<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________________
COMMISSION FILE NUMBER: 333-49743
UNIVERSAL HOSPITAL SERVICES, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Minnesota 41-0760940
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1250 Northland Plaza
3800 West 80th Street
Bloomington, Minnesota 55431-4442
----------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
612-893-3200
------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIVERSAL HOSPITAL SERVICES, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Equipment rentals $ 14,022,692 $ 13,862,653 $ 29,159,874 $ 28,385,302
Sales of supplies and equipment, and other 1,069,825 1,478,704 2,366,436 2,917,838
------------ ------------ ------------ ------------
Total revenues 15,092,517 15,341,357 31,526,310 31,303,140
Costs of rentals and sales:
Cost of equipment rentals 3,657,219 3,195,799 7,276,389 6,449,495
Rental equipment depreciation 4,020,000 3,600,000 7,845,000 7,000,000
Cost of supplies and equipment sales, and other 733,885 1,020,242 1,557,860 2,025,147
------------ ------------ ------------ ------------
Total cost of rentals and sales 8,411,104 7,816,041 16,679,249 15,474,642
------------ ------------ ------------ ------------
Gross profit 6,681,413 7,525,316 14,847,061 15,828,498
Selling, general and administrative 4,435,368 4,707,985 9,419,237 9,950,955
Recapitalization and transaction costs 268,440 5,027,905 910,921
------------ ------------ ------------ ------------
Operating income 2,246,045 2,548,891 399,919 4,966,622
Interest expense 2,876,107 785,492 4,392,314 1,557,587
------------ ------------ ------------ ------------
(Loss) income before (benefit) provision income taxes and
extraordinary charge (630,062) 1,763,399 (3,992,395) 3,409,035
(Benefit) provision for income taxes:
Current 54,000 512,000 (400,000) 1,067,000
Deferred (392,000) 275,000 (278,000) 477,000
------------ ------------ ------------ ------------
(338,000) 787,000 (678,000) 1,544,000
------------ ------------ ------------ ------------
Net (loss) income before extraordinary charge (292,062) 976,399 (3,314,395) 1,865,035
Extraordinary charge, net of deferred income tax benefit
of $1,300,000 1,863,020
------------ ------------ ------------ ------------
Net (loss) income $ (292,062) $ 976,399 $ (5,177,415) $ 1,865,035
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the unaudited condensed financial
statements.
2
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UNIVERSAL HOSPITAL SERVICES, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Accounts receivable, net $ 12,416,911 $ 11,500,891
Inventories 1,759,716 1,356,828
Deferred income taxes 418,000 455,000
Other current assets 2,753,159 1,233,778
------------- -------------
Total current assets 17,347,786 14,546,497
Property and equipment:
Rental equipment, at cost less
accumulated depreciation 51,221,996 48,946,130
Property and office equipment, at cost
less accumulated depreciation 2,880,011 2,965,509
------------- -------------
Total property and equipment, net 54,102,007 51,911,639
Intangible and other assets:
Goodwill, less accumulated amortization 13,685,150 14,308,704
Other, primarily deferred financing costs, less
accumulated amortization 6,195,348 419,259
------------- -------------
Total Assets $ 91,330,291 $ 81,186,099
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current portion of long term debt $ 201,266 $ 211,229
Accounts payable 2,297,196 3,186,964
Accrued compensation and pension 1,955,659 2,213,841
Accrued expenses 4,016,983 810,874
Book overdrafts 56,102 717,675
------------- -------------
Total current liabilities 8,527,206 7,140,583
Long-term debt 112,763,871 33,733,773
Deferred compensation and pension 1,701,024 2,201,318
Deferred income taxes 3,495,000 5,110,000
Commitments and contingencies
Shareholders' equity (deficiency):
Preferred Stock, $0.01 par value; 5,000,000 shares
authorized, no shares issued and outstanding
Common Stock, $0.01 par value; 25,000,000 and
10,000,000 shares authorized at June 30, 1998 and
December 31, 1997, respectively, 15,624,464 and
5,480,829 shares issued and outstanding at June 30, 1998
and December 31, 1997, respectively 156,245 54,808
Additional paid-in capital 16,042,715
(Accumulated deficit) retained earnings (35,262,331) 16,902,902
Stock subscription receivable (50,724)
------------- -------------
Total shareholders' equity (deficiency) (35,156,810) 33,000,425
------------- -------------
Total Liabilities and Shareholders'
Equity (Deficiency) $ 91,330,291 $ 81,186,099
============= =============
</TABLE>
The accompanying notes are an integral part of the unaudited
condensed financial statements.
3
<PAGE>
UNIVERSAL HOSPITAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (5,177,415) $ 1,865,035
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 8,954,751 7,832,265
Provision for doubtful accounts 57,976 194,487
Loss (gain) on sales of equipment 532,996 (199,825)
Extraordinary charge less cash paid 303,314
Deferred income taxes (1,578,000) 477,000
Changes in operating assets and liabilities:
Accounts receivable (996,040) (717,678)
Inventories and other operating assets (1,922,269) 532,833
Accounts payable and accrued expenses 2,600,387 596,756
------------- -------------
Net cash provided by operating activities 2,775,700 10,580,873
------------- -------------
Cash flows from investing activities:
Rental equipment purchases (11,914,970) (9,795,674)
Property and office equipment purchases (294,750) (112,233)
Proceeds from sale of equipment 265,385 410,346
Other 27,080 (64,271)
------------- -------------
Net cash used in investing activities (11,917,255) (9,561,832)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs 20,713,096 764,546
Repurchase of common stock (84,734,914)
Proceeds under loan agreements 124,578,000 12,020,000
Payments under loan agreements (45,557,865) (13,779,614)
Payment of deferred financing costs (6,237,189)
Tax benefit of non-qualified stock options 1,042,000
Decrease in book overdraft (661,573) (221,395)
------------- -------------
Net cash provided by (used in) financing activities 9,194,555 (1,216,463)
Net change in cash and cash equivalents -- (197,422)
Cash and cash equivalents at beginning of period -- 197,422
------------- -------------
Cash and cash equivalents at end of period -- --
============= =============
Supplemental cash flow information:
Interest paid $ 1,044,000 $ 1,575,000
============= =============
Income taxes paid $ 425,000 $ 996,000
============= =============
Rental equipment purchases included in accounts payable $ 787,000 $ 424,000
============= =============
</TABLE>
The accompanying notes are an integral part of the unaudited
condensed financial statements.
4
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UNIVERSAL HOSPITAL SERVICES, INC.
NOTES TO UNAUDITED QUARTERLY REPORT FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The condensed financial statements included in this Form 10-Q have been
prepared by Universal Hospital Service, Inc. (the "Company") without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed, or omitted, pursuant to such
rules and regulations. These condensed financial statements should be read
in conjunction with the financial statements and related notes included in
the Company's Form S-1 filing filed with the Securities and Exchange
Commission on July 24, 1998.
The condensed financial statements presented herein as of June 30, 1998 and
1997, and for the three and six months then ended, reflect, in the opinion
of management, all adjustments necessary for a fair presentation of
financial position and the results of operations for the periods presented.
Except as discussed in Note 4 below, these adjustments are all of a normal,
recurring nature. The results of operations for any interim period are not
necessarily indicative of results for the full year.
The December 31, 1997 Condensed Balance Sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
2. ACQUISITION OF HOME CARE INSTRUMENTS, INC.
On July 30, 1998, the Company announced that it had completed the purchase
of Home Care Instruments, Inc. ("HCI"), a privately held company
headquartered in St. Louis, Missouri. The acquisition was financed by
drawing upon the bank revolving credit facility. In anticipation of the
acquisition of HCI, the bank revolving credit facility was increased from
$30 million to $40 million.
3. PENDING ACQUISITION OF PATIENT'S CHOICE HEALTHCARE, INC.
On, August 7, 1998, the Company signed a definitive purchase agreement to
acquire the outstanding stock of Patient's Choice Healthcare, Inc., a
privately held company headquartered in Columbus, Ohio. In connection with
the financing of the acquisition, the Company expects to increase the bank
revolving credit facility and issue shares of preferred stock. Such
issuance is subject to shareholder approval. The Company anticipates
completing the acquisition on or about August 17, 1998.
4. RECAPITALIZATION OF THE COMPANY
The Recapitalization was effected through the merger (the "Merger") of UHS
Acquisition Corp., a newly-formed Minnesota corporation controlled by J.W.
Childs Equity Partners, L.P. ("Childs") with and into the Company. The
Recapitalization and Merger was effective on February 25, 1998, the date on
which the Company shareholders approved the Recapitalization and the
Merger.
Pursuant to the Merger Agreement (i) UHS Acquisition Corp. was merged with
and into the Company, with the Company continuing as the surviving
corporation, and (ii) each outstanding share of Common Stock (other than
shares owned directly or indirectly by Childs or the Company, shares in
respect of which appraisal rights were properly exercised and shares held
by the Management Investors), together with certain associated
shareholders' rights, was converted into the right to receive $15.50 in
cash (the "Merger Consideration").
5
<PAGE>
In connection with the Recapitalization, (i) the Company's previous
shareholders (other than the new senior management team and certain other
continuing members of management) received, in consideration for the
cancellation of approximately 5.3 million shares of the Company's Common
Stock and options to purchase approximately 344,000 shares of Common Stock,
cash in the aggregate amount of approximately $84.7 million (net of
aggregate option exercise price), or $15.50 per share; (ii) the Company
repaid outstanding borrowings of approximately $35.5 million under existing
loan agreements; (iii) as of June 30, 1998, the Company paid fees and
expenses of approximately $11.5 million related to the Recapitalization of
which approximately $5.9 million was capitalized as deferred financing
costs and $0.6 million of which was recorded in equity, and (iv) the
Company paid approximately $3.3 million in severance payments to certain
non-continuing members of management, of which $0.5 million had already
been accrued.
In order to finance the Recapitalization, the Company: (i) received an
equity contribution of approximately $21.3 million in cash from Childs and
affiliates and the management investors; (ii) issued $100.0 million in
aggregate principal amount of 10.25% Senior Notes due 2008, and (iii)
borrowed approximately $14.3 million under a new Revolving Credit Facility.
In addition, the Management Investors retained their existing shares of
Common Stock and options to purchase shares of Common Stock which had a
total value of $3.7 million based upon the Merger Consideration and
represent, together with new investments by such persons, approximately 20%
of the capital stock of the Company on a fully diluted basis.
The transaction was structured as a leveraged recapitalization for
accounting purposes with all assets and liabilities carried over at
historical costs.
5. RECAPITALIZATION AND TRANSACTION COSTS
During the second quarter of 1997, the Company incurred $268,440, ($910,921
for the six months), of non-recurring expenses, consisting primarily of
legal, investment banking and special committee fees, associated with the
Company's subsequently mutually terminated sales agreement with MEDIQ
Incorporated ("MEDIQ").
During the first six months of 1998, the Company incurred $5,027,905 of
non-recurring expenses, consisting mainly of legal, auditing, and other
advisory related fees, associated with the Recapitalization (See Note 4).
6. NEW SENIOR NOTES
In connection with the Merger, the Company issued $100 million of 10.25%
Senior Notes, which mature on March 1, 2008. Interest is payable
semiannually in arrears on March 1 and September 1 of each year, commencing
September 1, 1998.
The Senior Notes will be redeemable, in whole or in part, at the option of
the Company on or after March 1, 2003 at a redemption price, plus accrued
interest to the date of redemption. The Senior Notes are not redeemable by
the Company prior to March 1, 2003, except that, at any time on or prior to
March 1, 2001, the Company, at its option, may redeem with the net cash
proceeds of one or more equity offerings up to 35% of the aggregate
principal amount of the Senior Notes originally issued, at a redemption
price equal to 110.25% of the principal amount thereof, plus accrued
interest to the date of redemption; provided, that at least 65% of the
aggregate principal amount of the Senior Notes originally issued remains
outstanding immediately following such redemption.
The Senior Notes are general unsecured obligations of the Company, rank
PARI PASSU in right of payment to all existing and future unsubordinated
indebtedness of the company and rank senior in right of payment to all
subordinated obligations of the Company. The Senior Notes are effectively
subordinated to any secured indebtedness of the Company, including
indebtedness under the Revolving Credit Facility (See Note 7).
6
<PAGE>
7. NEW REVOLVING CREDIT FACILITY
On February 24, 1998, the Company entered into a new Revolving Credit
Facility with two banks, which consists of a $40 million senior secured
revolving credit facility (see Note 2), which will terminate on February
23, 2003. At June 30, 1998 borrowings outstanding under the Revolving
Credit Facility were $14.3 million. The facility is collateralized by
substantially all the assets of the Company.
Interest on loans outstanding are payable at a rate per annum, selected at
the option of the Company, equal to the Base Rate plus a margin of 1% (the
"Base Rate Margin") or the adjusted Eurodollar Rate plus a margin of 2.25%
(the "Eurodollar Rate Margin"). Commencing September 30, 1998, the Banks
Base Rate and the Eurodollar Rate used to calculate such interest rates may
be adjusted if the Company satisfies certain leverage ratios. Interest on
borrowings at the Base Rate shall be paid quarterly. Interest on borrowings
at the Eurodollar Rate shall be paid at the end of the corresponding
Eurodollar loan.
The Credit Agreement also provides that a commitment fee of 0.50% per annum
is payable on the unutilized amount of the Revolving Credit Facility.
The Credit Agreement contains certain covenants including restrictions and
limitations on dividends, capital expenditures, liens, leases, incurrence
of debt, transactions with affiliates, investments and certain payments,
and on mergers, acquisitions, consolidations and asset sales. Furthermore,
the Company is required to maintain compliance with certain financial
covenants such as a maximum leverage ratio, a minimum fixed charge test and
an interest coverage test. The Credit Agreement also prohibits the Company
from prepaying the Senior Notes.
At June 30, 1998, the Company's Base Rate Margin was 9.5% and the
Eurodollar Rate Margin was 7.88%.
8. EXTRAORDINARY CHARGE
In connection with the repayment of the long-term debt, the Company
incurred an extraordinary charge $1,863,020 net of tax benefit of
$1,300,000, for early termination fees and write-off of the related
deferred financing costs.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the accompanying 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>
Percent of Total Revenues
Three Months Six Months Percent Increase (Decrease)
Ended June 30, Ended June 30, ---------------------------------------
----------------- ----------------- Qtr 2 1998 Six Months 1998
1998 1997 1998 1997 Over Qtr 2 1997 Over Six Months 1997
------ ------ ------ ------ --------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals 92.91% 90.36% 92.49% 90.68% 1.15% 2.73%
Sales of supplies and equipment, and other 7.09% 9.64% 7.51% 9.32% (27.65%) (18.90%)
------ ------ ------ ------
Total revenues 100.00% 100.00% 100.00% 100.00% (1.62%) 0.71%
Costs of rentals and sales:
Cost of equipment rentals 24.23% 20.83% 23.08% 20.60% 14.44% 12.82%
Rental equipment depreciation 26.64% 23.47% 24.88% 22.36% 11.67% 12.07%
Cost of supplies and equipment sales, and other 4.86% 6.65% 4.94% 6.47% (28.07%) (23.07%)
------ ------ ------ ------
Total cost of rentals and sales 55.73% 50.95% 52.90% 49.43% 7.61% 7.78%
------ ------ ------ ------
Gross profit 44.27% 49.05% 47.10% 50.57% (11.21%) (6.20%)
Selling, general and administrative 29.39% 30.69% 29.88% 31.79% (5.79%) (5.34%)
Recapitalization and transaction costs 1.75% 15.95% 2.91% N/M 451.96%
------ ------ ------ ------
Operating income 14.88% 16.61% 1.27% 15.87% (11.88%) (91.95%)
Interest expense 19.06% 5.12% 13.93% 4.98% 266.15% 181.99%
------ ------ ------ ------
(Loss) income before (benefit) provision for
income taxes and extraordinary charge (4.18%) 11.49% (12.66%) 10.89% N/M N/M
(Benefit) provision for income taxes (2.24%) 5.13% (2.15%) 4.93% N/M N/M
------ ------ ------ ------
Net (loss) income before extraordinary charge (1.94%) 6.36% (10.51%) 5.96% N/M N/M
Extraordinary charge 5.91% N/M N/M
------ ------ ------ ------
Net (loss) income (1.94%) 6.36% (16.42%) 5.96% N/M N/M
====== ====== ====== ======
</TABLE>
8
<PAGE>
GENERAL
The Company is a leading provider of moveable medical equipment to more than
2,800 hospitals and alternate care providers through its equipment rental and
outsourcing programs.
The following discussion addresses the financial condition of Universal Hospital
Services, Inc., as of June 30, 1998 and the results of operations and cash flows
for the three months and six months ended June 30, 1998 and 1997, respectively.
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 Form S-1 filing filed with the Securities
and Exchange Commission on July 24, 1998.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: Statements in this filing may contain "forward looking" information which
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 in
the company's Form S-1 filing filed with the Securities and Exchange Commission
on July 24, 1998 under the caption "Risk Factors."
INDUSTRY ASSESSMENT
The Company's customers, primarily hospitals and alternate care providers, have
been and continue to be faced with cost containment pressures and uncertainties
with respect to health care reform and reimbursement. The Company believes that
market reform is continuing with movement toward managed care, health care
related consolidations and the formation of integrated health care systems.
There is 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 approved five-year
budget and Taxpayer Relief Act of 1997, which will be financed largely through
cuts in the growth of Medicare spending, will continue to place focus on cost
containment in health care.
The Company believes its Pay-Per-Use and other rental 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 health
care 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 uncertain 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 on health care spending and reimbursement
reform, or uncertainty as to possible reform, causes hospitals and alternate
care providers to defer the procurement of medical equipment, reduce their
capital expenditures or change significantly their utilization of medical
equipment, there could be a material adverse effect on the Company's business,
financial condition and results of operations.
RECAPITALIZATION FINANCIANG AND RELATED TRANSACTIONS
On November 25, 1997, the Board of Directors of the Company entered into the
Merger Agreement with UHS Acquisition Corp. and J.W. Childs Equity Partners,
L.P. and the Recapitalization was completed on February 25, 1998. (See footnote
2 to the financial statements)
9
<PAGE>
EQUIPMENT RENTAL REVENUES
Equipment rental revenues were $14.0 million for the second quarter of 1998,
representing a $0.1 million, or 1.2% increase from equipment rental revenues of
$13.9 million for the same period of 1997. For the first six months of 1998,
equipment rental revenues were $29.2, representing a $0.8 million, or 2.7%
increase from rental revenues of $28.4 million for the same period of 1997. This
rental revenue increase resulted from continued growth at acute care hospitals
and at both established and new offices, while being partially offset by a
decline in rental revenues from alternate care customers due to lower customer
demand which the Company believes is not an indicator of the long term market
prospects of this sector.
Effective February 1, 1997, the Company entered into a two year agreement with
Premier, one of the nation's largest health care alliance enterprises, 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 special rates, discounts and incentives on equipment
rentals. The Premier agreement and some longer term commitments the Company has
established with some of its larger customers have required some price
concessions. Management believes that these agreements will contribute to future
rental revenue growth.
SALES OF SUPPLIES AND EQUIPMENT, AND OTHER
Sales of supplies and equipment, and other were $1.1 million for the second
quarter of 1998, representing a $0.4 million, or 27.7% decrease from sales of
supplies and equipment, and other of $1.5 million for the same period of 1997.
For the first six months of 1998, sales of supplies and equipment, and other
were $2.4 million, representing a $0.5 million, or 18.9% decrease from sales of
supplies and equipment, and other of $2.9 million for the same period of 1997.
Sales of supplies and equipment, and other were adversely impacted by the
continuing trend of major vendors of disposables to market its products
directly to some of the Company's larger customers. In order to be a full
service provider, the Company sells supplies to its customers, however sales of
supplies is not emphasized.
COST OF EQUIPMENT RENTALS
Cost of equipment rentals were $3.7 million for the second quarter of 1998,
representing a $0.5 million, or 14.4% increase from cost of equipment rentals
of $3.2 million for the same period of 1997. For the first six months of 1998,
cost of equipment rentals was $7.3 million, representing a $0.9 million, or
12.8% increase from cost of equipment rentals of $6.4 million for the same
period of 1997. Cost of equipment rentals, as a percentage of equipment rental
revenues, increased to 26.1% for the second quarter of 1998 from 23.1% for the
same period of 1997. For the first six months of 1998, cost of equipment
rentals, as a percentage of equipment rental revenues, increased to 25.0% from
22.7% for the same period of 1997. During 1998, the Company changed its emphasis
to increase support staff activity while redirecting and decreasing its
promotional staff. This change resulted in a higher rental costs offset by
reduced promotional expenses in the Selling, General and Administrative expense
area. In addition, there were lower repair and replacement expenses incurred in
1997 as a result of the uncertainty in the Company's ownership during that time.
RENTAL EQUIPMENT DEPRECIATION
Rental equipment depreciation was a $4.0 million for the second quarter of 1998,
representing $0.4 million, or 11.7% increase from rental equipment depreciation
of $3.6 million for the same period of 1997. For the first six months of 1998,
rental equipment depreciation was $7.8 million, representing a $0.8 million, or
12.1% increase from rental equipment depreciation of $7.0 million for the same
period of 1997. Rental equipment depreciation as a percentage of equipment
rental revenues increased to 28.7% in the second quarter of 1998 from 26.0% for
the same period of 1997. For the first six months of 1998, rental equipment
depreciation, as a percentage of equipment rental revenues, increased to 26.9%
from 24.7% for the same period of 1997. This increase was the result of the
impact of a full year's depreciation on 1997 equipment acquisitions not being
matched by growth in rental revenues.
10
<PAGE>
GROSS PROFIT
Total gross profit was $6.7 million for the second quarter of 1998, representing
a $0.8 million, or 11.2% decrease from total gross profits of $7.5 million for
the same period of 1997. For the first six months of 1998, total gross profit
was $14.8 million, representing a $1.0 million, or 6.2% decrease from total
gross profit of $15.8 million for the same period of 1997. Total gross profit
decreased to 44.3% of the total revenues for the second quarter of 1998 from
49.1% of total revenues for the same period of 1997. For the first six months of
1998, total gross profit, as a percentage of total revenues, decreased to 47.1%
from 50.6% for the same period of 1997. Gross profit on rentals represents
equipment rental revenues reduced by the cost of equipment rentals and rental
equipment depreciation. Gross profit on rentals decreased to 45.3% for the
second quarter of 1998 from 51.03% for the same period in 1997. For the first
six months of 1998, gross profit on rental revenue decreased to 48.1% from 52.6%
for the same period of 1997. This decrease was predominately due to the
previously discussed increases in cost of equipment rentals and rental equipment
depreciation as a percent of equipment rental revenues.
Gross profit on sales of supplies and equipment, and other increased to 31.4% in
the second quarter of 1998 from 31.0% for the same period of 1997. For the first
six months of 1998, gross profit on sales of supplies and equipment, and other
increased to 34.2% from 30.6% for the same period of 1997. This increase in
sales gross margin was due to improved product mix, as the sales lost to
competitors were the Company's lowest margin sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $4.4 million in the second
quarter of 1998, representing a $0.3 million, or 5.8% decrease from selling,
general and administrative expenses of $4.7 million for the same period of 1997.
For the first six months of 1998, selling, general and administrative expenses
were $9.4 million, representing a $0.6 million, or 5.3% decrease from $10.0
million for the same period of 1997. Selling, general and administrative
expenses as a percentage of total revenue decreased to 29.4% for the second
quarter of 1998 from 30.7% for the same period in 1997. For the first six months
of 1998, selling, general and administration decreased to 29.9% from 31.8% for
the same period of 1997. The decrease reflected the reduction in salary expenses
of the executive staff, which did not continue on with the Company after the
Recapitalization combined with the reduction in promotional expense as mentioned
under the Cost of Equipment Rentals category above.
RECAPITALIZATION AND TRANSACTION COSTS
For the first six months of 1998, the Company incurred $5.0 million of
non-recurring expenses, consisting primarily of legal, accounting, and other
advisory related fees, associated with the Recapitalization.
During the second quarter of 1997, the Company incurred $0.3 million of
non-recurring expenses, consisting primarily of legal, investment banking and
special committee fees, associated with the Company's subsequently mutually
terminated acquisition agreement with MEDIQ. For the first six months of 1997,
the Company incurred $0.9 million of non-recurring expenses.
INTEREST EXPENSE
Interest expense was $2.9 million for the second quarter of 1998, representing
an increase of $2.1 million, or 266.2% from interest expense of $0.8 in the same
period of 1997. For the first six months of 1998, interest expense was $4.4
million, representing a $2.8 million, or 182.0% increase from $1.6 million for
the same period of 1997. This increase primarily reflects incremental borrowings
associated with capital equipment additions and the recapitalization of the
Company. Average borrowings increased to $113.0 million during the second
quarter of 1998 from $35.3 million for the same period in 1997 and from $36.1
million during the first six months of 1997, to $90.4 million for the first six
months of 1998.
11
<PAGE>
INCOME TAXES
The Company's effective income tax rate for the first six months of 1998 was
17.0% compared to a statutory income tax rate of 37%. This reduced tax benefit
is primarily due to the effect of non-deductible expenses associated with the
Recapitalization on the Company's taxable loss.
EXTRAORDINARY CHARGE
As a result of the Recapitalization and Senior Note issuance, the Company
prepaid existing notes and a credit facility totaling $35.5 million, incurred a
prepayment penalty of $2.9 million, and wrote off deferred finance expense of
$0.3 million. This amount was reduced by the deferred tax affect of these
expenses of approximately $1.3 million.
NET LOSS
The Company incurred a net loss during the second quarter of 1998 as a result of
the increase in interest expense, as stated previously. The first six months of
1998 resulted in a net loss due to the increase in interest expense combined
with the previously mentioned Recapitalization related expenses.
EBITDA
The Company believes earnings before interest, taxes, depreciation, and
amortization ("EBITDA") to be a useful measurement of operating performance.
EBITDA should not be considered in isolation or as a substitute for net income,
cash flows or other income or cash flow data prepared in accordance with
generally accepted accounting principles ("GAAP") or as a measure of a Company's
profitability or liquidity. EBITDA for the second quarter of 1998 was $6.9
million versus $6.6 million for the same period of 1997. For the first six
months of 1998, EBITDA was $9.4 million versus $12.8 million for the same period
of 1997. Adjusted EBITDA, which adjusts for non-recurring Recapitalization and
transaction costs, was $6.9 million and $6.8 million for the second quarter of
1998 and 1997, respectively. Adjusted EBITDA for the first six months of 1998
was $14.4 million and $13.7 million for the corresponding period in 1997.
RENTAL EQUIPMENT BUILD UP
The Company acquired its equipment pool of Bazooka portable specialty beds under
an exclusive agreement which was terminated by the Company in March 1996. The
Company does not expect to acquire any additional Bazooka beds and further
expects that future purchases of equipment will be in response to customer
driven demand, consistent with the Company's current and historical strategy.
Utilization of Bazooka beds in the Company's pool is currently below the desired
level and declined steadily during 1997 and the first six months of 1998. The
Company has performed an impairment analysis based upon projected undiscounted
cash flows in accordance with the current accounting literature and has
determined that the current book value of these assets is currently fully
recoverable. The Company is reviewing its alternatives with the Bazooka product
line, to include such options as the review of price sensitivity or the possible
disposal of excess units. In the event that growth in customer demand for this
product does not occur, the Company will eliminate excess units, which will have
an adverse affect on the Company's margin. As of June 30, 1998, the net book
value of Bazooka bed inventory was $4.6 million.
ACQUISITIONS
On July 30, 1998, the Company announced it had completed the purchase of Home
Care Instruments, Inc. ("HCI"), a privately held company headquartered in St.
Louis, Missouri.
On August 7, 1998, the Company signed a definitive purchase agreement to acquire
the outstanding stock of Patient's Choice Healthcare, Inc., a privately held
company headquartered in Columbus, Ohio. In connection with the financing of the
acquisition, the Company expects to increase the bank revolving credit facility
and issue shares of preferred stock. Such issuance is subject to shareholder
approval. The Company anticipates completing the acquisition on or about August
17, 1998.
QUARTERLY FINANCIAL INFORMATION: SEASONALITY
Quarterly operating results are typically affected by seasonal factors.
Historically, the Company's first and fourth quarter are the most profitable,
reflecting increased hospital utilization during the fall and winter months.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its equipment purchases primarily through
internally generated funds and borrowings under its existing revolving credit
facility. As an asset intensive business, the Company has required continued
access to capital to support the acquisition of equipment for rental to its
customers. The Company expects to purchase approximately $24.0 million of rental
equipment in 1998.
In connection with the acquisition of HCI, the revolving credit facility was
increased from $30 million to $40 million. Simultaneous with the acquisition of
HCI, the bank revolving credit facility increased to $29.1 million.
As part of the pending acquisition of Patient's Choice Healthcare, Inc., the
bank revolving credit facility is expected to be increased from $40 million to
$48 million.
During the first six months of 1998 and 1997, net cash flows provided by
operating activities were $2.8 million and $10.6 million, respectively. Net cash
flows used in investing activities were $12.0 million and $9.6 million, in each
of these periods. Net cash flows provided by (used in) financing activities were
$9.2 million and ($1.2) million, respectively.
POST-RECAPITALIZATION
The Company's principal sources of liquidity are expected to be cash flows from
operating activities and borrowings under the Revolving Credit Facility. It is
anticipated that the Company's principal uses of liquidity will be to fund
capital expenditures related to purchases of movable medical equipment, provide
working capital, meet debt service requirements and finance the Company's
strategic plans.
The Company is capitalized with $100 million of Senior Notes and a $30 million
senior secured Revolving Credit Facility ($11.6 million of which was outstanding
on June 30, 1998). Interest on loans outstanding under the Credit Agreement is
payable at a rate per annum, selected at the option of the Company, equal to the
Base Rate plus a margin of 1.00% (the "Base Rate Margin"), or the adjusted
Eurodollar Rate plus a margin of 2.25% (the "Eurodollar Rate Margin").
Commencing September 30, 1998, the Eurodollar Rate Margin and the Base Rate
Margin used to calculate such interest rates may be adjusted if the Company
satisfies certain leverage rations. The Credit Agreement contains restrictive
covenants which, among other things, limit the Company from entering into
additional indebtedness, dividends, transactions with affiliates, asset sales,
acquisitions, mergers and consolidations, liens and encumbrances, and
prepayments of other indebtedness.
The Company believes that, based on current levels of operations and anticipated
growth, its cash from operations, together with other sources of liquidity,
including borrowings available under the Revolving Credit Facility, will be
sufficient over the next several years to fund anticipated capital expenditures
and make required payments of principal and interest on its debt, including
payments due on the Senior Notes and obligations under the Revolving Credit
Facility. The Company believes that its ability to repay the Senior Notes and
amounts outstanding under the Revolving Credit Facility at maturity will require
additional financing. There can be no assurance, however, that any such
financing will be available at such time to the Company, or that any such
financing will be on terms favorable to the Company. In addition, the Company
continually evaluates potential acquisitions and expects to fund such
acquisitions from its available sources of liquidity, including borrowings under
the Revolving Credit Facility.
The Company's expansion and acquisition strategy may require substantial
capital, and no assurance can be given that the Company will be able to raise
any necessary additional funds through bank financing or the issuance of equity
or debt securities on terms acceptable to the Company, if at all.
13
<PAGE>
THE YEAR 2000 ISSUE
The Company is currently evaluating the potential impact of the situation
referred to as the "Year 2000 Issue." The Year 2000 Issue concerns the inability
of computer software programs to properly recognize the process date sensitive
information relating to the Year 2000. The Company has acquired and is using an
automated Year 2000 tool to assist in the updating of applications. Certain of
the Company's systems, including general ledger, accounts payable, fixed assets,
payroll and human resources, are currently Year 2000 compliant. The Company's
newer applications, which utilize a two-digit century field, are expected to
require little additional effort to be Year 2000 compliant. Other systems,
including the Company's AIMS/CS software package licensed to customers, are
upgraded annually, and will be made Year 2000 compliant in the next upgrade
required in 1999. The Company's pool of rental equipment includes certain pieces
of older equipment that may not be Year 2000 compliant. The Company is in the
process of examining which units need to be upgraded. The Company does not
anticipate that the cost associated with the necessary upgrades to either the
Company's computer software or rental equipment will be material to its
business, financial position or results of operations. The Company is also in
the process of evaluating the impact of Year 2000 compliance issues as they
relate to its significant customers and suppliers.
14
<PAGE>
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
(12) Ratio of Earnings to Fixed Charges
(B) REPORTS ON FORM 8-K:
None
15
<PAGE>
SIGNATURES
The Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 15, 1998
UNIVERSAL HOSPITAL SERVICES, INC.
By /s/ David E. Dovenberg
---------------------------------
David E. Dovenberg,
President and Chief Executive Officer
By /s/ Gerald L. Brandt
--------------------------------
Gerald L. Brandt,
Vice President of Finance and
Chief Financial Officer
16
<PAGE>
UNIVERSAL HOSPITAL SERVICES, INC.
EXHIBIT INDEX TO REPORT ON FORM 10-Q
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
12 Ratio of Earnings to Fixed Charges 18
<PAGE>
EXHIBIT 12
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
DETERMINATION OF RATIO OF EARNINGS TO
FIXED CHARGES:
(Loss) earnings before (benefit) provision for
income taxes and extraordinary charge $ (630,062) $ 1,763,399 $(3,992,395) $ 3,409,035
Fixed charges
Amortization of deferred financing costs 243,275 328,435
Interest expense 2,876,107 785,492 4,392,314 1,557,587
----------- ----------- ----------- -----------
Earnings before fixed charges 2,489,320 2,548,891 728,354 4,966,622
Fixed charges
Amortization of deferred financing costs 243,275 328,435
Interest expense 2,876,107 785,492 4,392,314 1,557,587
----------- ----------- ----------- -----------
Total fixed charges 3,119,382 785,492 4,720,749 1,557,587
Ratio of earnings to fixed charges 0.80X 3.24X 0.15X 3.19X
=========== =========== =========== ===========
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET, STATEMENT OF INCOME, AND STATEMENT OF CASH FLOW AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 13,106,919
<ALLOWANCES> 690,008
<INVENTORY> 1,759,716
<CURRENT-ASSETS> 17,347,786
<PP&E> 137,214,781
<DEPRECIATION> 83,112,774
<TOTAL-ASSETS> 91,330,291
<CURRENT-LIABILITIES> 8,527,206
<BONDS> 0
0
0
<COMMON> 156,245
<OTHER-SE> (35,303,055)
<TOTAL-LIABILITY-AND-EQUITY> 91,330,291
<SALES> 1,985,345
<TOTAL-REVENUES> 31,526,310
<CGS> 1,557,860
<TOTAL-COSTS> 16,679,249
<OTHER-EXPENSES> 5,027,905
<LOSS-PROVISION> 57,976
<INTEREST-EXPENSE> 4,392,314
<INCOME-PRETAX> (3,992,395)
<INCOME-TAX> (678,000)
<INCOME-CONTINUING> (3,314,395)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,863,020
<CHANGES> 0
<NET-INCOME> (5,177,415)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
