Effective Time it will not, and will
cause the Subsidiary not to, and will use its best efforts to cause the
officers, directors, employees, representatives and agents of UHS and the
Subsidiary not to, directly or indirectly, solicit, initiate or encourage any
inquiry, proposal, offer or indication of interest from any person that
constitutes or would reasonably be expected to lead to any Acquisition Proposal,
or enter into discussions or negotiate with any person or entity in furtherance
of any such inquiries or to obtain or approve any Acquisition Proposal, or agree
to or endorse any Acquisition Proposal. As agreed, UHS will immediately notify
MEDIQ of all relevant terms of any such inquiries or proposals received by UHS
or the Subsidiary or by any such officer, director, employee, representatives or
agents, relating to any of such matters, any material change in the details
(including any amendments or proposed amendments) of any such inquiries or
proposals, the identity of each of the persons or entities making such inquiries
or proposals, and, if such inquiry or proposal is in writing, UHS will
immediately deliver or cause to be delivered to MEDIQ a copy of such inquiry or
proposal. However, if, prior to the Effective Time, UHS receives an unsolicited
Acquisition Proposal that the Board of Directors of UHS, based upon the advice
of its legal counsel, reasonably believes that it has a fiduciary duty to
consider, then UHS, without violating the Merger Agreement, may thereafter
furnish information to and enter into discussions or negotiations with such
third party. Nothing contained in the Merger Agreement prevents the Special
Committee or the Board of Directors of UHS, after receiving an opinion of
outside counsel to the effect that the Board of Directors is required to do so
in order to discharge properly its fiduciary duties, from considering,
negotiating, approving and recommending to the UHS shareholders an unsolicited,
bona fide written Acquisition Proposal which the Board of Directors of UHS
determines in good faith (after consultation with its financial advisors) (A)
would result in a transaction more favorable to UHS shareholders than the
transaction contemplated by the Merger Agreement and (B) is made by a person
financially capable of consummating such Acquisition Proposal (such an
Acquisition Proposal is referred to in the Merger Agreement as a "Superior
Proposal"). If the Board of Directors resolves to accept or accepts a Superior
Proposal, then upon written notice to MEDIQ, UHS may terminate the Merger
Agreement, provided that UHS must pay MEDIQ the $3,000,000 Break-Up Fee. An
"Acquisition Proposal" is defined in the Merger Agreement as any proposal for a
merger, consolidation or other business combination involving UHS or the
acquisition of any equity interest in, or a substantial portion of the assets of
UHS or the Subsidiary, other than the transactions contemplated by the Merger
Agreement.
Conditions to Consummation of the Merger
The Merger will occur only if the Merger Agreement is approved and adopted
by the requisite votes of the holders of the UHS Common Stock. Consummation of
the Merger also is subject to the satisfaction of certain other conditions
specified in the Merger Agreement, unless such conditions are waived (to the
extent such waiver is permitted by law). The failure of any such condition to be
satisfied, if not waived, would prevent consummation of the Merger.
The obligations of MEDIQ to consummate the Merger are subject to
satisfaction of, among others, the following conditions: (a) (i) UHS shall have
performed and complied in all material respects with all of its covenants and
agreements under the Merger Agreement to be performed or complied with prior to
or before the Effective Time; and (ii) each of the representations and
warranties of UHS contained in the Merger Agreement shall have been true and
correct as of the date of execution of the Merger Agreement and as of the
Effective Time in all material respects (except for any representation or
warranty which is qualified by materiality, which must be true and correct in
all respects); (b) MEDIQ shall have received certificates from a duly authorized
officer of UHS (in such person's capacity as an officer without personal
liability) certifying as to the fulfillment of the conditions set for in (a)
above; (c) the Merger Agreement and the Merger shall have received the necessary
approval of UHS shareholders; (d) the applicable waiting period under the HSR
Act shall have expired or terminated; (e) no preliminary or permanent injunction
or other order by any federal or state court in the United States which prevents
the consummation of the Merger shall have been issued and remain in effect; and
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(f) the Rights shall not have become nonredeemable, exercisable, distributed
or triggered pursuant to the terms of the Rights Agreement.
The obligations of UHS to consummate the Merger are subject to satisfaction
of the following conditions, among others: (a) (i) MEDIQ shall have performed
and complied in all material respects with all of its covenants and agreements
under the Merger Agreement to be performed or complied with prior to or before
the Effective Time; and (ii) each of the representations and warranties of MEDIQ
contained in the Merger Agreement shall have been true and correct as of the
date of execution of the Merger Agreement and as of the Effective Time in all
material respects (except for any representation or warranty which is qualified
by materiality, which must be true and correct in all respects); (b) UHS shall
have received certificates from a duly authorized officer (in such person's
capacity as an officer without personal liability) of MEDIQ and Merger Sub
certifying as to the fulfillment of the conditions set forth in (a) above; (c)
the Merger Agreement and the Merger shall have received the necessary approval
of UHS shareholders; (d) the applicable waiting period under the HSR Act shall
have expired or terminated; and (e) no preliminary or permanent injunction or
other order by any federal or state court in the United States which prevents
the consummation of the Merger shall have been issued and remain in effect.
Employment Matters
The parties to the Merger Agreement have agreed to certain post-closing
covenants regarding employees of UHS and the Subsidiary (the "UHS Employees").
MEDIQ has agreed that the UHS Employees will continue employment with the
Surviving Corporation and its subsidiary, respectively, in the same positions
and at the same level of wages and/or salary and without having incurred a
termination of employment or separation from service; provided, however, except
as may be specifically required by applicable law or any contract, the Surviving
Corporation and its subsidiaries are not obligated to continue any employment
relationship with any UHS Employee for any period of time. MEDIQ, Merger Sub and
UHS have agreed that UHS Employees whose employment is terminated on or after
the Effective Time or within 12 months thereafter will receive severance
payments to the extent provided pursuant to a policy agreed to by UHS and MEDIQ.
MEDIQ agrees that UHS Employees who remain employed by the Surviving Corporation
following the Merger will be eligible to participate in all plans, programs or
policies then afforded to similarly situated employees of MEDIQ and its
affiliated companies.
Indemnification of Officers and Directors
Under the Merger Agreement, the Surviving Corporation will until the later
of (i) the six year anniversary date of the Effective Time or (ii) the
respective termination or expiration date of any indemnification agreement or
arrangement of UHS or the Subsidiary, cause its articles of incorporation and
bylaws to continue to provide indemnification provisions for the benefit of
those individuals who have served as directors or officers of UHS or the
Subsidiary at any time prior to the Effective Time. Such provision will be
comparable to the provisions as are currently contained in UHS's or the
Subsidiary's articles of incorporation and bylaws. In addition, subject to the
occurrence of the Effective Time, MEDIQ has guaranteed unconditionally full
payment and performance of the indemnification obligations discussed above.
MEDIQ has also agreed, subject to certain limitations, to use reasonable efforts
to cause the Surviving Corporation to maintain for the benefit of such persons
for a period of six years after the Merger, officers' and directors' liability
insurance comparable in scope and amount to the officers' and directors'
insurance coverage currently maintained by UHS. See "INTERESTS OF CERTAIN
PERSONS IN THE MERGER-Indemnification of Officers and Directors."
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Termination
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the filing of articles of merger with the Minnesota Secretary of State,
whether before of after action by UHS shareholders, and without further approval
by UHS shareholders, under any of the following circumstances:
(a) by mutual written consent of the Board of Directors of each of
MEDIQ and UHS;
(b) by either MEDIQ or UHS, if any of the conditions to such party's
obligation to consummate the transactions contemplated in the Merger
Agreement shall have become impossible to satisfy;
(c) by either MEDIQ or UHS, if the Merger has not been consummated on
or before August 30, 1997 (unless the failure to consummate the Merger by
such date shall be due to the action or failure to act of the party seeking
to terminate the Merger Agreement in breach of such party's obligations
under the Merger Agreement);
(d) by UHS upon approval of a Superior Proposal and payment of the
Break-Up Fee; or
(e) By MEDIQ, if the Board of Directors of UHS or the Special
Committee (i) withdraws, modifies or changes its recommendation regarding
the approval of the Merger Agreement or the Merger in a manner adverse to
MEDIQ; (ii) shall have recommended to the UHS shareholders any Acquisition
Proposal; (iii) shall have taken any action under the Rights Agreement to
exclude any person or entity (other than MEDIQ, Merger Sub or their
affiliates) from the definition of "Acquiring Person" (as defined in the
Rights Agreement) or to redeem the Rights; (iv) shall have taken any action
under Section 302A.673 of the MBCA to approve any "business combination"
(as defined in the MBCA) with an "interested shareholder" (as defined in
the MBCA) (other than MEDIQ, Merger Sub or their affiliates) prior to such
shareholder's "share acquisition date" (as defined in the MBCA) or the
acquisition of shares by such shareholder; (v) shall have taken any action
to provide that an Acquisition Proposal shall be exempt from the provisions
of Section 302A.671 of the MBCA; or (vi) shall have resolved to do any of
the foregoing.
UHS shall be obligated to pay a $3,000,000 Break-Up Fee to MEDIQ if (i) UHS
or MEDIQ terminates the Merger Agreement pursuant to clauses (d) or (e) above,
(ii) the Merger Agreement is terminated because of a failure to receive the
requisite shareholder approval of the Merger and, prior to the Special Meeting,
UHS had entered into discussions or negotiations with any person or entity with
respect to an Acquisition Proposal and the Board of Directors of UHS had not
reaffirmed its Merger recommendation to the UHS shareholders by the time of the
Special Meeting or (iii) the Merger Agreement is terminated because of a breach
by UHS and within twelve months after such termination, a merger, consolidation
or other business combination involving UHS or an acquisition of 50% or more of
an equity interest in UHS is consummated with any other person or entity.
Expenses
Under the Merger Agreement, generally all costs and expenses incurred by
UHS, MEDIQ and Merger Sub will be paid by the party that has incurred such costs
and expenses. However, if the Merger Agreement is terminated for certain reasons
specified in the Merger Agreement, UHS is required to pay MEDIQ the $3,000,000
Break-Up Fee. See "THE MERGER AGREEMENT-Restrictions on Solicitation" and
"-Termination."
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CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, UHS will become a wholly-owned indirect
subsidiary or MEDIQ and the current shareholders of UHS will not have any
continuing interest in UHS. UHS Common Stock will no longer be traded on the
Nasdaq Stock Market, and the registration of UHS Common Stock under the Exchange
Act will be terminated.
After the Merger, UHS's Board of Directors will be composed of individuals
designated by MEDIQ, and the officers of Merger Sub at the effective time of the
Merger (the "Effective Time") will be the initial officers of UHS after the
Merger until their respective successors are duly appointed or elected and
qualified.
The Rights are not currently exercisable and, pursuant to the Merger
Agreement, UHS has taken all action necessary (i) to render the Rights
inapplicable to the Merger and the transactions contemplated by the Merger
Agreement and (ii) to ensure that a "Distribution Date" (as defined in the
Rights Agreement) will not occur by reason of the announcement or consummation
of the Merger or any of the other transactions contemplated by the Merger
Agreement. The Rights will expire at the Effective Time and thereafter the
shareholders of UHS will not have any further rights with respect thereto.
REGULATORY APPROVALS
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division"), and
specified waiting period requirements have been satisfied. MEDIQ and UHS filed
premerger notification and report forms with the FTC and Antitrust Division on
or before February 18, 1997.
The waiting period under the HSR Act, which was originally scheduled to
expire on March 20, 1997 (thirty days after the date of filing), will now expire
on April 10, 1997 (thirty days after the date of filing an amendment to the
original filing) unless the period is terminated sooner pursuant to MEDIQ's and
UHS's request for early termination of the waiting period.
At any time before or after consummation of the Merger, and notwithstanding
the satisfaction of the HSR Act requirements, the FTC or the Antitrust Division
or any state could take action under the federal or state antitrust laws to seek
to enjoin consummation of the Merger. Private parties may also seek to take
legal action under the antitrust laws.
Based on the information available to them, each of MEDIQ and UHS believes
that the Merger can be effected in compliance with federal and state antitrust
laws. However, there can be no assurance that a challenge to the Merger on
antitrust grounds will not be made or that, if such a challenge were made, MEDIQ
and UHS would prevail.
Neither UHS nor MEDIQ believes that any material federal or state
regulatory approvals, filings or notices are required in connection with the
Merger other than the filing of articles of merger with the Secretary of State
of the State of Minnesota. Other than as described above, neither UHS nor MEDIQ
is aware of any license or regulatory permit that is material to the business of
UHS and that is likely to be adversely affected by consummation of the Merger or
any approval or other action by any state, federal or foreign government or
governmental agency (other than routine relicensing procedures) that would be
required prior to the Merger.
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ACCOUNTING TREATMENT
MEDIQ will account for the Merger under the "purchase" method of accounting
under which the total consideration paid in the Merger will be allocated among
the Surviving Corporation's consolidated assets and liabilities based on the
fair values of the assets acquired and liabilities assumed in the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Special Committee of the Board of
Directors of UHS with respect to the Merger Agreement, the shareholders of UHS
should be aware that certain members of UHS's management and Board of Directors
have interests in the Merger that are different from, or in addition to, the
interests of UHS shareholders generally. The Special Committee of the Board of
Directors of UHS was aware of these interests and considered them in approving
the Merger, the Merger Agreement and the transactions contemplated thereby.
UHS Stock Options
As described at page 21, above, upon the consummation of the Merger, each
option to acquire shares of UHS Common Stock outstanding immediately prior to
the Effective Time under UHS's 1992 Long-Term Incentive and Stock Option Plan,
as amended (the "ISO Plan") and UHS's 1992 Directors' Stock Option Plan, as
amended (the "Directors' Plan"), whether vested or unvested (each, an "Option,"
and collectively, the "Options"), will automatically become immediately vested
and exercisable and each holder of an Option will have the right to receive from
MEDIQ a cash payment (less applicable withholding taxes) in an aggregate amount
equal to the difference between the Merger Consideration and the exercise price
per share applicable to such Option for all shares subject to the Option as
expressly stated in the applicable stock option agreement or other agreement
(the "Option Consideration"). UHS has agreed to take such other actions
(including, without limitation, giving requisite notices to holders of Options
advising them of such accelerated vesting and rights pursuant to the Merger
Agreement) as are necessary to fully advise holders of Options of their rights
under the Merger Agreement and the Options and to facilitate their timely
exercise of such rights. From and after the Effective Time, other than as
expressly set forth in the Merger Agreement, no holder of an Option will have
any rights in respect thereof other than to receive payment for such holder's
Options equal to the Option Consideration, and the Surviving Corporation shall
take all reasonably necessary actions to terminate UHS's stock option plans and
similar arrangements. The Option Consideration payable upon consummation of the
Merger to executive officers of UHS pursuant to outstanding Options under the
ISO Plan are as follows: Thomas A. Minner, $888,775; Michael W. Bohman,
$490,263; Paul W. Larsen, $490,263; Duane R. Wenell, $490,263; David E.
Dovenberg, $490,263 and all executive officers as a group, $2,849,827. The
Option Consideration payable upon consummation of the Merger to non-employee
directors of UHS, who constituted all of the members of the Special Committee,
pursuant to outstanding Options under the Directors' Plan are as follows: Karen
M. Bohn, $91,000; Samuel B. Humphries, $131,125; Terrance D. McGrath, $131,125;
and all non-employee directors as a group, $353,250.
Employee Stock Purchase Plan
UHS currently maintains an Employee Stock Purchase Plan (the "ESPP") for
the benefit of certain of its employees. In accordance with the Merger
Agreement, outstanding purchase rights under the ESPP will be exercised upon the
earlier of (i) the next scheduled purchase date under the ESPP or (ii)
immediately prior to the Effective Time, and each participant in the ESPP,
including executive officers of UHS participating therein, accordingly will be
issued shares at that time that shall be cancelled at the Effective Time and
converted into the right to receive the Merger Consideration for those shares.
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The ESPP shall terminate with such exercise date, and no purchase rights shall
be subsequently granted or exercised under the ESPP.
Change in Control Agreements
Effective January 1994, UHS 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 in control of UHS.
The consummation of the Merger will constitute a "change of control" under the
Severance Plan. Under the Severance Plan, each of UHS's five executive officers
is eligible to receive a severance payment up to three times his base salary in
the event of a change in control of UHS and termination of such officer within
three years of such change in control for reasons other than death, total
disability or "just cause" (as defined in the Severance Plan) and voluntary
termination without "good reason," which is defined in the Severance Plan as an
aggregate reduction of 10% or more in such officer's base salary and benefits, a
material reduction in the nature and scope of such officer's authorities or
duties, or a required relocation of such officer to a location more than 35
miles from such officer's existing job location other than a required relocation
to those locations at which UHS maintained operations prior to the change in
control. The approximate amount payable to each of UHS's executive officers upon
a qualifying termination, assuming current base salaries, is as follows: Mr.
Minner, $845,913; Mr. Bohman, $580,152; Mr. Larsen, $552,912; Mr. Dovenberg,
$531,005 Mr. Wenell, $506,250; and all executive officers and directors as a
group, $3,016,232.
UHS has certain other compensatory arrangements with its executive officers
which will result from a change in control of UHS. In addition to payment of the
Option Consideration referred to above under the heading "-UHS Stock Options,"
executive officers of UHS are entitled to receive a lump sum payment equal to
the present value of all benefits accrued under the UHS supplemental pension
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 and a qualifying termination, executive officers of UHS are also
entitled to payment of a pro rata portion of all awards granted under the UHS
Long-Term Incentive Plan and UHS Annual Incentive Plan based on achievement of
performance objectives during that portion of the performance periods elapsed
prior to the change in control.
Indemnification of Officers and Directors
The Merger Agreement provides that MEDIQ shall, and shall cause the
Surviving Corporation to, honor the obligations of UHS under Minnesota law and
their respective articles or certificates of incorporation or bylaws relating to
indemnification of the present and former officers, directors, employees or
agents of UHS to full extent permitted thereunder against losses, claims,
damages or liabilities arising out of actions or omissions occurring at or prior
to the Effective Time. MEDIQ has also agreed, subject to certain limitations, to
use reasonable efforts to cause the Surviving Corporation to maintain for the
benefit of such persons for a period of six years after the Merger, officers'
and directors' liability insurance comparable in scope and amount to the
officers' and directors' insurance coverage currently maintained by UHS.
Certain Relationships
Karen M. Bohn, a director of UHS and a member of the Special Committee, is
a Managing Director and the Chief Administrative Officer of Piper Jaffray
Companies, Inc., the parent of Piper Jaffray. As described above under "THE
MERGER-Opinion of UHS Financial Advisor," Piper Jaffray will receive a fee in
connection with the financial advisory services rendered by Piper Jaffray to the
Company in connection with the Merger and the transactions described under "THE
MERGER-Background of the Merger."
29
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Under currently existing provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), the treasury regulations promulgated thereunder,
applicable judicial decisions and administrative rulings, all of which are
subject to change, the federal income tax consequences described below are
expected to arise in connection with the Merger. Due to the complexity of the
Code, the following discussion is limited to the material federal income tax
aspects of the Merger for a UHS shareholder who is a citizen or resident of the
United States and who, as of the Effective Time, holds shares of UHS Common
Stock as a capital asset. The general tax principles discussed below are subject
to retroactive changes that may result from subsequent amendments to the Code.
The following discussion does not address potential foreign, state, local and
other tax consequences, nor does it address taxpayers subject to special
treatment under the federal income tax laws, such as tax-exempt organizations, S
corporations and taxpayers subject to the alternative minimum tax. In addition,
the following discussion may not apply to UHS shareholders who acquired their
shares upon the exercise of employee stock options or otherwise as compensation.
Neither UHS nor MEDIQ has requested either the Internal Revenue Service or
counsel to rule or issue an opinion on the federal income tax consequences of
the Merger. ALL SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES OF THE
DISPOSITION OF THEIR SHARES IN THE MERGER.
For federal income tax purposes, the Merger will be treated as a taxable
sale or exchange of shares of UHS Common Stock for cash by each holder of such
shares (including any holder of Dissenting Shares). Accordingly, the federal
income tax consequences to the holders of UHS Common Stock will generally be as
follows:
(a) Assuming that the shares of UHS Common Stock exchanged by a UHS
shareholder for cash in connection with the Merger are capital assets in
the hands of the shareholder at the Effective Time, such shareholder may
recognize a capital gain or loss by reason of the consummation of the
Merger.
(b) The capital gain or loss, if any, will be long-term with respect
to shares of UHS Common Stock held for more than 12 months as of the
Effective Time and short-term with respect to such shares held for 12
months or less as of the Effective Time.
(c) The amount of capital gain or loss to be recognized by each
holder of UHS Common Stock will be measured by the difference between the
amount of cash received by such shareholder in connection with the Merger
(including cash received for Dissenting Shares) and such shareholder's tax
basis in the UHS Common Stock at the Effective Time.
Cash payments made pursuant to the Merger (including any cash paid to
holders of Dissenting Shares) will be reported to the extent required by the
Code to shareholders of UHS and the Internal Revenue Service. Such amounts will
ordinarily not be subject to withholding of federal income tax. However, backup
withholding of such tax at a rate of 31% may apply to certain shareholders by
reason of the events specified in Section 3406 of the Code and the treasury
regulations promulgated thereunder, which include failure of a shareholder to
supply UHS or its agent with such shareholder's taxpayer identification number.
Accordingly, each UHS shareholder will be asked to provide the shareholder's
correct taxpayer identification number on a Substitute Form W-9 which is to be
included in the letter of transmittal to be sent to shareholders relating to
their shares of UHS Common Stock. Withholding may also apply to UHS shareholders
who are otherwise exempt from such withholding, such as a foreign person, if
such person fails to properly document its status as an exempt recipient.
30
<PAGE>
RIGHTS OF DISSENTING SHAREHOLDERS
Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act
(the "MBCA") provide to each shareholder the right to dissent from the Merger,
and obtain payment for the "fair value" of such shareholder's shares following
the consummation of the Merger.
The following summary of the applicable provisions of Sections 302A.471 and
302A.473 of the MBCA is not intended to be a complete statement of such
provisions and is qualified in its entirety by reference to such sections, the
full texts of which are attached as Appendix C to this Proxy Statement. These
sections should be reviewed carefully by any shareholder who wishes to exercise
dissenters' rights or who wishes to preserve the right to do so, since failure
to comply with the procedures set forth herein or therein will result in the
loss of dissenters' rights.
Under the MBCA, holders of UHS Common Stock will have the right, by fully
complying with the applicable provisions of Sections 302A.471 and 302A.473, to
dissent with respect to the Merger and to receive from the Surviving Corporation
payment in cash of the "fair value" of their shares of UHS Common Stock after
the Merger is completed. The term "fair value" means the value of the shares of
UHS Common Stock immediately before the Effective Time.
All references in Sections 302A.471 and 302A.473 and in this summary to a
"shareholder" are to a record holder of the shares of UHS Common Stock as to
which dissenters' rights are asserted. A person having beneficial ownership of
shares of UHS Common Stock that are held of record in the name of another
person, such as a broker, nominee, trustee or custodian, must act promptly to
cause the record holder to follow the steps summarized below properly and in a
timely manner in order to perfect whatever dissenters' rights such beneficial
owner may have.
Shareholders of record who desire to exercise their dissenters' rights must
satisfy all of the following conditions. A written notice of intent to demand
fair value for shares must be delivered to the executive offices of UHS before
the taking of the shareholder vote on the Merger. This written demand must be in
addition to and separate from any proxy or vote against the Merger. Voting
against, abstaining from voting or failing to vote on the Merger does not
constitute a demand for appraisal within the meaning of the MBCA.
Shareholders electing to exercise their dissenters' rights under the MBCA
must not vote for adoption of the Merger. A shareholder's failure to vote
against the Merger will not constitute a waiver of dissenters' rights. However,
if a shareholder returns a signed proxy but does not specify a vote against
adoption of the Merger or direction to abstain, the proxy will be voted for
adoption of the Merger, which will have the effect of waiving that shareholder's
dissenters' rights.
A UHS shareholder may not assert dissenters' rights as to less than all of
the shares registered in such holder's name except where certain shares are
beneficially owned by another person but registered in such holder's name. If a
record owner, such as a broker, nominee, trustee or custodian, wishes to dissent
with respect to shares beneficially owned by another person, such shareholder
must dissent with respect to all of such shares and must disclose the name and
address of the beneficial owner on whose behalf the dissent is made. A
beneficial owner of shares of UHS Common Stock who is not the record owner of
such shares may assert dissenters' rights as to shares held on such person's
behalf, provided that such beneficial owner submits a written consent of the
record owner to UHS at or before time such rights are asserted.
A shareholder who elects to exercise dissenters' rights must send his or
her written demand, before the taking of the vote on the Merger, to the
Secretary of UHS, 1250 Northland Plaza, 3800 West 80th Street, Bloomington,
Minnesota 55431--4442. The written demand should specify the shareholder's name
and mailing address, the number of shares owned and that the shareholder intends
to demand the value of his or her shares.
31
<PAGE>
After approval of the Merger by the shareholders at the Special Meeting,
the Surviving Corporation will send a written notice to each shareholder who
filed a written demand for dissenters' rights. The notice will contain the
address to which the shareholder shall send a demand for payment and the stock
certificates in order to obtain payment and the date by which they must be
received, a form to be used in connection therewith and other related
information.
In order to receive fair value for his or her shares, a dissenting
shareholder must, within 30 days after the date such notice was given, send his
or her stock certificates, and all other information specified in the notice
from the Surviving Corporation, to the address specified in such notice. A
dissenting shareholder will retain all rights as a shareholder until the
Effective Time. After a valid demand for payment and the related stock
certificates and other information are received, or after the Effective Time,
whichever is later, the Surviving Corporation will remit to each dissenting
shareholder who has complied with statutory requirements the amount that the
Surviving Corporation estimates to be the fair value of such shareholder's
shares, with interest commencing five days after the Effective Time at a rate
prescribed by statute. Remittance will be accompanied by the Surviving
Corporation's closing balance sheet and statement of income for a fiscal year
ending not more than 16 months before the Effective Time, together with the
latest available interim financial data, an estimate of the fair value of the
shareholder's shares and a brief description of the method used to reach the
estimate, a brief description of the procedure to be followed if such holder is
demanding supplemental payment and copies of Sections 302A.471 and 302A.473 of
the MBCA.
If the dissenting shareholder believes that the amount remitted by the
Surviving Corporation is less than the fair value of such holder's shares, plus
interest, the shareholder may give written notice to the Surviving Corporation
of such holder's own estimate of the fair value of the shares, plus interest,
within 30 days after the mailing date of the remittance and demand payment of
the difference. Such notice must be given at the executive offices of UHS at the
address set forth above. A shareholder who fails to give such written notice
within this time period is entitled only to the amount remitted by the Surviving
Corporation.
Within 60 days after receipt of a demand for supplemental payment, the
Surviving Corporation must either pay the shareholder the amount demanded or
agreed to by such shareholder after discussion with the Surviving Corporation or
petition a court for the determination of the fair value of the shares, plus
interest. The petition shall name as parties all shareholders who have demanded
supplemental payment and have not reached an agreement with the Surviving
Corporation. The court, after determining that the shareholder or shareholders
in question have complied with all statutory requirements, may use any valuation
method or combination of methods it deems appropriate to use, whether or not
used by the Surviving Corporation or the dissenting shareholder, and may appoint
appraisers to recommend the amount of the fair value of the shares. The court's
determination will be binding on all UHS shareholders who properly exercised
dissenters' rights and did not agree with the Surviving Corporation as to the
fair value of the shares. Dissenting shareholders are entitled to judgment for
the amount by which the court-determined fair value per share, plus interest,
exceeds the amount per share, plus interest, remitted to the shareholders by the
Surviving Corporation. The shareholders shall not be liable to the Surviving
Corporation for any amounts paid by the Surviving Corporation which exceed the
fair value of the shares as determined by the court, plus interest. The costs
and expenses of such a proceeding, including the expenses and compensation of
any appraisers, will be determined by the court and assessed against the
Surviving Corporation, except that the court may, in its discretion, assess part
or all of those costs and expenses against any shareholder whose action in
demanding supplemental payment is found to be arbitrary, vexatious or not in
good faith. The court may award fees and expenses to an attorney for the
dissenting shareholders out of the amount, if any, awarded to such shareholders.
Fees and expenses of experts or attorneys may also be assessed against any
person who acted arbitrarily, vexatiously or not in good faith in bringing the
proceeding.
32
<PAGE>
UHS may withhold the remittance of the estimated fair value, plus interest,
for any shares owned by any person who was not a shareholder or who is
dissenting on behalf of a person who was not a beneficial owner on February 11,
1997, the date on which the proposed Merger was first announced to the public
(the "Public Announcement Date"). The Surviving Corporation will forward to any
such dissenting shareholder who has complied with all requirements in exercising
dissenters' rights the notice and all other materials sent after shareholder
approval of the Merger to all shareholders who have properly exercised
dissenters' rights, together with a statement of the reason for withholding the
remittance and an offer to pay the dissenting shareholder the amount listed in
the materials if the shareholder agrees to accept that amount in full
satisfaction. The shareholder may decline this offer and demand payment by
following the same procedure as that described for demand of supplemental
payment by shareholders who owned their shares as of the Public Announcement
Date. Any shareholder who did not own shares on the Public Announcement Date and
who fails properly to demand payment will be entitled only to the amount offered
by UHS. Upon proper demand by any such shareholder, rules and procedures
applicable in connection with receipt by UHS of the demand for supplemental
payment given by a dissenting shareholder who owned shares on the Public
Announcement Date will also apply to any shareholder properly giving a demand
but who did not own shares of record or beneficially on the Public Announcement
Date, except that any such shareholder is not entitled to receive any remittance
from UHS until the fair value of the shares, plus interest, has been determined
pursuant to such rules and procedures.
Shareholders considering exercising dissenters' rights should bear in mind
that the fair value of their shares determined under Sections 302A.471 and
302A.473 of the MBCA could be more than, the same as or, in certain
circumstances, less than the consideration they would receive pursuant to the
Merger Agreement if they do not seek appraisal of their shares, and that the
opinion of any investment banking firm as to fairness, from a financial point of
view, is not an opinion as to fair value under Sections 302A.471 and 302A.473.
Cash received pursuant to the exercise of dissenters' rights may be subject
to federal or state income tax. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
ANY HOLDER WHO FAILS TO COMPLY FULLY WITH THE STATUTORY PROCEDURE
SUMMARIZED ABOVE WILL FORFEIT HIS OR HER RIGHTS OF DISSENT AND WILL RECEIVE THE
MERGER CONSIDERATION FOR HIS OR HER SHARES. See Appendix C.
FINANCING THE MERGER
If the Merger is consummated, the total amount required to pay the Merger
Consideration to the UHS shareholders, refinance indebtedness of UHS that will
be accelerated by reason of the Merger, and pay estimated fees and expenses of
MEDIQ and Merger Sub, will be approximately $144,000,000. Merger Sub will obtain
the necessary funds to consummate the Merger and pay all related fees and
expenses from the general corporate funds of MEDIQ, which intends to obtain such
funds from funds on deposit with its lenders and loans under its existing credit
agreement (the "Credit Agreement") with a group of lenders for which Banque
Nationale de Paris acts as Administrative Agent and NationsBank, N.A. acts as
Documentation Agent. Certain amendments to the Credit Agreement were made on
January 24, 1997, to increase the amount of the Credit Facility and otherwise
facilitate the financing of the Merger. The availability of loan proceeds under
the Credit Agreement to finance the Merger is subject to certain conditions set
forth in the Credit Agreement, including: (1) approval and adoption of the
Merger Agreement by the holders of a majority of the outstanding shares of UHS
Common Stock; (2) receipt of all necessary governmental approvals; and (3) the
satisfaction, before and after the Merger, of certain financial conditions set
forth in the Credit Agreement. UHS has been advised that MEDIQ expects such
financial conditions to be satisfied as of the Effective Time of the Merger.
33
<PAGE>
The Credit Agreement provides for four separate loans: a Term A loan ($35
million), a Term B loan ($145 million), an Acquisition Revolver ($100 million)
and a Working Capital Revolver ($30 million). As of March 14, 1997 there was
approximately $33,800,000 outstanding under the Term A loan, and approximately
$99,750,000 outstanding under the Term B loan. There were no outstanding
balances under the Acquisition Revolver or the Working Capital Revolver.
The loans bear interest at either the prime rate or at a Eurodollar rate
plus a factor. The factor changes quarterly based upon MEDIQ's leverage ratio,
within ranges of 1.125% to 1.75% for Term B prime rate loans, 2.75% to 3.25% for
Term B Eurodollar loans, 0.25% to 1.25% for other prime rate loans, and 1.75% to
2.75% for other Eurodollar loans. The loans are collateralized by substantially
all of the assets of MEDIQ and its principal subsidiaries. The Credit Agreement
requires the assets of UHS to be pledged to secure MEDIQ's obligations under the
Credit Agreement following the Merger.
The Term A loan is payable in quarterly installments of $1.2 million
beginning December 31, 1996, through September 30, 2001, and in quarterly
installments of $2.75 million from December 31, 2001, through September 30,
2002. The Term B loan is payable in quarterly installments of $250,000 beginning
December 31, 1996, through September 30, 2002, quarterly installments of $13.0
million in fiscal 2003, and quarterly installments of $21.8 million in fiscal
2004. MEDIQ can borrow and repay under the Acquisition Revolver until March 31,
1998, in accordance with the Credit Agreement. On March 31, 1998, the
Acquisition Revolver converts to a term loan which is payable in quarterly
installments beginning on June 30, 1998. The first two such installments each
equal 5.0% of the converted balance, and each remaining quarterly payment equals
5.625% of the converted balance. The Working Capital Revolver terminates on
September 30, 2002, at which time all outstanding balances are due. The Credit
Agreement requires MEDIQ to maintain certain financial ratios and imposes
certain other financial and dividend limitations. The Credit Agreement requires
MEDIQ to pay to the lenders certain fees, to reimburse the lenders and their
agents for certain expenses, and to provide certain indemnities, all on terms
customary for similar credit facilities.
MEDIQ anticipates that the indebtedness incurred by MEDIQ under the Credit
Agreement will be repaid from funds generated internally by MEDIQ and its
subsidiaries (including, after the Merger, if consummated, funds generated by
UHS), through additional borrowings, or through a combination of such sources.
No final decisions have been made concerning the method that MEDIQ will employ
to repay such indebtedness. Such decisions when made will be based on MEDIQ's
review from time to time of the advisability of particular actions, as well as
on prevailing interest rates and financial and other economic conditions.
UHS FINANCIAL PROJECTIONS
During the course of inviting parties, including MEDIQ, to express an
interest in acquiring UHS, UHS made available certain information to all
interested parties (including MEDIQ) that included historical and projected
financial information. The financial portion of the information, which UHS
indicated it was making available to all interested parties, included the
following financial estimates for 1996 and financial projections for the years
1997 through 2001.
Material assumptions on which the financial projections presented below are
based include the following:
1. Rental revenues are projected to grow at 10% annually in the years
1998 through 2001. This future growth assumes the addition of four new
offices per year as well as growth with existing customers and the
addition of new customers. In 1997, the Company receives the
incremental benefit of the BERS acquisition in addition to a 10%
growth of base UHS revenues.
34
<PAGE>
2. Sales revenue is projected to drop slightly in 1997 due to a
continuing trend by a major vendor of disposables to market its
products directly to some of the UHS's larger customers. Sales revenue
is not projected to grow after 1997.
3. The direct costs associated with rental and repair of equipment are
variable costs and are projected at 9.3% of rental revenue from 1997
through 2001. All other rental costs (costs associated with operating
district offices such as vehicles, computers and occupancy) are
budgeted for no growth in 1997 and projected to grow at 9% annually
from 1998 through 2001 in order to support continued revenue growth.
4. Rental depreciation reflects depreciation of the rental equipment
portfolio and is dependent on new rental equipment purchases which are
projected to increase gradually. The costs of new rental equipment are
depreciated, on average, over six years.
5. Compensation and benefits (other than any district incentive
compensation) for all sales people and district administration is
projected to grow at 8% in each year from 1998 through 2001 over 1997
budgeted amounts, reflecting the impact of inflation and growth in
infrastructure. Corporate general and administrative costs (other than
profit sharing expenses) are projected to grow at 4% in each year
primarily reflecting inflationary growth. The projections take into
consideration a district incentive of 2% of rental revenue after 1997
and a corporate profit sharing plan equal to 11% of pre-bonus
operating income in each year.
6. The average cost of borrowing on the UHS revolving credit facility is
assumed to be approximately 8%.
7. Beginning in 1997, the projections assume a 42% federal and state tax
rate.
8. Rental equipment purchases are estimated to be $13.5 million in 1996,
$19.5 million in 1997 and $20.5 million in 1998. Purchases grow by
$1.5 million each year from 1999 through 2001. Approximately 40% to
45% of rental equipment purchases can be classified as maintenance
expenditures (replacing equipment that is taken out of service) and
the remainder represents incremental additions to the portfolio.
9. The projections do not assume any external financing, acquisitions,
divestitures or material one-time events, including costs associated
with the disposal of the Company's DPAP inventory, costs related to
the Company's expense control initiatives and professional fees and
Directors' compensation costs relating to the Board of Directors'
review of strategic alternatives for enhancing shareholder value, all
as described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 included as Appendix D hereto under the
caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
35
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals $50,651,258 $58,478,099 $64,325,909 $70,758,500 $77,834,350 $85,617,785
Sales, service & other 6,274,669 6,708,841 6,708,841 6,708,841 6,708,841 6,708,841
----------- ----------- ----------- ----------- ----------- -----------
Total Revenues 56,925,927 65,186,940 71,034,750 77,467,341 84,543,191 92,326,626
Costs and expenses:
Costs of rentals 13,141,825 13,722,060 15,011,142 16,421,651 17,965,057 19,653,915
Depreciation 12,532,657 15,000,000 17,133,333 18,266,667 19,200,000 20,400,000
Cost of sales 4,520,753 4,628,867 5,031,631 5,031,631 5,031,631 5,031,631
Selling, general and
administrative 20,594,607 21,793,446 23,006,886 24,539,249 26,221,974 28,014,691
Interest 2,441,062 2,845,400 2,679,867 2,446,086 2,121,799 1,690,012
----------- ----------- ----------- ----------- ----------- -----------
Total costs and
expenses 53,230,904 57,989,773 62,862,859 66,705,284 70,540,461 74,790,249
----------- ----------- ----------- ----------- ----------- -----------
Income before taxes 3,695,023 7,197,167 8,171,891 10,762,057 14,002,730 17,536,377
Income taxes 1,625,140 3,022,810 3,432,194 4,520,064 5,881,147 7,365,278
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 2,069,883 $ 4,174,357 $ 4,739,697 $ 6,241,993 $ 8,121,583 $10,171,099
=========== =========== =========== =========== =========== ===========
Net earnings per share $ 0.38 $ 0.75 $ 0.84 $ 1.09 $ 1.39 $ 1.73
=========== =========== =========== =========== =========== ===========
</TABLE>
UHS does not as a matter of course make public any projections as to future
performance or earnings, and the projections set forth above are included in
this Proxy Statement only because the information was provided to MEDIQ. The
projections were not prepared with a view to public disclosure or compliance
with the published guidelines of the Commission or the guidelines established by
the American Institute of Certified Public Accountants regarding projections or
forecasts. UHS's internal operating projections are, in general, prepared solely
for internal use in connection with capital budgeting and other management
decisions and are subjective in many respects and thus susceptible to various
interpretations and periodic revisions based on actual experience and business
developments. The projections were based on a number of material assumptions
specified therein and summarized above. These assumptions are beyond the control
of UHS, MEDIQ or Merger Sub or their respective financial advisors, and require
a degree of economic forecasting (both general and specific to UHS's business)
that is inherently uncertain and subjective. None of UHS, MEDIQ or Merger Sub or
their respective financial advisors assumes any responsibility for the accuracy
of any of the projections. The inclusion of the foregoing projections should not
be regarded as an indication that UHS, MEDIQ or Merger Sub or any other person
who received such information considers it an accurate prediction of future
events. Neither UHS nor MEDIQ intends to update, revise or correct such
projections if they become inaccurate (even in the short term).
The foregoing projections constitute "forward-looking statements" under the
Private Securities Litigation Reform Act of 1995 and involve risks and
uncertainties. The Company's actual results may differ significantly from those
discussed herein. Factors that might cause such a difference include, but are
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 in the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 (included in this Proxy Statement as
Appendix D) under the captions "Industry Assessment," "Rental Equipment Build
Up" and "Business."
36
<PAGE>
THE SUPPORT/VOTING AGREEMENTS
Pursuant to the Support/Voting Agreements, certain members of UHS
management, specifically, Thomas A. Minner, Paul W. Larsen, Michael W. Bohman
and Duane R. Wenell (the "Supporting Stockholders") have severally agreed to
vote in favor of the Merger Agreement and Merger all shares of UHS Common Stock
that they owned on February 17, 1997, consisting of approximately 16.0% of the
aggregate number of shares outstanding as of such date.
Each of the Supporting Stockholders has also agreed not to (i) sell,
contract to sell or otherwise dispose of, or enter into any contract, option or
other arrangement or understanding with respect to the sale, transfer, pledge,
assignment or other disposition of, shares to any person other than MEDIQ or
MEDIQ's designee, (ii) enter into any voting arrangement, whether by proxy,
voting agreement, voting trust, power-of-attorney or otherwise, with respect to
shares of UHS Common Stock or (iii) take any other action that would in any way
restrict, limit or interfere with the performance of its obligations hereunder
or the transactions contemplated hereby. Each of the Supporting Stockholders has
also agreed not to solicit, initiate or encourage (including by way of
furnishing information) and not to participate in any discussions or
negotiations regarding any Competing Transaction (as defined in the
Support/Voting Agreements) or vote in favor of any Competing Transaction.
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding ownership of UHS
Common Stock (the only class of voting securities of the Company) as of February
15, 1997 by each person beneficially owning at least 5% of such securities, by
each director of UHS, by each of the executive officers of UHS, and by all
executive officers and directors as a group.
<TABLE>
<CAPTION>
Amount 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 253,901 4.7
Paul W. Larsen 198,289 3.7
David E. Dovenberg 198,792 (5) 3.7
Duane R. Wenell 192,364 (6) 3.6
Karen M. Bohn 9,300 *
Samuel B. Humphries 14,000 *
Terrance D. McGrath 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
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Amount of
Beneficial
Name and Address of Beneficial Owner Ownership(1)(2) Percent
- ------------------------------------ --------------- -------
<S> <C> <C>
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%
(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. The table
does not include options to purchase the following number of shares which
do not become exercisable within such 60-day period but which will
nevertheless automatically fully vest upon consummation of the Merger: Mr.
Minner, 44,748; Mr. Bohman, 22,374 shares; Mr. Larsen, 22,374 shares; Mr.
Dovenberg, 22,374 shares; Mr. Wenell, 22,374 shares; and all executive
officers and directors as a group, 134,244 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
38
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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) Based on a 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.
MARKET PRICE AND DIVIDEND INFORMATION FOR UHS COMMON STOCK
UHS Common Stock is traded on the Nasdaq Stock Market under the symbol
"UHOS." As of February 26, 1997, there were approximately 1,200 shareholders.
UHS has not paid any cash dividends on UHS 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 the UHS Common Stock.
The following table shows the high and low sale prices for UHS Common Stock
as reported on the Nasdaq Stock Market for each period indicated. On February
10, 1997, the last full trading day prior to the public announcement of the
Merger Agreement, the high and low sales prices reported for shares of UHS
Common Stock on the Nasdaq Stock Market were $12.50 and $12.00, respectively,
and the closing price was $12.38. On March 18, 1997, the closing price for
shares of UHS Common Stock, as reported on the Nasdaq Stock Market, was $17.125.
SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THEIR SHARES.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
1995
First Quarter.............................. $ 8.13 $ 6.25
Second Quarter............................. 9.13 7.75
Third Quarter.............................. 10.88 7.75
Fourth Quarter............................. 10.25 8.88
1996
First Quarter.............................. $10.50 $ 9.00
Second Quarter............................. 9.50 7.75
Third Quarter.............................. 9.00 5.73
Fourth Quarter............................. 11.13 6.25
1997
First Quarter (through March 18, 1997).. $17.25 $10.75
------
</TABLE>
39
<PAGE>
DESCRIPTION OF UHS CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000 shares
of UHS Common Stock, $.01 par value, of which 5,372,421 shares were outstanding
on February 26, 1997; 100,000 shares of Series A Junior Participating Preferred
Stock, $.01 par value (the "Junior Preferred Shares"), no shares of which are
outstanding; and 4,900,000 shares of undesignated preferred stock, $.01 par
value, no shares of which are outstanding.
UHS Common Stock
The holders of the UHS Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of shareholders. There is no
cumulative voting for the election of directors so that the holders of more than
50% of the outstanding UHS Common Stock can elect directors. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of the UHS Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor and
in liquidation proceedings. Holders of UHS Common Stock have no preemptive or
subscription rights and there are no redemption rights with respect to such
shares. The outstanding shares of UHS Common Stock are fully paid and
nonassessable.
Undesignated Preferred Stock
The Company's Board of Directors is authorized, without further shareholder
action, to issue preferred stock in one or more series and to fix the voting
rights, liquidation preferences, dividend rights, repurchase rights, conversion
rights, redemption rights and terms, including sinking fund provisions, and
certain other rights and preferences, of the preferred stock.
Although there is no current intention to do so, the Board of Directors of
the Company may, without shareholder approval, issue shares of a class or series
of preferred stock with voting and conversion rights which could adversely
affect the voting power of the holders of UHS Common Stock and may have the
effect of delaying, deferring or preventing a change in control of the Company.
Provisions of the Company's Restated Articles and Bylaws
and the Minnesota Business Corporation Act
The existence of authorized but unissued preferred stock, described above,
and certain provisions of the Company's Restated Articles of Incorporation and
Bylaws and Minnesota law, described below, could have an anti-takeover effect.
These provisions are intended to provide management flexibility, to enhance the
likelihood of continuity and stability in the composition of the Company's Board
of Directors and in the policies formulated by the Board and to discourage an
unsolicited takeover of the Company if the Board determines that such a takeover
is not in the best interests of the Company and its shareholders. However, these
provisions could have the effect of discouraging certain attempts to acquire the
Company which could deprive the Company's shareholders of opportunities to sell
their shares of UHS Common Stock at prices higher than prevailing market prices.
Pursuant to the Restated Articles of Incorporation and Bylaws, the Board of
Directors of the Company is divided into three classes serving staggered three-
year terms. As a result, at least two shareholders' meetings will generally be
required for shareholders to effect a change in control of the Board of
Directors.
Section 302A.671 of the Minnesota Statutes applies, with certain
exceptions, to any acquisition of voting stock of the Company (from a person
other than the Company, and other than in connection with certain mergers and
exchanges to which the Company is a party) resulting in the beneficial ownership
of 20% or more of the voting stock then outstanding. Section 302A.671 requires
approval of any such acquisitions by a majority vote of the shareholders of the
Company prior to its consummation. In
40
<PAGE>
general, shares acquired in the absence of such approval are denied voting
rights and are redeemable at their then fair market value by the Company within
30 days after the acquiring person has failed to give a timely information
statement to the Company or the date the shareholders voted not to grant voting
rights to the acquiring person's shares. Section 302A.671 does not apply to the
Merger.
Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by the Company, or any subsidiary of the Company, with any
shareholder which purchases 10% or more of the Company's voting shares (an
"interested shareholder") within four years following such interested
shareholder's share acquisition date, unless the business combination is
approved by a committee of all of the disinterested members of the Board of
Directors of the Company before the interested shareholder's share acquisition
date. Section 302A.673 does not apply to the Merger.
Rights and Junior Preferred Shares
On November 8, 1996, the Company adopted a shareholder rights plan under
which the Rights were declared as a dividend at the rate of one Right for each
share of UHS Common Stock held by shareholders of record at the close of
business on November 21, 1996. The Rights automatically accompany all shares of
UHS Common Stock outstanding and trade with them.
Each Right entitles the holder to buy one 1/100th of a Junior Preferred
Share at a price of $40.00. However, the Rights are exercisable only if a person
or group acquires or makes a tender offer for 15% or more of the UHS Common
Stock. The Rights are redeemable at 1/10c per right at any time prior to the
acquisition of a 15% position. The Rights expire on Novemberu8, 2006.
If a person or group acquires 15% or more of the UHS Common Stock (except
in connection with the Merger, as described below) each Right will entitle its
holder to purchase, at the Right's then-current exercise price, Junior Preferred
Shares having a market value of twice the Right's exercise price. If the Company
is acquired in a merger (except in connection with the Merger, as described
below) or sells 50% or more of its assets or earning power, each Right will
entitle its holder to purchase, at the Rights' then current exercise price, the
acquiring company's common stock having a market value of twice the Right's
exercise price.
The Junior Preferred Shares purchasable upon exercise of the Rights will
not be redeemable. Each Junior Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of $1.00 per share but will be entitled
to an aggregate dividend of 100 times the dividend declared per share of UHS
Common Stock. In the event of liquidation, the holders of the Junior Preferred
Shares will be entitled to a minimum preferential liquidation payment of $100.00
per share but will be entitled to an aggregate payment of 100 times the payment
made per share of UHS Common Stock. Each Junior Preferred Share will have 100
votes, voting together with shares of UHS Common Stock. Finally, in the event of
any merger, consolidation or other transaction in which the UHS Common Stock are
exchanged, each Junior Preferred Share will be entitled to receive 100 times the
amount received per share of UHS Common Stock. These rights are subject to
adjustment in the event of a stock dividend on the shares of UHS Common Stock or
a subdivision, combination or consolidation of the UHS Common Stock.
The Rights are not currently exercisable and, pursuant to the Merger
Agreement, UHS has taken all action necessary (i) to render the Rights
inapplicable to the Merger and the transactions contemplated by the Merger
Agreement and (ii) to ensure that a "Distribution Date" (as defined in the
Rights Agreement) will not occur by reason of the announcement or consummation
of the Merger or any of the other transactions contemplated by the Merger
Agreement. The Rights will expire on the date of the Merger and thereafter the
shareholders of UHS will not have any further rights with respect thereto.
41
<PAGE>
Transfer Agent and Registrar
The Transfer Agent and Registrar with respect to the UHS Common Stock is
Norwest Bank Minnesota, N.A.
SHAREHOLDER PROPOSALS
If the Merger is consummated, no public annual meetings of shareholders of
UHS will be held in the future. If the Merger is not consummated, because the
date of any such annual meeting cannot currently be determined, shareholders
will be informed (by press release or other means determined reasonable by UHS)
of the date of such meeting and the date that shareholder proposals for
inclusion in the proxy material must be received by UHS, which proposals must
comply with the rules and regulations of the Commission then in effect.
OTHER MATTERS
The Board of Directors of UHS does not presently know of any matters to be
presented for consideration at the Special Meeting other than matters described
in the Notice of Special Meeting mailed together with this Proxy Statement, but
if other matters are presented, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment. The proxy confers discretionary authority to vote only with respect
to matters that the Board of Directors of UHS did not know, within a reasonable
time before the mailing of these materials, were to be presented at the Special
Meeting.
COMPLIANCE WITH SECTION 16(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires UHS's officers and directors and
persons who own more than ten percent of UHS Common Stock to file reports of
ownership and changes in ownership with the Commission. These reporting persons
are also required to furnish UHS with copies of all reports they file. Based
solely on its review of the copies of such forms received by it, or written
representations from certain reporting persons that no Forms 5 were required for
those persons, UHS believes that during its 1996 fiscal year all filing
requirements applicable to its officers, directors and greater than ten percent
shareholders were complied with.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of UHS as of December 31, 1996 and
1995 and for the years ended December 31, 1996, 1995 and 1994, included in this
Proxy Statement, have been audited by Coopers & Lybrand L.L.P., independent
accountants.
A representative of Coopers & Lybrand L.L.P. will be at the Special Meeting
to answer questions by shareholders and will have the opportunity to make a
statement if so desired.
42
<PAGE>
AVAILABLE INFORMATION
UHS and MEDIQ are subject to the informational requirements of the Exchange
Act, and, in accordance therewith, file reports and other information with the
United States Securities and Exchange Commission (the "Commission"). Reports,
proxy statements and other information filed by UHS and MEDIQ can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
Regional Offices of the Commission: Citicorp Center, 5600 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite 1300,
New York, New York 10048. Copies of such material also can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a Web
site address, http://www.sec.gov. UHS Common Stock is listed and traded on the
Nasdaq Stock Market; MEDIQ Common Stock is listed and traded on the American
Stock Exchange. Reports, proxy statements and other information concerning UHS
may be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006. Reports, proxy statements and other information
concerning MEDIQ may be inspected at the offices of the American Stock Exchange,
86 Trinity Place, New York, New York 10006.
DOCUMENTS INCLUDED IN APPENDIX D
The Company's Annual Report on Form 10-K for the year ended December 31,
1996, heretofore filed with the Commission by UHS (File Number 0-20086) pursuant
to the Exchange Act, has been attached as Appendix D to this Proxy Statement and
constitutes a part hereof. The foregoing document contains financial and other
information concerning UHS and should be reviewed together with all other
information contained herein.
By Order of the Board of Directors,
[Signature]
Paul W. Larsen
Secretary
Bloomington, Minnesota
March 19, 1997
43
<PAGE>
Appendix A
================================================================================
AGREEMENT AND PLAN OF MERGER
DATED AS OF
February 10, 1997
by and among
MEDIQ INCORPORATED,
PRN MERGER CORPORATION
and
UNIVERSAL HOSPITAL SERVICES, INC.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I--THE MERGER....................................................... 1
Section 1.1. The Merger............................................. 1
Section 1.2. Effective Date and Time................................ 1
Section 1.3. Effect of the Merger................................... 1
Section 1.4. Subsequent Actions..................................... 1
Section 1.5. Articles of Incorporation; Bylaws; Directors
and Officers........................................... 2
Section 1.6. Cancellation of Company Shares......................... 2
Section 1.7. Dissenting Shares...................................... 3
Section 1.8. Company Plans.......................................... 3
Section 1.9. Surrender of Securities; Funding of Payments;
Stock Transfer Books................................... 3
ARTICLE II--REPRESENTATIONS AND WARRANTIES OF THE COMPANY................... 5
Section 2.1. Corporate Organization and Authorization............... 5
Section 2.2. Capitalization......................................... 6
Section 2.3. Noncontravention....................................... 7
Section 2.4. SEC Filings............................................ 7
Section 2.5. No Material Adverse Changes............................ 8
Section 2.6. Legal Proceedings...................................... 8
Section 2.7. No Dividends or Distributions.......................... 8
Section 2.8. Fairness Opinion....................................... 8
Section 2.9. Tax Matters............................................ 8
Section 2.10. Absence of Undisclosed Liabilities..................... 9
Section 2.11. Compliance with Laws; Permits.......................... 9
Section 2.12. Contracts and Commitments.............................. 10
Section 2.13. No Brokers or Finders.................................. 10
Section 2.14. Employee Benefit Plans................................. 10
Section 2.15. Rights Agreement....................................... 12
Section 2.16. Disclosure............................................. 13
Section 2.17. State Takeover Laws.................................... 13
Section 2.18. Intellectual Property.................................. 13
Section 2.19. Certain Business Practices............................. 13
Section 2.20. Insurance.............................................. 13
Section 2.21. Properties; Environmental Matters...................... 13
Section 2.22. Vote Required.......................................... 15
Section 2.23. Information in Proxy Statement......................... 15
ARTICLE III--REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND NEWCO........... 15
Section 3.1. Corporate Organization and Authorization............... 15
Section 3.2. Capitalization......................................... 16
Section 3.3. Noncontravention....................................... 16
Section 3.4. Approvals or Consents.................................. 16
Section 3.5. SEC Filings............................................ 16
Section 3.6. No Material Adverse Changes............................ 16
Section 3.7. Legal Proceedings...................................... 16
Section 3.8. Financing.............................................. 16
Section 3.9. Disclosure............................................. 17
Section 3.10. Information in Proxy Statement......................... 17
ARTICLE IV--COVENANTS....................................................... 17
Section 4.1. Conduct of the Company Prior to the Effective
Time................................................... 17
Section 4.2. Additional Covenants of Acquiror, Newco and
the Company............................................ 19
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE V--CONDITIONS TO ACQUIROR'S OBLIGATIONS............................. 22
Section 5.1. Representations and Warranties.......................... 22
Section 5.2. Performance............................................. 22
Section 5.3. Officer's Certificate................................... 22
Section 5.4. Shareholder Approvals................................... 22
Section 5.5. HSR Waiting Period...................................... 22
Section 5.6. No Injunction........................................... 22
Section 5.7. Rights Agreement........................................ 23
ARTICLE VI--CONDITIONS TO THE COMPANY'S OBLIGATIONS......................... 23
Section 6.1. Representations and Warranties.......................... 23
Section 6.2. Performance............................................. 23
Section 6.3. Officer's Certificate................................... 23
Section 6.4. Shareholder Approvals................................... 23
Section 6.5. HSR Waiting Period...................................... 23
Section 6.6. No Injunction............................................ 23
ARTICLE VII--SURVIVAL OF REPRESENTATIONS.................................... 23
Section 7.1. No Survival of Representations.......................... 23
Section 7.2. Exclusive Remedy........................................ 23
ARTICLE VIII--TERMINATION OF AGREEMENT...................................... 24
Section 8.1. Termination of Agreement Prior to the Effective Time.... 24
Section 8.2. Effect of Termination................................... 24
ARTICLE IX--MISCELLANEOUS................................................... 25
Section 9.1. Waiver of Compliance.................................... 25
Section 9.2. Expenses................................................ 25
Section 9.3. Assignability; Parties in Interest...................... 25
Section 9.4. Specific Performance.................................... 25
Section 9.5. Agreement; Amendments................................... 25
Section 9.6. Headings................................................ 26
Section 9.7. Severability............................................ 26
Section 9.8. Notices................................................. 26
Section 9.9. Law Governing........................................... 26
Section 9.10. Counterparts........................................... 26
Section 9.11. Announcements.......................................... 26
Section 9.12. Representations........................................ 27
</TABLE>
Schedule 2.1(c)
Schedule 2.2
Schedule 2.3
Schedule 2.5
Schedule 2.6
Schedule 2.12
Schedule 2.14
Schedule 2.18
Schedule 2.20
Schedule 2.21
Schedule 3.1(b)
Schedule 4.1(b)
Schedule 4.2
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of February
10, 1997, is by and among MEDIQ INCORPORATED a Delaware corporation
("Acquiror"), PRN MERGER CORPORATION., a Minnesota corporation and an indirect
wholly owned subsidiary of Acquiror ("Newco"), and UNIVERSAL HOSPITAL SERVICES,
INC., a Minnesota corporation (the "Company").
WHEREAS, Acquiror, Newco and the Company desire to effect a business
combination by means of a merger of Newco with and into the Company; and
WHEREAS, the Boards of Directors of Acquiror, Newco and the Company have
approved, and deem it advisable and in the best interests of their respective
shareholders to consummate, the merger of Newco with and into the Company upon
the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein, the parties hereto
agree as follows:
ARTICLE I
THE MERGER
----------
Section 1.1. The Merger. Subject to the satisfaction or waiver of the
----------
conditions set forth in Articles V and VI herein, on a date within five business
days following expiration or termination of the applicable waiting period
required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations thereunder (the "HSR Act"), Newco will
merge with and into the Company (the "Merger"). The Company shall be the
corporation surviving in the Merger and in such capacity is sometimes referred
to herein as the "Surviving Corporation." The Merger will be effected pursuant
to the provisions of, and with the effect provided in, the Minnesota Business
Corporation Act (the "MBCA").
Section 1.2. Effective Date and Time. As promptly as practicable after
-----------------------
the satisfaction or waiver of the conditions set forth in Articles V and VI
herein, the parties hereto shall cause the Merger to be consummated by
delivering to the Secretary of State of Minnesota articles of merger ("Articles
of Merger"), in such form or forms as may be required by, and executed and
acknowledged in accordance with, the relevant and applicable provisions of the
MBCA. Subject to Section 1.1, the parties hereto shall cause the effective date
of the Merger (the "Effective Date") to occur on the date that the Articles of
Merger are filed with the Secretary of State of the State of Minnesota in
accordance with the relevant provisions of the MBCA (or at such later time,
which shall be as soon as reasonably practicable, as may be specified in the
Articles of Merger). The time on the Effective Date when the Merger shall
become effective is referred to as the "Effective Time."
Section 1.3. Effect of the Merger. At the Effective Time, the separate
--------------------
corporate existence of Newco shall cease and the Surviving Corporation shall
continue its corporate existence under the laws of the State of Minnesota.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time all the property, rights, privileges, powers, immunities and
franchises of Newco and the Company shall vest in the Surviving Corporation, and
all debts, liabilities, obligations and duties of Newco and the Company shall
become the debts, liabilities, obligations and duties of the Surviving
Corporation.
Section 1.4. Subsequent Actions. If, at any time after the Effective
------------------
Time, the Acquiror or the Surviving Corporation shall consider or be advised
that any deeds, bills of sale, assignments, assurances or any other actions or
things are necessary or desirable to vest, perfect or confirm of record or
otherwise in the Surviving Corporation its right, title or interest in, to or
under any of the rights, properties or assets of either of the Company or Newco
acquired or to be acquired by the Surviving Corporation as a result of, or in
connection with, the Merger or otherwise to carry out this Agreement, the
officers and directors of the Surviving Corporation shall be authorized to
execute and deliver, in the name and on behalf of either the Company or Newco,
all such deeds, bills of sale, assignments and assurances and to take, in the
name and on behalf of each of such corporations or otherwise, all such other
actions and things as may be necessary or desirable to vest, perfect or confirm
any and all right, title and interest in, to and under such rights,
A-1
<PAGE>
properties or assets in the Surviving Corporation or otherwise to carry out the
transactions contemplated by this Agreement.
Section 1.5. Articles of Incorporation; Bylaws; Directors and Officers.
---------------------------------------------------------
(a) Subject to Section 4.2(c), at the Effective Time, the Articles of
Incorporation of Newco, as in effect immediately before the Effective Time,
shall be the Articles of Incorporation of the Surviving Corporation until
thereafter amended as provided by the MBCA and the provisions of such Articles
of Incorporation.
(b) Subject to Section 4.2(c), the Bylaws of Newco, as in effect
immediately before the Effective Time, shall become the Bylaws of the Surviving
Corporation until thereafter amended as provided by the MBCA, the provisions of
the Articles of Incorporation of the Surviving Corporation and such Bylaws.
(c) The directors and officers of Newco immediately before the Effective
Time shall be the initial directors and officers of the Surviving Corporation in
each case until their successors are elected or appointed and qualified. If, at
the Effective Time, a vacancy shall exist on the Board of Directors or in any
office of the Surviving Corporation, such vacancy shall thereafter be filled in
the manner provided by the MBCA, the Articles of Incorporation and Bylaws of the
Surviving Corporation.
Section 1.6. Cancellation of Company Shares. Upon the terms and subject
------------------------------
to the conditions of this Agreement, at the Effective Time, automatically by
virtue of the Merger and without any further action on the part of Acquiror, the
Company, the Surviving Corporation or the holders of any of the following
securities:
(a) Each share (a "Share") of the common stock of the Company, $.01 par
value (the "Common Stock"), together with the associated rights to purchase
shares of Series A Junior Participating Preferred Stock, par value $.01 per
share (the "Rights"), pursuant that certain Rights Agreement dated as of
November 8, 1996 between the Company and Norwest Bank Minnesota N.A., as
Rights Agent (the "Rights Agreement"), issued and outstanding immediately
prior to the Effective Time, other than Shares cancelled pursuant to this
Section 1.6(b) and Dissenting Shares (as defined in Section 1.7(b)), shall be
cancelled, extinguished and converted into and become a right to receive
$17.50 in net cash per Share without any interest thereon (the "Merger
Consideration"), subject to adjustment for any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange occurring
before the Effective Time.
(b) Each Share (including the associated Rights) that is issued and
outstanding immediately prior to the Effective Time and owned by Acquiror or
any direct or indirect subsidiary or affiliate of Acquiror or by the Company
or any direct or indirect subsidiary of the Company, shall be cancelled,
extinguished and retired, and no payment of any consideration shall be made
with respect thereto.
(c) Each share of Newco's capital stock issued and outstanding
immediately prior to the Effective Time shall be converted into one share of
common stock of the Surviving Corporation.
(d) As a result of their conversion pursuant to this Section 1.6(a), all
Shares (including any associated Rights, but excluding any Dissenting Shares
and any Shares described in this Section 1.6(b) issued and outstanding
immediately before the Effective Time shall cease to be outstanding and shall
automatically be canceled and retired, and each certificate ("Certificate")
previously evidencing such Shares (other than Dissenting Shares and Shares
described in this Section 1.6(b) ("Converted Shares") shall thereafter solely
represent the right to receive the Merger Consideration pursuant to this
Section 1.6(a) of this Agreement. The holders of Certificates shall cease to
have any rights with respect to such Converted Shares except as otherwise
provided herein or by law.
A-2
<PAGE>
Section 1.7. Dissenting Shares.
-----------------
(a) Notwithstanding any provision of this Agreement to the contrary, any
Shares held by a holder (a "Dissenting Shareholder") who has demanded and
perfected his demand for appraisal of his Shares in accordance with Sections 471
and 473 of the MBCA and as of the Effective Time has neither effectively
withdrawn nor lost his right to such appraisal shall not represent a right to
receive the aggregate Merger Consideration for such Shares pursuant to
Section 1.6 above, but in lieu thereof the holder thereof shall be entitled to
only such rights as are granted by the MBCA. Acquiror shall make any and all
payments to holders of Shares with respect to such demands.
(b) Notwithstanding the provisions of Section 1.7(a) above, if any
Dissenting Shareholder demanding appraisal of such Dissenting Shareholder's
Shares ("Dissenting Shares") under the MBCA shall effectively withdraw or lose
(through failure to perfect or otherwise) his right to appraisal, then as of the
Effective Time or the occurrence of such event, whichever later occurs, such
Dissenting Shares shall automatically be converted into and represent only the
right to receive the Merger Consideration as provided in Section 1.6 above upon
surrender of the certificate or certificates representing such Dissenting
Shares.
(c) The Company shall give Acquiror prompt notice of any demands by a
Dissenting Shareholder for payment, or notices of intent to demand payment
received by the Company under Sections 473 of the MBCA and Acquiror shall have
the right to participate in all negotiations and proceedings with respect to
such demands. The Company shall not, except with the prior written consent of
Acquiror (which will not be unreasonably withheld or delayed) or as otherwise
required by law, make any payment with respect to, or settle, or offer to
settle, any such demands.
Section 1.8. Company Plans.
-------------
(a) Stock Options. Upon the consummation of the Merger, each option to
-------------
acquire Shares outstanding immediately prior to the Effective Time under the
Company's 1992 Long-Term Incentive and Stock Option Plan, as amended (the "ISO
Plan") and the Company's 1992 Directors' Stock Option Plan, as amended (the
"Directors' Plan"), whether vested or unvested (each, an "Option," collectively,
the "Options"), shall automatically become immediately vested and exercisable
and each holder of an Option shall have the right to receive from Acquiror a
cash payment (less applicable withholding taxes) in an aggregate amount equal to
the difference between the Merger Consideration less the exercise price per
Share applicable to such Option for all Shares subject to the Option as
expressly stated in the applicable stock option agreement or other agreement
(the "Option Consideration"). The Company shall take such other actions
(including, without limitation, giving requisite notices to holders of Options
advising them of such accelerated vesting and rights pursuant to this Section
1.8) as are necessary to fully advise holders of Options of their rights under
this Agreement and the Options and to facilitate their timely exercise of such
rights. From and after the Effective Time, other than as expressly set forth in
this Section 1.8, no holder of an Option shall have any other rights in respect
thereof other than to receive payment for his Options equal to the Option
Consideration, and the Surviving Corporation shall take all reasonably necessary
actions to terminate the Company's stock option plans and similar arrangements.
(b) Employee Stock Purchase Plan. Outstanding purchase rights under the
----------------------------
Company's 1992 Employee Stock Purchase Plan, as amended (the "ESPP"), shall be
exercised upon the earlier of (i) the next scheduled purchase date under the
ESPP or (ii) immediately prior to the Effective Time, and each participant in
the ESPP shall accordingly be issued Shares at that time which shall be
cancelled at the Effective Time and converted into the right to receive the
Merger Consideration for those Shares. The ESPP shall terminate with such
exercise date, and no purchase rights shall be subsequently granted or exercised
under the Company ESPP.
Section 1.9. Surrender of Securities; Funding of Payments; Stock
---------------------------------------------------
Transfer Books.
--------------
(a) Pursuant to an agreement reasonably satisfactory to the Company and
Acquiror entered before the Effective Time, the Company shall designate a bank
or trust company reasonably acceptable to Acquiror to act as agent for the
holders of the Shares and Options (the "Exchange Agent") for the purpose
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of exchanging Certificates for the Merger Consideration and documents
representing Options (the "Option Agreements") for the Option Consideration. The
fees and expenses of the Exchange Agent shall be paid by Acquiror and Acquiror
shall indemnify the Exchange Agent and the Company against actions taken by the
Exchange Agent pursuant hereto other than for acts or omissions which constitute
willful misconduct or gross negligence, pursuant to the agreement with the
Exchange Agent.
(b) At the Effective Time, Acquiror shall remit to the Exchange Agent an
amount equal to (i) the aggregate Merger Consideration and Option Consideration
necessary to pay the holders of the Converted Shares and Options (collectively,
the "Payment Fund").
(c) Acquiror agrees that, as soon as practicable after the Effective Time
and in no event later than five business days thereafter, the Surviving
Corporation shall cause the distribution to holders of record of the
Certificates and Option Agreements (as of the Effective Time) of a form of
letter of transmittal and other appropriate materials and instructions for use
in effecting the surrender of the Certificates for payment of the Merger
Consideration therefor and in effecting the surrender of the Option Agreements
for payment of the Option Consideration therefor. In the event any Certificate
or Option Agreement shall have been lost or destroyed, the Exchange Agent,
subject to such other conditions as the Surviving Corporation may reasonably
impose (including the posting of an indemnity bond or other surety in favor of
the Surviving Corporation with respect to the Certificate alleged to be lost or
destroyed), shall be authorized to accept an affidavit from the record holder of
such Certificate or Option Agreement in a form reasonably satisfactory to
Acquiror. Upon the surrender of each such Certificate formerly representing
Shares, together with such letter of transmittal, duly completed and validly
executed in accordance with the instructions thereto, the Exchange Agent shall
pay to holders of such Certificates out of the Payment Fund the Merger
Consideration multiplied by the number of Converted Shares represented by such
Certificates, less any amounts required to be held pursuant to applicable tax
laws. Upon the surrender of each such Option Agreement formerly representing
Options, together with a letter of transmittal, duly completed and validly
executed in accordance with the instructions thereto, the Exchange Agent shall
pay such holders the Option Consideration multiplied by the number of Shares for
which such Options were exercisable as of the Effective Time, less any amounts
required to be withheld pursuant to applicable tax laws.
(d) If any portion of the Merger Consideration or Option Consideration is
to be paid to a person other than the person in whose name a Certificate or
Option Agreement is registered, it shall be a condition to such payment that
such Certificate or Option Agreement shall be surrendered and shall be properly
endorsed or shall be otherwise in proper form for transfer and that the person
requesting such payment shall have paid any transfer and other taxes required by
reason of such payment in a name other than that of the registered holder of the
certificate or instrument surrendered or shall have established to the
satisfaction of Acquiror and the Exchange Agent that such tax either has been
paid or is not payable.
(e) At the Effective Time, the stock transfer books of the Company shall
be closed and there shall not be any further registration of transfers of Shares
thereafter on the records of the Company.
(f) To the extent not immediately required for payment on surrendered
Shares and Options, proceeds in the Payment Fund shall be invested by the
Exchange Agent, as directed by the Surviving Corporation (as long as such
directions do not impair the rights of holders of Shares or Options), in direct
obligations of the United States of America, obligations for which the faith and
credit of the United States of America is pledged to provide for the payment of
principal and interest, commercial paper rated of the highest investment quality
by Moody's Investors Service, Inc. or Standard & Poor's Ratings Group, or
certificates of deposit issued by a commercial bank having at least $5 billion
in assets, and any net earnings with respect thereto shall be paid to the
Surviving Corporation as and when requested by the Surviving Corporation.
(g) After the Effective Time, no dividends, interest or other
distributions shall be paid to the holder of any unsurrendered Certificates.
(h) After the Effective Time, holders of Certificates shall cease to have
any rights as shareholders of the Company, except as provided herein or under
applicable state corporation law. No
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interest shall be paid on any Merger Consideration or Option Consideration
payable to former holders of Shares or Options.
(i) Promptly following the one-year anniversary date of the Effective
Date, the Exchange Agent shall return to the Surviving Corporation all of the
remaining Payment Fund, and the Exchange Agent's duties shall terminate.
Thereafter, each holder of a Certificate or an Option Agreement may surrender
the same to the Surviving Corporation and upon such surrender (subject to
applicable abandoned property, escheat or similar laws) shall receive the
applicable aggregate Merger Consideration and/or Option Consideration, as
applicable. Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to any former holder of Shares or Options for any
amount delivered to a public official pursuant to applicable escheat or similar
law.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
The Company represents and warrants to Acquiror that:
Section 2.1. Corporate Organization and Authorization.
----------------------------------------
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Minnesota and has all requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business, and to enter into this Agreement and to carry out the
transactions contemplated hereby.
(b) (i) The Company has all requisite governmental authorizations,
certificates, licenses, consents and approvals required to carry on its
business as presently conducted, except where the failure to possess such
authorizations, certificates, licenses, consents and approvals (either
individually or in the aggregate) would not have a Material Adverse Effect on
the Company (as defined in Section 2.1(b)(ii)). The Company is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the character of the property owned or leased by it
or the nature of the activities conducted by it makes such qualification
necessary, except where the failure to so qualify or to maintain such good
standing (either in one jurisdiction or in the aggregate) would not have a
Material Adverse Effect.
(ii) For purposes of this Agreement, "Material Adverse Effect" shall
mean with respect to the Company or Acquiror, as applicable, any effect that
individually or when taken together with all similar effects (i) is material
and adverse to the prospects, assets, financial position, results of
operations or business of the Company and the Subsidiary taken as a whole, or
Acquiror and its subsidiaries taken as a whole, respectively, or (ii) would
materially impair the ability of the Company or Acquiror, respectively, to
perform its obligations under this Agreement or otherwise materially threaten
or materially impede the consummation of the Merger and the other
transactions contemplated by this Agreement; provided, however, that Material
Adverse Effect shall not be deemed to include the impact of (a) actions or
omissions of the Company or Acquiror taken with the prior written consent of
the Company or Acquiror, as applicable, in contemplation of the transactions
contemplated hereby, and (b) the effects of the Merger (or any announcement
with respect thereto) and compliance with the provisions of this Agreement on
the operating performance or prospects of such party and its subsidiaries,
including without limitation, with respect to the Company, any loss of
customer relationships or employees following the announcement of the Merger.
(c) The Company's only subsidiary is Biomedical Equipment Rental & Sales,
Inc., (the "Subsidiary") and since 1992 the Company has not had any subsidiary
other than the Subsidiary. For purposes of this section, "subsidiary" means any
entity of which securities or other ownership interests having ordinary voting
power to elect a majority of the Board of Directors or other persons performing
similar functions are directly or indirectly owned by the Company. Neither the
Company nor the Subsidiary (i) directly or indirectly owns, (ii) has agreed to
purchase or otherwise acquire or (iii) holds any interest convertible into or
exchangeable or exercisable for, 5% or more of the capital stock or other
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<PAGE>
equity interest of any corporation, partnership, company, joint venture or other
business association or entity (other than the Company's ownership of the
capital stock of the Subsidiary). Except as set forth in Schedule 2.1(c), and
for any agreements, arrangements or commitments solely between the Company and
the Subsidiary, there are no agreements, arrangements or commitments of any
character (contingent or otherwise) pursuant to which any person is or may be
entitled to receive any payment based on the revenues or earnings, or calculated
in accordance therewith, of the Company or the Subsidiary. There are no voting
trusts, proxies or other agreements or understandings to which the Company or
the Subsidiary is a party or by which the Company or the Subsidiary is bound
with respect to the voting of any shares of capital stock of the Company or the
Subsidiary.
(d) The Subsidiary is a corporation duly organized, validly existing and
in good standing under the laws of North Carolina and has all requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business, and has all governmental authorizations, certificates,
licenses, consents and approvals required to carry on its business as presently
conducted, except where the failure to possess such authorizations,
certificates, licenses, consents and approvals (either individually or in the
aggregate) would not have a Material Adverse Effect on the Company. The
Subsidiary is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction where the character of the property owned or
leased by it or the nature of the activities conducted by it makes such
qualification necessary, except where the failure to so qualify or to maintain
such good standing (either in one jurisdiction or in the aggregate) would not
have a Material Adverse Effect on the Company.
(e) All of the outstanding capital stock of the Subsidiary (i) has been
validly issued, is fully paid and nonassessable and is not subject to preemptive
or similar rights and all such shares of capital stock were issued in material
compliance with all applicable federal and state securities laws, and (ii) is
owned by the Company free and clear of any lien or other encumbrance. There are
no outstanding (i) securities of the Subsidiary convertible into or exchangeable
for shares of capital stock or other voting securities or ownership interests in
the Subsidiary or (ii) options or other rights to acquire from the Company or
the Subsidiary, and no other obligation of the Company or the Subsidiary to
issue, any capital stock, voting securities or other ownership interests in, or
any securities convertible into or exchangeable for, any capital stock, voting
securities or ownership interests in the Subsidiary (items in clauses (i) and
(ii) being referred to collectively as the "Subsidiary Securities"). There are
no outstanding obligations of the Company or the Subsidiary to repurchase,
redeem or otherwise acquire any outstanding Subsidiary Securities.
(f) This Agreement has been duly authorized by the Board of Directors of
the Company, has been duly executed and delivered by the Company and, except for
obtaining the approval of the Company's shareholders at the Company Special
Meeting (as defined herein), no further corporate authorization on the part of
the Company is necessary to consummate the transactions contemplated by this
Agreement.
(g) This Agreement constitutes a valid and binding agreement of the
Company and is enforceable against the Company in accordance with its terms,
except to the extent enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally and general equitable principles (whether considered
in a proceeding in equity or in law).
(h) The copies of the respective Articles of Incorporation and Bylaws,
and all amendments thereto, of the Company and the Subsidiary heretofore
delivered to Acquiror are complete and true copies of such documents as in
effect on the date hereof.
Section 2.2. Capitalization. The authorized capital stock of the
--------------
Company consists of 10,000,000 shares of Common Stock, 100,000 shares of Series
A Junior Participating Preferred Stock, par value $.01 per share (the "Junior
Preferred Stock"), and 4,900,000 shares of undesignated preferred stock, par
value $.01 per share ("Undesignated Stock"). As of the date of this Agreement,
(a) 5,372,221 Shares were issued and outstanding, all of which have been duly
authorized, and are validly issued and outstanding, fully paid and
nonassessable; (b) no shares of Junior Preferred Stock were issued and
outstanding; (c) 540,867 Shares were reserved for issuance pursuant to
outstanding Options heretofore
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<PAGE>
granted under the ISO Plan and the Directors' Plan. Schedule 2.2 sets forth as
of the date of this Agreement a schedule showing (i) each outstanding Option and
the date it was granted; (ii) the number of Shares subject thereto as of the
Effective Date (assuming full acceleration of vesting as provided in such
Options and Section 1.8); (iii) the exercise price; and (iv) the method by which
the number of Shares issuable pursuant to Section 1.8(b) under the ESPP may be
determined. All of the Shares were issued in material compliance with all
applicable federal and state securities laws and none of the Shares were issued
in violation of any preemptive or similar rights. Except as described in this
Section 2.2 (including shares reserved under the ESPP), no shares of the capital
stock of the Company are reserved for issuance for any purpose. Except as set
forth above or in the Rights Agreement, there are no other shares of capital
stock or other equity securities, instruments or other rights of the Company
outstanding and no other outstanding options, warrants, rights to subscribe to
(including any preemptive rights), calls or commitments of any character
whatsoever to which the Company or the Subsidiary is a party or may be bound
requiring the issuance, transfer or sale of any shares of capital stock or other
equity securities of the Company or any securities or rights convertible into or
exchangeable or exercisable for any such shares or equity securities, and there
are no contracts, commitments, understandings or arrangements by which the
Company or the Subsidiary is or may become bound to issue additional shares of
its capital stock options, warrants or rights to purchase, redeem or acquire any
additional shares of its capital stock or securities convertible into or
exchangeable or exercisable for any such shares or other securities.
Section 2.3. Noncontravention.
----------------
(a) Subject to the expiration or termination of the applicable waiting
period required by the HSR Act, neither the execution or delivery of this
Agreement nor the consummation of the transactions contemplated hereby:
(i) violates, conflicts with, or constitutes a default under, the
Articles of Incorporation or Bylaws, as amended, of any of the Company or the
Subsidiary; or
(ii) assuming that all consents, approvals, orders or authorizations
contemplated by subsection (b) below have been obtained and all filings
described therein have been made, (A) violates or will violate any statute or
law or any rule, regulation, order, judgment or decree of any court or
governmental authority to which the Company or the Subsidiary is subject or
(B)(with or without notice or lapse of time or both), except as disclosed on
Schedule 2.3(a) hereto, constitutes a default or breach under, or gives to
others any rights of termination, acceleration or modification of, any note,
bond, mortgage, indenture, deed of trust, license, lease or other material
agreement, instrument or obligation to which the Company or the Subsidiary is
a party or by which either of them is bound.
(b) Except for the expiration or termination of the applicable waiting
period under the HSR Act, and in connection with the MBCA, the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), state securities or
"Blue Sky" laws or regulations (the "Blue Sky laws") and the Nasdaq Stock
Market, there is no other consent, approval, order or authorization of, or
filing with, or any permit from, or any notice to, any federal, governmental,
regulatory or administrative authority required to be obtained by the Company or
the Subsidiary for the execution of this Agreement by the Company and the
consummation of the transactions contemplated hereby.
Section 2.4. SEC Filings.
-----------
(a) Prior to the execution of this Agreement, the Company has delivered
or made available to Acquiror complete and accurate copies of (i) the Company's
Annual Reports on Form 10-K for the years ended December 31, 1995, 1994 and
1993, as amended (the "Company 10-K Reports"), as filed under the Exchange Act
with the United States Securities and Exchange Commission (the "SEC"), (ii) all
Company proxy statements and annual reports to shareholders used in connection
with meetings of Company shareholders held since January 1, 1994 (the "Annual
Proxy Statements"), (iii) the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (the "Company 10-Q Report"), as filed under the
Exchange Act with the SEC (such Company 10-K Reports, Annual Proxy Statements
and the Company 10-Q Report, together with all subsequent documents filed by the
Company with the SEC after December
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<PAGE>
31, 1996 and prior to the Effective Date, are referred to herein as the "Company
Public Reports"), and (iv) the Company's unaudited financial statements for the
year ended December 31, 1996 (the "Interim Financial Statements"). As of their
respective dates, the Company Public Reports (x) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and (y) complied as to
form in all material respects with the applicable laws and rules and regulations
of the SEC. Since January 1, 1993, the Company has filed in a timely manner all
reports that it was required to file with the SEC pursuant to the Exchange Act.
(b) The Company financial statements (including any footnotes thereto)
contained in the Company Public Reports and the Interim Financial Statements
were prepared in accordance with the published rules and regulations of the SEC
and generally accepted accounting principles applied on a consistent basis
during the periods involved (except as may be otherwise indicated therein and
except that the Interim Financial Statements do not contain any footnotes
thereto) and fairly presented the consolidated financial position of the Company
and the Subsidiary as of the dates thereof and the consolidated results of
operations, changes in shareholders' equity and cash flows for the periods then
ended, except that any unaudited financial statements contained therein are
subject to normal and recurring year-end adjustments.
Section 2.5. No Material Adverse Changes. Since December 31, 1996,
---------------------------
there has been no material adverse change in, and no event, loss, occurrence or
development in the business of the Company or the Subsidiary, taken as a whole,
that, taken together with other events, occurrences and developments with
respect to such business, has had or would reasonably be expected to have a
Material Adverse Effect on the Company. Except as disclosed in the Company
Public Reports filed prior to the date of this Agreement or as contemplated in
this Agreement, since December 31, 1996, the Company and the Subsidiary have
conducted their respective businesses only in the ordinary course and in a
manner consistent with past practice.
Section 2.6. Legal Proceedings. Except as set forth on Schedule 2.6
-----------------
attached hereto, there are no, and since January 1, 1995 there have not been
any, claims, actions, suits, proceedings (arbitration or otherwise) or
investigations pending or, to the Company's knowledge, threatened by or against,
the Company or the Subsidiary. Except as set forth on Schedule 2.6, no such
claims, actions, suits, proceedings or investigations are (i) seeking to enjoin,
prohibit, restrain or otherwise prevent the transactions contemplated hereby or
(ii) reasonably likely to result in a Material Adverse Effect on the Company if
adversely determined. There are no judgments, decrees or orders issued by any
court, board or other governmental or administrative agency presently
outstanding and unsatisfied against the Company or the Subsidiary.
Section 2.7. No Dividends or Distributions. Since December 31, 1996,
-----------------------------
there has not been any declaration, setting aside or payment of any dividend or
any other distribution with respect to the Company's or the Subsidiary's capital
stock or any redemption, purchase or other acquisition of any of the Company's
securities.
Section 2.8. Fairness Opinion. The Board of Directors of the Company
----------------
has received the written opinion of Piper Jaffray Inc., financial advisor to the
duly appointed and acting special committee of the Board of Directors of the
Company (the "Special Committee"), dated as of the date hereof to the effect
that the consideration to be received by the Company's shareholders in the
Merger is fair to the shareholders of the Company from a financial point of
view, and such opinion is in a form and substance reasonably satisfactory to the
Special Committee.
Section 2.9. Tax Matters.
-----------
(a) Each of the Company and the Subsidiary has filed all Tax Returns
required to be filed by any of them on or prior to the Effective Date and has
paid (or the Company has paid on its behalf), or has set up an adequate reserve
for the payment of, all Taxes required to be paid in respect of the periods
covered by such returns (except where the failure to pay would not have a
Material Adverse Effect on the Company). The information contained in such Tax
Returns is true, complete and accurate in all material
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respects. Neither the Company nor the Subsidiary is delinquent in the payment of
any tax, assessment or governmental charge, except where such delinquency would
not have a Material Adverse Effect on the Company. There are no Tax liens upon
the assets of the Company or the Subsidiary except liens for Taxes not yet due
or being contested in good faith through appropriate proceedings. No deficiency
for any Taxes has been proposed, asserted or assessed against the Company or the
Subsidiary that has not been resolved or paid in full. No audits or other
administrative proceedings or court proceedings are presently pending with
regard to any material Taxes or Tax Returns of the Company or the Subsidiary. No
amount that could be received (whether in cash or property or the vesting of
property) as a result of any of the transactions contemplated by this Agreement
by any employee, officer or director of the Company or any of its affiliates who
is a "disqualified individual" (as such term is defined in proposed Treasury
Regulation Section 1.280G-1) under any employment, severance or termination
agreement, other compensation arrangement or company benefit plan currently in
effect would be an "excess parachute payment" (as such term is defined in
Section 280G(b)(1) of the Code). Neither the Company nor the Subsidiary has made
an election under section 341(f) of the Code. Neither the Company nor the
Subsidiary is required to make any adjustments under Section 481(a) of the code.
Neither the Company nor the Subsidiary is a party to any tax-sharing, allocation
or indemnification agreement with any party other than the Company. Neither the
Company nor the Subsidiary has been a United States real property holding
corporation within the meaning of Section 897(c)(2) during the past five years.
(b) For Purposes of this Agreement:
(i) "Tax or Taxes" means any federal, state, county, local or foreign
------------
taxes, charges, fees, levies, or other assessments, including all net income,
gross income, sales and use, ad valorem, transfer, gains, profits, excise,
franchise, real and personal property, gross receipts, capital stock,
production, business and occupation, disability, employment, payroll,
license, estimated, stamp, custom duties, severance or withholding taxes or
charges imposed by any governmental entity, and includes any interest and
penalties (civil or criminal) on or additions to any such taxes; and
(ii) "Tax Return" means a report, return or other information
----------
required to be supplied to a governmental entity with respect to Taxes
including, where permitted or required, combined or consolidated returns for
a group of entities.
Section 2.10. Absence of Undisclosed Liabilities. All of the
----------------------------------
obligations or liabilities (whether accrued, absolute, contingent, unliquidated
or otherwise, whether due or to become due, and regardless of when asserted,
including Taxes (as defined in Section 2.9)) with respect to or based upon
transactions or events heretofore occurring ("Liabilities"), required to be
reflected on the latest balance sheet delivered to Acquiror pursuant to Section
2.4 (the "Latest Balance Sheet") in accordance with generally accepted
accounting principles have been so reflected. The Company and the Subsidiary
have no Liabilities which are, in the aggregate, material to the business,
assets, operation, prospects or financial condition of the Company and the
Subsidiary, taken as a whole, except (a) as reflected on the Latest Balance
Sheet, (b) Liabilities which arose prior to the date of the Latest Balance Sheet
in the ordinary course of business and not required under generally accepted
accounting principals to be reflected on the Latest Balance Sheet, (c) current
Liabilities which have arisen after the date of the Latest Balance Sheet in the
ordinary course of business, and (d) as otherwise disclosed on Schedule 2.10.
Section 2.11. Compliance with Laws; Permits. Each of the Company and
-----------------------------
the Subsidiary has complied with all applicable laws and regulations of foreign,
federal, state and local governments and all agencies thereof ("Laws") which
affect the business or any leased properties of the Company and the Subsidiary
and to which the Company or the Subsidiary may be subject (including, without
limitation, any state or federal acts (including rules and regulations
thereunder) regulating or otherwise affecting, equal employment opportunity,
employee health and safety or the environment), except where the failure to so
comply would not, individually or in the aggregate, have a Material Adverse
Effect on the Company; and no claims have been filed by any such governments or
agencies against the Company or the Subsidiary alleging such a violation of any
such law or regulation which have not been resolved to the satisfaction of such
governments or agencies. Since December 31, 1994, neither the Company nor any
of its subsidiaries has received from any governmental entity any written
notification with respect to possible conflicts, defaults or violations of Laws,
except for written notices relating to possible conflicts, defaults or
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violations that have not had and could not reasonably be expected to have a
Material Adverse Effect on the Company. Each of the Company and the Subsidiary
holds all of the permits, licenses, certificates and other authorizations of
foreign, federal, state and local governmental agencies required for the conduct
of its business ("Permits"), except where failure to obtain such authorizations
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company.
Section 2.12. Contracts and Commitments.
-------------------------
(a) Except as set forth on Schedule 2.12, neither the Company or the
Subsidiary (i) is a party to any collective bargaining agreement or contract
with any labor union, (ii) is a party to any written or oral contract for the
employment of any officer, individual employee or other person on a full-time or
consulting basis, or relating to severance pay for any such person, (iii) is a
party to any (A) written or oral agreement or understanding to repurchase assets
previously sold (or to indemnify or otherwise compensate the purchaser in
respect of such assets) or (B) agreement for the sale of any capital asset, (iv)
is a party to any contract, arrangement, commitment or understanding (whether
written or oral) which provides for future payments by the Company or the
Subsidiary in excess of $50,000 and is not terminable by the Company within 60
days without payment of a penalty or premium, other than employment contracts,
benefit plans and leases otherwise disclosed in Schedule 2.12 or in another
Schedule to this Agreement or listed as an exhibit in the Company Public
Reports, (v) is a party to any contract, arrangement, commitment or
understanding which is a material contract (as defined in Item 601(b)(10) of
Regulation S-K of the SEC) to be performed after the date of this Agreement that
has not been filed or incorporated by reference in the Company Public Reports,
(vi) is a party to any confidentiality agreement or any agreement which
prohibits the Company or the Subsidiary from freely engaging in any business
anywhere in the world, (vii) is a party to any agreement or indenture relating
to the borrowing of money or to mortgaging, pledging or otherwise placing a lien
on any of the assets of the Company or the Subsidiary, (viii) has guaranteed any
obligation for borrowed money, and (ix) is a party to any agreement or contract
that obligates Company or the Subsidiary to pay a customer consequential
damages.
(b) Except as disclosed on Schedule 2.12, each of the Company and the
Subsidiary has performed all obligations required to be performed by it prior to
the date hereof in connection with the contracts or commitments set forth on
Schedule 2.12, and neither the Company nor the Subsidiary is in receipt of any
claim of default under any contract or commitment set forth on Schedule 2.12,
except for any failures to perform, breaches or defaults which would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
(c) Prior to the date of this Agreement, Acquiror has been given an
opportunity to review a true and correct copy of each written contract or
commitment, and a written description of each oral contract or commitment, set
forth on Schedule 2.12, together with all amendments, waivers or other changes
thereto.
Section 2.13. No Brokers or Finders. Except for the letter agreements
---------------------
dated November 7, 1996, November 13, 1996 and January 3, 1997 between the
Company and Piper Jaffray, Inc., true and correct copies of which have been
delivered to Acquiror, there are no claims for brokerage commissions, finders'
fees, investment advisory fees or similar compensation in connection with the
transactions contemplated by this Agreement, based on any arrangement,
understanding, commitment or agreement made by or on behalf of the Company,
obligating the Company or Acquiror to pay such claim.
Section 2.14. Employee Benefit Plans.
----------------------
(a) Definitions. For the purpose of this Section 2.14, "ERISA" means the
-----------
Employee Retirement Income Security Act of 1974, as amended, and the term "plan"
means every plan, fund, contract, program and arrangement (whether written or
not) which is maintained or contributed to by the Company for the benefit of
present or former employees or directors of the Company or the Subsidiary,
including those intended to provide: (a) medical, surgical, health care,
hospitalization, dental, vision, life insurance, death, disability, legal
services, severance, sickness or accident benefits (whether or not defined in
Section 3(1) of ERISA), (b) pension, profit sharing, stock bonus, retirement,
supplemental retirement or deferred compensation benefits (whether or not tax
qualified and whether or not defined in
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Section 3(2) of ERISA), (c) bonus, incentive compensation, stock option, stock
appreciation right, phantom stock or stock purchase benefits, or (d) salary
continuation, unemployment, supplemental unemployment, termination pay, vacation
or holiday benefits (whether or not defined in Section 3(3) of ERISA).
The term "plan" shall also include every such plan, fund, contract,
program and arrangement: (a) which the Company has committed to implement,
establish, adopt or contribute to in the future, (b) for which the Company is or
may be financially liable as a result of the direct sponsor's affiliation to the
Company or its owners (whether or not such affiliation exists at the date of
this Agreement and notwithstanding that the plan is not maintained by the
Company for the benefit of its employees or former employees), (c) which is in
the process of terminating (but such term does not include any arrangement that
has been terminated and completely wound up prior to the date of this Agreement
such that the Company has no present or potential liability with respect to such
arrangement), or (d) for or with respect to which the Company is or may become
liable under any common law successor doctrine, express successor liability
provisions of law, provisions of a collective bargaining agreement, labor or
employment law or agreement with a predecessor employer. Notwithstanding the
foregoing, the term "plan" shall not include any arrangement or program mandated
by federal, state or local law, such as social security benefits.
(b) Disclosure of Plans and Other Information. Schedule 2.14 sets forth
-----------------------------------------
all plans, other than the Directors' Plan, by name and brief description
identifying: (i) the type of plan, (ii) the funding arrangements for the plan,
(iii) the sponsorship of the plan, and (iv) the participating employers in the
plan. Schedule 2.14 also sets forth the identity of each corporation, trade or
business (separately for each category below that applies): (i) which is (or was
during the preceding five years) under common control with the Company within
the meaning of Section 414(b) or (c) of the Code; (ii) which is (or was during
the preceding five years) in an affiliated service group with the Company within
the meaning of Section 414(m) of the Code; and (iii) which is (or was during the
preceding five years) the legal employer of persons providing services to the
Company as leased employees within the meaning of Section 414(n) of the Code as
in effect for each plan.
The Company has furnished Acquiror with true and complete copies of: (i)
the most recent determination letter, if any, received by the Company from the
Internal Revenue Service regarding each qualified plan; (ii) the most recent
financial statements and annual report or return, if any, for each plan; (iii)
the most recent actuarial valuation reports, if any, for each plan; and (iv) all
documents, trust agreements, insurance contracts, service agreements and all
related contracts and documents (including any employee summaries and material
employee communications) with respect to each plan.
Schedule 2.14 identifies each employee of the Company who is: (i) absent
from active employment due to short or long term disability; (ii) absent from
active employment due to a leave pursuant to the Family and Medical Leave Act or
a comparable state law; (iii) absent from active employment due to other leave
or approved absence; (iv) absent from active employment due to military service
(under conditions that give the employee rights to re-employment); or (v) an
employee with an employment contract that requires more than 31 days termination
notice.
With respect to continuation rights arising under federal or state law as
applied to plans that are group health plans (as defined in Section 601 et. seq.
of ERISA), Schedule 2.14 identifies: (i) each employee, former employee or
qualifying beneficiary who has elected continuation; and (ii) each employee,
former employee or qualifying beneficiary who has not elected continuation
coverage but is still within the period in which such election may be made as of
February 1, 1997.
(c) Compliance With Law. Except as disclosed on Schedule 2.14: (i) all
-------------------
plans intended to be tax qualified under Section 401(a) or Section 403(a) of the
Code are so qualified (subject to amendments to reflect changes where
retroactive amendments are allowed, such as Public Law 104-188, the Small
Business Job Protection Act of 1996); (ii) all trusts established in connection
with plans which are intended to be tax exempt under Section 501(a) or (c) of
the Code are so tax exempt; (iii) to the extent required either as a matter of
law or to obtain the intended tax treatment and tax benefits, all plans comply
in all material respects with the requirements of ERISA and the Code; (iv) all
plans have been administered in material compliance with the documents and
instruments governing the plans except in cases where changes in the law require
compliance with the laws for periods preceding the date plans are required to
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be amended with retroactive effect; (v) all reports and filings with
governmental agencies (including but not limited to the Department of Labor,
Internal Revenue Service, Pension Benefit Guaranty Corporation and the
Securities and Exchange Commission) required in connection with each plan have
been timely made; (vi) all material disclosures and notices required by law or
plan provisions to be given to participants and beneficiaries in connection with
each plan have been properly and timely made; and (vii) the Company has made a
good faith effort to comply with the reporting and taxation requirements for
FICA taxes with respect to any deferred compensation arrangements under Section
3121(v) of the Code. For purposes of this Section 2.14(c), any failure to comply
with the requirements of ERISA or the Code resulting in a fine or penalty of
more than $5,000 shall be deemed to be "material."
(d) Funding. Except as disclosed on Schedule 2.14: (i) all
-------
contributions, premium payments and other payments required to be made in
connection with the plans as of the date of this Agreement have been made; (ii)
proper accrual has been made on the books of the Company for all contributions,
premium payments and other payments due in the current fiscal year but not made
as of the date of this Agreement; (iii) no contribution, premium payment or
other payment has been made in support of any plan that is in excess of the
allowable deduction for federal income tax purposes for the year with respect to
which the contribution was made (whether under Section 162, Section 280G,
Section 404, Section 419, Section 419A of the Code or otherwise); and (iv) with
respect to each plan that is subject to Section 301 et. seq. of ERISA or Section
412 of the Code, such plan has met the minimum funding standard for the 1996
plan year.
(e) Absence of Certain Claims. Except as disclosed on Schedule 2.14 or
-------------------------
as otherwise contemplated by this Agreement: (i) no action, suit, charge,
complaint, proceeding, hearing, investigation or claim is pending with regard to
any plan other than routine uncontested claims for benefits; (ii) the
consummation of the transactions contemplated by this Agreement will not cause
any plan to increase benefits payable to any participant or beneficiary; (iii)
the consummation of the transactions contemplated by this Agreement will not:
(A) entitle any current or former employee of the Company to severance pay,
unemployment compensation or any other payment, benefit or award under the
plans, or (B) accelerate or modify the time of payment or vesting, or increase
the amount of any benefit, award or compensation due any such employee under the
plans; (iv) no plan is currently under examination or audit by the Department of
Labor, the Internal Revenue Service, the Pension Benefit Guaranty Corporation or
the Securities and Exchange Commission; (v) the Company has no actual or
potential liability arising under Title IV of ERISA as a result of any plan that
has terminated or is in the process of terminating; (vi) the Company has no
actual or potential liability under Section 4201 et. seq. of ERISA for either a
complete withdrawal or a partial withdrawal from a multiemployer plan; and (vii)
with respect to the plans, the Company has no liability (either directly or as a
result of indemnification) for (and the transaction contemplated by this
Agreement will not cause any liability for): (A) any excise taxes under Section
4971 through Section 4980B, Section 4999 or Section 5000, or (B) any penalty
under Section 502(i), Section 502(l), Part 6 of Title I or any other provision
of ERISA, or (C) any excise taxes, penalties, damages or equitable relief as a
result of any prohibited transaction, breach of fiduciary duty or other
violation under ERISA or any other applicable law.
(f) Post-Separation Benefits. Except as disclosed on Schedule 2.14 (i)
------------------------
all accruals required under FAS 106 have been properly accrued on the financial
statements of the Company and (ii) the Company has no liability for life
insurance, death or medical benefits after separation from employment other
than: (A) such death benefits under the plans identified on Schedule 2.14, (B)
health care continuation benefits described in Section 4980B of the Code, or (C)
as may be required under other federal, state or local law.
Section 2.15. Rights Agreement. The Company has taken all action
----------------
(including, if required, redeeming all of the outstanding Rights issued pursuant
to the Rights Agreement) so that the entering into of this Agreement and the
consummation of the transactions contemplated hereby do not and will not, with
or without the passage of time, result in (i) the grant of any rights to any
person under the Rights Agreement or enable or require the Company's outstanding
rights to be exercised, distributed or triggered, (ii) Acquiror or Merger Sub
becoming an "Acquiring Person" (as defined in the Rights Agreement), or (iii) a
"Distribution Date" (as defined in the Rights Agreement).
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Section 2.16. Disclosure. The representations and warranties of the
----------
Company contained in this Agreement are true and correct in all material
respects, and such representations and warranties do not omit any material fact
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
Section 2.17. State Takeover Laws. The Board of Directors of the
-------------------
Company and a special committee thereof satisfying the requirements of Section
673(d) of the MBCA has approved the execution of this Agreement and authorized
and approved the Merger prior to the execution by the Company of this Agreement
in accordance with the Section 673 of the MBCA, so that such Section will not
apply to this Agreement contemplated hereby. The Board of Directors of the
Company has taken all such action required to be taken by it to provide that
this Agreement and the transactions contemplated hereby and thereby shall be
exempt from the requirements of any "moratorium," "control share," "fair price"
or other anti-takeover laws or regulations of any state (including without
limitation Section 671 of the MBCA).
Section 2.18. Intellectual Property. Schedule 2.18 sets forth a true
---------------------
and complete list of each fictitious business name, tradename, registered and
unregistered trademark, service mark and related application, patent, patent
right and patent application, copyright in published and material unpublished
works and all software other than generally available software (such as Excel,
WordPerfect and the like) in each case owned, used, filed by, granted to or
licensed by the Company or the Subsidiary and which is material to the Company's
or the Subsidiary's business (collectively, the "Intellectual Property").
Except as otherwise disclosed on Schedule 2.18: (i) the Company owns or has the
exclusive perpetual right to use, without payment to any other party, all
Intellectual Property; (ii) no other person has any rights in or to any of the
Intellectual Property (including, without limitation, any rights to royalties or
other payments with respect to, or rights to market or distribute any of, the
Intellectual Property); (iii) the rights of company in and to any of the
Intellectual Property will not be limited or otherwise affected by reason of any
of the transactions contemplated hereby; (iv) the Intellectual Property is
sufficient for the conduct of Company's business as such is presently conducted;
(v) none of the Intellectual Property infringes or is alleged to infringe any
trademark, copyright, patent or other proprietary right of any person.
Section 2.19. Certain Business Practices. None of the Company, the
--------------------------
Subsidiary or any directors, officers, agent or employees of the Company or the
Subsidiary has (i) used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political activity, (ii)
made any unlawful payment to foreign or domestic governmental officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended, (iii)
consummated any transaction, made any payment, entered into any agreement or
arrangement or taken any other action in violation of Section 1128B(b) of the
Social Security Act, as amended, or (iv) made any other unlawful payment.
Section 2.20. Insurance. Set forth in Schedule 2.20 is a complete and
---------
correct list of all insurance policies and programs (other than welfare benefit
insurance policies and programs disclosed in Schedule 2.14), including self-
insurance programs, maintained by the Company and/or the Subsidiary.
Section 2.21. Properties; Environmental Matters.
---------------------------------
(a) The only real property owned by the Company is the Company's district
office located at 2438 27th Avenue South, Minneapolis, Minnesota, and the
Company has owned no other real property since 1987. Schedule 2.21 sets forth
by office location all real property used or occupied by the Company or the
Subsidiary that is held under lease or sub-lease by the Company or the
Subsidiary (the "Leases"). Except for the properties subject to the Leases and
as set forth on Schedule 2.21, the Company and the Subsidiary have good title,
free and clear of all liens, mortgages, claims, restrictions, pledges, or other
claims or encumbrances to all their material tangible properties and tangible
assets reflected on the Latest Balance Sheet or acquired since the date thereof,
except for (i) liens for current Taxes not yet due and payable, (ii) assets
disposed of since the date of the Latest Balance Sheet in the ordinary course of
business, (iii) liens imposed by law and incurred in the ordinary course of
business for obligations not yet due to carriers, warehousemen, laborers and
materialmen, (iv) liens in respect of pledges or deposits under workers'
compensation laws, and (v) liens and encumbrances which do not affect
marketability of title or
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<PAGE>
the use being made of such properties or immaterial title defects which can be
corrected or cured at no cost, all of which, individually and in the aggregate,
do not have a Material Adverse Effect on the Company. The Leases are in full
force and effect, and the Company or the Subsidiary holds a valid existing
leasehold interest under each of the Leases on the terms set forth in such
Leases. The Company has delivered to Acquiror complete and accurate copies of
each of the Leases, and none of the Leases has been modified in any material
respect, except to the extent such modifications are disclosed by the copies
delivered to Acquiror. All rent and other sums and charges payable by the
Company or the Subsidiary under the Leases are current, and no termination event
or condition or default of a material nature on the part of the Company or the
Subsidiary exists under any such Lease.
(b) All of the buildings, machinery, equipment and other tangible assets
necessary for the conduct of the Company's business as currently being conducted
are in good condition and repair, ordinary wear and tear excepted, and are
usable in the ordinary course of business. The Company owns, or leases under
valid leases, all buildings, machinery, equipment and other tangible assets
necessary for the conduct of its business as currently being conducted. All
rental equipment and disposable medical care products inventory reflected on the
Latest Balance Sheet is in the possession or under the control of the Company or
the Subsidiary, except for rental equipment inventory which is (i) currently
being rented or held by a customer and therefore is in the possession or control
of a customer, or (ii) in transit with a common carrier for delivery to or from
a customer.
(c) The Company and the Subsidiary are and at all times have been in
compliance in all material respects with all Environmental Laws and all Permits.
(d) Neither the Company nor the Subsidiary (i) has received written
notice of any person, including but not limited to, a governmental entity,
alleging that the Company or any subsidiary is in violation of any Permit or
applicable Environmental Law or otherwise may be liable under any Permit or
applicable Environmental Law, including but not limited to, liability in
connection with a Cleanup, which violation or liability is unresolved, (ii)
knows of any event or circumstance that exists which (A) may constitute or
result in a violation by the Company or the Subsidiary of, or the failure on the
part of the Company or the Subsidiary to comply with such Permits or
Environmental Laws, or (B) may give rise to any obligation on the part of the
Company or the Subsidiary to undertake, or to bear all or any portion of the
cost of any Cleanup which, in the case of clauses (A) or (B), could have a
Material Adverse Effect on the Company.
(e) To the knowledge of the Company, there have been no release, spills
or discharges of Regulated Materials on or underneath any location which is
owned, leased or otherwise operated by the Company or the Subsidiary
("Properties"), which release, spills or discharges could have a Material
Adverse Effect on the Company. There are no pending or, to the knowledge of the
Company or the Subsidiary, threatened, claims, liens, encumbrances or other
restrictions of any nature, resulting from Environmental Laws, with respect to
or affecting any of the Properties.
(f) For the purposes of this Agreement the following terms shall have the
following meanings:
"Cleanup" means all actions required to: (a) cleanup, remove, treat or
remediate Regulated Materials; (ii) prevent the release of Regulated Materials
so that they do not migrate, endanger or threaten to endanger public health or
welfare or the environment; (iii) perform pre-remedial studies and
investigations and post-remedial monitoring and care; (iv) respond to any
government or private party requests for information or documents in any way
relating to cleanup, removal, treatment or remediation or potential cleanup,
removal, treatment or remediation of Regulated Materials in the environment; or
(v) any legal or administrative proceeding related to items (1) through (iv)
including, but not limited to, actions brought by third parties to recover costs
incurred with respect to Cleanup.
"Environmental Laws" shall mean all federal, state, local laws, statutes,
ordinances, codes, rules and regulations related to the protection of the
environment, natural resources, or the handling, use, recycle, generation,
treatment, storage, transportation or disposal of Regulated Materials.
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"Regulated Materials" shall mean any pollutants, contaminants, toxic,
hazardous or extremely hazardous substances, materials, wastes, constituents,
compounds, chemicals, natural or man-made elements or forces that are regulated
by, or may now or in the future form the basis of liability under, any
Environmental Laws.
Section 2.22. Vote Required. The only votes of the holders of any
-------------
class or series of Company capital stock necessary to approve the Merger are the
affirmative votes of the holders of a majority of the outstanding Shares.
Section 2.23. Information in Proxy Statement. The Proxy Statement (as
------------------------------
defined herein), will, at the date mailed to the Company's shareholders and at
the time of the Special Meeting (as defined herein), not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statement therein, in light of
the circumstances under which they are made, not misleading, except that no
representation is made by the Company with respect to statements made therein
based on information supplied by Acquiror or Newco.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND NEWCO
----------------------------------------------------
Each of Acquiror and Newco represents and warrants to the Company that:
Section 3.1. Corporate Organization and Authorization.
----------------------------------------
(a) Acquiror is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has all requisite
corporate power and authority to enter into this Agreement and to carry out the
transactions contemplated hereby. Newco is a corporation duly organized,
validly existing and in good standing under the laws of the State of Minnesota,
and has all requisite corporate power and authority to enter into this Agreement
and to carry out the transactions contemplated hereby.
(b) Each of Acquiror and Newco has all requisite corporate power and
authority and all governmental authorizations, certificates, licenses, consents
and approvals required to carry on its respective business as presently
conducted, except where the failure to possess such authorizations,
certificates, licenses, consents and approvals (either individually or in the
aggregate) would not have a Material Adverse Effect on Acquiror or Newco. Each
of Acquiror and Newco is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction where the character of the property
owned or leased by it or the nature of the activities conducted by it makes such
qualification necessary, except where the failure to so qualify or to maintain
such good standing (either in one jurisdiction or in the aggregate) would not
have a Material Adverse Effect on Acquiror.
(c) This Agreement has been duly executed and delivered by each of
Acquiror and Newco, and no further corporate authorization on the part of
Acquiror or Newco is necessary to consummate the transactions contemplated by
this Agreement.
(d) This Agreement constitutes a valid and binding agreement of each of
Acquiror and Newco, enforceable against each of Acquiror and Newco in accordance
with its terms, except to the extent enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affect creditors' rights generally and general equitable principles (whether
considered in a proceeding in equity or in law).
(e) The copies of the Articles of Incorporation and Bylaws, and all
amendments thereto, of each of Acquiror and Newco delivered to the Company are
complete and true copies of such documents as in effect on the date hereof.
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Section 3.2. Capitalization. The authorized capital stock of Acquiror
--------------
consists of 40,000,000 shares of common stock, $1.00 par value, and 20,000,000
shares of preferred stock, $.50 par value, all of which shares of preferred
stock have been designated Series A Preferred Stock. As of January 27, 1997
there were 18,511,394 shares of Common Stock issued and outstanding and
6,300,501 shares of Series A Preferred Stock outstanding. All outstanding
shares of capital stock of Acquiror have been duly authorized and validly issued
and are fully paid and nonassessable.
Section 3.3. Noncontravention. Subject to the expiration or termination
----------------
of the applicable waiting period required by the HSR Act, neither the execution
or delivery of this Agreement nor the consummation of the transactions
contemplated hereby (i) violates, conflicts with, or constitutes a default
under, the Articles of Incorporation or Bylaws, as amended, of Acquiror or
Newco, or (ii) assuming all consents, approvals, orders or authorizations
contemplated by Section 3.4 have been obtained and all filings described therein
have been made, (y) violates or will violate any statute or law or any rule,
regulation, order, judgment or decree of any court or governmental authority to
which Acquiror or Newco is subject or (z) (with or without notice or lapse of
time or both) constitutes a default under any material contract or agreement of
any kind to which Acquiror or Newco is a party or by which it is bound which
default has or would have a Material Adverse Effect on Acquiror.
Section 3.4. Approvals or Consents. Except for the expiration or
---------------------
termination of the applicable waiting period under the HSR Act, and in
connection with the MBCA, the Exchange Act, the Blue Sky laws, the Nasdaq Stock
Market, there is no other consent, approval, order or authorization of, or
filing with, or any permit from, or any notice to, any federal, governmental,
regulatory or administrative authority required to be obtained by Acquiror for
the execution of this Agreement by Acquiror and the consummation of the
transactions contemplated hereby.
Section 3.5. SEC Filings. Prior to the execution of this Agreement,
-----------
Acquiror has delivered or made available to the Company complete and accurate
copies of the Acquiror's Annual Reports on Form 10-K for the years ended
September 31, 1996, 1995 and 1994, as amended (the "Acquiror 10-K Reports"), as
filed under the Exchange Act with the SEC, (ii) all Acquiror proxy statements
and annual reports to shareholders used in connection with meetings of Acquiror
shareholders held since January 1, 1994 (the "Acquiror Proxy Statements") (such
Acquiror 10-K Reports and Acquiror Proxy Statements, together with all
subsequent documents filed by Acquiror with the SEC after December 31, 1996 and
prior to the Effective Date (the "Acquiror Public Reports"). As of their
respective dates, the Acquiror Public Reports (x) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and (y) complied as to
form in all material respects with the applicable laws and rules and regulations
of the SEC.
Section 3.6. No Material Adverse Changes. Since the date of most recent
---------------------------
balance sheet contained in Acquiror Public Reports, there has been no material
adverse change in, and no event, occurrence or development in the business of
Acquiror and its subsidiaries, taken as a whole, that, taken together with other
events, occurrences and developments with respect to such business, has had or
would reasonably be expected to have a Material Adverse Effect on Acquiror.
Section 3.7. Legal Proceedings. Except as disclosed in the Acquiror 10-
-----------------
K Reports, there are no claims, actions, suits, proceedings or investigations
pending or, to the Acquiror's knowledge, threatened by or against, Acquiror or
any of its subsidiaries (i) seeking to enjoin, prohibit, restrain or otherwise
prevent the transactions contemplated hereby or (ii) which, if adversely
determined, are reasonably likely to materially impair the ability of Acquiror
or Newco to fulfil their respective obligations under this Agreement or
materially impede or threaten to impede the consummation of the transactions
contemplated hereby. There are no judgments, decrees or orders issued by any
court, board or other governmental or administrative agency presently
outstanding and unsatisfied against Acquiror or any or its subsidiaries.
Section 3.8. Financing. Acquiror has executed agreements with financial
---------
institutions for any financing required by Acquiror to consummate the Merger,
and have delivered true, correct and complete copies of such agreements to the
Company. At the Effective Time, Acquiror shall have all funds necessary
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to consummate the Merger including, but not limited to, paying an aggregate
Merger Consideration and Option Consideration to all holders of Shares and
Options.
Section 3.9. Disclosure. The representations and warranties of Acquiror
----------
contained in this Agreement are true and correct in all material respects, and
such representations and warranties do not omit any material fact necessary to
make the statements contained therein, in light of the circumstances under which
they were made, not misleading.
Section 3.10. Information in Proxy Statement. None of the information
------------------------------
supplied by Acquiror or Newco specifically for inclusion or incorporation by
reference in the Proxy Statement will, at the date mailed to shareholders and at
the time of the Special Meeting, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
ARTICLE IV
COVENANTS
---------
Section 4.1. Conduct of the Company Prior to the Effective Time.
--------------------------------------------------
(a) No Solicitation; Other Offers.
-----------------------------
(i) From the date hereof until the termination of this Agreement or
the Effective Date, whichever first occurs, the Company will not, and will
cause the Subsidiary not to, and will use its best efforts to cause the
officers, directors, employees, representatives and agents of the Company and
the Subsidiary not to, directly or indirectly, solicit, initiate or encourage
any inquiry, proposal, offer or indication of interest from any person that
constitutes or would reasonably be expected to lead to any Acquisition
Proposal (as hereinafter defined) or enter into discussions or negotiate with
any person or entity in furtherance of any such inquiries or to obtain or
approve any Acquisition Proposal, or agree to or endorse any Acquisition
Proposal, and the Company shall immediately notify Acquiror of all relevant
terms of any such inquiries or proposals received by the Company or the
Subsidiary or by any such officer, director, employee, representatives, or
agents, relating to any of such matters, any material change in the details
(including any amendments or proposed amendments) of any such inquiries or
proposals, the identity of each of the persons or entities making such
inquiries or proposals, and, if such inquiry or proposal is in writing, the
Company shall immediately deliver or cause to be delivered to Acquiror a copy
of such inquiry or proposal; provided, however, that if, prior to the
-------- -------
Effective Time, the Company shall receive an unsolicited Acquisition Proposal
that the Board of Directors of the Company, based upon the advice of its
legal counsel, reasonably believes that it has a fiduciary duty to consider,
then the Company, without violating this Agreement, may thereafter furnish
information to and enter into discussions or negotiations with such third
party. Nothing contained in this Section 4.1(a) or any other provision of
this Agreement shall prevent the Board of Directors of the Company or the
Special Committee, after receiving an opinion of outside counsel to the
effect that the Board of Directors is required to do so in order to discharge
properly its fiduciary duties, from considering, negotiating, approving and
recommending to the shareholders of the Company an unsolicited, bona fide
written Acquisition Proposal which the Board of Directors of the Company
determines in good faith (after consultation with its financial advisors) (A)
would result in a transaction more favorable to the Company's shareholders
than the transaction contemplated by this Agreement and (B) is made by a
person financially capable of consummating such Acquisition Proposal (any
such Acquisition Proposal being referred to herein as a "Superior Proposal").
If the Board of Directors of the Company shall have resolved to accept or
accepted a Superior Proposal then upon written notice to Acquiror, the
Company may pursuant to Section 8.1(d) terminate this Agreement and the
transactions contemplated hereby. For purposes hereof, "Acquisition
Proposal" means any proposal for a merger, consolidation or other business
combination involving the Company or the acquisition of any equity interest
in, or a substantial portion of the assets of the Company or the Subsidiary,
other than the transactions contemplated by this Agreement.
A-17
<PAGE>
(ii) Upon any termination by the Company of this Agreement permitted
by Section 4.1(a)(i), the Company shall pay to Acquiror the sum of $3,000,000
(the "Break-Up Fee"). In such circumstances, the Break-Up Fee shall be
deemed to include all costs and expenses of Acquiror.
(b) Conduct of the Company's Business and Operations. Except as
------------------------------------- ----------
expressly provided in this Agreement or as agreed in writing by Acquiror, from
the date hereof to the Effective Date, the Company covenants and agrees that:
(i) The Company shall, and shall cause the Subsidiary to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and shall, and shall
cause the Subsidiary to, use their reasonable efforts to preserve intact
their present business organizations, keep available the services of their
present officers and employees and preserve their relationships with
customers, suppliers and others having business dealings with them. The
Company shall, and shall cause the Subsidiary to: (A) maintain insurance
coverages and its books, accounts and records in the usual manner consistent
with prior practices; (B) comply in all material respects with all laws,
ordinances and regulations of governmental entities applicable to the Company
and the Subsidiary; (C) maintain and keep its properties and equipment in
good repair, working order and condition, ordinary wear and tear excepted;
and (D) perform in all material respects its obligations under all contracts
and commitments to which it is a party or by which it is bound, in each case
other than where the failure to so maintain, comply or perform, either
individually or in the aggregate, would result in a Material Adverse Effect
on the Company;
(ii) The Company shall not and shall not propose to: (A) sell or
pledge or agree to sell or pledge any capital stock owned by it in the
Subsidiary; (B) amend its Articles of Incorporation or Bylaws; (C) split,
combine or reclassify its outstanding capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or in
substitution for shares of capital stock of the Company, or declare, set
aside or pay any dividend or other distribution payable in cash, stock or
property; or (D) directly and/or indirectly redeem, purchase or otherwise
acquire or agree to redeem, purchase or otherwise acquire any shares of the
Company's capital stock;
(iii) The Company shall not, nor shall it permit the Subsidiary to:
(A) except as required by this Agreement and pursuant to Option Agreements
outstanding on the date hereof or under the ESPP as in effect on the date
hereof, issue, deliver or sell or agree to issue, deliver or sell any
additional shares of, or rights of any kind to acquire any shares of, its
capital stock of any class, any indebtedness or any options, rights or
warrants to acquire, or securities convertible into, shares of capital stock;
(B) acquire, lease or dispose or agree to acquire, lease or dispose of any
capital assets or any other assets other than in the ordinary course of
business; (C) incur additional indebtedness or encumber or grant a security
interest in any asset or enter into any other material transaction other than
in each case in the ordinary course of business (and in the case of incurring
additional indebtedness, in any event in an amount not more than $600,000 in
excess of the amount reflected on the Latest Balance Sheet) in the aggregate;
(D) acquire or agree to acquire by merging or consolidating with, or by
purchasing a equity interest in, or by any other manner, any business or any
corporation, partnership, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any assets of any
other person (other than the purchase or lease of assets from suppliers or
vendors in the ordinary course of business consistent with past practice); or
(E) enter into any contract, agreement, commitment or arrangement with
respect to any of the foregoing;
(iv) Except as disclosed on Schedule 4.1(b), the Company shall not,
nor shall it permit the Subsidiary to (except as required to comply with
applicable law): (A) adopt, enter into, terminate or amend any bonus, profit
sharing, compensation, severance, termination, stock option, pension,
retirement, deferred compensation, employment or other employee benefit plan,
agreement, trust, fund or other arrangement for the benefit or welfare of any
director, officer or current or former employee; (B) increase in any manner
the compensation or fringe benefit of any director, officer or employee
(except for normal increases in the ordinary course of business that are
consistent with past practice and that, in the aggregate, do not result in a
material increase in such employee's benefits or compensation relative to the
level in effect prior to such amendment); (C) pay any benefit not
A-18
<PAGE>
provided under any existing plan or arrangement; (D) grant any awards under
any bonus, incentive, performance or other compensation plan or arrangement
or employee benefit plan (including, without limitation, the grant of stock
options, stock appreciation rights, stock based or stock related awards,
performance units or restricted stock, or the removal of existing
restrictions in any benefit plans or agreements or awards made thereunder)
(other than such plans and arrangements which are made in the ordinary course
of business consistent with past practice); (E) take any action to fund or in
any other way secure the payment of compensation or benefits under any
employee plan, agreement, contract or arrangement or employee benefit plan
other than in the ordinary course of business consistent with past practice;
or (F) adopt, enter into, amend or terminate any contract, agreement,
commitment or arrangement to do any of the foregoing;
(v) The Company shall not, nor shall it permit the Subsidiary to,
enter into or amend any agreements pursuant to which any other party is
granted exclusive marketing, distribution or manufacturing rights of any type
or scope for any period extending beyond the Effective Time with respect to
any products or services of the Company or the Subsidiary;
(vi) the Company shall not, nor shall it permit the Subsidiary to,
release any third party from its obligations under any existing standstill
agreement or arrangement relating to any Acquisition Proposal or otherwise
under any confidentiality, non-competition or other similar agreement;
(vii) the Company shall not, nor shall it permit the Subsidiary to,
(A) change any of its methods of accounting in effect at December 31, 1995,
or (B) make or rescind any express or deemed election relating to Taxes or
make any election relating to Taxes, or change any of its methods of
reporting income or deductions for federal income tax purposes from those
employed in the preparation of the federal income tax returns for the taxable
year ending December 31, 1995, except, in the case of clause (A) or clause
(B), as may be required by Law or generally accepted accounting principles,
or (C) settle or compromise any material claim, action, suit, litigation,
proceeding, arbitration, investigation, audit or controversy.
Section 4.2. Additional Covenants of Acquiror, Newco and the Company.
-------------------------------------------------------
(a) Employee Benefits. As of the Effective Time, the employees of the
-----------------
Company and the Subsidiary (the "Company Employees") shall continue employment
with the Surviving Corporation and its subsidiaries, respectively, in the same
positions and at the same level of wages and/or salary and without having
incurred a termination of employment or separation from service; provided,
however, except as may be specifically required by applicable law or any
contract, the Surviving Corporation and its subsidiaries shall not be obligated
to continue any employment relationship with any Company Employee for any period
of time. Acquiror, Newco and the Company agree that Company Employees will be
entitled to the policies and programs set forth on Schedule 4.2, to the extent
provided therein, and that Company Employees whose employment is terminated on
or after the Effective Date or within 12 months thereafter will receive
severance payments to the extent provided pursuant to policy attached hereto as
Schedule 4.2. Acquiror agrees that Company Employees who remain employed by the
Surviving Corporation following the Merger shall be eligible to participate in
all plans, programs or policies then afforded to similarly situated employees of
Acquiror and its affiliated companies. To the extent any employee benefit
plan, program or policy of Acquiror or its affiliates is made available to the
employees of the Surviving Corporation or its subsidiaries: (i) service with
the Company and the Subsidiary by any Company Employee prior to the Effective
Time shall be credited in determining such employee's eligibility, vesting and
benefit levels (but not for accrual of benefits), and (ii) with respect to any
welfare benefit plans to which such employees may become eligible, Acquiror
shall cause such plans to provide credit for any co-payments or deductibles by
such employees and waive all pre-existing condition exclusions and waiting
periods, other than limitations or waiting periods that have not been satisfied
under any welfare plans maintained by the Company and the Subsidiary for Company
Employees prior to the Effective Time.
(b) Confidentiality. Prior to the Effective Time and after any
---------------
termination of this Agreement, each party will hold, and will use its best
efforts to cause its officers, directors, employees,
A-19
<PAGE>
accountants, counsel, consultants, advisors and agents to hold, in confidence,
unless compelled to disclose by judicial or administrative process or by other
requirements of law, all confidential documents and information concerning the
other party furnished in connection with the transactions contemplated by this
Agreement, except to the extent that such information can be shown to have been
(i) previously known on a nonconfidential basis by such party (ii) in the public
domain through no fault of such party or (iii) later lawfully acquired by such
party from sources other than the other party; provided that such party may
--------
disclose such information to its officers, directors, employees, accountants,
counsel, consultants, advisors and agents in connection with the transactions
contemplated by this Agreement and, in the case of Acquiror, to its lenders in
connection with obtaining the financing for the transactions contemplated by
this Agreement so long as such persons are informed by such party of the
confidential nature of such information and are directed by such party to treat
such information confidentially. Each party's obligation to hold any such
information in confidence shall be satisfied if it exercises the same care with
respect to such information as it would take to preserve the confidentiality of
its own similar information. If this Agreement is terminated, each party will,
and will cause its subsidiaries, to use its best efforts to cause their
respective officers, directors, employees, accountants, counsel, consultants,
advisors and agents to, destroy or deliver to the other party, upon request, all
documents and other materials, and all copies thereof, obtained by such party or
on its behalf from the other party in connection with this Agreement that are
subject to such confidence.
(c) Indemnification; Directors' and Officers' Insurance. Newco will
---------------------------------------------------
(i) until the later of the six year anniversary date of the Effective Date or
the respective termination or expiration date of any existing Company or
Subsidiary indemnification agreement or arrangement, cause its Articles of
Incorporation and Bylaws to continue to provide indemnification provisions for
the benefit of those individuals who have served as directors or officers of the
Company or the Subsidiary at any time prior to the Effective Date which are
comparable to such provisions as are currently contained in the Company's or the
Subsidiary's, as applicable, Articles of Incorporation and Bylaws and
(ii) subject to the occurrence of the Effective Date, Acquiror hereby guarantees
unconditionally full payment and performance of the indemnification obligations
set forth in (i) above. In the event the Surviving Corporation or any of its
successors or assigns (A) consolidates with or merges into any other person and
the Surviving Corporation shall not be the continuing or surviving corporation
or entity of such consolidation or merger or (B) transfers all or substantially
all of its properties and assets to any person, then, and in each such case,
proper provision shall be made so that the successors and assigns of the
Surviving Corporation shall assume the obligations set forth in this Section
4.2(c). Acquiror shall, or shall cause the Surviving Corporation to, obtain and
maintain in effect for not less than six years after the Effective Date, the
current directors' and officers' liability insurance policies maintained by the
Company (provided that Acquiror or the Surviving Corporation may substitute
therefore a policy or policies of at least the same coverage containing similar
terms and conditions so long as no lapse in coverage occurs as a result of such
substitution) with respect to all matters, including the transactions
contemplated hereby, occurring prior to, and including the Effective Date;
provided that in no event shall Acquiror or the Surviving Company be required to
expend more than 250% of the current annual premiums paid by the Company for
such coverage (the "Maximum Premium"); and provided, further, that if Acquiror
or the Surviving Corporation is unable to obtain the amount of insurance
required by this Section 4.2(c) for such aggregate premium, Acquiror of the
Surviving Corporation shall obtain as much insurance as can be obtained for an
annual premium not in excess of the Maximum Premium. Acquiror will, promptly
after the Effective Time, confirm to each such officer and director in writing
that it has undertaken to perform such obligations.
(d) Conduct of Business Pending the Merger. Prior to the Effective Date,
--------------------------------------
unless otherwise contemplated or permitted by this Agreement: (a) each of the
Company and Acquiror shall not, and shall cause its subsidiaries not to take, or
agree in writing or otherwise to take, any actions that would (i) make any
representation or warranty of the Company or Acquiror, respectively, or its
subsidiaries contained in this Agreement untrue or incorrect so as to cause the
conditions set forth in Articles V and VI hereof not to be fulfilled as of the
Effective Date or (ii) result in any of the other conditions of this Agreement
not being satisfied as of the Effective Date. The Company's sole remedy (except
as otherwise expressly provided in this Merger Agreement) for any breach of this
Section 4.2(d) shall be injunctive relief.
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<PAGE>
(e) Access to Information. The Company will (and will cause each of its
---------------------
respective representatives to) afford to Acquiror (or representatives of
Acquiror, including without limitation directors, officers and employees of the
Acquiror and their affiliates and counsel, accountants and other professionals
retained by Acquiror) such access throughout the period prior to the earlier of
the termination of this Agreement or the Effective Time to books, records
(including without limitation tax returns and work papers of independent
auditors), agreements, properties (including for the purpose of making any
reasonable environmental investigation), personnel, suppliers and franchisees as
Acquiror reasonably requests from the Company.
(f) HSR Act. The Company and Acquiror shall use their best efforts to
-------
file as soon as reasonably practicable notifications under the HSR Act in
connection with the Merger and the transactions contemplated hereby and to
respond as promptly as practicable to any inquiries received from the Federal
Trade Commission (the "FTC") or the Antitrust Division of the Department of
Justice (the "Antitrust Division") for additional information or documentation
and to respond as promptly as practicable to all inquiries and requests received
from any State Attorney General or any court, administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign (each, a "Governmental Entity"), in connection with antitrust matters.
The Company and Acquiror shall take such actions as are necessary to overcome
any objections which may be raised by the FTC or Antitrust Division.
(g) Best Efforts. Acquiror and the Company will each use its best
------------
efforts to perform its obligations under this Agreement, to satisfy the
conditions set forth in Articles V and VI, and to consummate the Merger on the
terms and conditions set forth in this Agreement.
(h) Certain Filings. The Company and Acquiror shall use their best
---------------
efforts to cooperate with one another in determining whether any action by or in
respect of, or filing with, any governmental body, agency or official, or
authority is required, or any actions, consents, approvals or waivers are
required to be obtained from parties to any material contracts, in connection
with the consummation of the transactions contemplated by this Agreement and in
seeking to timely obtain any such actions, consents, approvals or waivers, or
making any such filings or furnishing information required in connection
therewith.
(i) Public Announcements. The initial press release relating to this
--------------------
Agreement shall be a joint press release and thereafter Acquiror and the Company
will consult with each other before issuing any press release or making any
public statement with respect to this Agreement and the transactions
contemplated hereby and, will not issue any such press release or make any such
public statement without the prior consent of the other party, which consent
shall not be unreasonably withheld; provided, however, that a party may, without
the prior consent of the other party, issue such press release or make such
public statement as may upon the advice of counsel be required by law, any
securities exchange or the National Association of Securities Dealers, Inc. if
it has used all reasonable efforts to consult with the other party.
(j) Special Meeting. The Company shall take all action necessary, in
---------------
accordance with applicable law and its Articles of Incorporation and Bylaws, to
convene a special meeting of the holders of the Shares ("Special Meeting") as
promptly as practicable for the purpose of considering and taking action upon
this Agreement, unless the Board of Directors of the Company shall have accepted
a Superior Proposal and determined pursuant to Section 4.1(a), in the exercise
of its fiduciary duties, not to recommend that holders of the Shares approve the
Merger and this Agreement and shall have paid to Acquiror the Break-Up Fee. The
Board of Directors of the Company and the Special Committee will, subject to its
fiduciary obligations, recommend that holders of the Shares vote in favor of and
approve the Merger and this Agreement at the Special Meeting.
(k) Proxy Statement.
---------------
(i) As soon as practicable after the date hereof, the Company shall
prepare and file with the SEC a proxy statement and a form of proxy, in
connection with the vote of the Company's shareholders to be held at the Special
Meeting with respect to this Agreement (such proxy statement, together with any
amendments thereof or supplements thereto, in each case in the form or forms
mailed to the Company's shareholders, being the "Proxy Statement") and shall use
its best efforts to respond promptly to any
A-21
<PAGE>
comments of the SEC or its staff and to cause the Proxy Statement to be mailed
to the Company's shareholders as promptly as practicable after responding to all
such comments to the satisfaction of the staff of the SEC. Acquiror and Newco
shall furnish such information concerning Acquiror and Newco as is necessary to
cause the Proxy Statement, insofar as it relates to Acquiror and Newco, to be
prepared in accordance with the Rules and Regulations of the SEC. The Company
shall notify Acquiror promptly of the receipt of any comments from the SEC or
its staff and of any request by the SEC or its staff for amendments or
supplements to the Proxy Statement or for additional information and will supply
Acquiror with copies of all correspondence between the Company or any of its
representatives, on the one hand, and the SEC or its staff, on the other hand,
with respect to the Proxy Statement or the Merger. Prior to filing the Proxy
Statement with the SEC, the Company shall provide reasonable opportunity for
Acquiror to review and comment upon the contents of the Proxy Statement and
shall not include therein or omit therefrom any information to which counsel to
Acquiror shall reasonably object. The Proxy Statement shall include the
recommendation of the Company's Board of Directors in favor of the Merger.
(ii) If at any time prior to the Special Meeting any event or
circumstances relating to the Company, Acquiror or Newco or any of their
respective affiliates, or their respective officers or directors, should be
discovered by the Company, Acquiror or Newco that should be set forth in an
amendment or supplement to the Proxy Statement, the Company shall promptly
inform Acquiror and Newco, and Acquiror and Newco shall promptly inform the
Company, as the case may be, and the Company shall prepare, file with the SEC,
and mail such amendment or supplement to the shareholders of the Company in
accordance with the procedures (including the procedures relating to review and
comment by Acquiror) set forth in Section 4.2(l)(i).
(l) Completion of Audit and SEC Filings. Prior to the Effective Date,
-----------------------------------
the Company agrees that it shall complete an audit of the Interim Financial
Statements and that it will continue to make all filings required by the SEC
under the Exchange Act.
ARTICLE V
CONDITIONS TO ACQUIROR'S OBLIGATIONS
------------------------------------
All obligations of Acquiror under this Agreement are subject to the
fulfillment or waiver, prior to or at the Effective Time, of each of the
following conditions:
Section 5.1. Representations and Warranties. Each of the
------------------------------
representations and warranties made by the Company in this Agreement shall be
true and correct in all material respects on the date of this Agreement and as
of the Effective Time; provided that, any such representation or warranty which
is qualified by materiality shall then be true and correct in all respects.
Section 5.2. Performance. The Company shall have performed and complied
-----------
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or before the Effective
Time.
Section 5.3. Officer's Certificate. The Company shall have delivered to
---------------------
Acquiror a certificate of a duly authorized officer of the Company in such
person's capacity as an officer and without personal liability, dated the
Effective Date, certifying as to the fulfillment of the conditions specified in
Sections 5.1 and 5.2 hereof.
Section 5.4. Shareholder Approvals. This Agreement and the Merger shall
---------------------
have received the necessary shareholder approval of the Company's shareholders.
Section 5.5. HSR Waiting Period. The applicable waiting period under
------------------
the HSR Act, if any, shall have expired or terminated.
Section 5.6. No Injunction. No preliminary or permanent injunction or
-------------
other order by any federal or state court in the United States which prevents
the consummation of the Merger shall have been
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<PAGE>
issued and remain in effect (the Company and Acquiror agreeing to use their
reasonable best efforts to have any such injunction lifted).
Section 5.7. Rights Agreement. The Rights shall not have become
----------------
nonredeemable, exercisable, distributed or triggered pursuant to the terms of
the Rights Agreement.
ARTICLE VI
CONDITIONS TO THE COMPANY'S OBLIGATIONS
---------------------------------------
All obligations of the Company under this Agreement are subject to the
fulfillment or waiver, prior to or at the Effective Time, of each of the
following conditions:
Section 6.1. Representations and Warranties. Each of the
------------------------------
representations and warranties made by Acquiror in this Agreement shall have
been true and correct in all material respects on the date of this Agreement and
as of the Effective Time; provided that, any such representation or warranty
which is qualified by materiality shall then be true and correct in all
respects.
Section 6.2. Performance. Acquiror shall have performed and complied in
-----------
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or before the Effective
Time.
Section 6.3. Officer's Certificate. Acquiror shall have delivered to
---------------------
the Company a certificate of a duly authorized officer in such person's capacity
as an officer and without personal liability, dated the Effective Date,
certifying as to the fulfillment of the conditions specified in Sections 6.1 and
6.2 hereof.
Section 6.4. Shareholder Approvals. This Agreement and the Merger shall
---------------------
have received the necessary approval of the Company's shareholders.
Section 6.5. HSR Waiting Period. The applicable waiting period under
------------------
the HSR Act shall have expired or been otherwise terminated.
Section 6.6. No Injunction. No preliminary or permanent injunction or
-------------
other order by any federal or state court in the United States which prevents
the consummation of the Merger shall have been issued and remain in effect (the
Company and Acquiror agreeing to use their reasonable best efforts to have any
such injunction lifted).
ARTICLE VII
SURVIVAL OF REPRESENTATIONS
---------------------------
Section 7.1. No Survival of Representations. The representations,
------------------------------
warranties, covenants and agreements made by the Company, Acquiror and Newco in
this Agreement or in any instrument delivered pursuant to this Agreement shall
terminate on, and shall have no further force or effect after, the Effective
Time, except for those covenants and agreements contained herein or therein
which by their terms apply in whole or in part after the Effective Time. In the
event of a breach of any of such representations, warranties, covenants or
agreements, the party to whom such representations, warranties, covenants or
agreements have been made shall have all rights and remedies for such breach
available to it under the provisions of this Agreement, regardless of any
disclosure to, or investigation made by or on behalf of, such party on or before
the Effective Date.
Section 7.2. Exclusive Remedy.
----------------
(a) Acquiror and Newco hereby waive, from and after the Effective Date
to the fullest extent permitted under applicable law, any and all rights, claims
and causes of action it or any of its
A-23
<PAGE>
affiliates may have against the Company or the Subsidiary relating to the
subject matter of this Agreement arising under or based upon any federal, state,
local or foreign statute, law, ordinance, rule or regulation or otherwise.
(b) Acquiror further acknowledges and agrees that (i) other than the
representations and warranties of the Company and the Subsidiary specifically
contained in this Agreement, there are no representations or warranties of the
Company or the Subsidiary either expressed or implied with respect to the
Company, the Subsidiary or their respective assets, liabilities and businesses,
and (ii) other than as incorporated or repeated in the representations and
warranties of the Company made in this Agreement, it shall have no claim or
right to indemnification with respect to any information (whether written or
oral), documents or material furnished by the Company, the Subsidiary or any of
their respective officers, directors, employees, agents or advisors to Acquiror,
including any information, documents or material made available to Acquiror in
certain "data rooms," management presentations or any other form in expectation
of the transactions contemplated by this Agreement.
ARTICLE VIII
TERMINATION OF AGREEMENT
------------------------
Section 8.1. Termination of Agreement Prior to the Effective Time.
----------------------------------------------------
This Agreement may be terminated and the Merger contemplated hereby may be
abandoned at any time, notwithstanding approval thereof by the shareholders of
the Company, but prior to the Effective Time:
(a) By mutual written consent of each of the Boards of Directors of
Acquiror and the Company;
(b) By either the Acquiror or the Company, if any of the conditions to
such party's obligation to consummate the transactions contemplated in this
Agreement shall have become impossible to satisfy;
(c) By either the Acquiror or the Company, if the Merger has not been
consummated on or before August 30, 1997 (unless the failure to consummate
the Merger by such date shall be due to the action or failure to act of the
party seeking to terminate this Agreement in breach of such party's
obligations under this Agreement);
(d) By the Company pursuant to Section 4.1(a) or 4.2(j) hereof, upon
payment of the Break-Up Fee; or
(e) By the Acquiror, if the Board of Directors of the Company or the
Special Committee (i) withdraws, modifies or changes its recommendation
regarding the approval of this Agreement, or the Merger in a manner adverse
to the Acquiror; (ii) shall have recommended to the shareholders of the
Company any Acquisition Proposal; (iii) shall have taken any action under the
Rights Agreement to exclude any person or entity (other than Acquiror, Newco
or any affiliate of Acquiror or Newco) from the definition of "Acquiring
Person" (as defined in the Rights Agreement) or to redeem the Rights; (iv)
shall have taken any action under Section 673 of the MBCA to approve any
"business combination" (as defined in the MBCA) with an "interested
shareholder" (as defined in the MBCA) (other than Acquiror, Newco or any
affiliate of Acquiror or Newco) prior to such shareholder's "share
acquisition date" (as defined in the MBCA) or the acquisition of Shares by
such shareholder; (v) shall have taken any action to provide that an
Acquisition Proposal shall be exempt from the provisions of Section 671 of
the MBCA; or (vi) shall have resolved to do any of the foregoing.
Any party desiring to terminate this Agreement shall give written notice
of such termination and the reasons therefor to the other parties.
Section 8.2. Effect of Termination. In the event this Agreement is
---------------------
terminated pursuant to Section 8.1 above, this Agreement shall become void and
of no effect and no party hereto will have any liability to the other for costs,
expenses, loss of anticipated profits or otherwise, except that (i) the
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<PAGE>
agreements contained in this Section 8.2 and Sections 4.1(a)(ii), 4.2(b) and 9.2
shall survive the termination hereof, and (ii) nothing herein shall relieve any
party from its obligations with respect to any breach of this Agreement
occurring prior to a termination. The right of any party hereto to terminate
this Agreement pursuant to Section 8.1 shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of any party
hereto, any person controlling any such party or any of their respective
officers, directors, employees, accountants, consultants, legal counsel, agents
or other representatives, whether prior to or after the execution of this
Agreement.
ARTICLE IX
MISCELLANEOUS
-------------
Section 9.1. Waiver of Compliance. Except for any regulatory approval
--------------------
required hereunder, any failure of a party to comply with any obligation,
covenant, agreement or condition herein may be expressly waived in writing by
the other party hereto, but such waiver will not operate as a waiver of, or
estopped with respect to, any subsequent or other failure.
Section 9.2. Expenses. Each party will bear its respective expenses,
--------
fees and costs incurred or arising in connection with the negotiation and
preparation of this Agreement and any documents related hereto, and the parties
will have no liability between or among themselves for such expenses, fees or
costs. Notwithstanding the foregoing, if (i) this Agreement is terminated
because of a failure to receive the requisite shareholder approval of the Merger
and, prior to the Special Meeting, the Company shall have entered into
discussions or negotiations with, any person or entity with respect to an
Acquisition Proposal involving the Company or the Subsidiary and the Board of
Directors of the Company shall not have reaffirmed its recommendation to the
shareholders of the Company with respect to the transactions contemplated by
this Agreement by the time of the Special Meeting; (ii) Acquiror terminates this
Agreement pursuant to Section 8.1(e) or (iii) (A) Company or Acquiror terminates
this Agreement pursuant to Section 8.1(b) or 8.1(c) at a time that a Company
Breach exists, and (B) within 12 months after such termination, a merger,
consolidation or other business combination involving the Company or an
acquisition of 50% or more of an equity interest in the Company is consummated
with any other person or entity, then in any such case the Company shall
promptly pay to Acquiror the Break-up Fee. As used herein, a "Company Breach"
means a willful breach by the Company of any representation, warranty, covenant
or agreement set forth herein, such that the conditions set forth in Sections
5.1 or 5.2 would not be satisfied.
Section 9.3. Assignability; Parties in Interest. Neither this Agreement
----------------------------------
nor any of the rights or obligations hereunder may be assigned by either of the
parties hereto without the prior written consent of the other party. All the
terms and provisions of this Agreement will be binding upon, inure to the
benefit of and be enforceable by, the respective successors and permitted
assigns of the parties hereto. Notwithstanding the foregoing, Section 4.2(c) of
this Agreement shall inure to the benefit of the persons identified therein.
Section 9.4. Specific Performance. The parties hereto agree that if for
--------------------
any reason any party hereto shall have failed to perform its obligations under
this Agreement, then any other party hereto seeking to enforce this Agreement
against such nonperforming party shall, in addition to all other remedies
available to it, be entitled to specific performance and injunctive and other
equitable relief, and the parties hereto further agree to waive any requirement
for the securing or posting of any bond in connection with the obtaining of any
such injunctive or other equitable relief.
Section 9.5. Agreement; Amendments.
---------------------
(a) This Agreement, including the exhibits, schedules, and other
documents delivered pursuant hereto, contains the entire understanding of the
parties. This Agreement may be amended only by a written instrument duly signed
by the parties hereto or their respective successors or assigns.
(b) No discussions regarding or exchange of drafts or comments in
connection with the transactions contemplated herein shall constitute an
agreement among the parties hereto. Any agreement among the parties shall exist
only when the parties have fully executed and delivered this Agreement.
Section 9.6. Headings. The Article and Section headings contained in
--------
this Agreement are for reference purposes only and will not affect in any way
the meaning or interpretation of any provision of this Agreement.
A-25
<PAGE>
Section 9.7. Severability. The invalidity of any term or terms of this
------------
Agreement will not affect any other term of this Agreement, which will remain in
full force and effect.
Section 9.8. Notices. All notices, requests and other communications to
-------
any party hereunder shall be in writing (including telecopy or similar writing)
and shall be given,
if to the Company, to: 1250 Northland Plaza
3800 West 80th Street
Bloomington, Minnesota 55431-4442
Attention: Thomas A. Minner
Chief Executive Officer
Telephone #: (612) 893-3200
Facsimile #:
with a copy to: Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Elizabeth C. Hinck, Esq.
Telephone #: (612) 340-8877
Facsimile #: (612) 340-8738
if to Acquiror, to: MEDIQ Incorporated
One MEDIQ Plaza
Pennsauken, New Jersey 08110
Attention: Thomas E. Carroll
President and Chief Executive Officer
Telephone #: (609) 662-3200
Facsimile #: (609) 661-0958
with a copy to: Drinker Biddle & Reath
1345 Chestnut Street
Philadelphia, Pennsylvania 19107
Attention: F. Douglas Raymond, III
Telephone #: (215) 988-2700
Facsimile #: (215) 988-2757
or such other address or telecopy number as such party may hereafter specify for
the purpose by notice to the other parties hereto. Each such notice, request or
other communication shall be effective (i) if given by telecopy, when such
telecopy is transmitted to the telecopy number specified in this Section and the
appropriate answerback is received or (ii) if given by any other means, when
delivered at the address specified in this Section.
Section 9.9. Law Governing. This Agreement shall be governed by,
-------------
construed and enforced in accordance with the laws of the State of Minnesota,
without regard to its conflict of laws rules.
Section 9.10. Counterparts. This Agreement may be executed
------------
simultaneously in several counterparts, each of which shall be deemed an
original, but all counterparts so executed will constitute one and the same
agreement.
Section 9.11. Announcements. No party will make any announcement or
-------------
press release respecting the subject matter of this Agreement without the prior
written consent of the other party, except that
A-26
<PAGE>
either party may make such announcement or other disclosure if required by any
law or governmental regulation.
Section 9.12. Representations. No representation or warranty in this
---------------
Agreement shall be deemed to be violated by a party hereto if the information
therein required to be disclosed shall be furnished by such party in response to
any other representation or warranty in this Agreement.
IN WITNESS WHEREOF, this Agreement has been duly executed on behalf of
each of the parties hereto as of the day and year first above written.
MEDIQ INCORPORATED
By: /s/Thomas E. Carroll
----------------------------------------------
Thomas E. Carroll, President
PRN MERGER CORPORATION
By: /s/Thomas E. Carroll
----------------------------------------------
Thomas E. Carroll, President
UNIVERSAL HOSPITAL SERVICES, INC.
By: /s/Thomas A. Minner
----------------------------------------------
Thomas A. Minner, Chief Executive
Officer
A-27
<PAGE>
APPENDIX B
March 18, 1997
Special Committee of the Board of Directors
Universal Hospital Services, Inc.
1250 Northland Plaza
3800 West 80th Street
Bloomington, MN 55431
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the outstanding shares of Common Stock (the "Shares") of
Universal Hospital Services, Inc. ("UHS" or the "Company"), of the $17.50 per
Share in cash into which each outstanding Share of the Company is proposed to be
converted pursuant to the terms of the proposed merger (the "Merger") of the
Company with PRN Merger Corporation ("Acquisition Subsidiary"), a wholly-owned
subsidiary of Mediq Inc. ("Acquiror"). The terms of the Merger are set forth in
the Agreement and Plan of Merger, dated as of February 10, 1997, by and among
the Company, Acquisition Subsidiary and Acquiror (the "Merger Agreement").
Piper Jaffray Inc. ("Piper Jaffray"), as a customary part of its investment
banking business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, underwritings and
secondary distributions of securities, private placements, and valuations for
estate, corporate and other purposes. Piper Jaffray is currently acting as
financial advisor to the Special Committee of the Board of Directors of the
Company in connection with the Merger, for which the Company will pay a fee that
is contingent upon the consummation of the Merger. For our services in rendering
this opinion, the Company will pay us a fee that is not contingent upon the
consummation of the Merger. The Company has also agree to indemnify us against
certain liabilities in connection with this engagement. In the past, we have
provided certain investment banking services to UHS. Piper Jaffray makes a
market in UHS Common Stock and provides research coverage on the Company. Karen
Bohn, a Managing Director and the Chief Administrative Officer of Piper Jaffray
Companies, Inc., the parent of Piper Jaffray Inc., is a director of the Company
and a member of the Special Committee of the Board of Directors.
In arriving at our opinion, we have undertaken such reviews, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have:
(i) reviewed the Merger Agreement;
(ii) reviewed the Annual Reports on Form 10-K for UHS for the three fiscal
years ended December 31, 1995;
(iii) reviewed the Quarterly Reports on Form 10-Q for UHS for the quarters
ended September 30, 1996, June 30, 1996, and March 31, 1996;
(iv) reviewed estimated financial results for the Company for the fiscal year
ended December 31, 1996 and five-year financial forecasts for UHS
prepared by the Company management for the years 1997 through 2001;
B-1
<PAGE>
Special Committee of the Board of Directors
Universal Hospital Services, Inc.
March 18, 1997
(v) visited the headquarters and the Minneapolis facility of UHS and
conducted discussions with certain members of senior management of UHS
concerning topics such as the financial condition, operating performance
and balance sheet of UHS, the prospects for the Company and the
background and rationale of the proposed Merger;
(vi) conducted discussions with members of the Special Committee of the
Board of Directors and the entire Board of Directors of the Company;
(vii) reviewed the historical prices and trading activity for the Company
Common Stock;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions which we deemed
relevant;
(ix) performed discounted cash flow analysis on the five-year financial
forecasts for UHS furnished by UHS management;
(x) analyzed the premiums paid in recent public company acquisitions; and
(xi) compared certain financial data of UHS with certain financial and
securities data of companies deemed similar to UHS or representative of
the business sector in which UHS operates.
We have relied upon and assumed the accuracy, completeness and fairness of the
financial statements and other information provided by UHS or otherwise made
available to us and have not attempted independently to verify such information.
We have assumed, in reliance upon the assurances of UHS management, that the
information provided pertaining to UHS has been prepared on a reasonable basis
in accordance with industry practice and, with respect to financial planning
data, reflects the best currently available estimates and judgement of UHS's
management as to the expected future financial performance of UHS, and that the
management of UHS is not aware of any information or facts that would make the
information provided to us incomplete or misleading. Without limiting the
generality of the foregoing, for the purpose of this opinion, we have assumed
that UHS is not a party to any pending transaction, including external
financing, recapitalizations, acquisitions or mergers discussions, other than
the Merger or in the ordinary course of business. We have also assumed that
there have been no material changes in the Company's assets, financial
condition, results of operations, business or prospects since the date of the
last financial statements made available to us.
In arriving at our opinion, we have not performed any appraisals or valuations
of specific assets or liabilities of UHS, have not been furnished with any such
appraisals or valuations, have made no physical inspection of the properties or
assets of the Company and express no opinion regarding the liquidation value of
UHS.
Without limiting the generality of the foregoing, we have undertaken no
independent analysis of any pending or threatened litigation, possible
unasserted claims or other contingent liabilities, to which either UHS or its
affiliates is a party or may be subject and at UHS's direction and with its
consent, our opinion makes no assumption concerning and therefore does not
consider, the possible assertion of claims, outcomes or damages arising out of
any such matters.
B-2
<PAGE>
Special Committee of the Board of Directors
Universal Hospital Services, Inc.
March 18, 1997
Our opinion is necessarily based upon information available to us, facts and
circumstances and economic, market and other conditions as they exist and are
subject to evaluation on the date hereof; events occurring after the date hereof
could materially affect the assumptions used in preparing this opinion. We are
not expressing any opinion herein as to the prices at which shares of Company
Common Stock have traded or at which such shares may trade at any future time.
This opinion is furnished pursuant to our engagement letter dated January 3,
1997. Except with respect to the use of this opinion in connection with the
proxy statement relating to the Merger, this opinion may not be used or referred
to by the Company or quoted or disclosed to any person in any manner without our
prior written consent. This opinion is not intended to be and shall not be
deemed to be a recommendation to any shareholder of the Company as to how to
vote with respect to the Merger.
Based upon and subject to the foregoing and based upon such other factors as we
consider relevant, it is our opinion that, as of the date hereof, the cash
consideration to be received by shareholders of the Company pursuant to the
Merger Agreement is fair, from a financial point of view, to the shareholders as
of the date hereof.
Sincerely,
PIPER JAFFRAY INC.
B-3
<PAGE>
APPENDIX C
SECTIONS 302A.471 AND 302A.473 OF THE MINNESOTA BUSINESS CORPORATION ACT -
DISSENTERS' APPRAISAL RIGHTS
302A.471. Rights of dissenting shareholders
Subdivision 1. Actions creating rights. A shareholder of a corporation
may dissent from, and obtain payment for the fair value of the shareholder's
shares in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption of
the shares, including a provision respecting a sinking fund for the redemption
or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares to
acquire shares, securities other than shares, or rights to purchase shares or
securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter, or
to cumulate votes, except as the right may be excluded or limited through the
authorization or issuance of securities of an existing or new class or series
with similar or different voting rights; except that an amendment to the
articles of an issuing public corporation that provides that section 302A.671
does not apply to a control share acquisition does not give rise to the right to
obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 302A.661,
subdivision 1, or a disposition in dissolution described in section 302A.725,
subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B,
to which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the board
directs that dissenting shareholders may obtain payment for their shares.
Subd. 2. Beneficial owners. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as
C-1
<PAGE>
to which the shareholder has dissented and the other shares were registered in
the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
Subd. 3. Rights not to apply. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
Subd. 4. Other rights. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473. Procedures for asserting dissenters' rights
Subdivision 1. Definitions. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a shareholder meeting
at which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If the proposed action must be approved by
the shareholders, a shareholder who wishes to exercise dissenters' rights must
file with the corporation before the vote on the proposed action a written
notice of intent to demand the fair value of the shares owned by the shareholder
and must not vote the shares in favor of the proposed action.
Subd. 4. Notice of procedure; deposit of shares. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will apply
after the demand for payment is received;
C-2
<PAGE>
(3) A form to be used to certify the date on which the shareholder, or the
beneficial owner on whose behalf the shareholder dissents, acquired the shares
or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description of
the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
Subd. 5. Payment; return of shares. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months before the effective date of the
corporate action, together With the latest available interim financial
statements;
(2) An estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief description of
the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a) a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision
4 and require deposit or restrict transfer at a later time.
Subd. 6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to
the amount remitted by the corporation.
Subd. 7. Petition; determination. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
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<PAGE>
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of 180 civil procedure. Nonresidents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding
on all shareholders, wherever located. A dissenter is entitled to judgment in
cash for the amount by which the fair value of the shares as determined by the
court, plus interest, exceeds the amount, if any, remitted under subdivision 5,
but shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
Subd. 8. Costs; fees; expenses. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
C-4
<PAGE>
Appendix D
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.
------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0760940
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1250 Northland Plaza
3800 West 80th Street
Bloomington, Minnesota 55431-4442
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(612) 893-3200
---------------------
(Registrant's telephone number, including area code)
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]
D-1
<PAGE>
FORM 10-K INDEX
---------------
<TABLE>
<CAPTION>
PAGE
----
PART I
- ------
<S> <C> <C>
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
- -------
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
- --------
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
- -------
ITEM 14 Exhibits, Financial Statements, Schedule and
Reports on Form 8-K 38
</TABLE>
D-2
<PAGE>
PART I
------
ITEM 1. BUSINESS
-----------------
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.
D-3
<PAGE>
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."
D-4
<PAGE>
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.
D-5
<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.
D-6
<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>
<S> <C> <C>
Critical Care Monitoring Newborn Care
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."
D-7
<PAGE>
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.
D-8
<PAGE>
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.
D-9
<PAGE>
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.
D-10
<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
- ----------------------- ----------- ----------------- ------
<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.
D-11
<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.
D-12
<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.
D-13
<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.
D-14
<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.
D-15
<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>
D-16
<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.
D-17
<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.
D-18
<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>
D-19
<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.
D-20
<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.
D-21
<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.
D-22
<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.
D-23
<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.
D-24
<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.
D-25
<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.
D-26
<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.
D-27
<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.
D-28
<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
D-29
<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.
D-30
<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.
D-31
<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)
D-32
<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).
D-33
<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.
D-34
<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.
D-35
<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>
D-36
<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)
D-37
<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.
D-38
<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.
D-39
<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>
D-40
<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)
D-41
<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)
D-42
<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.
D-43
<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
D-44
<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>
D-45
<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.
D-46
<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.
D-47
<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.
D-48
<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>
D-49
<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.
D-50
<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.
D-51
<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.
D-52
<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.
D-53
<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.
D-54
<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>
D-55
<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.
D-56
<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>
D-57
<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.
D-58
<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>
D-59
<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.
D-60
<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.
D-61
<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.
D-62
<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>
D-63
<PAGE>
LOGO
UNIVERSAL HOSPITAL SERVICES, INC.
1250 NORTHLAND PLAZA
3800 WEST 80TH STREET
BLOOMINGTON, MINNESOTA 55431-4442
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS APRIL 4, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints Thomas A. Minner and Paul W. Larsen, and each of
them, with power to act without the other and with all the right of
substitution in each, the proxies of the undersigned to vote all shares of
Universal Hospital Services, Inc. (the "Company") held by the undersigned on
February 26, 1997, at the Special Meeting of Shareholders of the Company, to be
held on April 4, 1997, at 9:00 a.m. at the Radisson Hotel South, 7800
Normandale Boulevard, Bloomington, Minnesota, and all adjournments thereof,
with all powers the undersigned would possess if present in person. All
previous proxies given with respect to the meeting are revoked.
Receipt of Notice of Special Meeting of Shareholders and Proxy Statement is
acknowledged by your execution of this proxy. Complete, sign, date, and return
this proxy in the addressed envelope--no postage required. Please mail promptly
to save further solicitation expenses.
1. Approval of Merger [_] FOR the Merger[_] AGAINST the Merger[_] ABSTAIN
Agreement, dated as
of February 10, 1997,
by and among MEDIQ
Incorporated, PRN
Merger Corporation
and Universal
Hospital Services,
Inc.
(continued, and to be dated and signed, on other side)
P
R
O
X
Y
2. To vote with discretionary authority upon such other matters as may come
before the meeting. (Discretionary authority will be only exercised with
respect to votes in favor or abstentions.)
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS PROVIDED BY THE
UNDERSIGNED SHAREHOLDER, THIS PROXY WILL BE VOTED "FOR" ITEM 1 LISTED HEREIN.
UPON ALL OTHER MATTERS, THE PROXIES SHALL VOTE AS THEY DEEM IN THE BEST
INTERESTS OF THE COMPANY.
SIGNATURE(S)
------------------------------------
------------------------------------
Dated: _______________________, 1997
INSTRUCTION: When shares are held
by joint tenants, all joint tenants
should sign. When signing as attor-
ney, executor, administrator,
trustee, custodian, or guardian,
please give full title as such. If
shares are held by a corporation,
this proxy should be signed in full
corporate name by its president or
other authorized officer. If a
partnership holds the shares sub-
ject to this proxy, an authorized
person should sign in the name of
such partnership.
