<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended December 31, 1999, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] For the transition period from
________ to _________.
Commission File Number: 0-20086
UNIVERSAL HOSPITAL SERVICES, INC.
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(Exact name of Registrant as specified in its charter)
Minnesota 41-0760940
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3800 West 80th Street, Suite 1250
Bloomington, Minnesota 55431-4442
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(Address of principal executive offices)
(Zip Code)
(612) 893-3200
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
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]
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FORM 10-K INDEX
Page
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PART I
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ITEM 1 Business 3
ITEM 2 Properties 16
ITEM 3 Legal Proceedings 16
ITEM 4 Submission of Matters to a Vote of Security Holders 16
PART II
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ITEM 5 Market for Registrant's Common Equity and
Related Stockholder Matters 17
ITEM 6 Selected Financial Data 18
ITEM 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
ITEM 7A Quantitative and Qualitative Disclosures about
Market Risk 29
ITEM 8 Financial Statements and Supplementary Data 29
ITEM 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 29
PART III
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ITEM 10 Directors and Executive Officers of the Registrant 30
ITEM 11 Executive Compensation 32
ITEM 12 Principal Shareholders 36
ITEM 13 Certain Relationships and Related Transactions 37
PART IV
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ITEM 14 Exhibits, Financial Statements, Schedule and
Reports on Form 8-K 40
2
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PART I
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ITEM 1: BUSINESS
----------------
General
Universal Hospital Services, Inc. ("UHS" or the "Company") is a leading
nationwide provider of movable medical equipment to more than 4,800 hospitals
and alternate care providers through equipment rental and outsourcing programs.
Our principal rental program is an innovative Pay-Per-Use(TM) program where we
charge a per use rental fee based on daily use of equipment per patient. We also
offer other rental programs where we charge customers on a daily, weekly or
monthly basis. All of our rental programs include a comprehensive range of
support services, including equipment delivery, training, technical and
educational support, inspection, maintenance, and comprehensive documentation.
In addition, through our Asset Management Partnership (AMP) Program, we allow
customers to outsource substantially all, or a significant portion of, their
movable medical equipment needs by providing, maintaining, managing and tracking
that equipment for them. We also sell disposable medical supplies to hospitals
in conjunction with the equipment we rent and to alternate care providers both
in connection with our rental equipment and on a stand-alone basis. We seek to
maintain high utilization of our rental equipment by pooling and redeploying
that equipment among a diverse customer base and adjusting pricing on a customer
by customer basis to compensate for their varying use rates. For the year ended
December 31, 1999, we had total revenues of approximately $92.2 million, a net
loss of $5.5 million and Adjusted EBITDA (as defined herein) of $35.9 million.
For the year ended December 31, 1999, on a pro forma basis, including the two
acquisitions made in 1999, our revenue, net loss and pro forma adjusted EBITDA
(as defined herein) were $94.4 million, $5.0 and $37.1 million, respectively.
We believe that our equipment rental and outsourcing programs are more cost
effective for health care providers than the purchase or lease of movable
medical equipment for the following reasons:
o Increase Equipment Productivity Rates. Health care providers' movable
medical equipment needs fluctuate on a daily basis due to varying
patient census levels and severity of illness and condition.
Therefore, a health care provider's equipment productivity will vary
for a given fixed level of equipment. By using our rental programs,
health care providers can increase the use rates of their medical
equipment, allowing them to purchase less equipment and reduce related
costs. Furthermore, our rental programs, especially our Pay-Per-Use
program, allow customers more effectively to match the costs of
variable equipment use with actual patient charges.
o Outsource Support Services. Our full range of support services are
included in our rental fee. We believe that we can often provide these
support services at a lower cost than customers can themselves.
Accordingly, health care providers can reduce the substantial
operating costs associated with equipment ownership or lease.
o Minimize Equipment Obsolescence Risk. Health care providers can
effectively eliminate the risk of equipment obsolescence through our
short-term rental and Pay-Per-Use programs. Our obsolescence risk is
reduced because we can maintain high utilization of our equipment.
We own a rental pool of over 88,000 pieces of movable medical equipment in
four primary categories: critical care, monitoring, respiratory therapy, and
newborn care. We are one of only two national providers of movable medical
equipment rental and outsourcing programs. As of December 31, 1999, we operated
through 56 district offices and 12 regional service centers, serving rental and
sales customers in 50 states and the District of Columbia.
Market Overview
Historically, hospitals have purchased a majority of their movable medical
equipment. In response to cost containment pressures, however, hospitals and
other health care providers are seeking ways to reduce their movable medical
equipment purchases and related capital and service costs. In making medical
equipment procurement decisions, hospitals and other health care providers
consider factors such as productivity levels of equipment and the costs of
quality assurance, regulatory documentation, maintenance, repair, storage and
obsolescence. We estimate that productivity rates of movable medical equipment
owned by hospitals average between 45-68%, based on over 300 studies we and/or
these hospitals conducted. We believe that these studies show that hospitals can
purchase less equipment and reduce related costs by participating in our rental
programs.
3
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Company Strengths
We attribute our historical success to, and believe that our potential for
future growth comes from, the following strengths:
Superior Service and Strong Customer Relationships. We distinguish
ourselves by being a leading service company rather than just an equipment
rental provider. We compete on the basis of our value-added, full-service
features of our rental programs in addition to price. Our support services
include 24-hour-a-day, 365-day-a-year delivery of "patient ready" equipment,
technical support, training in equipment use, quality assurance services,
regular inspections and maintenance of all our equipment. As a result of our
service focus, we enjoy strong customer relationships. Of our 100 largest
customers as of January 1, 1995, 88 remain customers as of December 31, 1999.
National Network. We are one of only two national providers of a broad
range of movable medical equipment rental and outsourcing programs. As of March
31, 2000, our national network of 56 district offices and 13 regional service
centers serves hospital and alternate care customers in 50 states and the
District of Columbia. This broad network allows us to meet the equipment rental
and service needs of independent health care facilities, national and regional
health care chains and group purchasing organizations. Our national network also
enables us to redeploy equipment throughout our system in order to maintain high
levels of equipment utilization and customer service.
Sophisticated Use of Information Technology. Through our commitment to
information technology, we developed proprietary systems designed to enhance
our, and our customers', operating efficiencies. We maintain a complete service
history of all our rental equipment, including data on length of placement,
transfers, modifications, repairs, maintenance and inspections. We use this
information to monitor and schedule preventive maintenance and safety testing
programs and to maximize equipment utilization. Our systems provide information
that helps customers meet their equipment documentation needs under applicable
industry standards and regulations. We also offer our customers software to
track the location, productivity and availability of all of their movable
medical equipment. Our MIS staff designed these systems and will continue to
upgrade these systems and develop new applications.
Depth and Breadth of Equipment Rental Pool; Purchasing Power. We own a
rental pool of over 88,000 pieces of movable medical equipment in four primary
categories: critical care, monitoring, respiratory therapy and newborn care. Our
diversified equipment rental pool includes equipment purchased from
approximately 100 manufacturers in the year ended December 31, 1999 and enables
us to offer customers numerous models from different manufacturers within each
primary equipment category. During 1999, we purchased 78% of our medical
equipment direct from manufacturers while 22% was purchased from the used
equipment market. The breadth of our product offerings gives us a competitive
strength, compared to manufacturers and regional equipment rental firms that may
offer a limited range of models within an equipment category. In addition, the
amount of our annual equipment purchases enables us to obtain favorable pricing
terms from many equipment vendors. As of December 31, 1999, approximately 63% of
our rental pool (valued at original cost and excluding companies acquired in
1998 and 1999) was purchased within the last four years.
Experienced and Committed Management Team. As part of our February 1998
recapitalization (the "Recapitalization"), (See "Item 7, Management Discussion
and Analysis of Financial Condition and Results of Operations--Recapitalization,
Financing and Related Transactions) we installed a new senior management team
comprised of existing senior operating managers who have now been with us for an
average of 22 years. We have expanded our management team with people
experienced in the alternate care market. This management team is refocusing and
expanding our growth strategy. Our management team has made a significant equity
investment in the Company, owning over 19% of our common stock on a fully
diluted basis.
Attractive Return on Rental Pool. Our pricing strategy is designed to
generate a payback period which is substantially shorter than the useful life of
a particular piece of equipment. We expect to achieve a two-year payback period
on the original purchase price of our entire rental pool. In contrast, the
average useful life of the equipment in our rental pool (including acquisitions)
has historically been 7.9 years.
Large and Diversified Customer Base. We provide movable medical equipment
to approximately 2,300 hospitals and approximately 2,500 alternate care
providers (such as home care providers, nursing homes, surgicenters, subacute
care facilities and outpatient centers) throughout the United States. For the
year ended December 31, 1999, our top ten customers accounted for approximately
10% of total rental revenues.
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Growth Strategy
We believe that the aging population, increased life expectancy and managed
care will provide significant growth opportunities in both hospital and
alternate care settings. Our strategy is to achieve continued growth by:
Increasing Business with Existing Customers. We seek to increase our
business with existing customers by renting additional equipment to them and
reaching additional departments. Because our customers are familiar with our
programs and the benefits of these programs, we believe that our existing
customer base represents a significant expansion opportunity. Our two largest
district offices generated an average monthly rental revenue per hospital
customer census bed (i.e., occupied bed) of approximately $85 for the years
ended December 31, 1998 and 1999, while increasing the number of census beds
served by 5.4%. We believe that there is significant growth potential by
increasing the level of revenue per hospital customer throughout all of our
offices. Company-wide, we generated an average monthly rental revenue per
hospital customer census bed of approximately $20 for the years 1998 and 1999,
while increasing census beds served by 17.0%.
Providing Comprehensive Equipment Management Programs. We offer a total
equipment management outsourcing program called Asset Management Partnership, or
AMP. Through this program, we provide, maintain, manage and track substantially
all, or a significant portion of, a customer's movable medical equipment. The
AMP program allows health care providers to control capital spending and certain
operating costs through outsourcing and improved productivity. We plan to
increase conversions of existing customers into the AMP program as well as
promote the AMP program to a target list of potential customers. As of December
31, 1999, we had 15 AMP accounts, 9 of which we have added since January 1,
1996. The average monthly rental revenue at these 9 accounts increased 181%
after conversion to AMP.
Developing Business with New Customers. We plan to further penetrate the
hospital and alternate care markets by establishing new customer relationships
either individually or through group purchasing organizations. To date, we have
signed agreements with several independent Group Purchasing Organizations
(GPOs), including Premier, Novation and Amerinet, three of the nation's largest
health care alliances. These agreements give us preferred supplier status to
over 4,000 hospitals in existing markets. We also plan to expand business with
alternate care providers. Our alternate care business increased to 20% of rental
revenue for the year ended December 31, 1999 from 4% in 1992.
Opening New District Offices. In order to expand our geographic coverage,
we plan to open three to four new full-service district offices in 2000 (two of
which were opened in December 1999) and in each of the subsequent several years.
In choosing locations for our district offices, we consider the nature and size
of the potential customer market, customer concentration and GPO affiliation
within the market, demographics and vendor relationships. While major
metropolitan areas will remain a primary focus for expansion, we expect that
regional clusters of hospitals will provide attractive expansion opportunities.
Pursuing Strategic Alliances. We intend to pursue strategic alliances with
major manufacturers of movable medical equipment. The nature of these alliances
could include joint marketing arrangements and/or revenue sharing agreements
whereby our rental programs and services would be marketed by the manufacturer's
sales distribution network. Under these agreements, such manufacturers would not
offer the rental programs and services of any other company.
5
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Pursuing Strategic Acquisitions. We plan to pursue strategic acquisitions
that will increase our market share in existing markets, enable us to more
quickly penetrate new geographic and alternate care markets and/or improve our
overall operating efficiencies. Since August 1996, we have acquired the
following companies:
<TABLE>
<CAPTION>
LTM Total LTM
Company Locations Date Revenues (1) EBITDA (1)
------- --------- ---- ------------ ---------
(in thousands)
<S> <C> <C> <C> <C>
Biomedical Equipment Rental & Sales,
Inc. "BERS"........................ Raleigh, North Carolina August 1996 $6,035 $2,853
Home Care Instruments, Inc. "HCI"..... St. Louis, Missouri July 1998 7,920 3,229
Patient's Choice Healthcare,
Inc. "PCH"......................... Columbus, Ohio August 1998 8,653 2,432
Medical Rentals Stat, Inc. "MRS"...... Oklahoma City, Oklahoma November 1998 926 441
Express Medical Supply, Inc. "EMS".... Nashville, Tennessee March 1999 995 234
Vital Choice Medical..................
Systems, Inc. "VC"................. Fresno, California October 1999 2,472 1,009
</TABLE>
(1) Total revenues and EBITDA (as defined herein) are for the last twelve months
immediately preceding the acquisition date.
These acquisitions expanded our market share and service capabilities in
new regions and in the alternate care market. Our strategy is to expand our
rental and disposable sales presence in the alternate care market across all of
our acute care district offices.
Equipment Management Programs
Description
Rental Programs. Our primary equipment rental program is the Pay-Per-Use
program whereby customers are able to obtain equipment when they need it and pay
for equipment only when it is used. Customers may also obtain equipment through
daily, weekly or monthly rental programs. When our customers request a piece of
equipment, we provide the equipment in "patient ready" condition. Upon delivery,
each piece of rented equipment is logged into our tracking system as being
placed with the particular customer. We provide 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. We generally do
not use written agreements with our customers but emphasize continuous contact
and shared information with each customer. Under our Pay-Per-Use program, the
customer is responsible for keeping a record of each equipment use and reporting
the use to us on a monthly basis. Many customers report equipment usage in
conjunction with their patient billing procedures. We bill each customer monthly
based on this reported usage. The customer is under no obligation to use the
equipment and may request that we remove the equipment at any time.
Correspondingly, we may remove equipment or raise the per-use rental fee if it
is under-utilized.
Outsourcing Programs. The scope of our relationship with some of our
largest customers has evolved into the AMP program. Through this program, we
provide, maintain, manage and track substantially all, or a significant portion
of, a customer's movable medical equipment within the customer's organization.
One or more of our employees are located on site at the customer's facility to
coordinate the equipment management program and record equipment use. Contracts
are typically three to five years in length and equipment rental rates are
generally guaranteed for three years based on target equipment productivity
levels. These rental rates reflect all of the costs related to the additional
services provided as part of the AMP program and are adjusted to reflect actual
equipment productivity levels. Our AMP program enables health care providers to
have access to all appropriate medical equipment available when it is needed,
while controlling their costs through improved productivity and efficiency.
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Attributes
Full Service. We emphasize the full-service features of our equipment
rental and outsourcing programs. Our equipment rental fee includes
24-hour-a-day, 365-day-a-year delivery of "patient ready" equipment, technical
support, training in equipment use, quality assurance services, regular
inspections and maintenance of all equipment rented from us. We maintain a total
service history of any rented equipment, which includes inspection, repair and
modification activities for the entire life of the unit. We also offer an
optional software package that allows a particular customer to track location,
productivity and availability of all equipment rented, owned or leased by that
customer. Together, these services allow health care providers to eliminate many
of the major overhead costs associated with the ownership or lease of medical
equipment.
Customer Responsiveness. Our operational structure is designed to enable us
to respond quickly to a customer's needs. Through our district offices, we
maintain both a local and system-wide inventory network which is designed to
assure access to a broad range of medical equipment. Our 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.
Management of Equipment Utilization. We seek to allocate our pool of rental
equipment efficiently among our customers by continually monitoring customers'
equipment productivity levels. We review customer productivity routinely and,
depending on productivity level, may adjust the rental 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 productivity and benefits us as it
attempts to maximize the utilization of the equipment in its inventory. See
"Item 1, Business, Operations -- Pricing."
Diverse Equipment Selection. We generally purchase new equipment which we
believe to be state-of-the-art from manufacturers with a reputation for quality,
product support and innovation. We purchase from a number of different
manufacturers to address our customers' diverse needs with a special emphasis on
equipment that lowers patient care costs while improving quality of care and
treatment outcomes. See "Item 1, Business, Operations -- Equipment Inventory."
Operations
Pricing. Our rental and AMP program pricing strategy is designed to
generate a pay-back period that is substantially shorter than the useful life of
a particular piece of equipment. On a customer-specific basis, we develop a
rental rate for a given piece of equipment which takes into consideration the
customer's needs with respect to equipment type, assumed equipment productivity,
length of placement, frequency and extent of support service and volume of
business. As a customer's productivity rate increases, we may adjust the rental
fee, which benefits the customer by permitting them to obtain a lower rental fee
and benefits us as it attempts to maximize the utilization of our equipment
inventory. The rental rate is designed not only to recoup costs but also to
provide us a targeted financial return on our investment for the particular
category of equipment. Service requirements and rental rates are generally
reviewed on a quarterly basis and rates may be adjusted as the customer's
service needs or productivity levels vary from expected levels. This evaluation
process enables us to continuously monitor actual revenues as compared to
targeted return objectives.
Equipment Inventory. We purchase movable medical equipment in the areas of
critical care, monitoring, respiratory therapy and newborn care. Equipment
acquisitions may be made to expand our pool of existing equipment or to add new
equipment technologies to our existing rental pool. We consider historical
utilization levels, customer demand, life cycle phase of the equipment and
vendor relationships before acquiring such equipment in order to avoid
speculative purchases. We have established a product evaluation committee to
consider new technologies or new vendors, 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.
In making equipment purchases, we consider a variety of factors including
equipment mobility, anticipated utilization level, service intensiveness and
anticipated obsolescence. Of additional consideration is the relative safety of
and the risks associated with such equipment.
We seek to maximize the useful life of our equipment by renting our older
equipment inventory at lower rental rates or bundling such older equipment with
newer equipment in rental programs with price incentives to the customer.
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Equipment, which is no longer required or desired, is either sold, primarily to
non-hospital purchasers, utilized for spare parts or sold for scrap value.
We own over 88,000 pieces of equipment available for use by our customers.
The cost of each category of equipment in our rental pool relative to the entire
pool as of December 31, 1999 was: critical care, 59%; monitoring, 22%;
respiratory therapy, 17%; and newborn care, 2%. The following is a list of the
principal types of medical equipment available to our customers by category:
<TABLE>
<CAPTION>
Critical Care Monitoring Respiratory Therapy
- ------------- ---------- -------------------
<S> <C> <C>
Adult/Pediatric Volumetric Pumps Adult Monitors Aerosol Tents
Alternating Pressure/Flotation Devices Anesthetic Agent Monitors BiPAP
Ambulatory Infusion Pumps Apnea Monitors Nebulizers
Anesthesia Machines Blood Pressure Monitors Oximeters
Blood/Fluid Warmers Defibrillators Oxygen Concentrators
Cold Therapy Units Electrocardiographs Ventilators
Continuous Passive Motion Devices (CPM) End Tidal CO(2) Monitors
Controllers, Infusion Fetal Monitors Newborn Care
Electrosurgical Generators Monitoring Systems ------------
Enteral Infusion Pumps Neonatal Monitors Incubators
Heat Therapy Units Oximeters Infant Warmers
Hyper-Hypothermia Units PO(2)/CO(2) Monitors Phototherapy Devices
Foot Pumps Recorders and Printers
Lymphodema Pumps Surgical Monitors
Patient Controlled Analgesia (PCA) Telemetry Monitors
Minimal Invasive Surgery (MIS) Urine Output/Temperature Monitors
Sequential Compression Devices (SCD) Vital Signs Monitors
Specialty Beds and Support Services
Suction Devices
Syringe Pumps
Tympanic Thermometry
Ultrasonic Aspirators
Wheel Chairs
</TABLE>
During 1999, we purchased 78% of our medical equipment directly from
approximately 100 manufacturers and 22% from the used equipment market. Our five
largest manufacturers of movable medical equipment, which supplied approximately
38% of our direct movable medical equipment purchases for 1999, were: Baxter
Healthcare Corporation, Mallinckrodt (Nellcor Puritan Bennett, Inc.), The
Kendall Company, Abbott Laboratories, Inc. and Agilent, Inc. Although the
identity of the top ten manufacturers remains relatively constant from year to
year, the relative ranking of suppliers within this group may vary over time. We
believe that alternative sources of medical equipment are available to us should
they be needed.
We seek to ensure availability of equipment at favorable prices. Although
we do not generally enter into long-term fixed price contracts with suppliers of
our equipment, we may receive price discounts related to the volume of our
purchases. In order to receive strong vendor support throughout the geographic
areas in which it does business, we seek to structure our equipment purchases to
ensure credit to local representatives of those vendors. The purchase price for
equipment generally ranges from $2,000 to $50,000, with some complete monitoring
systems costing more than $1.0 million.
Information Technology. We track the history of each piece of equipment in
its inventory on an IBM AS/400 centralized computer system located at our
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 our district offices and regional service centers.
Data on length of placement, transfers, modifications, repairs, maintenance and
inspections is kept for the life of the equipment and is used extensively for
the establishment of preventive maintenance and safety testing programs and the
improvement of equipment performance. We also track utilization for each piece
of equipment, which helps us to maximize utilization of all the equipment in our
rental pool.
Information as to a customer's rental equipment is also provided to the
customer through our Rental Equipment Documentation System ("REDS") and the
Operator Error Identification System ("OEIS"). REDS and OEIS help the customer
to meet its equipment documentation needs under applicable standards and
regulations. In addition, REDS helps the customer track the productivity levels
of each piece of equipment. Keeping utilization records helps us maximize the
utilization of all equipment in our inventory. We also offer an optional
software package that allows a
8
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particular customer to track location, productivity and availability of all
equipment rented, owned or leased by that customer.
Sale of Disposable Products
In order to serve our customers fully, we sell disposable medical supplies
used in conjunction with the medical equipment we rent. Examples of such
disposable items include tubing and cassettes for infusion devices. In addition,
we sell disposable medical supplies in the alternate care market both in
connection with rental equipment and on a stand-alone basis. We believe that
customers purchase disposables from us due to the convenience of obtaining
equipment and related supplies from one source and, particularly in the
alternate care market, the anticipated cost-savings resulting from acquiring
disposables only on an as-needed basis. We currently acquire substantially all
of our rental-related medical disposables from approximately 150 suppliers. The
five largest current suppliers of disposables to us, accounting for over 51% of
our disposable purchases for 1999, were: The Kendall Company; Sims Deltec, Inc.;
B. Braun McGaw, Inc.; Alaris Medical Systems, Inc.; and Huntleigh Healthcare,
Inc. We believe that alternative purchasing sources of most disposable medical
supplies are available to us, if necessary.
Maintenance
We provide all necessary repairs and maintenance of our equipment and
maintain control over the functional testing and safety of all equipment through
our technical staff. Prior to placing equipment with a customer, we apply
testing standards designed to ensure the safety of all such equipment. We
conduct regular inspections of our equipment either at one of our district
offices or regional service centers, or on-site at the customer. In order to
assist customers in meeting their equipment documentation needs for purposes of
applicable standards or regulations, we maintain a complete record of all
inspections, maintenance and repairs on our REDS computer program. See "Item 1,
Business, Operations--Information Technology" and "-- Regulation of Medical
Equipment."
Our equipment is generally initially covered by manufacturers' warranties,
which typically warrant repairs for a period of three to twelve months from the
date of purchase. Because we employ manufacturer-trained personnel for the
technical support of our equipment, a significant portion of repair and
maintenance of our equipment is conducted by our employees.
Marketing
We market our rental and equipment management programs primarily through
our direct sales force, which consisted of 105 promotional sales representatives
as of December 31, 1999. In our marketing efforts, we primarily target 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. We also promote our programs
and services to hospital and alternate care provider groups and associations. We
develop and provide our direct sales force with a variety of materials designed
to support their promotional efforts. We also use direct mail advertising, as
well as targeted trade journal advertising, to supplement this activity.
From time to time, we have developed specific marketing programs intended
to address current market demands. The most significant of such programs
include: the AMP program, which presents hospitals with a total management
approach to equipment needs; REDS, 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 ("SMDA"); and OEIS, which responds to JCAHO
requirements regarding equipment operator training. See "Item 1,
Business--Regulation of Medical Equipment."
District Offices Network
As of December 31, 1999 we operated through 56 district offices, serving
rental and sales 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, customer training, equipment inspection, maintenance and repair work.
Complementing the district offices are 12 regional service centers, which
provide more sophisticated maintenance and repair on equipment. The following
table shows each district office location and the year it opened:
9
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<TABLE>
<CAPTION>
Office Year Opened Office Year Opened
- ------ ----------- ------ -----------
<S> <C> <S> <C>
Minneapolis, MN....................... 1941 Phoenix, AZ................... 1990
Omaha, NE............................. 1972 Pittsburgh, PA................ 1990
Bismarck, ND.......................... 1973 Cincinnati, OH................ 1992
Fargo, ND............................. 1974 Pasadena, CA.................. 1992
Marquette, MI......................... 1975 Memphis, TN................... 1992
Madison, WI........................... 1975 Houston, TX................... 1993
Duluth, MN............................ 1978 Wichita, KS................... 1993
Kansas City, MO....................... 1978 Rochester, NY................. 1993
Sioux Falls, SD....................... 1978 New York, NY.................. 1994
Milwaukee, WI......................... 1980 San Diego, CA................. 1994
Dallas, TX............................ 1981 Richmond, VA.................. 1994
San Antonio, TX....................... 1982 Denver, CO.................... 1995
Atlanta, GA........................... 1983 Indianapolis, IN.............. 1995
St. Louis, MO......................... 1983 Jacksonville, FL.............. 1995
Tampa, FL............................. 1984 Sacramento, CA................ 1995
Cleveland, OH......................... 1985 Portland, OR.................. 1996
Iowa City, IA......................... 1985 Knoxville, TN................. 1996
Chicago, IL........................... 1986 Raleigh, NC................... 1996
Boston, MA............................ 1986 Columbus, OH.................. 1998
Philadelphia, PA...................... 1986 Louisville, KY................ 1998
Ft. Lauderdale, FL.................... 1987 Columbia, SC.................. 1998
Baltimore, MD......................... 1988 Oklahoma City, OK............. 1998
San Francisco, CA..................... 1989 Salt Lake City, UT............ 1999
Seattle, WA........................... 1989 Little Rock, AR............... 1999
New Orleans, LA....................... 1990 Nashville, TN................. 1999
Charlotte, NC......................... 1990 Fresno, CA.................... 1999
Detroit, MI........................... 1990 Las Vegas, NV................. 1999
Anaheim, CA........................... 1990 Charleston, WV................ 1999
</TABLE>
Regulation of Medical Equipment
Our 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: JCAHO; the Association for Advancement of Medical
Instrumentation; and the SMDA. Some states and municipalities also have similar
regulations. Our REDS and OEIS programs are specifically designed to help
customers meet their documentation and reporting needs under such standards and
laws. We also monitor changes in law and accommodate the needs of customers by
providing specific product information and manufacturers' addresses and contacts
to these customers upon their request. Manufacturers of our 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. We believe that
all medical equipment we rent conforms to these regulations.
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. We
work with our customers to assist them in meeting their reporting obligations
under the SMDA. Although we do not believe that we are subject to the SMDA or
its reporting requirements, it is possible that we 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 us 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. Our medical tracking
systems have been reviewed by the FDA and found to be in substantial compliance
with these regulations.
10
<PAGE>
Third Party Reimbursement
Our business may be significantly affected by, and the success of our
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 without regard to the individual
hospital's actual cost. This rate includes any equipment needed to treat the
patient. 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 level of Medicare 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
related costs more efficiently and effectively. We believe that hospitals will
continue to feel pressure to increase cost-containment and cost-efficiency
measures, such as converting existing fixed equipment costs to variable costs
through rental and equipment management programs.
In July 1998, the HCFA changed the way it reimburses nursing homes to a
prospective payment system similar to the payment system for hospitals. Under
this system, patients are assessed based on their health status. This assessment
determines the amount that Medicare will reimburse the facility, regardless of
the actual cost to treat the patient. Patients will be periodically reassessed
to update their health status code and, therefore, the reimbursement allowed by
Medicare. Under this more complicated system, nursing homes are under even more
pressure to control costs. We believe that one way nursing homes can address
these cost containment measures is by converting existing fixed equipment costs
to variable costs through rental and equipment management programs.
Hospitals and alternate care providers are also facing increased cost
containment pressures from public and private insurers and other managed care
providers, such as health maintenance organizations, preferred provider
organizations and managed fee-for-service plans, as these organizations attempt
to reduce the cost and utilization of health care services. We believe 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. We believe that these cost reduction efforts will place
additional pressures on health care providers' operating margins and will
encourage efficient equipment management practices, such as use of our
Pay-Per-Use rental and AMP programs.
There are widespread efforts to control health care costs in the United
States and abroad. As an example, the Balanced Budget Act of 1997 significantly
reduces the growth in federal spending on Medicare and Medicaid over the
subsequent five years by reducing annual payment updates to hospitals, changing
payment systems for both skilled nursing facilities and home health care
services from cost-based to prospective payment systems, eliminating annual
payment updates for durable medical equipment, and allowing states greater
flexibility in controlling Medicaid costs at the state level. While these
legislative changes have not yet been fully phased in by HCFA, they have already
had a significant adverse financial impact on health care providers,
particularly nursing homes and home care agencies. We cannot predict what the
continued impact of these reimbursement changes will have on the pricing,
profitability or demand for our products and services. We also believe it is
likely that the efforts by governmental and private payors to contain costs
through managed care and other efforts and to reform health systems will
continue in the future. There can be no assurance that current or future
initiatives will not have a material adverse effect on our business, financial
condition or results of operations.
Liability and Insurance
Although we do not manufacture any medical equipment, our business entails
the risk of claims related to the rental and sale of medical equipment. In
addition, our servicing and repair activity with respect to our rental equipment
and our instruction of hospital employees with respect to the equipment's use
are additional sources of potential claims. We have not suffered a material loss
due to a claim; however, any such claim, if made, could have a material adverse
effect on our business, financial condition or results of operations. We
maintain general liability coverage, including product liability insurance and
excess liability coverage. Both policies are subject to annual renewal. We
believe that our current insurance coverage is adequate. There is no assurance,
however, that claims exceeding such coverage will not be made or that we will be
able to continue to obtain liability insurance at acceptable levels of cost and
coverage.
11
<PAGE>
Competition
We believe that the strongest competition to our rental and outsourcing
programs is the purchase alternative for obtaining movable medical equipment.
Currently, many hospitals and alternate 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 we believe that we can demonstrate
the cost-effectiveness of renting medical equipment on a long-term per-use
basis, we believe that many health care providers will continue to purchase a
substantial portion of their movable medical equipment.
We have one principal competitor in the medical equipment rental business:
Mediq/PRN, a subsidiary of MEDIQ, based in Pennsauken, New Jersey. Other
competition consists of smaller regional companies and some medical equipment
manufacturers and dealers who rent equipment to augment their medical equipment
sales. We believe that we can effectively compete with any of these entities in
the geographic regions in which we operate.
Service Marks and Trade Names
We use the "UHS" and "Universal Hospital Services" names as trade names and
as service marks in connection with our rental of medical equipment. We have
registered these and other marks as service marks with the United States Patent
and Trademark Office.
Employees
We had 553 employees as of December 31, 1999, including 504 full-time and
49 part-time employees. Of such employees, 105 are promotional sales
representatives, 61 are technical support personnel, 84 are employed in the
areas of corporate and marketing and 303 are district office support personnel.
None of our employees is covered by a collective bargaining agreement, and
we have experienced no work stoppages to date. We believe that our relations
with our employees are good.
Risk Factors
Set forth below and elsewhere in this Form 10-K and in the other documents
we file with the SEC, are risks and uncertainties that could cause actual
results to differ materially from the results contemplated by the
forward-looking statements contained in this Form 10-K.
Substantial Leverage; Ability to Service Debt. We have substantial outstanding
debt and are highly leveraged. As of December 31, 1999, we had $187.5 million of
debt outstanding, including $56.0 million of secured debt and excluding $21.5
million available to borrow under our $77.5 million revolving credit facility.
We may incur additional debt in the future, including senior debt, subject to
certain limitations.
12
<PAGE>
The degree to which we are leveraged may also have the following effects:
. a substantial portion of our cash flow from operations must be
dedicated to debt service and will not be available for other
purposes;
. we may not be able to obtain additional debt financing in the future
for working capital, capital expenditures or acquisitions; and
. our flexibility to react to changes in the industry and economic
conditions may be limited. Certain of our competitors may currently
operate on a less leveraged basis and therefore could have
significantly greater operating and financing flexibility than we
have.
Borrowings made as part of the Recapitalization resulted in a significant
increase in our interest expense in 1999 and 1998 relative to prior periods. Our
ability to make cash payments with respect to the 10.25% Senior Notes due 2008
(the "Notes") and to satisfy or refinance our other debt obligations will depend
upon our future operating performance. We believe, based on current
circumstances, that our cash flow, together with available borrowings under our
revolving credit facility, will be sufficient to permit us to pay the interest
on the Notes and to service our other debt. This belief assumes, among other
things, that we will continue to successfully implement our business strategy
and that there will be no material adverse developments in our business,
liquidity or capital requirements. However, if we are unable to generate
sufficient cash flow from operations, we will be forced to adopt an alternate
strategy that may include actions such as reducing or delaying acquisitions and
capital expenditures, selling assets, restructuring or refinancing our debt or
seeking additional equity capital. We cannot assure you that any of these
strategies will be effected on satisfactory terms, if at all. If we are unable
to repay our debt at maturity, we may have to obtain alternative financing.
Restrictions Imposed by Terms of the Company's Indebtedness. Under the Indenture
related to the Notes, we are restricted in our ability to:
o incur additional indebtedness;
o pay cash dividends or make certain other restricted payments;
o create certain liens;
o use proceeds from sales of assets and subsidiary stock; and
o enter into certain sale and leaseback transactions and transactions
with affiliates.
If we violate these restrictions, we would be in default under the
Indenture and the principal and accrued interest on the Notes could be declared
due and payable. In addition, our revolving credit facility contains other and
more restrictive covenants and prohibits us from prepaying the Notes. Our
revolving credit facility also requires us to maintain specified financial
ratios and satisfy certain financial condition tests. We may be unable to meet
those financial ratios and tests because of events beyond our control. We cannot
assure you that we will meet those ratios and tests. A violation of these
restrictions or a failure to meet the ratios and tests could result in a default
under our revolving credit facility and/or the Indenture. If an event of default
should occur under our revolving credit facility, the lenders can accelerate
repayment of the debt, plus accrued interest. If we fail to repay those amounts,
the lenders could proceed against the collateral granted to them to secure that
debt and other debt of the Company. Substantially all of our assets are pledged
as security under our revolving credit facility.
Risks Associated with New Strategy; Possible Adverse Consequences of Recent
Acquisitions. Our financial performance and profitability will depend on our
ability to execute our business strategy and manage our recent and possible
future growth. Since July 1998, we have acquired five new businesses, two of
which primarily serve the alternate care market. While we have substantially
completed the integration of these businesses and operations into our business
and operations, we cannot assure you that there will not be a significant loss
of customers from these acquired businesses. Unforeseen issues relating to the
assimilation of these businesses may adversely affect the
13
<PAGE>
Company. In addition, any future acquisitions or other possible future growth
may present operating and other problems that could have a material adverse
effect on our business, financial condition and results of operations. Our
financial performance will also depend on our ability to maintain profitable
operations as we invest our efforts and resources to expand our presence in the
alternate care market. We cannot assure you that we will be able to continue the
growth or maintain the level of profitability we have recently experienced.
Uncertainties as to Health Care Reform; Reimbursement of Medical Equipment
Costs. There are widespread efforts to control health care costs in the United
States and abroad. As an example, the Balanced Budget Act of 1997 significantly
reduces the growth in federal spending on Medicare and Medicaid over the next
five years by reducing annual payment updates to hospitals, changing payment
systems for both skilled nursing facilities and home health care services from
cost-based to prospective payment systems. These changes eliminate annual
payment updates for durable medical equipment, and allow states greater
flexibility in controlling Medicaid costs at the state level. We believe that it
is likely that the efforts by governmental and private payors to contain costs
through managed care and other efforts and to reform health systems will
continue in the future. Our business, financial condition or results of
operations may be adversely affected by these current or any future initiatives.
In this event, the value of the Notes could be materially adversely affected.
See "Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Industry Assessment," and "-- Third Party
Reimbursement."
Substantially all of the payments made to us in connection with our rental
programs are received directly from health care providers, rather than from
private insurers, other third party payors or governmental entities. Under
current reimbursement regulations, we are prohibited from billing the insurer or
the patient directly for services provided for hospital inpatients or
outpatients. Payment to health care providers by third party payors for our
services depends substantially upon such payors' reimbursement policies.
Consequently, those policies have a direct effect on health care providers'
ability to pay for our services and an indirect effect on our level of charges.
Ongoing concerns about rising health care costs may cause more restrictive
reimbursement policies to be implemented in the future. Restrictions on
reimbursements to health care providers may affect such providers' ability to
pay for the services we offer and could indirectly have a material adverse
effect on our business, financial condition or results of operations. See "Item
I, Business--Third Party Reimbursement."
General Absence of Formalized Agreements with Customers. Our Pay-Per-Use program
offers customers a flexible approach to obtaining movable medical equipment. Our
customers are generally not obligated to rent our equipment under formalized
agreements requiring long-term commitments or otherwise fixing the rights and
obligations of the parties regarding matters such as billing, liability,
warranty or use. Therefore, we face risks such as fluctuations in usage,
inaccurate or false reporting of usage by customers and disputes over
liabilities related to equipment use. See "Item 1, Business -- Equipment
Management Programs."
Medical Equipment Liability. Although we do not manufacture any medical
equipment, our business entails the risk of claims related to the medical
equipment that we rent and service. We have not suffered a material loss due to
a claim. However, any such claims, if made, could have a material adverse effect
on our business, financial condition or results of operations. Although we
believe that our current insurance coverage is adequate, we may be subject to
claims exceeding our coverage or we may not be able to continue to obtain
liability insurance at acceptable levels of cost and coverage. See "Item 1,
Business -- Liability and Insurance."
Competition. We believe that the strongest competition to our programs is the
purchase alternative for obtaining movable medical equipment. Currently, many
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 we believe that we are able to demonstrate the cost-effectiveness of
renting medical equipment on a long-term basis, we believe that many health care
providers will continue to purchase a substantial portion of their movable
medical equipment. Additionally, in a number of our geographic and product
markets, we compete with one principal competitor and various smaller equipment
rental companies that may compete primarily on the basis of price. These
competitors may be able to offer certain customers lower prices depending on
utilization levels and other factors. See "Item 1, Business--Competition."
14
<PAGE>
Relationships with Key Suppliers. We purchased our movable medical equipment
from approximately 100 manufacturers and our disposable medical supplies from
approximately 150 suppliers in 1999. Our five largest suppliers of movable
medical equipment, which supplied approximately 38% of our direct movable
medical equipment purchases for 1999 are: Baxter Healthcare Corporation,
Mallinckrodt (Nellcor Puritan Bennett Inc.), The Kendall Company, Abbott
Laboratories, Inc. and Agilent, Inc. Adverse developments concerning key
suppliers or our relationships with them could have a material adverse effect on
our business, financial condition or results of operations. See "Item 1 Business
- -- Operations" and "-- Sale of Disposable Products."
Dependence on Key Personnel. We rely on a number of key personnel, the loss of
whom could have a material adverse effect on our business, financial condition
or results of operations. We believe that our future success will depend greatly
on our continued ability to attract and retain highly skilled and qualified
personnel. We have employment agreements with David E. Dovenberg and other key
personnel. (See "Certain Relationship and Related Transactions.") However, we
cannot assure you that key personnel will stay with us or that we will be able
to attract and retain qualified personnel in the future. If we fail to attract
or retain such personnel, our business, financial condition or results of
operations could be adversely affected.
Dependence on Sales Representatives and Service Specialists. We believe that to
be successful we must continue to hire, train and retain highly qualified sales
representatives and service specialists. Our sales growth has been supported by
hiring and developing new sales representatives and adding, through
acquisitions, established sales representatives whose existing customers
generally have become our customers. Due to the relationships developed between
our sales representatives and our customers, we face the risk of losing our
customers when a sales representative leaves the Company. We have experienced
and will continue to experience intense competition for managers and experienced
sales representatives. We cannot assure you that we will be able to retain or
attract qualified personnel in the future. If we fail to attract or retain such
personnel, our business, financial condition or results of operations could be
adversely effected. From February 10, 1997 through September 22, 1997, we lost
employees as a result of uncertainties regarding district office closures and
administrative consolidation in connection with the MEDIQ Transaction. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- MEDIQ Transaction."
Control by Investors. J. W. Childs & Associates, Inc. and its affiliates
("Childs") beneficially own shares representing approximately 78% of the fully
diluted common equity in the Company. Accordingly, Childs and its affiliates
have the power to elect our board of directors, appoint new management and
approve any action requiring a shareholder vote, including amendments to our
Articles of Incorporation and approving mergers or sales of substantially all of
our assets. The directors elected by Childs will have the authority to make
decisions affecting our capital structure, including the issuance of additional
indebtedness and the declaration of dividends.
15
<PAGE>
ITEM 2: PROPERTIES
------------------
We own our 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 3,900 square feet,
and regional service centers. We lease our executive offices, approximately
17,000 square feet, in Bloomington, Minnesota.
ITEM 3: LEGAL PROCEEDINGS
-------------------------
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE
---------------------------------------
OF SECURITY HOLDERS
-------------------
None
16
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND
-------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
As of December 31, 1999 there were 53 holders of UHS' Common Stock, par
value $.01 per share, of the Company ("Common Stock"). Our Common Stock is not
publicly traded and we have never declared or paid a cash dividend on any class
of its Common Stock. We intend to retain earnings for use in the operation and
expansion of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Our loan agreements contain certain
restrictions on the Company's ability to pay cash dividends on its Common Stock.
As of December 31, 1999, UHS has 6,246 shares of Series B 13% Cumulative
Accruing Pay-In-Kind Preferred Stock (the "Series B Preferred Stock")
outstanding, all held by one shareholder. There is no public market for the
Series B Preferred Stock. Dividends on the Series B Preferred Stock are payable
at the end of each year in the form of additional shares of Series B Preferred
Stock. (See "Item 7, Management Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources).
On October 26, 1999 we sold 34,560 and 5,440 shares of Common Stock to
Daren M. Kneeland and Michael P. McRoberts, respectively, each employees of UHS,
for an aggregate purchase prices of $172,800 and $27,200 in a private offering
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act") pursuant to Section 4(2) of the Securities Act.
17
<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, 1999 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."
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Equipment rentals.......................... $79,345 $61,701 $54,489 $50,743 $45,870
Sales of supplies and equipment, and other . 12,878 7,672 5,586 6,198 7,166
------- ------- ------- ------- -------
Total revenues........................... 92,223 69,373 60,075 56,941 53,036
Cost of rentals and sales:
Cost of equipment rentals................... 22,398 16,312 13,577 13,332 11,841
Rental equipment depreciation............... 18,865 14,432 14,435 12,603 10,800
Loss on disposition of Bazooka Beds(1)...... - 2,866 - - -
Cost of supplies and equipment sales........ 8,354 4,867 3,838 4,423 5,352
Write-down of DPAP inventories (2).......... - - - 2,213 -
------- ------- ------- ------- -------
Total costs of rentals and sales......... 49,617 38,477 31,850 32,571 27,993
------- ------- ------- ------- -------
Gross profit................................... 42,606 30,896 28,225 24,370 25,043
Selling, general and administrative............ 30,570 21,300 18,448 19,695 18,560
Recapitalization and transaction costs (3)..... - 5,099 1,719 306 -
------- ------- ------- ------- -------
Operating income............................... 12,036 4,497 8,058 4,369 6,483
Interest expense............................... 18,013 11,234 3,012 2,518 1,784
------- ------- ------- ------- -------
(Loss) income before income taxes and
extraordinary charge.......................... (5,977) (6,737) 5,046 1,851 4,699
(Benefit) provision for income taxes........... (1,655) (1,097) 2,347 919 1,949
------- ------- ------- ------- -------
(Loss) income before extraordinary charge...... (4,322) (5,640) 2,699 932 2,750
Extraordinary charge net of deferred tax
benefit of $474 and $1,300.................... 812 1,863 - - -
------- ------- ------- ------- -------
Net (loss) income.............................. $(5,133) $(7,503) $ 2,699 $ 932 $ 2,750
======= ======= ======= ======= =======
Other Data:
Net cash provided by operating activities...... $15,192 $9,740 $20,001 $14,657 $13,071
Net cash used in investing activities.......... (49,441) (62,896) (18,026) (26,859) (19,725)
Net cash provided by (used in) financing
activities.................................... 34,249 53,156 (2,172) 12,400 6,654
EBITDA (4)..................................... 35,853 22,145 24,129 18,266 18,246
Adjusted EBITDA (5)............................ $35,853 $30,110 $25,848 $20,785 $18,246
Adjusted EBITDA margin (6)..................... 38.9% 43.4% 43.0% 36.5% 34.4%
Pro forma adjusted EBITDA (7).................. $37,122 $34,684
Ratio of earnings to fixed charges (8)......... 0.7x 0.4x 2.7x 1.7x 3.6x
Adjusted ratio of earnings to fixed charges (9) 0.7x 1.1x 3.2x 2.7x 3.6x
Depreciation and amortization.................. $23,817 $17,648 $16,071 $13,897 $11,763
Rental equipment additions (including
acquisitions)................................. $41,587 $42,588 $20,397 $17,178 $24,044
Rental equipment (units at end of period)...... 88,000 72,000 56,000 52,000 45,000
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------
(dollars in thousands)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital (10)........................... $ 11,842 $ 2,934 $ 7,617 $ 8,573 $ 5,059
Total Assets................................... 176,736 144,221 81,186 79,707 66,849
Total Debt..................................... 187,462 150,116 33,945 37,150 23,588
Shareholders' (deficiency) equity.............. $(41,416) $(35,702) $33,000 $29,128 $28,712
Operating Data: (Unaudited)
Offices (at end of period)..................... 56 50 46 46 43
</TABLE>
(1) The Company's utilization of Bazooka Beds in its rental pool had been below
the desired level and had declined steadily during 1997 and 1998. Because
utilization levels did not meet expectations, the Company disposed of
approximately 1,700 excess Bazooka Beds with a recorded loss of $2.9
million in the year ended December 31, 1998.
(2) The Company experienced declining sales of Demand Positive Airway Pressure
("DPAP") devices for adult obstructive sleep apnea during 1996. Because
market acceptance of the DPAP devices did not meet expectations, the
Company's assessment resulted in a write-down of $2.2 million in 1996.
(3) Reflects expenses, consisting primarily of legal, investment banking and
special committee fees, incurred prior to December 31, 1997, by the Company
in the process of exploring strategic alternatives to enhance shareholder
value. Expenses subsequent to December 31, 1997 consist primarily of legal,
investment banking and severance payments incurred by the Company related
to the Recapitalization.
(4) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. Management believes the EBITDA is generally
accepted as providing useful information regarding a company's ability to
service and/or incur debt. However, 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 or as a measure of a company's profitability or liquidity.
(5) Adjusted EBITDA reflects EBITDA, adjusted to exclude the write-down of DPAP
inventories of $2.2 million for the year ended December 31, 1996, loss on
disposition of Bazooka Beds of $2.9 million for the year ended December 31,
1998 and Recapitalization and transaction costs of $5.1 million, $1.7
million, and $0.3 million for the years ended December 31, 1998, 1997, and
1996, respectively. Adjusted 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 GAAP or as a measure of a company's
profitability or liquidity.
(6) Adjusted EBITDA margin represents the ratio of adjusted EBITDA to total
revenues.
(7) Pro forma adjusted EBITDA represents adjusted EBITDA including the 1998 pro
forma results of the acquisitions of HCI, PCH, and MRS, (See "Item 1,
Business--Growth Strategies, Pursuing Strategic Alliances") assuming such
acquisitions had occurred on January 1, 1998. The 1999 pro forma results of
the acquisitions of EMS and VC, assuming such acquisitions had occurred on
January 1, 1999.
(8) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes, and fixed charges. Fixed
charges consist of interest expense, which includes the amortization of
deferred debt issuance costs.
19
<PAGE>
(9) For the purpose of determining the adjusted ratio of earnings to fixed
charges, earnings consist of income before income taxes, fixed charges,
write-down of DPAP inventories, loss on disposition of Bazooka Beds and
Recapitalization and transaction costs. Fixed charges consist of interest
expense, which includes the amortization of deferred debt issuance costs.
(10) Represents total current assets (excluding cash and cash equivalents) less
total current liabilities, excluding current portion of long-term debt.
20
<PAGE>
Selected Quarterly Financial Information
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1999
----------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total Revenues................................... $ 23,433 $ 21,974 $21,407 $ 25,409
Gross Profit..................................... $ 12,517 $ 9,929 $ 9,268 $ 10,892
Gross Margin..................................... 53.4% 45.2% 43.3% 42.9%
Net Income(Loss)................................. $ 251 $ (17) $(3,107) $ (2,260)
EBITDA................................... 9,936 8,240 8,321 9,356
Net cash provided by operating activities......... 2,287 6,981 4,903 1,021
Net cash used in investing activities............. (20,685) (8,028) (8,878) (11,850)
Net cash provided by financing activities......... $ 18,398 $ 1,046 $ 5,710 $ 9,095
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total Revenues.................................... $16,434 $15,093 $ 17,562 $ 20,284
Gross Profit (1).................................. $ 8,166 $ 6,681 $ 6,439 $ 9,610
Gross Margin (1).................................. 49.7% 44.3% 36.7% 47.4%
Net Loss (1)...................................... $(4,885) $ (292) $ (2,001) $ (325)
Adjusted EBITDA (2)............................... 7,492 6,891 7,460 8,267
Net cash (used in) provided by operating
activities....................................... (3,732) 6,508 (170) 7,134
Net cash used in investing activities............. (7,093) (4,825) (38,581) (12,397)
Net cash provided (used in) by financing
activities....................................... $11,910 $(2,768) $ 38,751 $ 5,263
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total Revenues.................................... $15,962 $15,341 $14,186 $14,586
Gross Profit...................................... $ 8,303 $ 7,525 $ 6,120 $ 6,277
Gross Margin...................................... 52.0% 49.1% 43.1% 43.0%
Net Income........................................ $ 889 $ 976 $ 502 $ 332
Adjusted EBITDA (2)............................... 6,871 6,838 5,972 6,166
Net cash provided by operating activities......... 4,566 6,015 5,812 3,608
Net cash used in investing activities............. (4,291) (5,271) (3,616) (4,848)
Net cash (used in) provided by financing
activities....................................... $ (473) $ (743) $(2,197) $ 1,241
</TABLE>
(1) Includes loss on disposition of Bazooka Beds of $2.9 million in the third
quarter of 1998.
(2) Adjusted EBITDA reflects EBITDA adjusted to the loss on disposition of
Bazooka Beds of $2.9 million for the year ended December 31, 1998 and
Recapitalization and transaction cost of $0.6 million, $0.3 million, $0.2
million, $0.6 million, $5.0 million and $0.1 million for the quarters ended
March 31, 1997, June 30, 1997, September 30, 1997, December 31, 1997, March 31,
1998, and December 31,1998, respectively. Adjusted 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 GAAP or as measure of a
Company's Profitability or Liquidity.
21
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-----------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
General
We are a leading nationwide provider of movable medical equipment to more
than 4,800 hospitals and alternate care providers through our equipment rental
and outsourcing programs.
The following discussion addresses our financial condition as of December
31, 1999, and the results of operations and cash flows for the years ended
December 31, 1999, 1998 and 1997. This discussion should be read in conjunction
with the Financial Statements included elsewhere herein.
Safe Harbor Statements under the Private Securities Litigation Reform Act
of 1995: Statements in this Form 10-K looking forward in time involve risks and
uncertainties. The following factors, among others, could adversely effect our
business, operations and financial condition causing our actual results to
differ materially from those expressed in any forward-looking statements: the
Company's substantial outstanding debt and high degree of leverage and the
continued availability, terms and deployment of capital, including the Company's
ability to service or refinance debt; restrictions imposed by the terms of the
Company's debt; adverse regulatory developments affecting, among other things,
the ability of our customers to obtain reimbursement of payments made to UHS;
changes and trends in customer preferences, including increased purchasing of
movable medical equipment; difficulties or delays in our continued expansion
into certain markets and development of new markets; unanticipated costs or
difficulties or delays in implementing the components of our strategy and plan
and possible adverse consequences relating to our ability to successfully
integrate recent acquisitions; effect of and changes in economic conditions,
including inflation and monetary conditions; actions by competitors and
availability of and ability to retain qualified personnel. For a more complete
discussion of these risk factors, See "Item 1, Business--Risk Factors."
Industry Assessment
Our business may be significantly affected by, and the success of our
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. Our
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. There has been, and we believe
there will continue to be, a transition toward fixed, per-capita payment systems
and other risk-sharing mechanisms. Under its prospective payment system, the
Health Care Financing Administration, which determines Medicare reimbursement
levels, reimburses hospitals for medical treatment at fixed rates according to
diagnostic related groups without regard to the individual hospital's actual
cost. In July 1998, HCFA changed the way it reimburses nursing homes to a
similar prospective payment system. The Balanced Budget Act of 1997
significantly reduced the growth in federal spending on Medicare and Medicaid
over the next five years.
We believe our Pay-Per-Use and other rental programs respond favorably to
the current industry environment 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 our 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 us.
Because the capital equipment procurement decisions of health care
providers are significantly influenced by the regulatory and political
environment for health care, our operating results historically have been
adversely affected 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 our business's financial
condition and results of operations.
22
<PAGE>
Recapitalization, Financing and Related Transactions
The Recapitalization was effected through the merger (the "Merger") of UHS
Acquisition Corp., a newly formed Minnesota corporation ("Merger Sub")
controlled by Childs, with and into the Company. In connection with the
Recapitalization: (i) our existing shareholders (other than management
investors) received, in consideration for the cancellation of approximately 5.3
million shares of Common Stock, par value $.01 per share, of the Company and
options to purchase approximately 344,000 shares of the Common Stock, cash in
the aggregate amount of approximately $84.7 million (net of aggregate option
exercise price), or $15.50 per share; (ii) we repaid outstanding borrowings of
approximately $35.5 million under existing loan agreements; (iii) we paid fees
and expenses of approximately $11.5 million related to the Recapitalization; and
(iv) we paid approximately $3.3 million in severance payments to certain
non-continuing members of management. In order to finance the Recapitalization,
we: (i) received an equity contribution of approximately $21.3 million in cash
from Childs and affiliates and management investors; (ii) issued $100.0 million
in principal amount of Outstanding Notes and (iii) borrowed approximately $14.3
million under the Revolving Credit Facility. In addition, management investors
retained their existing shares of Common Stock and options to purchase shares of
Common Stock.
In 1998, we incurred non-recurring costs related to the Recapitalization of
approximately $8.9 million, including $3.2 million in severance expense to
certain non-continuing members of management, $2.8 million ($1.4 million net of
tax) for prepayment penalties on existing loans and write-off of corresponding
loan origination fees, $1.2 million in investment banker fees, and approximately
$1.7 million in additional Recapitalization expenses (of which $0.6 million was
recorded directly in equity).
Completed Acquisitions
On July 30, 1998, we completed the purchase of HCI for a purchase price of
approximately $19.3 million, including the repayment of approximately $3.6
million of outstanding indebtedness.
On August 17, 1998, we completed the purchase of PCH for a purchase price
of approximately $14.6 million, including the repayment of approximately $2.7
million of outstanding indebtedness.
On November 5, 1998, we completed the purchase of MRS for a purchase price
of approximately $1.8 million, including the repayment of approximately $0.4
million of outstanding indebtedness.
On March 31, 1999, we completed the purchase of EMS for a purchase price of
approximately $0.8 million.
On October 26, 1999, we completed the purchase of VC for a purchase price
of approximately $5.5 million, including the repayment of approximately $2.1
million of outstanding indebtedness.
23
<PAGE>
Results of Operations
The following table provides information on the percentages of certain
items of selected financial data to total revenues.
<TABLE>
<CAPTION>
Percentasge of Total Revenues Percentage
----------------------------- Increase (Decrease)
----------------------
Year Ended December 31, Year Ended Year Ended
1999 over 1998 over
1999 1998 1997 Year 1998 Year 1997
------ ------ ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Rentals:
Equipment rentals............................ 86.0% 88.9% 90.7% 28.6% 13.2%
Sales of supplies and equipment, and
other....................................... 14.0 11.1 9.3 67.9 37.3
------ ------ ------
Total Revenues............................ 100.0 100.0 100.0 32.9 15.5
Cost of rentals and sales:
Cost of equipment rentals.................... 24.3 23.5 22.6 37.3 20.1
Rental equipment depreciation................ 20.4 20.8 24.0 30.7 0.0
Loss on disposition of Bazooka Beds.......... - 4.2 - N/A N/A
Cost of supplies and equipment sales......... 9.1 7.0 6.4 71.7 26.8
------ ------ ------
Gross Profit................................... 46.2 44.5 47.0 37.9 9.5
Selling, general and administrative............ 33.1 30.7 30.7 43.5 15.5
Recapitalization and transaction costs......... - 7.3 2.9 N/A 196.6
Interest expense............................... 19.6 16.2 5.0 60.3 273.0
------ ------ ------
(Loss) income before income taxes and
extraordinary charge.......................... (6.5) (9.7) 8.4 N/A N/A
------ ------ ------
(Benefit) provision for income taxes........... (1.8) (1.6) 3.9 N/A N/A
------ ------ ------
(Loss) income before extraordinary charge...... (4.7) (8.1) 4.5 N/A N/A
Extraordinary charge........................... 0.9 2.7 - (43.6) N/A
------ ------ ------
Net (loss) income.............................. (5.6)% (10.8)% 4.5% N/A N/A
====== ====== ======
</TABLE>
1999 Compared to 1998
Equipment Rental Revenues. Equipment rental revenues for the year ended
December 31, 1999 were $79.3 million, representing a $17.6 million, or 28.6%
increase from rental revenues of $61.7 million for the same period of 1998. We
acquired HCI and PCH in the third quarter of 1998, MRS in the fourth quarter of
1998, EMS in the first quarter of 1999, and VC in the fourth quarter of 1999. On
a proforma basis, as if these acquisitions had occurred on January 1, 1998,
rental revenues in 1999 would have increased 16.4% compared to 1998. The strong
growth in rental revenues was partially offset by price concessions to certain
Group Purchasing Organizations (GPO) to achieve preferred vendor relationships.
Sales of Supplies and Equipment, and Other. Sales of supplies and equipment,
and other for the year ended December 31, 1999 were $12.9 million, representing
a $5.2 million, or 67.9% increase from sales of supplies and equipment, and
other of $7.7 million for the same period of 1998. These increases are the
result of the acquisitions of HCI, PCH, MRS, EMS and VC. PCH placed a greater
emphasis on and generated approximately two thirds of its revenue from sales of
disposables to health care providers.
Cost of Equipment Rentals. Cost of equipment rentals for the year ended
December 31, 1999 were $22.4 million, representing a $6.1 million, or 37.3%,
increase from cost of equipment rentals of $16.3 million for the same period of
1998. For the year of 1999, cost of equipment rentals, as a percentage of
equipment rental revenues, increased to 28.2% from 26.4% for the same period of
1998 as a result of GPO pricing concessions, increased amount of freight
expense, and additional replacement parts cost as a result of used equipment
purchases. Furthermore, the percentage was lower than normal during the first
quarter of 1998 reflecting the reduced level of personnel due to the high
turnover during the 1997 period of ownership uncertainty. On February 10, 1997,
UHS and MEDIQ Incorporated ("MEDIQ") entered into a definitive agreement for
MEDIQ to acquire the Company. On September 22, 1997 (the
24
<PAGE>
"Termination Date"), the Company and MEDIQ mutually terminated their agreement
(the agreement and its termination, collectively, the "MEDIQ Transaction"). From
February 10, 1997 through the Termination Date, we experienced a gradual loss of
employees as a result of uncertainties regarding district office closures and
administrative consolidation.
Rental Equipment Depreciation. Rental equipment depreciation for the year
ended December 31, 1999, was $18.9 million, representing a $4.5 million, or
30.7% increase from rental equipment depreciation of $14.4 million for the same
period of 1998. For the year of 1999, rental equipment depreciation, as a
percentage of equipment rental revenues, increased moderately to 23.8% from
23.4% for the same period of 1998. This increase was a result of the impact of a
full year of depreciation on $38.7 million in equipment purchases in 1998,
approximately 31.4% of which was purchased in the fourth quarter of 1998. In
1998, we changed our rental equipment depreciation lives from a range of five to
seven years to seven years for all rental equipment. (See footnote 7 to the
financial statements). This change was effective July 1, 1998.
Gross Profit. Total gross profit for the year ended December 31, 1999, was
$42.6 million, representing a $8.8 million, or 26.0% increase from total gross
profit of $33.8 million for the same period of 1998, exclusive of the loss on
disposition of Bazooka beds. For the year of 1999, total gross profit, as a
percentage of total revenues, decreased to 46.2% from 48.7% for the same period
of 1998, exclusive of the loss on disposition of Bazooka beds. These decreases
are mainly due to the increased cost of equipment rentals discussed above and
changes in the rental/sales mix as a result of acquisitions.
Gross profit on rentals represents equipment rental revenues reduced by the
cost of equipment rentals and rental equipment depreciation. Gross profit on
rentals for 1999 decreased to 48.0% from 50.2% in 1998. This decrease was
predominately due to the previously discussed increase in cost of equipment
rentals.
Gross margin on sales of supplies and equipment and other for the year of
1999 decreased to 35.1% from 36.6% for the same period of 1998. This decrease in
sales gross margin was mainly due to the full year's impact of the acquisition
of PCH which generates lower margin sales, mainly to alternate care providers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1999 were $30.6 million,
representing a $9.3 million, or 43.5%, increase from $21.3 million for the same
period of 1998. The increase for the year is the result of the acquisitions of
HCI, PCH, MRS, EMS and VC, an increase in employee count in 1999 over 1998, the
impact of the promotional employee incentive plan, the amortization of goodwill
from acquisitions, additional costs related to our Year 2000 compliance program
and the impact of the GPO administrative fees.
Recapitalization and Transaction Costs. For the year ended December 31,
1998, we incurred $5.1 million of non-recurring expenses, consisting primarily
of legal, accounting, and other advisory related fees, associated with the
Recapitalization.
Adjusted EBITDA. We believe earnings before interest, taxes, depreciation,
and amortization ("EBITDA") to be a measurement of operating performance.
Adjusted EBITDA for the year ended December 31, 1999, was $35.9 and $30.1 for
the corresponding period in 1998 which adjusts for the loss on disposal of
Bazooka beds and non-recurring Recapitalization and transaction costs. Adjusted
EBITDA as a percentage of total revenue decreased to 38.9% for the year of 1999
from 43.4% for the same period in 1998. See Notes 4, 5 and 6 to "Selected
Historical Financial Data." Pro forma adjusted EBITDA (as defined) for the years
ended December 31, 1999 and 1998 were $37.1 and $34.7 million, respectively.
Interest Expense. Interest expense for the year ended December 31, 1999 was
$18.0 million, representing a $6.8 million, or 60.3% increase from interest
expense of $11.2 million for the same period of 1998. This increase primarily
reflects the Recapitalization, incremental borrowings associated with capital
equipment additions and the acquisitions previously mentioned. Average
borrowings increased from $114.4 million for the year of 1998 to $180.4 million
for the year of 1999.
Income Taxes. Our effective income tax rate for 1999 was a benefit of 27.7%
due to the net loss of the Company compared to a statutory income tax rate of
34.0%. This reduced tax rate is primarily due to amortization of goodwill that
is not deductible for income tax purposes.
25
<PAGE>
Extraordinary Charge. In connection with the extinguishment of the
Revolving Credit Facility on October 26, 1999, we wrote off deferred financing
costs of $1.3 million. This extraordinary charge was reduced by the tax effect
of approximately $0.5 million. In conjunction with the Recapitalization and
Senior Note issuance in the first quarter of 1998, we prepaid existing notes and
a credit facility totaling $35.5 million, which resulted in an incurrence of a
prepayment penalty of $2.9 million, and write off of deferred finance costs of
$0.3 million. These extraordinary charges were reduced by the tax affect of
these charges of approximately $1.3 million.
1998 Compared to 1997
Equipment Rental Revenues. Equipment rental revenues for the year ended
December 31, 1998, were $61.7 million, representing a $7.2 million, or 13.2%
increase from rental revenues of $54.5 million for 1997. Without considering the
acquisitions of HCI, PCH, and MRS, equipment rental revenue would have increased
6.1% for the year ended December 31, 1998 compared to the year ended 1997. The
rental revenue increase resulted from the acquisitions of HCI, PCH and MRS,
which contributed approximately $3.9 million of rental revenue growth combined
with continued growth at UHS' acute care hospital customers and at both
established and new district offices.
Sales of Supplies and Equipment, and Other. Sales of supplies and
equipment, and other for the year ended December 31, 1998, were $7.7 million,
representing a $2.1 million, or 37.3% increase from sales of supplies and
equipment, and other of $5.6 million for the same period of 1997. These
increases are the result of the acquisitions of HCI, PCH and MRS which have
generated sales of supplies and equipment, and other of approximately $2.9
million since the acquisitions were completed. PCH places a greater emphasis on
sales of disposable products and generates approximately two-thirds of its
revenue from sales of disposables to health care providers.
Cost of Equipment Rentals. Cost of equipment rentals for the year ended
December 31, 1998, was $16.3 million, representing a $2.7 million, or 20.1%,
increase from cost of equipment rentals of $13.6 million for the same period of
1997. For 1998, cost of equipment rentals, as a percentage of equipment rental
revenues, increased to 26.4% from 24.9% for the same period of 1997. During
1998, we changed our emphasis to increase support staff while redirecting and
decreasing its promotional staff. This change resulted in higher rental costs
offset by reduced promotional expenses in the selling, general and
administrative expense area. This was combined with lower repair and replacement
expenses in 1997 as a result of the uncertainty in UHS' ownership.
Rental Equipment Depreciation. Rental equipment depreciation for each of
the years ending December 31, 1998 and 1997, was $14.4 million. For 1998, rental
equipment depreciation, as a percentage of equipment rental revenues, decreased
to 23.4% from 26.5% for 1997. These decreases were the result of our change in
rental equipment depreciation lives from a range of five to seven years to seven
years for all rental equipment. (See footnote 8 to the financial statements).
This change was effective July 1, 1998. The change in rental equipment
depreciation lives decreased rental equipment depreciation by approximately $2.4
million in 1998.
Loss on Disposal of Bazooka Beds. Our utilization of Bazooka beds in our
rental pool had been below the desired level and had declined steadily during
1997 and 1998. We acquired our equipment pool of Bazooka portable specialty beds
under an exclusive agreement, which was terminated by us in March 1996. Because
of the continued decline in utilization, we decided to dispose of approximately
1,700 excess Bazooka beds and associated products in the third quarter of 1998.
The disposition of the units resulted in a loss of $2.9 million in the third
quarter of 1998. Approximately 750 units of Bazooka beds were retained for
rental.
Gross Profit. Total gross profit for the year ended December 31, 1998,
exclusive of the loss on disposition of Bazooka beds, was $33.8 million,
representing a $5.6 million, or 19.6% increase from total gross profit of $28.2
million for the same period of 1997. For the year of 1998, total gross profit,
exclusive of the loss on disposition of Bazooka beds, as a percentage of total
revenues, increased to 48.7% from 47.0% for the same period of 1997. This
increase was predominately due to the change in rental equipment depreciation
lives. Gross profit on rentals represents equipment rental revenues reduced by
the cost of equipment rentals and rental equipment depreciation. Gross profit on
rentals for 1998 increased to 50.2% from 48.6% in 1997. This increase was
predominately due to the previously discussed change in depreciation lives on
the rental equipment.
Gross margin on sales of supplies and equipment and other for the year of
1998 increased to 36.6% from 31.3% for the same period of 1997. This increase in
sales gross margin was due to the acquisition of PCH which, since the
acquisition, generated approximately $0.9 million of higher margin sales, mainly
to alternate care providers.
26
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1998 were $21.3 million,
representing a $2.9 million, or 15.5%, increase from $18.4 million for the same
period of 1997. The increase for the year is the result of the acquisitions of
HCI, PCH and MRS in 1998 in addition to increased employee count in 1998 over
1997. The employee count was abnormally low in 1997 due to employees who had
left the Company as a result of the uncertainty relating to the potential sale
of the Company to MEDIQ. These employee expenses were not offset by the
reduction in salary expenses of the executive staff who did not continue on with
UHS after the Recapitalization.
Recapitalization and Transaction Costs. For the year ended December 31,
1998, we incurred $5.1 million of non-recurring expenses, consisting primarily
of legal, accounting, and other advisory related fees, associated with the
Recapitalization.
For the year of 1997, we incurred $1.7 million of non-recurring expenses,
consisting primarily of legal, investment banking and special committee fees,
associated with our subsequently mutually terminated acquisition agreement with
MEDIQ.
Adjusted EBITDA. We believe earnings before interest, taxes, depreciation,
and amortization ("EBITDA") to be a measurement of operating performance.
Adjusted EBITDA, which adjusts for the loss on disposal of Bazooka beds and
non-recurring Recapitalization and transaction costs for the year ended December
31, 1998 was $30.1 and $25.8 for the corresponding period in 1997. Adjusted
EBITDA as a percentage of total revenue increased to 43.4% for the year of 1998
from 43.0% for the same period in 1997. See Notes 4, 5 and 6 to "Selected
Historical Financial Data." Pro forma adjusted EBITDA (as defined) for the year
ended December 31, 1998 was $34.7 million.
Interest Expense. Interest expense for the year ended December 31, 1998 was
$11.2 million, representing a $8.2 million increase from $3.0 million for the
same period of 1997. This increase primarily reflects the Recapitalization of
UHS, incremental borrowings associated with capital equipment additions and the
acquisitions of HCI, PCH and MRS. Average borrowings increased from $34.6
million for the year of 1997, to $114.4 million for the year of 1998.
Income Taxes. Our effective income tax rate for 1998 was a benefit of 16.3%
due to the net loss compared to a statutory income tax rate of 34.0%. This
reduced tax rate is primarily due to the effect of non-deductible expenses
associated with the Recapitalization.
Extraordinary Charge. In conjunction with the Recapitalization and Senior
Note issuance in the first quarter of 1998, we prepaid existing notes and a
credit facility totaling $35.5 million, which resulted in an incurrence of a
prepayment penalty of $2.9 million, and write off of deferred finance costs of
$0.3 million. These extraordinary charges were reduced by the tax affect of
these charges of approximately $1.3 million.
Liquidity and Capital Resources
Historically, we have financed our equipment purchases primarily through
internally generated funds and borrowings under our existing Revolving Credit
Facility. As an asset intensive business, we have required continued access to
capital to support the acquisition of equipment for rental to our customers. We
purchased, on a cashflow basis, $44.4 million, $27.7 million and $18.9 million
of rental equipment in 1999, 1998 and 1997, respectively.
During the years ended December 31, 1999, 1998 and 1997, net cash flows
provided by operating activities were $15.2 million, $9.7 million and $20.0
million, respectively. Net cash flows used in investing activities were $49.4
million, $62.9 million and $18.0 million in 1999, 1998 and 1997,
respectively.Net cash flows provided by (used in) financing activities were
$34.2 million, $53.2 million and $(2.2) million in 1999, 1998 and 1997,
respectively.
Our principal sources of liquidity are expected to be cash flows from
operating activities and borrowings under the Revolving Credit Facility. It is
anticipated that our 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 our strategic plans.
As of December 31,1999, we had outstanding $135.0 million of our 10.25%
Notes and had borrowed $56.0 million under our $77.5 million senior secured
Revolving Credit Facility (the "Revolving Credit Facility "). Interest on loans
outstanding under the Revolving Credit Facility is payable at a rate per annum,
selected at our option, equal to the Base Rate Margin (the Banks' Base Rate plus
1.75%) or the adjusted Eurodollar Rate Margin (3.00% over the
27
<PAGE>
adjusted Eurodollar Rate). Commencing April 30, 2000, the Banks' Base rate and
the Eurodollar Rate used to calculate such interest rates may be adjusted if we
satisfy certain leverage ratios. The Revolving Credit Facility, which terminates
on October 31, 2004, 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.
On August 17, 1998, we issued 6,000 shares of our Series A 12% Cumulative
Convertible Accruing Pay-In-Kind Preferred Stock (the "Series A Preferred
Stock") to an affiliate of Childs, the holder of approximately 78% of the
Company's Common Stock, for an aggregate price of $6.0 million. On December 18,
1998, we redeemed our Series A Preferred Stock for an aggregate price of
approximately $6.3 million and issued 6,246 shares of Series B 13% Cumulative
Accruing Pay-in-Kind Preferred Stock to an insurance company, together with
warrants to purchase 350,000 shares of the Company's Common Stock for an
aggregate price of approximately $6.3 million.
We believe that, based on current levels of operations and anticipated
growth, our cash from operations, together with our 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 our debt, including
payments due on the Notes and obligations under the Revolving Credit Facility.
We believe that our ability to repay the 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 us, or that any such financing will be on terms favorable to us.
Our expansion and acquisition strategy may require substantial capital, and
no assurance can be given that sufficient funding for such acquisitions will be
available under our Revolving Credit Facility or that we will be able to raise
any necessary additional funds through bank financing or the issuance of equity
or debt securities on terms acceptable to us, if at all.
Implications of Year 2000
Many installed computer systems and software were coded to accept only
two-digit entries in the data code fields. These data code fields were modified
to accept four-digit entries to distinguish 21st century dates from 20th century
dates. Prior to January 1, 2000, we completed all systems and software upgrades
or replacements necessary to comply with Year 2000 requirements.
Costs we incurred in resolving our Year 2000 issues were approximately
$700,000, of which approximately $625,000 was charged to earnings in 1999 and
$75,000 was charged in 1998.
Based on our assessments to date, we believe we will not experience any
material disruption as a result of Year 2000 problems, either internally or with
customers and suppliers. We believe that we have managed our total Year 2000
transition without any material effect on our results of operations or financial
condition.
Recent Accounting Pronouncements
In 1999, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." We must adopt Statement No. 133 no later than January 1,
2001. We are reviewing the requirements of this standard. Although we expect
this standard will not materially affect our financial position or results of
operations, we have not yet finalized our determination of the impact of this
standard on our financial statements.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. We adopted SOP No. 98-1 beginning on January 1, 1999. The adoption did not
have a material impact on our financial position or results of operations.
28
<PAGE>
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
We do not have any liquid investments. Cash is kept to a minimum through
the use of our Revolving Credit Facility. Our exposure to interest rate risk is
mainly through its borrowings under its secured Revolving Credit Facility which
permits borrowings up to $77.5 million. At December 31, 1999 we were primarily
exposed to the London Interbank Offered Rate (LIBOR) interest rate on its
borrowings under the Revolving Credit Facility. We do not use derivative
financial instruments. Information about our borrowing arrangements including
principal amounts and related interest rates appear in Note 8 to the Financial
Statements included herein.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------
The report of the independent Accountants, Financial Statements and Schedules
are set forth on pages 44 to 71 of this report.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None
29
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------------------------
Executive Officers and Directors
Set forth below are the names, ages and positions of the persons who serve
as directors and executive officers of the Company.
Name Age Position
- ---- --- --------
David E. Dovenberg....... 55 Director, President and Chief Executive Officer
Jerry D. Horn............ 62 Director
Samuel B. Humphries...... 57 Director
Steven G. Segal.......... 39 Director
Edward D. Yun............ 33 Director
Robert H. Braun.......... 48 Senior Vice President, Sales and Marketing
John A. Gappa............ 40 Senior Vice President, Chief Financial Officer
Andrew R. Amicon......... 39 Vice President, Disposable Sales & Alternate
Care National Accounts
Gerald L. Brandt......... 50 Vice President, Finance and Controller
Randy C. Engen........... 43 Vice President, Sales-- East
Michael R. Johnson....... 41 Vice President, Administrative Services
Gary L. Preston.......... 57 Vice President, National Accounts & Marketing
Jeffrey L. Singer........ 38 Vice President, Purchasing & Logistics
Judy M. Slater........... 41 Vice President, Sales-- West
David E. Dovenberg is the President and Chief Executive Officer, and a
Director of the Company and has served in both of these positions since the 1998
Recapitalization. He joined the Company in 1988 as Vice President, Finance and
Chief Financial Officer. Prior to joining the Company, he had been with The
Prudential Insurance Company of America since 1969. From 1979 to 1988, he was a
regional Vice President in the area of corporate investments in private
placements for Prudential Capital Corporation. Mr. Dovenberg is a member of the
Healthcare Financial Management Association. He is also a member of several
Boards of Directors: Lund International Holdings, Inc., a publicly traded
manufacturer of appearance accessories for light trucks, sport utility vehicles
and vans; the Minnesota Chapter of the United Ostomy Association; and the
Hennepin County Unit of the American Cancer Society.
Jerry D. Horn is a Director of the Company. He was Chairman of the Board of
General Nutrition Companies, Inc., a 3,000-store vitamin and nutritional
supplement retail chain operating under the GNC name until August 1999. He had
served in this capacity since October 1991, and prior to that, was President and
Chief Executive Officer since 1985. Mr. Horn is also Chairman of the Board of
Quality Stores, a director of Chevys, Inc. and Pan Am International Flight
Academy Holdings, Inc. and a Managing Director of J. W. Childs Associates.
Samuel B. Humphries is a Director of the Company. He is also the Managing
Director of The Executive Advisory Group. Prior to that he was President and
Chief Executive Officer of American Medical Systems from September 1998 to May
1999, President and Chief Executive Officer of Optical Sensors Inc. from 1991 to
1998 and President and Chief Executive Officer of American Medical Systems from
September 1988 to May 1991. He is a director of Optical Sensors Inc.
Steven G. Segal is a Director of the Company. He also is Senior Managing
Director of Childs and has been at Childs since July 1995. Prior to that time,
he was an executive at Thomas H. Lee Company from August 1987, most recently
holding the position of Managing Director. He is also a director of Quality
Stores, Jillian's Entertainment, Inc., International Diverse Foods, Inc.,
National Nephrology Associates, Inc. and Big V Supermarkets, Inc., and is
Chairman of the Board of Empire Kosher Poultry, Inc.
Edward D. Yun is a Director of the Company. He also is a Vice President of
Childs and has been at Childs since September 1996. From August 1994 until
September 1996 he was an Associate at DLJ Merchant Banking, Inc. He is
30
<PAGE>
also a director of Jillian's Entertainment Holdings, Inc., International Diverse
Foods, Inc., Pan Am International Flight Academy Holdings, Inc. and National
Nephrology Associates, Inc.
Robert H. Braun has been the Senior Vice President of Sales and Marketing
since 1999 and prior to that was Vice President of Sales and Marketing since the
1998 Recapitalization. He joined the Company in 1975. He has held multiple sales
management positions within the Company, including Account Manger, National
Accounts Manager, and Division Manager-North Central which culminated in his
promotion to Director of Rental and Sales, West, in 1996.
John A. Gappa is the Senior Vice President and Chief Financial Officer and
has held that position since November of 1999. He is responsible for the
financial and information systems functions for the company. Prior to joining
the company, Mr. Gappa served five years as Senior Vice President, Reimbursement
and Chief Financial Officer for McKessonHBOC's Red Line Extended Care division,
formerly known as Red Line HealthCare Corporation. He also held additional
positions during his nine years at Red Line including Director of Operations,
Division Controller and Director of Planning and Analysis. Prior to joining Red
Line in 1991, Mr. Gappa held a variety of financial management positions at The
Pillsbury Company from 1982 to 1991
Andrew R. Amicon has been the Vice President of Disposable Sales &
Alternate Care National Accounts since 1999 and prior to that was Vice
President, Alternate Care - East since joining the Company in 1998. Prior to
joining the Company, Mr. Amicon was founder and CEO of Patient's Choice
Healthcare, Inc. from 1990 to 1998.
Gerald L. Brandt, C.P.A. has been the Vice President of Finance and
Controller since 1999 and prior to that was the Vice President of Finance, CFO
since the 1998 Recapitalization. He joined the Company in 1978 as Manager of
Accounting, and was promoted to Director of Finance and Accounting in 1994.
Prior to joining the Company, Mr. Brandt was Vehicle Accounting Manager for
National Car Rental from 1976 to 1978. From 1974 to 1976, he was an Auditor with
Deloitte, Haskins and Sells. He is a member of the Minnesota State Society of
Certified Public Accountants and the American Institute of Certified Public
Accountants.
Randy C. Engen has been the Vice President of Sales -- East since 1999 and
prior to that was the Vice President of Sales and Business Development since the
1998 Recapitalization. He joined the Company in 1979. He has held multiple sales
management roles including Account, District and Divisional Manager positions.
Throughout his tenure with the Company, Mr. Engen has managed the Company's
Madison, Wisconsin district office, the Company's second largest.
Michael R. Johnson is the Vice President of Administration and has been
since the 1998 Recapitalization. He joined the Company in 1978. He served as
Director, Human Resources/Administration since 1990. Prior to that, Mr. Johnson
had been an Instructor in the Training and Development Department, followed by a
promotion to Training Manager in 1984 and to Human Resources Manager in 1989.
Gary L. Preston has been the Vice President of National Accounts and
Marketing since 1999 and prior to that was the Vice President of Sales and Major
Accounts since the 1998 Recapitalization. He joined the Company in 1964. He has
held multiple sales management roles including Account, District and Divisional
Manager positions. As District Manager, Mr. Preston served for thirteen years in
the company's largest district office.
Jeffrey L. Singer has been Vice President, Purchasing & Logistics since
1999 and prior to that was the Vice President of Alternate Care - West since he
joined the Company in 1998. Prior to joining the Company, Mr. Singer was CEO of
Home Care Instruments, Inc. from 1991 to 1998, and held various other positions
at HCI from 1986 to 1991.
Judy M. Slater is Vice President, Sales -- West. She joined the Company in
1979 after a three-year break, returned in 1997 as Division Manager West. She
was promoted to her present position in August 1999.
31
<PAGE>
ITEM 11: EXECUTIVE COMPENSATION
-------------------------------
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 other highest paid executive officers of the Company whose
salary and bonus earned in 1999 exceeded $100,000.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation -------------------------
----------------------- Awards
Stock Payouts
Name and Options LTIP All Other
Principal Position Year Salary Bonus(1) (Shares)(2) Payouts(3) Compensation(4)
------------------ ---- ------ -------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
David E. Dovenberg 1999 $236,924 $ 40,000 - - $ 4,800
Chief Executive 1998 205,516 163,579 383,758 $32,955 36,039
Officer and 1997 188,246 21,837 - 22,304 4,537
President
Robert H. Braun 1999 147,989 28,000 10,000 - 4,341
Senior Vice President of 1998 125,781 61,612 191,909 - 3,562
Sales & Marketing
Michael R. Johnson 1999 137,387 25,000 - - 4,042
Vice President of 1998 124,683 71,612 191,909 - 3,541
Administrative Services
4,042
Randy C. Engen 1999 135,471 25,000 - - 4,042
Vice President of 1998 109,259 61,612 191,909 - 3,720
Sales - East
Jeffrey L. Singer 1999 134,737 22,000 - - 2,500
Vice President of 1998 40,865 13,851 191,909 - -
Purchasing & Logistics
</TABLE>
(1) The amounts shown in this column represent annual bonuses earned for the
fiscal year indicated. Such bonuses are paid shortly after the end of such
fiscal year. In 1998, the amounts also reflect a non-recurring bonus
payment made to Mr. Dovenberg and Mr. Johnson upon the completion of the
recapitalization.
(2) The stock options shown in this column for 1997 were all granted pursuant
to the 1992 Long Term Incentive and Stock Option Plan, and as amended in
1995, which was terminated upon the Recapitalization. The stock options
shown in this column for 1998 and 1999 were all granted pursuant to the
1998 Stock Option Plan. For a discussion of the material terms the options
granted in 1999 under the 1998 Stock Option Plan, See footnotes 1, 2 and 3
to the table below entitled "Option Grants During the Year Ended December
31, 1999".
(3) For 1998, the amounts include regular payments under the Long Term
Incentive Plan (LTIP) and payments resulting from the early termination of
the LTIP as of the date of the Recapitalization. The amount of the payments
made in connection with the early termination of the LTIP were $10,630 for
Mr. Dovenberg. For 1997, payments were regular payments under the Long
Term Incentive Plan (LTIP).
32
<PAGE>
(4) 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. In addition for 1998, for Mr. Dovenberg,
$31,239 of the amount represents payments made upon termination of the
Supplemental Executive Retirement Plan (SERP) in connection with the
Recapitalization.
33
<PAGE>
Stock Options
The following tables summarize option grants during the year ended December
31, 1999 to the Chief Executive Officer and the executive officers named in the
"Summary Compensation Table" above, and the values of the options held by such
persons at December 31, 1999.
<TABLE>
<CAPTION>
Option Grants During Year Ended December 31, 1999
------------------------------------------------------------
Potential
% of Realizable Value
Total at Annual Rates
Options of Stock Price
Granted to Exercise Appreciation for
Employees or Base Option Term (3)
Options in Fiscal Price Expiration -----------------
Name Granted Year 1999 ($/Sh)(2) Date 5% 10%
- ----------------- ------- --------- --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Robert H. Braun 10,000 (1) 3.82 $3.31 03/17/08 $20,816 $52,753
</TABLE>
(1) With such incentive stock options, up to 33.3% of the shares under such
options vest on April 1 of each of the years 2001 through 2003. The amount
of shares exercisable on each annual vesting date is based on the Company's
achievement of certain EBITDA targets for the previous fiscal year, but in
no event will more than 33.3% of the shares become exercisable in a single
year.
(2) The exercise price is equal to the fair market value on the date of grant
with respect to each option as determined by the Company's Board of
Directors. 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. The amounts reflected in this
table may not necessarily be achieved. If the price of the Common Stock at
the date of grant ($3.31) 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 value on July 1, 2009 of approximately $5.39 and $8.59
per share, respectively (assuming no change in the number of outstanding
shares of UHS Common Stock).
<TABLE>
<CAPTION>
Aggregated Option Exercised During Year Ended December 31, 1999
and Value of Options at December 31, 1999
-------------------------------------------------------------------------
Number of Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired December 31, 1999 December 31, 1989 (1)
on Value --------------------------- ---------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ---------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David E. Dovenberg - - 523,939 354,219 $1,308,936 $593,160
Robert H. Braun - - 14,773 187,136 26,001 311,759
Randy C. Engen - - 73,643 177,136 174,982 311,759
Michael R. Johnson - - 77,313 177,136 184,257 311,759
Jeffrey L. Singer - - - 89,944 - 46,771
</TABLE>
(1) Based on the fair market value of Common Stock, as of December 31, 1999, of
$3.31 as determined by UHS' Board of Directors.
34
<PAGE>
Long Term Incentive Plan
The Long Term Incentive Plan was terminated on February 25, 1998 in
connection with the Recapitalization. During 1998, two payouts were completed
for this plan. The first was the normal plan payout and the second resulted from
the early termination of the plan. The early termination payouts for Mr.
Dovenberg was $10,630.
Retirement Plan
The following table sets forth various estimated maximum annual pension
benefits under the Company's qualified non-contributory defined benefit pension
plan 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.
Compensation Years of Credited Service
------------ -------------------------
5 10 20 30
------- -------- -------- -------
$100,000...... $ 6,500 $12,500 $25,500 $32,000
125,000...... 8,500 16,500 33,500 42,000
150,000...... 10,500 20,500 41,500 52,000
200,000...... 11,000 22,500 44,500 56,000
300,000...... 11,000 22,500 44,500 56,000
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, subject to a $160,000 cap in 1999. As of December 31, 1999,
Messrs. Dovenberg, Brandt, Johnson, Braun, Preston, Engen, Slater, Singer,
Amicon, and Gappa had 11.7, 21.7, 20.7, 24.4, 31.9, 20.6, 17.7, 1.5, 1.5, and .1
years of credited service, respectively, under the Pension Plan.
Employment Agreements
The Company has entered into employment agreements with each of the
executive officers named in the Summary Compensation Table. For a description of
such employment agreements see "Certain Relationships and Related Transactions -
Employment Agreements."
Compensation Committee Interlocks and Insider Participation
The Company's Board of Directors has a Compensation Committee consisting of
directors of the Company. The current members of the Compensation Committee are
Steven G. Segal and Samuel B. Humphries. Mr. Segal has entered into the
stockholders' agreement with the Company and is an affiliate of Childs, which
has entered into the stockholders' agreement and the management agreement with
the Company. For a description of such arrangements, and agreements See "Item
13: Certain Relationships and Related Transactions."
35
<PAGE>
ITEM 12: PRINCIPAL SHAREHOLDERS
-------------------------------
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1999 by each
beneficial owner of more than five percent of the Common Stock, each person who
serves as a director of the Company, each named executive officer and all
persons serving as directors and executive officers of the Company as a group.
Except as otherwise indicated, the beneficial owners of the voting stock listed
below, based on information furnished by such owners, have sole investment and
voting power with respect to such shares. The business address for each
executive officer of the Company is in care of the Company.
Shares
Beneficially Percentage
Beneficial Owner Owned (1) Owned
- ------------------------ --------- -----
David E. Dovenberg(2)................................ 2,231,809 13.5%
Robert H. Braun(3)................................... 59,453 0.4%
Andrew R. Amicon..................................... 71,684 0.4%
Gerald L. Brandt(4).................................. 257,173 1.6%
Randy C. Engen(5).................................... 94,363 0.6%
Michael R. Johnson(6)................................ 116,033 0.7%
Gary L. Preston(5)................................... 117,513 0.7%
Jeffrey L. Singer.................................... 256,272 1.6%
Judy M. Slater(7) ................................... 8,290 0.1%
Samuel B. Humphries.................................. 16,129 0.1%
J.W. Childs Equity Partners, L.P.....................12,466,931 77.6%
Steven G. Segal(8)...................................12,622,131 78.6%
J.W. Childs Equity Partners, L.P.
One Federal Street
Boston, Massachusetts
Jerry D. Horn(8).....................................12,500,905 77.8%
J.W. Childs Equity Partners, L.P.
One Federal Street
Boston, Massachusetts
Edward D. Yun(8).....................................12,481,149 77.7%
J.W. Childs Equity Partners, L.P.
One Federal Street
Boston, Massachusetts
All Officers & Directors as a group (twelve
(persons)(9)........................................15,909,043 93.5%
(1) Beneficial ownership is determined in accordance with rules of the
Commission, and includes generally voting power and/or investment power
with respect to securities. Shares of Common Stock subject to options
currently exercisable or exercisable within 60 days of December 31, 1999
are deemed outstanding for computing the beneficial ownership percentage of
the person holding such options but are not deemed outstanding for
computing the beneficial ownership percentage of any other person. Except
as indicated by footnote, the persons named in the table above have the
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
(2) Includes 523,939 shares of Common Stock subject to options exercisable
within 60 days after December 31, 1999, 626,530 shares of Common Stock
owned by Mr. Dovenberg's wife and 49,116 shares of Common Stock owned by
Mr. Dovenberg's children.
(3) Includes 14,773 shares of Common Stock subject to options exercisable
within 60 days after December 31, 1999.
(4) Includes 191,073 shares of Common Stock subject to options exercisable
within 60 days after December 31, 1999.
(5) Includes 73,643 shares of Common Stock subject to options exercisable
within 60 days after December 31, 1999.
(6) Includes 77,313 shares of Common Stock subject to options exercisable
within 60 days after December 31, 1999.
(7) Includes 1,840 shares of Common Stock subject to options exercisable within
60 days after December 31, 1999.
(8) Includes 12,466,931 shares of Common Stock held by Childs which the
shareholder may be deemed to beneficially own by virtue of his position
with Childs Associates.
(9) Includes 956,224 shares of Common Stock subject to options exercisable
within 60 days after December 31, 1999.
36
<PAGE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
Stockholders' Agreement
Each executive officer and director who owns UHS common stock (the
"Management Holders") and Childs (with which Mr. Segal, Mr. Horn and Mr. Yun are
affiliated) and its affiliates (together, the "Stockholders") are parties to a
stockholders' agreement (the "Stockholders' Agreement") with the Company
governing certain aspects of the relationship among the Stockholders and the
Company. The Stockholders' Agreement, among other things: (i) restricts the
ability of the Stockholders to transfer their shares of the Company's Common
Stock, subject to certain exceptions; (ii) gives the Company, Childs and certain
Designated Employees (as defined in the Stockholders' Agreement) certain rights
of first refusal with respect to shares of Common Stock held by certain
Management Holders in the event of the termination of the employment of any such
Management Holder with the Company for any reason; (iii) gives each Management
Holder certain rights, subject to certain limitations imposed by the Credit
Agreement (as defined below), to require the Company to purchase shares of such
Common Stock held by him, in the event of the termination of his employment with
the Company, other than any such termination by the Company other than for Cause
or resignation by him without Good Reason (as such terms are defined in the
Stockholders' Agreement); and (iv) provides the parties thereto with certain
"tag-along," "drag-along," and "piggyback" registration rights.
Management Agreement
The Company is a party to management agreement with J. W. Childs
Associates, L.P. (with which Mr. Segal, Mr. Horn and Mr. Yun are affiliates)
("Childs Associates") pursuant to which: (i) the Company paid Childs Associates
a $1.2 million advisory and financing fee in consideration of Childs Associates'
services regarding the planning, structuring and negotiation of the
Recapitalization and (ii) the Company is obligated to pay Childs Associates an
annual management fee of $240,000 in consideration of Childs Associates' ongoing
provision of certain consulting and management advisory services. Payments under
this management agreement may be made only to the extent permitted by the
Revolving Credit Facility and the Indenture. The management agreement is for a
five-year term, automatically renewable for successive extension terms of one
year, unless Childs Associates gives notice of termination.
37
<PAGE>
Loan to Executive Officers
In connection with the Recapitalization, the Company made a loan (the
"Loan"), in an aggregate principal amount of approximately $100,000 , to David
E. Dovenberg in connection with his purchase of shares of Common Stock. The Loan
has a term of 10 years and is secured by a pledge of the shares of Common Stock
owned by Mr. Dovenberg and bear interest which is payable semiannually at a rate
equal to the Company's weighted average cost of capital on the Revolving Credit
Facility. The Loan is payable prior to maturity upon a sale by Mr. Dovenberg of
any or all of his equity securities of the Company or earlier under certain
circumstances. As of December 31, 1999, Mr. Dovenberg has paid off the loan.
Employment Agreements
Pursuant to a letter agreement dated November 25, 1997, (the "Dovenberg
Employment Agreement"), David E. Dovenberg, agreed to serve as President and
Chief Executive Officer of the Company for a term of three years from the
consummation of the Recapitalization, subject to earlier termination pursuant to
the terms thereof. The Dovenberg Employment Agreement automatically renews for
successive one-year terms unless written notice of termination is given by
either party no less than 30 days prior to the renewal date. The Dovenberg
Employment Agreement provides that during its initial three year term, Mr.
Dovenberg will be a member of the Board of Directors of the Company, will
receive an annual base salary of $200,000, subject to annual adjustment based on
changes in the consumer price index and Board of Directors review, and will
receive a bonus of up to 100% of such annual base salary, based on achievement
of certain EBITDA targets. It also provides for Mr. Dovenberg's participation in
one or more stock option plans to be adopted by the Company. Under the Dovenberg
Employment Agreement, if Mr. Dovenberg's employment is terminated by the Company
without cause or because of death or disability, or by Mr. Dovenberg because the
Company has materially breached the Dovenberg Employment Agreement, reduced or
reassigned a material portion of Mr. Dovenberg's duties, reduced Mr. Dovenberg's
annual base salary (other than in certain specified circumstances), required Mr.
Dovenberg to relocate outside the greater Minneapolis, Minnesota area, or if it
is not renewed on expiration of its initial three year term or the first
one-year renewal term, or because certain other specified events have occurred,
the Company will continue to pay Mr. Dovenberg his base salary and provide his
benefits for a period of 18 months from the date of termination. Payment or
benefits under the Dovenberg Employment Agreement to Mr. Dovenberg within this
18-month period would be offset by the value of compensation from Mr.
Dovenberg's subsequent employment during this 18-month period. In addition, the
Dovenberg Employment Agreement contains certain confidentiality and
noncompetition provisions.
In addition to the Dovenberg Employment Agreement with respect to Mr.
Dovenberg, the Company has entered into employment agreements (each, an
"Executive Employment Agreement," and collectively, the "Executive Employment
Agreements") with each of the executive officers named in the Summary
Compensation Table(each, a "Named Executive," and collectively, the "Named
Executives"). The Executive Employment Agreements each have a three year term at
the end of which the agreements will automatically renew for successive one-year
terms unless terminated by either party thereto no less than 30 days prior to
the renewal date. Pursuant to the Executive Employment Agreements, from and
after the consummation of the Recapitalization, the Named Executives each
receive an annual base salary, subject to annual adjustment based on changes in
the consumer price index and Board of Directors review, and are eligible to
receive a bonus of up to 100% of their respective annual base salaries based on
achievement of certain EBITDA targets. Employment Agreements also provide that
the Named Executives are entitled to receive stock options pursuant to one or
more stock option plans adopted or to be adopted by the Company. Under each
Executive Employment Agreement, if a Named Executive's employment is terminated
by the Company by reason of death or disability, the Company would continue to
pay the Named Executive, or the Named Executive's legal representatives, as the
case may be, salary and benefits for a six-month period from the date of
termination. If the Named Executive's employment is terminated by the Company
for other than cause or by the Named Executive for good reason (i.e., a breach
by the Company of the Executive's Employment Agreement, certain reductions in
salary or duties, required relocation or other specified events), then the
Company would pay the Named Executive a prorated bonus for the fiscal year in
which the termination occurred, and would continue to pay the Named Executive's
base salary for a 12-month period from the date of termination. Payments or
benefits under the Executive Employment Agreement to the Named Executive within
this 12-month period would be offset by the value of compensation from the Named
Executive's subsequent employment during this 12-month period. If the Named
Executive's employment is terminated for cause or the Named Executive resigns
without good reason, then all rights to payments (other than
38
<PAGE>
payments for services previously rendered), and all other benefits otherwise due
to the Named Executive under the Executive Employment Agreement, would cease.
In addition, the Executive Employment Agreements contain certain confidentiality
and noncompetition provisions. Finally, the Executive Employment Agreements
provide that the Named Executives will enter into the stockholders' agreement
with the other equity investors in the Company governing certain aspects of the
relationship among such equity investors and the Company.
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, 1999 and 1998
Statements of Income for the years ended December 31, 1999, 1998, and
1997
Statements of Shareholders' (Deficiency) Equity for the years ended
December 31, 1999, 1998, and 1997
Statements of Cash Flows for the years ended December 31, 1999 , 1998,
and 1997
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.
40
<PAGE>
3. Exhibits
Exhibit Description
No.
- -------- ----------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the Company
(Incorporated by reference to Exhibit 3.1 to Form 10-K filed March 31,
1999).
3.2a Amended and Restated Bylaws of the Company (Incorporated by reference
to Exhibit 3.2 to Form 10-K filed March 31, 1999).
*3.2b Amendment to Amended and Restated Bylaws of the Company.
3.3 Amendment to Articles of Incorporation of the Company (Incorporated by
reference to Exhibit 3.3 to Form 10-K filed March 31, 1999).
3.4 Certificate of Designation of Series A 12% Cumulative Convertible
Accruing Pay-In-Kind Preferred Stock (Incorporated by reference to
Exhibit 3.4 to Form 10-K filed March 31, 1999).
4.1 Indenture, dated as of February 25, 1998, by and between the Company
and First Trust National Association as Trustee, relating to the
Company's 10.25% Senior Notes Due 2008 (Incorporated by reference to
Exhibit (a)(8) to Amendment No. 4 to Schedule 13E-3/A of the Company
filed on march 19, 1998(the "13E-3/A").
10.1 Credit Agreement between Universal Hospital Services, Inc. and Key
Corporate Capital, Inc. as Collateral Agent, Heller Financial, Inc. as
Syndication Agent and Canadian Imperial Bank of Commerce as
Administrative Agent, dated October 25, 1999(Incorporated by reference
to Exhibit 10.20 to Form 10-Q filed November 12, 1999).
10.2 Form of Stockholders' Agreement dated as of February 25, 1998, by and
among the Company each of the Management Investors and each of the
Childs Investors (Incorporated by reference to Exhibit (c)(15) to the
13E-3/A).
10.3 Employment Agreement between the Company and David E. Dovenberg, dated
November 25, 1997 (Incorporated by reference to Exhibit 8 to Schedule
13D filed December 4, 1997 (File No. 5-42484)).
*10.4 Employment Agreement between the Company and John A. Gappa, dated
October 18, 1999.
10.5 Form of Executive Employment Agreement for all Executive Officer's
having Employment Agreements (Incorporated by reference to Exhibit
10.5 to the Form S-1 filed July 6, 1998).
10.6 Universal Hospital Services, Inc. 1998 Stock Option Plan (Incorporated
by reference to Exhibit 10.6 to the Form S-1 filed July 6, 1998).
10.7 Form of Incentive Stock Option Agreement dated as of March 17, 1998,
between the Company and certain officers of the Company (Incorporated
by reference to Exhibit 10.17 to Form 10-K filed March 31, 1999).
10.8 Form of Non-Incentive Stock Option Agreement dated as of March 17,
1998, between the Company and certain directors of the Company
((Incorporated by reference to Exhibit
41
<PAGE>
10.18 to Form 10-K filed March 31, 1999).
*12.1 Statement regarding the computation of ratio of earnings to fixed
charges for the Company
*27.1 Financial Data Schedule
*Filed herewith.
42
<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 28, 2000.
UNIVERSAL HOSPITAL SERVICES, INC.
By /s/ David E. Dovenberg
-------------------------------------
David E. Dovenberg
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 28, 2000.
/s/ David E. Dovenberg President, Chief Executive
---------------------------------- Officer and Chairman of the
David E. Dovenberg Board of Directors
(Principal Executive Officer)
/s/ John A. Gappa Senior Vice President and
---------------------------------- Chief Financial Officer
John A. Gappa (Principal Financial and
Accounting Officer)
/s/ Jerry D. Horn Director
----------------------------------
Jerry D. Horn
/s/ Samuel B. Humphries Director
----------------------------------
Samuel B. Humphries
/s/ Steven G. Segal Director
----------------------------------
Steven G. Segal
/s/ Edward D. Yun Director
----------------------------------
Edward D. Yun
43
<PAGE>
Universal Hospital Services, Inc.
Index to Financial Statements
- --------------------------------------------------------------------------------
Page(s)
Report of Independent Accountants 45
Financial Statements:
Balance Sheets as of December 31, 1999 and 1998 46
Statements of Income for the years ended December 31, 1999,
1998 and 1997 47
Statements of Shareholders' (Deficiency) Equity for the
years ended December 31, 1999, 1998 and 1997 48 - 49
Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997 50
Notes to Financial Statements 51 - 67
44
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Universal Hospital Services, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
income, shareholders' (deficiency) equity and cash flows present fairly, in all
material respects, the financial position of Universal Hospital Services, Inc.
(the Company) at December 31, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These 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 of these statements in
accordance with auditing standards generally accepted in the United States,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
February 28, 2000
45
<PAGE>
Universal Hospital Services, Inc.
Balance Sheets
As of December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
ASSETS
<S> <C> <C>
Current assets:
Accounts receivable, less allowance for doubtful accounts of $1,450,000 and
$964,160 at December 31, 1999 and 1998, respectively $27,338,595 $17,900,816
Inventories 3,527,161 2,617,019
Deferred income taxes 1,063,000 499,000
Other current assets 838,645 1,669,790
--------------- ---------------
Total current assets 32,767,401 22,686,625
Property and equipment, net:
Rental equipment, at cost less accumulated depreciation 91,952,914 73,057,730
Property and office equipment, at cost less accumulated depreciation 4,804,075 3,496,370
--------------- ---------------
Total property and equipment, net 96,756,989 76,554,100
Intangible assets:
Goodwill, less accumulated amortization 39,703,819 37,924,246
Other, primarily deferred financing costs, less accumulated amortization 7,507,815 7,055,695
--------------- ---------------
Total assets $176,736,024 $144,220,666
=============== ===============
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Current liabilities:
Current portion of long-term debt $ 304,830 $ 306,093
Accounts payable 9,418,960 10,127,962
Accrued compensation and pension 3,349,776 3,139,062
Accrued interest 4,925,010 3,675,921
Other accrued expenses 724,977 648,500
Book overdrafts 2,506,775 2,129,795
--------------- ---------------
Total current liabilities 21,230,328 20,027,333
Long-term debt, less current portion 187,156,792 149,809,706
Deferred compensation and pension 2,231,540 1,842,948
Deferred income taxes 1,326,000 2,966,000
Series B, 13% Cumulative Accruing Pay-In-Kind Stock, $0.01 par value; 25,000
shares authorized, 6,246 shares issued and outstanding at December 31, 1999
and December 31, 1998, net of unamortized discount, including accrued stock
dividends 6,206,969 5,277,000
Commitments and contingencies (Note 9)
Shareholders' (deficiency) equity:
Common Stock, $0.01 par value; 50,000,000 shares authorized, 16,063,240 and
16,028,450 shares issued and outstanding at December 31, 1999 and 1998,
respectively 160,632 160,285
Additional paid-in capital 2,242,603 2,051,026
Accumulated deficit (43,818,840) (37,864,701)
Stock subscription receivable (48,931)
--------------- ---------------
Total shareholders' (deficiency) equity (41,415,605) (35,702,321)
--------------- ---------------
Total liabilities and shareholders' (deficiency) equity $176,736,024 $144,220,666
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
46
<PAGE>
Universal Hospital Services, Inc.
Statements of Income
For the years ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Equipment rentals $79,344,705 $61,700,554 $54,488,572
Sales of supplies and equipment, and other 12,878,325 7,672,164 5,585,997
----------------- ----------------- -----------------
Total revenues 92,223,030 69,372,718 60,074,569
----------------- ----------------- -----------------
Costs of rentals and sales:
Cost of equipment rentals 22,397,867 16,311,608 13,577,382
Rental equipment depreciation 18,865,439 14,432,414 14,434,891
Loss on disposition of Bazooka Beds 2,866,119
Cost of supplies and equipment sales 8,353,623 4,866,604 3,837,508
----------------- ----------------- -----------------
Total costs of rentals and sales 49,616,929 38,476,745 31,849,781
----------------- ----------------- -----------------
Gross profit 42,606,101 30,895,973 28,224,788
Selling, general and administrative 30,570,245 21,299,536 18,448,092
Recapitalization and transaction costs 5,099,302 1,719,195
----------------- ----------------- -----------------
Operating income 12,035,856 4,497,135 8,057,501
Interest expense 18,012,479 11,233,885 3,011,610
----------------- ----------------- -----------------
(Loss) income before income taxes and
extraordinary charge (5,976,623) (6,736,750) 5,045,891
----------------- ----------------- -----------------
(Benefit) provision for income taxes (1,655,000) (1,097,000) 2,347,000
----------------- ----------------- -----------------
Net (loss) income before extraordinary charge (4,321,623) (5,639,750) 2,698,891
Extraordinary charge, net of deferred tax benefit
of $474,000 and $1,300,000 at December 31,
1999 and 1998, respectively 811,649 1,863,020
----------------- ----------------- -----------------
Net (loss) income $ (5,133,272) $ (7,502,770) $ 2,698,891
================= ================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
Universal Hospital Services, Inc.
Statements of Shareholders' (Deficiency) Equity
For the years ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Accumulated Total
Additional Deficit) Stock Shareholders'
Common Paid-in Retained Subscription Equity
Stock Capital Earnings Receivable (Deficiency)
--------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 53,719 $ 14,870,153 $ 14,204,011 $ 29,127,883
Sale of 11,738 shares of common stock to
employees under stock purchase plan 117 124,970 125,087
Issuance of 97,170 shares of common stock
(net of 4,530 shares of common stock tendered
for exercise of stock options) pursuant to
exercise of stock options, including $309,150
of tax benefit 972 1,047,592 1,048,564
Net income 2,698,891 2,698,891
--------- -------------- --------------- ----------------
Balance, December 31, 1997 54,808 16,042,715 16,902,902 33,000,425
Sale of 1,585 shares of common stock to
employees under stock purchase plan 16 20,367 20,383
Issuance of 334,201 shares of common stock pursuant
to exercise of stock options, including
$1,042,000 of tax benefit 3,342 3,566,249 3,569,591
Issuance of 13,756 shares of common stock pursuant to
the Merger (see Note 2), net of transaction cost
of $581,857 13,757 20,729,663 20,743,420
Repurchase and cancellation of 5,629,839 shares of
common stock pursuant to the Merger (see Note 2) (56,298) (40,358,994) (46,847,213) (87,262,505)
Stock subscription receivable $ (48,931) (48,931)
Stock split 140,620 (140,620)
Sale of 147,714 shares of common stock to employees 1,477 338,590 340,067
Issuance of 256,272 shares of common stock in connection
with acquisition of Home Care Instruments, Inc. 2,563 712,436 714,999
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
Universal Hospital Services, Inc.
Statements of Shareholders' (Deficiency) Equity
For the years ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Accumulated Total
Additional Deficit) Stock Shareholders'
Common Paid-in Retained Subscription Equity
Stock Capital Earnings Receivable (Deficiency)
--------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Issuance of warrant to purchase 350,000 shares of common
stock in connection with issuance of Series B
preferred stock $ 1,000,000 $ 1,000,000
Preferred stock dividends $ (277,000) (277,000)
Net loss (7,502,770) (7,502,770)
------------ ------------ ------------- ----------- ------------
Balance, December 31, 1998 $ 160,285 2,051,026 (37,864,701) $ (48,931) (35,702,321)
Repurchase of 5,210 shares of common stock from employee (53) (8,023) (8,076)
Issuance of 40,000 shares of common stock 400 199,600 200,000
Preferred stock dividends (820,867) (820,867)
Payment received for stock subscription 48,931 48,931
Net loss (5,133,272) (5,133,272)
------------ ------------ ------------- ----------- ------------
Balance, December 31, 1999 $ 160,632 $ 2,242,603 $(43,818,840) $ - $(41,415,605)
============ ============ ============= =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
Universal Hospital Services, Inc.
Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (5,133,272) $ (7,502,770) $ 2,698,891
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation 19,985,469 15,223,028 15,170,804
Amortization of goodwill 2,650,717 1,567,029 887,875
Amortization of deferred financing cost 1,181,000 858,000 12,000
Provision for doubtful accounts 1,339,348 194,512 641,035
(Gain) loss on sales of equipment (197,336) 3,241,077 (243,990)
Extraordinary charge less cash paid 1,285,649 303,313
Deferred income taxes (2,204,000) (2,778,000) 785,000
Changes in operating assets and liabilities,
net of impact of acquisitions:
Accounts receivable (9,716,654) (3,151,844) (208,719)
Inventories and other operating assets (654,433) (1,020,897) 228,085
Accounts payable and accrued expenses 6,655,413 2,806,629 29,956
------------- -------------- -------------
Net cash provided by operating activities 15,191,901 9,740,077 20,000,937
------------- -------------- -------------
Cash flows from investing activities:
Rental equipment purchases (44,388,766) (27,656,279) (18,933,142)
Property and office equipment purchases (2,330,720) (927,277) (210,968)
Proceeds from disposition of rental equipment 3,711,799 851,977 740,280
Acquisitions (6,293,189) (34,969,417)
Other (140,234) (194,647) 377,839
------------- -------------- -------------
Net cash used in investing activities (49,441,110) (62,895,643) (18,025,991)
------------- -------------- -------------
Cash flows from financing activities:
Proceeds under loan agreements 129,975,000 173,287,399 25,124,000
Payments under loan agreements (93,124,021) (57,141,017) (28,329,330)
Proceeds from issuance of common stock, net of
offering costs 21,054,955 864,501
Proceeds from issuance of Series B preferred stock
and common stock warrants 6,246,000
Proceeds from the issuance of Series A preferred stock 6,000,000
Redemption of Series A preferred stock (6,246,000)
Repurchase of common stock (8,076) (84,734,914)
Payment of deferred financing costs (2,970,674) (7,493,802)
Tax benefit of nonqualified stock options 1,042,000 309,150
Change in book overdraft 376,980 1,140,945 (140,689)
------------- -------------- -------------
Net cash provided by (used in) financing activities 34,249,209 53,155,566 (2,172,368)
------------- -------------- -------------
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 $ 16,153,000 $ 7,791,000 $ 2,987,000
============= ============== =============
Income taxes (received) paid $ (207,000) $ 601,000 $ 1,778,000
============= ============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
Universal Hospital Services, Inc.
Notes to 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. 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. Recapitalization, Financings and Related Transactions
On February 25, 1998, the Company completed a merger pursuant to the
Agreement and Plan of Merger (the Merger), dated as of November 25, 1997
between UHS Acquisition Corp., a newly-formed Minnesota corporation
controlled by J.W. Childs Equity Partners, L.P. (Childs), with and into the
Company. In connection with the Merger, the following occurred:
o The Company's existing shareholders (other than the new senior
management team and certain other continuing members of management)
received, in consideration for the cancellation of approximately 53
million shares of the Company's common stock and options to purchases
approximately 3.3 million shares of common stock, cash in the
aggregate amount of approximately $84.7 million (net of aggregate
option exercise price) or $1.55 per share.
o The Company repaid the outstanding principal balance of approximately
$35.5 million under existing loan agreements and incurred early
termination fees and write-off of the related deferred financing cost
(see Note 8).
o The Company paid fees and expenses of approximately $11.5 million
related to the Merger of which approximately $5.9 million were
capitalized as deferred financing costs.
o The Company paid approximately $3.3 million in severance payments to
certain noncontinuing members of the Company's management of which $.5
million had already been accrued.
o The Company received an equity contribution of approximately $21.3
million from Childs and affiliates and the management investors.
o The Company issued $100 million in aggregate principal amount of
10.25% Senior Notes due 2008 (the Senior Notes) (see Note 8).
o The Company borrowed approximately $14.3 million under a new Revolving
Credit Facility.
o The Company recognized a tax benefit from the exercise of stock
options of approximately $1 million.
51
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
The transaction was structured as a leveraged recapitalization for
accounting purposes, with all assets and liabilities being carried over at
historical cost.
During the years ended December 31, 1998 and 1997, the Company incurred
$5,099,302 and $1,719,195, respectively, of nonrecurring expenses
consisting primarily of legal, investment banking and special committee
fees associated with the Merger and the Company's efforts to evaluate ways
to enhance shareholder value, prior to the Merger.
3. Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
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 equipment's estimated useful lives of seven years since July 1,
1998 (see Note 7) and from 3 to 7 years prior to July 1, 1998. 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 as other revenue.
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.
Goodwill
Goodwill represents the excess purchase cost of acquired businesses over
the estimated fair values of tangible and identifiable intangible assets
acquired and is being amortized on a straight-line basis over lives ranging
from 15 to 40 years. Accumulated amortization was $7,200,902 and $4,714,262
as of December 31, 1999 and 1998, respectively.
Valuation of Long-Lived Assets
The Company periodically analyzes its long-lived assets for potential
impairment, assessing the appropriateness of lives and recoverability of
unamortized balances through measurement of undiscounted operating cash
flows on a basis consistent with generally accepted accounting principles,
accepted in the United States.
52
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Deferred Financing Costs
Deferred financing costs associated with issuing the 10.25% Senior Notes
and the new Revolving Credit Facility (see Note 8) are deferred and
amortized over the related terms using the straight-line method, which
approximates the effective interest rate method. Accumulated amortization
was $2,021,697 and $1,291,246 as of December 31, 1999 and 1998,
respectively.
Revenues
Equipment is generally rented on a short-term basis and rentals are
recorded in income generally as equipment is utilized. 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 in effect for the periods
in which the differences are expected to reverse. Income tax expense is the
tax payable for the period plus the change during the period in deferred
income taxes.
Fair Value of Financial Instruments
The Company considers that the carrying amount of financial instruments,
including accounts receivable, accounts payable, accrued liabilities and
notes payable, approximates fair value. Interest on notes payable is
payable at rates which approximate fair value.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Recent Accounting Pronouncements
In 1999, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." The Company must adopt Statement No. 133
no later than January 1, 2001. The Company is reviewing the requirements of
this standard. Although the Company expects that this standard will not
materially affect its financial position or results of operations, it has
not yet finalized its determination of the impact of this standard on its
financial statements.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP provides
guidance on accounting for the costs of computer software developed or
obtained for internal use. The Company adopted SOP No. 98-1 beginning on
January 1, 1999. The adoption did not have a material impact on the
Company's financial position or results of operations.
53
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company
must adopt this standard no later than January 1, 2001. The Company is
reviewing the requirements of this standard. Although the Company expects
that this standard will not materially affect its financial position or
results of operations, it has not yet determined the impact of this
standard on its financial statements.
4. Acquisitions
Vital Choice Medical Systems, Inc.
Effective October 1, 1999, the Company acquired Vital Choice Medical
Systems, Inc. (Vital Choice) pursuant to a Stock Purchase Agreement among
the Company and the shareholders of Vital Choice. Under the agreement, the
Company acquired all of the outstanding capital stock of Vital Choice for
approximately $5.3 million, including the repayment of approximately $2.1
million of outstanding indebtedness of Vital Choice. The source of funds
was from the new Credit Facility (see Note 8).
Vital Choice rents medical equipment to hospitals and alternate care
facilities from three locations in central and northern
California--Oakland, Fresno and Sacramento. Vital Choice also supplies
disposable medical products used in connection with rental equipment and
provides a variety of biomedical services. On November 5, 1999, Vital
Choice was merged with and into the Company.
Express Medical Supply, Inc.
On March 31, 1999, the Company acquired certain assets of Express Medical
Supply, Inc. (EMS) for approximately $0.8 million. The source of funds was
from the Revolving Credit Facility.
EMS rents respiratory equipment to hospitals and home care providers in the
Nashville, Tennessee area. EMS also supplies disposable respiratory
products used in connection with the respiratory equipment.
Medical Rentals Stat, Inc.
On November 5, 1998, the Company acquired Medical Rentals Stat, Inc. (MRS),
pursuant to a Stock Purchase Agreement among the Company and the
shareholders of MRS. Under the agreement, the Company acquired all of the
outstanding capital stock of MRS for approximately $1.8 million, including
the repayment of approximately $.4 million of outstanding indebtedness of
MRS. The source of funds was from the Revolving Credit Facility. In
connection with the acquisition, the Company amended its Revolving Credit
Facility (see Note 8).
MRS rents movable medical equipment to hospitals and home care providers in
Oklahoma. MRS also supplies disposable medical products used in connection
with the rental equipment, and provides a variety of biomedical services.
On November 10, 1998, MRS was merged with and into the Company.
54
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Patient's Choice Healthcare, Inc.
On August 17, 1998, the Company acquired all of the outstanding capital
stock of Patient's Choice Healthcare, Inc. (PCH), pursuant to a Stock
Purchase Agreement among the Company and the shareholders of PCH. Under the
agreement, the Company acquired all of the outstanding capital stock of PCH
for approximately $14.6 million, including the repayment of approximately
$2.7 million of outstanding indebtedness of PCH. In connection with the
acquisition, the Company amended its Revolving Credit Facility (see Note
8). The source of funds was approximately $8.6 million from the Revolving
Credit Facility and $6.0 million from proceeds of the issuance of 6,000
shares of Series A 12% Cumulative Convertible Accruing Paid-In-Kind
Preferred Stock of the Company (see Note 12).
PCH is a medical distribution company that rents, sells and leases IV pumps
to home infusion companies, long-term consulting pharmacies, oncology
clinics and hospitals. PCH sells over 4,000 disposable products and rents
over 60 different types of equipment. PCH also provides a variety of
biomedical services.
On September 30, 1998, PCH was merged with and into the Company.
Home Care Instruments, Inc.
On July 30, 1998, the Company acquired HCI Acquisition Corp. (HCI), the
parent company of Home Care Instruments, Inc., pursuant to a Stock Purchase
Agreement among the Company and shareholders of HCI. Under the agreement,
the Company acquired all of the outstanding capital stock of HCI for
approximately $19.3 million, including the repayment of approximately $3.6
million of outstanding indebtedness of HCI. The source of funds was
approximately $18.6 million under the Revolving Credit Facility and of the
issuance of 256,272 shares of the Company's common stock valued at
approximately $.7 million. In connection with the acquisition, the Company
amended its Revolving Credit Facility (see Note 8).
HCI rents medical equipment to the home care and hospital markets in the
Midwestern United States, renting approximately 100 types of equipment,
supplies disposable medical products used in connection with the rental
equipment, and provides a variety of biomedical services.
On September 29, 1998, Home Care Instruments, Inc. was merged with and into
HCI and, on September 30, 1998, HCI was merged with and into the Company.
55
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
The acquisitions of Vital Choice, EMS, MRS, PCH and HCI were accounted for
using the purchase method. Accordingly, the respective purchase prices were
allocated to assets and liabilities acquired based on their estimated fair
values. This treatment resulted in approximately $3.7 million and $25.3
million of cost in excess of net tangible assets and liabilities acquired
(goodwill) during the years ended December 31, 1999 and 1998, respectively,
which is being amortized on a straight-line basis over 15 years. The
estimated fair values of assets and liabilities acquired are as follows (in
thousands):
<TABLE>
<CAPTION>
Vital
Choice EMS MRS PCH HCI
<S> <C> <C> <C> <C> <C>
Accounts receivable $ 322 $ 223 $ 1,826 $ 1,141
Rental equipment 2,173 $430 585 2,631 4,788
Goodwill 3,024 361 1,018 10,482 14,393
Other assets 29 54 56 626 517
Accounts payable and other
liabilities (180) (67) (972) (973)
Deferred tax liabilities (68) (590)
------------ --------- ----------- ------------ -------------
$ 5,300 $845 $ 1,815 $ 14,593 $ 19,276
============ ========= =========== ============ =============
</TABLE>
The operations of the acquired entities have been included in the Company's
results of operations since the respective dates of acquisition.
The following summarizes pro forma results of operations for the years
ended December 31, 1999 and 1998, assuming the acquisitions of Vital
Choice, EMS, MRS, PCH and HCI occurred as of January 1 of the year
preceding the year acquired (in thousands):
1999 1998
Total revenues $ 94,361 $ 83,229
Net loss (5,001) (7,473)
5. Loss on Disposition of Bazooka Beds
During the third quarter of 1998, the Company recorded a loss of $2.9
million on the disposition of approximately 1,700 excess Bazooka Beds. The
Company retained approximately 750 Bazooka Beds in its rental equipment
pool. The Company had acquired its rental equipment pool of Bazooka Beds
under an exclusive agreement which was terminated by the Company in March
1996. Utilization of Bazooka Beds in the Company's pool had been below the
desired level and had declined steadily during 1997 and the first nine
months of 1998.
6. Book Overdrafts
The Company typically 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 a revolving credit
facility on a daily basis.
56
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
7. Property and Equipment
Property and equipment at December 31, consists of the following:
<TABLE>
<CAPTION>
1999 1998
------------------ -------------------
<S> <C> <C>
Rental equipment $182,536,532 $152,638,043
Less accumulated depreciation (90,583,618) (79,580,313)
------------------ -------------------
Rental equipment, net $ 91,952,914 $ 73,057,730
================== ===================
Land $ 120,000 $ 120,000
Buildings and leasehold improvements 2,180,804 1,670,963
Office equipment 7,782,903 6,432,469
------------------ -------------------
10,083,707 8,223,432
Less accumulated depreciation (5,279,632) (4,727,062)
------------------ -------------------
Property and office equipment, net $ 4,804,075 $ 3,496,370
================== ===================
Total property and equipment, net $ 96,756,989 $ 76,554,100
================== ===================
</TABLE>
Effective July 1, 1998, the Company changed the estimated remaining useful
lives of all of its rental equipment from a range of three to seven years
to seven years. These revised useful lives more closely reflect the
expected remaining lives of the Company's rental equipment. This change
resulted in a reduction of depreciation expense for the year ended December
31, 1998 of approximately $2.4 million.
Rental equipment additions, including equipment purchased in acquisitions,
were $41,587,000, $42,588,000 and $20,397,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
8. Long-Term Debt
Long-term debt at December 31, consists of the following:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
10.25% senior notes, net of unamortized discount $ 130,266,123 $ 100,000,000
Revolving credit facility 55,950,000 48,600,000
Capital lease obligations 1,245,498 1,515,799
------------- -------------
187,461,621 150,115,799
Less current portion of long-term debt (304,830) (306,093)
------------- -------------
Total long-term debt $ 187,156,791 $ 149,809,706
============= =============
</TABLE>
57
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
The fair value of long-term debt, based on the quoted market price for the
same or similar issues of debt as of December 31, 1999, would be
approximately $151,243,000.
The 10.25% Senior Notes (Senior Notes) mature on March 1, 2008. Interest on
the Senior Notes accrues at the rate of 10.25% per annum and is payable
semiannually on each March 1 and September 1. The Senior Notes are
redeemable, at the Company's option, in whole or in part, on or after March
1, 2003 at specified redemption prices plus accrued interest to the date of
redemption. In addition, the Senior Notes have a change of control
provision which gives each holder the right to require the Company to
purchase all or a portion of such holders' Senior Notes upon a change in
control, as defined in the agreement, at a purchase price equal to 101% of
the principal amount plus accrued interest to the date of purchase. The
Senior Notes have covenants that restrict the payment of dividends and
require that the Company maintain certain financial ratios. The Senior
Notes are uncollateralized.
On October 25, 1999, the Company entered into a new Revolving Credit
Facility with six banks, which consists of up to a $77.5 million senior
secured revolving credit facility which will terminate on October 31, 2004.
On December 31, 1998, $55,950,000 was drawn down on the facility. At
December 31, 1999, there was $69,500,000 available under the facility,
excluding amounts outstanding. Borrowings were used to pay off the existing
Revolving Credit Facility, pay financing expenses and for other general
working capital needs. Borrowings under the facility are collateralized by
substantially all the assets of the Company.
Interest on loans outstanding under the new Revolving Credit Facility are
payable at a rate per annum, selected at the Company's option, equal to the
Base Rate Margin (the Banks' Base Rate plus 1.75%) or the adjusted
Eurodollar Rate Margin (3.00% over the adjusted Eurodollar Rate).
Commencing April 30, 2000, the Bank's Base Rate and the Eurodollar Rate
used to calculate such interest rates may be adjusted if the Company
satisfies certain leverage ratios. At December 31, 1999, the Banks' Base
Rate was 10.25% and the Eurodollar Rate was 9.47%. 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. In addition, 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 new Revolving Credit Facility 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 maximum
fixed charge test and an interest coverage test. The Credit Agreement also
prohibits the Company from prepaying the Senior Notes.
The Company had previously entered into a Revolving Credit Facility with
three financial institutions that was replaced by the new Revolving Credit
Facility discussed above. The Credit Facility, as amended, consisted of a
$50.0 million senior secured revolving credit facility which would have
terminated on February 23, 2003. As of December 31, 1998, $48.6 million was
drawn down on the Revolving Credit Facility. In connection with the
refinancing of the Revolving Credit Facility on October 26, 1999, the
Company incurred an extraordinary charge of $1,285,649 net of deferred tax
benefit of $474,000, for the write-off of the related deferred financing
costs.
58
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
In connection with the Recapitalization on February 25, 1998 (see Note 2),
the Company paid all long-term debt balances outstanding at December 31,
1997, with the exception of the capital lease obligations. In connection
with the repayment of the long-term debt, the Company incurred an
extraordinary charge of $1,863,020 net of deferred tax benefit of
$1,300,000, for early termination fees and write-off of the related
deferred financing costs.
9. Commitments and Contingencies
Rental expenses were approximately $4,100,000, $3,300,000 and $3,100,000
for the years ended December 31, 1999, 1998 and 1997, respectively. The
Company is committed under various noncancellable operating leases for
regional sales and service offices and vehicles with minimum annual rental
commitments of the following at December 31, 1999:
2000 $ 4,139,457
2001 3,771,132
2002 1,839,661
2003 1,172,964
2004 575,288
Thereafter 676,699
-----------
Total $12,175,201
===========
The Company, in the ordinary course of business, could be subject to
liability claims related to employees and the equipment that it rents and
services. Asserted claims are subject to many uncertainties and the outcome
of individual matters is not predictable with assurance. While the ultimate
resolution of this action may have an impact on the Company's financial
results for a particular reporting period, management believes that any
such resolution will not have a material adverse effect on the financial
position or results of operations of the Company.
Management Agreement
The Company is a party to management agreement with J. W. Childs
Associates, L.P. (an affiliate with Childs) (Childs Associates) pursuant to
which the Company paid Childs Associates a $1.2 million advisory and
financing fee in consideration of Childs Associates' services regarding the
planning, structuring and negotiation of the Recapitalization (see Note 2).
In addition, the Company is obligated to pay Childs Associates an annual
management fee of $240,000 in consideration of Childs Associates' ongoing
provision of certain consulting and management advisory services. Payments
under this management agreement may be made only to the extent permitted by
the Revolving Credit Facility and the Indenture. The management agreement
is for a five-year term automatically renewable for successive extension
terms of one year, unless Childs Associates gives notice of termination.
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.
59
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Change in Benefit Obligation
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
Benefit obligation at beginning of year $ 10,870 $ 9,459 $ 7,902
Service cost 465 334 320
Interest cost 766 678 634
Actuarial gain (1,075) 662 898
Benefits paid (294) (263) (295)
-------- -------- --------
Benefit obligation at end of year $ 10,732 $ 10,870 $ 9,459
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
Fair value of plan assets at beginning of year $ 9,705 $ 8,177 $ 7,661
Actual return on plan assets 1,009 1,791 811
Benefits paid (294) (263) (295)
-------- -------- --------
Fair value of plan assets at end of year $ 10,420 $ 9,705 $ 8,177
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
Funded status $ (312) $ (1,165) $ (1,281)
Unrecognized net actuarial (loss) gain (1,747) (479) 20
Accrued benefit liability (172) (199) (226)
-------- -------- --------
Accrued benefit liability included in the balance sheet $ (2,231) $ (1,843) $ (1,487)
======== ======== ========
</TABLE>
Components of net periodic benefit cost are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
Service cost $ 465 $ 334 $ 320
Interest cost 766 678 634
Expected return on plan assets (815) (630) (583)
Amortization of prior service cost (27) (27) (27)
-------- -------- --------
Net periodic benefit cost $ 389 $ 355 $ 344
======== ======== ========
</TABLE>
60
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Weighted average assumptions as of December 31 are as follows:
1999 1998 1997
Discount rate 7.75% 6.75% 7.25%
Expected return on plan assets 8.50% 8.50% 8.50%
Rate of compensation increase 4.50% 4.50% 4.50%
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. Pursuant to the Merger on February 25, 1998
(see Note 2), the SERP was terminated resulting in a curtailment of the
plan. The Company paid $475,659 in settlement of the entire benefit
obligations due under the plan and recognized a gain on curtailment of the
plan of $155,962. The pension expense for the years ended December 31, 1998
and 1997 related to this plan, excluding the curtailment gain, was $12,500
and $208,000, 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 may contribute annually up to 12%
of their base compensation either before tax (subject to IRS limitation) or
after tax. The Company matches 50% of employee thrift contributions. The
Plan also has 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 401(k)
provision, the Company matches 50% of the first 6% of base compensation
that a participant contributes to the Plan. For the years ended December
31, 1999, 1998 and 1997, approximately $330,000, $241,000 and $246,000,
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 $85,000 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.
61
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
11. Income Taxes
The (benefit) provision for income taxes consisted of the following:
1999 1998 1997
----------- ----------- -----------
Currently payable:
Federal $ 1,194,000
State $ 75,000 $ 32,000 368,000
----------- ----------- -----------
75,000 32,000 1,562,000
----------- ----------- -----------
Deferred:
Federal (1,495,000) (981,000) 677,000
State (235,000) (148,000) 108,000
----------- ----------- -----------
(1,730,000) (1,129,000) 785,000
----------- ----------- -----------
$(1,655,000) $(1,097,000) $ 2,347,000
=========== =========== ===========
Reconciliations between the Company's effective income tax rate and the
U.S. statutory rate follow:
1999 1998 1997
------ ------ ------
Statutory U.S. Federal income tax rate (34.0)% (34.0)% 34.0%
State income taxes, net of U.S. Federal
income tax benefit (4.8) (3.3) 6.4
Recapitalization and transaction costs 14.1 3.4
Goodwill amortization 8.6 4.1 2.0
Other 2.5 2.8 0.7
------ ------ ------
Effective income tax rate (27.7)% (16.3)% 46.5%
------ ------ ------
62
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
The components of the Company's overall net deferred tax liability at
December 31, 1999 and 1998 are as follows:
1999 1998
----------- -----------
Deferred tax assets:
Accounts receivable $ 371,000 $ 64,000
Accrued and deferred compensation
and pension 1,154,000 1,024,000
Inventories 272,000 109,000
Other assets 71,000 47,000
Net operating loss carryforward 10,119,000 4,475,000
----------- -----------
Total deferred tax assets 11,987,000 5,719,000
----------- -----------
Deferred tax liabilities:
Accelerated depreciation 12,250,000 8,157,000
Other 29,000
----------- -----------
Total deferred tax liabilities 12,250,000 8,186,000
----------- -----------
Net deferred tax liability $ 263,000 $ 2,467,000
=========== ===========
At December 31, 1999, the Company had available unused net operating loss
carryforwards of approximately $24,100,000. The net operating loss
carryforwards will expire at various dates through 2019.
12. Preferred Stock
On August 7, 1998, the Company amended its Articles of Incorporation to
authorize the issuance of up to 10,000,000 shares of preferred stock, $0.01
par value, with such designations rights and preferences as the Board of
Directors of the Company may determine.
On August 17, 1998, the Board of Directors of the Company authorized the
issuance of 25,000 shares of preferred stock. These shares, designated as
Series A 12% Cumulative Convertible Accruing Pay-In-Kind Preferred Stock
(Series A Preferred Stock), are entitled to one vote per share on all
matters which common shareholders are entitled to vote and accrue
pay-in-kind dividends at the rate of 12% per annum. The Series A Preferred
Stock has a mandatory redemption date of August 17, 2008 at a redemption
price of $1,000 per share plus an amount in cash equal to all dividends
outstanding per share. The Series A Preferred Stock may be redeemed by the
Company at any time at a per share redemption price of $1,060 plus an
amount in cash equal to all dividends outstanding per share (calculated on
the basis of $1,060 per dividend share). The Series A Preferred Stock is
convertible, at the option of the holder, into common stock at the
conversion price of $2.79 per common share, adjusted for any subsequent
changes in number of common stock shares outstanding.
On August 17, 1998, the Company issued 6,000 shares of its Series A
Preferred Stock to an affiliate of J.W. Childs, L.P., the holders of
approximately 78% of the Company's common stock.
63
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
On December 18, 1998, the Company redeemed 6,246 shares, including a stock
dividend of 246 shares, of its Series A Preferred Stock at the redemption
price per share of $1,000. Concurrent with the redemption, the Company
issued 6,246 shares of Series B 13% Cumulative Accruing Pay-In-Kind
Preferred Stock (Series B Preferred Stock). The holder of Series B
Preferred Stock have no voting rights, and accrue pay-in-kind dividends at
the rate of 13% per annum. The Series B Preferred Stock has a mandatory
redemption date of the earlier of a change in control as defined, or August
17, 2008 at a redemption price of $1,000 per share plus an amount in cash
equal to all dividends outstanding per share. The Series B Preferred Stock
may be redeemed by the Company at any time at redemption price of $1,025 to
$1,050 as defined in the Agreement, plus an amount in cash equal to all
dividends outstanding per share. In addition, purchasers of the Series B
Preferred Stock received a warrant to purchase 350,000 shares of the
Company's common stock for $.01 per share. The warrant is exercisable
immediately and expires on August 17, 2008.
The estimated fair value of the warrant of $1,000,000 has increased
additional paid-in capital and has been reflected as a discount to the
carrying value of the Series B Preferred Stock. The discount is being
amortized as an additional dividend using the effective interest method
over the term of the Series B Preferred Stock.
13. Shareholders' Equity
On August 7, 1998, the Company amended its Articles of Incorporation to
increase the number of shares of common stock it is authorized to issue
from 25,000,000 to 50,000,000.
Concurrent with the Merger (see Note 2) the Company's Board of Directors
approved a 10-for-1 split of the Company's common stock. The split was
effective on February 25, 1998, for each share of common stock owned by
shareholders of record after the close of the Merger. All share
information, except that included in the Statement of Shareholders'
(Deficiency) Equity, has been retroactively restated to reflect the stock
split. In addition, the Company restated its articles of incorporation to
adjust the authorized shares of common stock to 25,000,000, which was
increased to 50,000,000 on August 7, 1998.
Shareholders' Agreement
Certain management shareholders (as defined) and Childs have entered into a
shareholders' agreement (the Shareholders' Agreement) with the Company. The
Shareholders' Agreement, among other things: (i) restricts the ability of
certain shareholders of the Company to transfer their shares of the
Company's common stock; (ii) gives the Company, Childs and certain
management shareholders certain rights of first refusal with respect to
shares of common stock held by certain management holders in the event of
the termination of the employment of any such management holder with the
Company for any reason; (iii) gives each management holder certain rights,
subject to certain limitations imposed by the Revolving Credit Facility, to
require the Company to purchase shares of such common stock held by the
management shareholders, in the event of the termination of his employment
with the Company, other than any such termination by the Company other than
for cause or resignation by him without good reason (as such terms are
defined in the Shareholders' Agreement) at a purchase price based on an
EBITDA formula, as defined; and (iv) provides the parties thereto with
certain "tag-along," "drag-along," and "piggyback" registration rights, as
defined. As of December 31, 1999 and 1998, there was no redemption value on
the common stock owned by certain management shareholders.
64
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
14. Stock Option Plans
On March 13, 1998, the Company adopted the 1998 Plan. Under the 1998 Plan,
the Company may grant incentive stock options and stock options and
performance awards to the Company's employees. A total of 5,000,000 shares
are reserved for issuance under the 1998 Plan. Options granted under the
plan will vest in whole or in part within five years from the date granted
based on the achievement of certain financial targets. Any unvested options
will vest eight years following the date of grant, expiring ten years after
the grant date. All options were granted with option prices based on the
estimated fair market value of the Company's common stock at date of grant.
Pursuant to the Merger (see Note 2), the Company's Incentive and Stock
Option Plan and the Director's Stock Option Plan were terminated with no
additional shares available for grant under the plans. Concurrent with the
Merger, 3,342,010 options granted under the plans were exercised and sold.
The remaining outstanding options were rolled over to and are covered by a
1998 stock option plan (1998 Plan) established by the Company concurrent
with the Merger. All options rolled over to the 1998 Plan continue to be
covered by the original agreements with the individual option holders and
retained the same terms as the Incentive and Stock Option Plan.
Stock option activity with respect to the 1998 Plan, Incentive and Stock
Option Plan and Director Plan is as follows:
<TABLE>
<CAPTION>
Incentive and Stock
1998 Plan Option Plan Director Plan
--------------------------------------------------------------------------
Year Ended December 31 Year Ended December 31 Year Ended December 31
---------------------- ---------------------- ----------------------
Shares 1999 1998 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Granted 261,888 2,096,691
Rollover 1,015,220 (1,015,220)
Exercised (3,052,010) (937,000) (290,000) (80,000)
Terminated (90,000) (30,000) (42,440)
----------- ----------- ------------ ----------- ---------- ----------
December 31:
Outstanding,
end of year 3,253,799 3,081,911 - 4,067,230 - 290,000
----------- ----------- ------------ ----------- ---------- ----------
Exercisable 1,276,008 1,015,220 - 2,973,960 - 290,000
</TABLE>
<TABLE>
<CAPTION>
Incentive and Stock
1998 Plan Option Plan Director Plan
-------------------------------------------------------------------------
Year Ended December 31 Year Ended December 31 Year Ended December 31
---------------------- ---------------------- ----------------------
Weighted Average
Exercise Price
Per Share 1999 1998 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Granted $3.20 $1.68
Rollover $0.77 $0.77
Exercised $0.76 $0.76 $0.80
Terminated $1.99 $1.55 $0.84
December 31:
Outstanding $1.86 $1.38 $0.76 $0.79
Exercisable $0.93 $0.77 $0.73 $0.79
</TABLE>
65
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Options outstanding and exercisable at December 31, 1999 for the 1998 Plan
are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Remaining
Weighted Weighted Weighted
Average Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life (Years) Price Shares Price
<S> <C> <C> <C> <C> <C>
$0.54 - $0.93 1,015,220 6.5 $0.77 1,015,220 $0.77
$1.55 - $3.31 2,238,579 9.1 $1.86 260,788 $1.55
</TABLE>
The Company measures compensation cost for its 1998 Plan and Employee Stock
Purchase Plan, using the intrinsic value method of accounting. Had the
Company used the fair value-based method of accounting for its 1998 Plan
and Employee Stock Purchase Plan and charged compensation cost against
income, over the vesting period, based on the fair value of options at the
date of grant, net (loss) income for the years ended December 31, 1999,
1998 and 1997 would have been reduced to the following pro forma amounts:
Pro Forma
-----------------------------------------------
1999 1998 1997
Net (loss) income $(5,193,151) $(7,829,799) $2,315,983
The pro forma information above includes stock options granted in 1996
through 1998. Compensation expense under the fair value-based method of
accounting has increased beginning in 1998 due to the 2,096,691 stock
options granted during the year ended December 31, 1998. However, this
increase in pro forma compensation expense is substantially offset due to
the 3,052,010 stock options exercised in connection with the
Recapitalization (see Note 2).
The weighted-average grant-date fair value of options granted under the
Employee Stock Purchase plans during 1999 and 1998 was $1.24 and $0.40,
respectively. The weighted-average grant-date fair value was determined
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:
1999 1998
Risk-free interest rates 5.21% to 6.24% 4.40% to 5.66%
Expected life 10 years 10 years
Expected volatility 0.00% 0.00%
Expected dividends None None
23
<PAGE>
Universal Hospital Services, Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
15. Noncash Investing and Financing Transactions
o In connection with the Company's acquisition of Vital Choice (see Note
4), the Company issued 40,000 shares of common stock valued at
$200,000 in partial consideration.
o In connection with the Company's acquisition of HCI (see Note 4), the
Company issued 256,272 shares of common stock valued at $714,999 in
partial consideration.
o Rental equipment purchases included in accounts payable at December
31, 1999, 1998 and 1997 was $3,000,243, $8,405,458 and $1,829,581,
respectively.
o During 1998, the Company issued preferred stock as dividends totaling
$277,000.
67
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors
of Universal Hospital Services, Inc.:
Our audits of the financial statements referred to in our report dated February
28, 2000, appearing in the 1999 Annual Report on Form 10-K also included an
audit of the financial statement schedule listed in item 14(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
February 28, 2000
68
<PAGE>
UNIVERSAL HOSPITAL SERVICES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance at Charged to Charged to Deductions Balance
beginning costs and other from at end
Description of period expense accounts reserves of period
- ---------------------------------- ------------- --------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Reserve for doubtful accounts:
Year ended December 31, 1999 964,160 1,339,348 (186,148) 667,360 1,450,000
Year ended December 31, 1998 775,000 194,512 494,287 499,639 964,160
Year ended December 31, 1997 418,000 641,035 130,931 414,966 775,000
Reserve for inventory obsolescence:
Year ended December 31, 1999 243,626 606,787 -- 299,413 551,000
Year ended December 31, 1998 209,333 119,393 -- 85,100 243,626
Year ended December 31, 1997 204,560 205,640 -- 200,867 209,333
</TABLE>
<PAGE>
Exhibit 3.2b
AMENDMENT NO. 1
TO
RESTATED BYLAWS
OF
UNIVERSAL HOSPITAL SERVICES, INC.
ARTICLE XII
MINNESOTA CONTROL SHARE ACQUISITION ACT
The corporation shall not be subject to the provisions of the Minnesota
Control Share Acquisition Act (Minnesota Statutes, Section 302A.671), or any
successor provision.
ARTICLE XIII
MINNESOTA BUSINESS COMBINATION ACT
The corporation shall not be subject to the provisions of the Minnesota
Business Combination Act (Minnesota Statutes, Section 302A.673), or any
successor provision.
<PAGE>
Exhibit 10.4
October 18, 1999
Mr. John A. Gappa
1717 Beechwood Avenue
St. Paul, MN 55116
Dear Mr. Gappa:
This letter sets forth the agreed terms of your employment with Universal
Hospital Services, Inc. (the "Company"). For good and valuable consideration,
the parties hereto agree as follows:
1. Position; Duties. The Company agrees to employ you, and you agree to serve
and accept employment, for the Term (as defined below) as Senior Vice President
and Chief Financial Officer of the Company, subject to the direction and control
of the Board of Directors of the Company (the "Board"), and, in connection
therewith, to perform such duties as the Board or the Chief Executive Officer
(the "CEO") of the Company may from time to time reasonably direct. Your place
of employment will be in the greater Minneapolis/St. Paul metropolitan area as
mutually agreed with the CEO. During the Term, you agree to devote all of your
time, energy, experience and talents during regular business hours, and as
otherwise reasonably necessary, to such employment, to devote your best efforts
to advance the interests of the Company and not to engage in any other business
activities of a material nature, as an employee, director, consultant or in any
other capacity, whether or not you receive any compensation therefor, without
the prior written consent of the Board. You will not be given duties
inconsistent with your executive position.
2. Term of Employment Agreement. The term of your employment hereunder will
begin 11/15/99 or such earlier date that you may designate and end as of the
close of business on the date which is three years from starting date, subject
to earlier termination pursuant to the terms hereof (including the Renewal Term,
as defined in the next sentence, the "Term"). Following the initial Term, this
Agreement will automatically be renewed for successive one-year terms (each a
"Renewal Term") unless notice of termination is given by either party upon not
less than 30 days' written notice prior to the date on which such renewal would
otherwise occur.
<PAGE>
3. Compensation and Benefits.
(a) Base Salary. Your bases salary will be at annual rate of $170,000,
payable in equal bi-weekly installments. Such base salary will be adjusted
annually based on changes in the consumer price index (all urban consumers,
U.S. city average). The Board will annually review your base salary
beginning in 2000. Necessary withholding taxes, FICA contributions and the
like will be deducted from your base salary.
(b) Bonus. In addition to your base salary, you will be entitled to receive
a bonus based on the achievement of the annual EBITDA targets contained in
exhibit A (such targets to be subject to adjustment by the Board of
Directors of the company, in good faith, to reflect any acquisitions,
dispositions, and material changes to capital spending). The EBITDA bonus
amount would rise linearly from 0% of base salary to 100% of base salary
based on achievement of EBITDA of 90% to 110% of target EBITDA. No bonus
shall be payable if EBITDA is 90% or less of target EBITDA. You will
automatically earn 75% of the EBITDA payout and a pool of cumulative monies
will be created from the other 25% from all executives to be distributed
per CEO and Board subjective determination. A $30,000.00 bonus will be paid
to you for 1999 contributions at the same time the other executive bonuses
are paid.
(c) Options. On the date hereof you will also receive options to purchase a
total of 112,430 shares of the Company's common stock, $.01 par value (the
"Common Stock"), at an exercise price of $3.31 per share, which options
will be granted under the Company's 1998 Stock Option Plan (the "Plan"). A
copy of the Plan has been provided to you. Such options will vest in
accordance with, and will have such other terms as provided in, the Stock
Option Agreement attached hereto as Exhibit A and the Plan.
(d) Other. You will be entitled to such health, life, disability, vacation,
pension, sick leave and other benefits as are generally made available by
the Company to its executive employees. Your benefits will also consist of
five weeks paid vacation time (pro-rated for 1999), an annual physical exam
and reimbursement for tax preparation costs.
4. Termination.
(a) Death. This Employment Agreement will automatically terminate upon your
death. In the event of such termination, the Company will pay to your legal
representatives your base salary in monthly installments and continue to
provide the benefits provided hereunder, in each case for six months
following such termination.
(b) Disability. If during the Term you become physically or mentally
disabled, whether totally or partially, either permanently or so that you
are unable substantially and competently to perform your duties hereunder
for a period of 90 consecutive days or for 90 days during any six-month
period during the Term (a "Disability"), the Company may terminate your
employment hereunder by written notice to you. In the event of such
2
<PAGE>
termination, the Company will pay to you your base salary in monthly
installments and continue to provide the benefits provided hereunder, in
each case for six months following such termination.
(c) Cause. Your employment hereunder may be terminated at any time by the
Company for Cause (as defined herein) by written notice to you. In the
event of such termination, all of your rights to payments (other than
payment for services already rendered) and any other benefits otherwise due
hereunder will cease immediately. The Company will have "Cause" for
termination of your employment hereunder if any of the following has
occurred.
(i) your continued failure, whether willful, intentional or
grossly negligent, after written notice, to perform substantially your
duties hereunder (other than as a result of a Disability);
(ii) dishonesty in the performance of your duties hereunder:
(iii) conviction or confession of an act or acts on your part
constituting a felony under the laws of the United States or any state
thereof;
(iv) any other willful act or omission on your part which is
materially injurious to the financial condition or business reputation
of the Company or any of its subsidiaries;
(v) you have breached any provision of this Employment Agreement
contained in Paragraphs 6, 7 and 8 hereof; or
(vi) you have breached any provision of this Employment Agreement
(other than paragraphs 6, 7 or 8 hereof) and such breach will not have
been cured within sixty days after notice thereof from the Company to
you.
(d) Without Cause. Your employment hereunder may be terminated at any time
by the Company without Cause by written notice to you. In the event of such
termination, the Company will (i) continue to pay you your base salary
through the date which is twelve months from the Date of Termination (as
defined herein), and (ii) pay to you a prorated bonus based upon the number
of days that you were employed by the Company during the fiscal year to
which such bonus relates, such bonus to be payable at such time as annual
bonuses with respect to such fiscal year are paid to all other Executive
Employees (as defined herein) who are employed by the Company on the last
day of such fiscal year. It is acknowledged and agreed that termination of
your employment upon expiration of the Term will not be deemed to
constitute a termination without Cause for purposes of this Employment
Agreement or for any other purpose. For purposes of this Employment
Agreement, "Executive Employees" will be deemed to mean the Vice Presidents
of the Company.
(e) Resignation Without Good Reason. You may terminate your employment
hereunder upon sixty days' prior written notice to the Company, without
Good Reason (as defined herein). In the event of such termination, all of
your rights to payment (other
3
<PAGE>
than payment for services already rendered) and any other benefits
otherwise due hereunder will cease upon the date of such termination. It is
acknowledged and agreed that termination of your employment upon expiration
of the Term will not be deemed to constitute resignation without Good
Reason for purposes of this Employment Agreement or any other purpose.
(f) Resignation For Good Reason. You may terminate your employment
hereunder at any time upon thirty days' written notice to the Company, for
Good Reason. In the event of such termination, the Company will (i)
continue to pay you your base salary though the date which is twelve months
from the Date of Termination, and (ii) pay to you a prorated bonus based
upon the number of days that you were employed by the Company during the
fiscal year to which such bonus relates, such bonus to be payable at such
time as annual bonuses with respect to such fiscal year are paid to all
other Executive Employees who are employed by the Company on the last day
of such fiscal year.
You will have "Good Reason" for termination of your employment hereunder
if, other than for Cause, any of the following has occurred:
(i) your base salary has been reduced other than in connection
with an across-the-board reduction (of approximately the same
percentage) in executive compensation to Executive Employees imposed
by the Board in response to negative financial results or other
adverse circumstances affecting the Company;
(ii) the Company has reduced or reassigned a material portion of
your duties hereunder;
(iii) your illness, that in the good faith determination of the
Board of Directors of the Company is likely to result in you becoming
disabled and unable to continue your employment with the Company;
(iv) the Company has breached this Employment Agreement in any
material respect; or
(v) the Company requires you to relocate outside of the
Minneapolis/St. Paul metropolitan area.
(g) Date and Effect of Termination. The date of termination of your
employment hereunder, pursuant to this Paragraph 4, will be, (i) in the
case of Paragraph 4(a), the date of your death, (ii) in the case of
Paragraphs 4(b), (c) or (d), the date specified as your last date of
employment in the Company's notice to you of such termination or (iii) in
the case of Paragraph 4(e) or 4(f), the date specified in your notice to
the Company of such termination (in each case, the "Date of Termination").
Upon any termination of your employment hereunder pursuant to this
Paragraph 4, you will not be entitled to any further payments or benefits
of any nature pursuant to this Employment Agreement, or as a result of such
termination, except as specifically provided for in this Employment
Agreement, the Stockholders' Agreement (as defined in Paragraph 10 hereof)
in any
4
<PAGE>
stock option plans adopted by the Company in accordance with Paragraph 3(b)
hereof, or as may be required by law.
(h) Other Employment. Notwithstanding anything in this Employment Agreement
to the contrary, if your employment hereunder is terminated pursuant to
Paragraph 4(d) or if you terminate your employment pursuant to Paragraph
4(f), and if prior to the date which is twelve months after the Date of
Termination you find other employment, the amount of payments or benefits
payable to you after such termination in accordance with the terms of this
Employment Agreement will be reduced by the value of your compensation in
your new employment through the date which is twelve months after the Date
of Termination.
(i) Termination Following Non-Renewal. In the event that (i) your
employment hereunder is not renewed at the end of the Term or any Renewal
Term pursuant to a notice of termination given by the Company to you in
accordance with Paragraph 2 hereof, (ii) you are still employed by the
Company after such non-renewal as an employee at will, (iii) the Company
thereafter terminates your employment as an employee at will, and (iv) no
circumstances exist at the time of such termination which would constitute
"Cause" as set forth in Paragraph 4(c) hereof, any amounts to which you are
entitled under any severance plan or program of the Company then in effect
which is generally applicable to employees of the Company will be paid to
you in accordance with the terms of such plan or program.
5. Acknowledgment. You agree and acknowledge that in the course of rendering
services to the Company and its clients and customers, you will have access to
and become acquainted with confidential information about the professional,
business and financial affairs of the Company and its affiliates. You
acknowledge that the Company is engaged and will be engaged in a highly
competitive business, and the success of the Company in the marketplace depends
upon its good will and reputation for quality and dependability. You agree and
acknowledge that reasonable limits on your ability to engage in activities
competitive with the Company are warranted to protect its substantial investment
in developing and maintaining its status in the marketplace, reputation and good
will.
6. Confidentiality. You agree that during and at all times after the Term, you
will keep secret all confidential matters and materials of the Company
(including its subsidiaries and affiliates), including, without limitation,
know-how, trade secrets, real estate plans and practices, individual office
results, customer lists, pricing policies, operational methods, any information
relating to the Company (including any of its subsidiaries and affiliates)
products, processes, customers and services and other business and financial
affairs of the Company (collectively, the "Confidential Information"), to which
you had or may have access and will not disclose such Confidential Information
to any person other than Holdings or the Company, their respective authorized
employees and such other person to whom you have been instructed to make
disclosure by the Board, in each case only to the extent required in the course
of your service to the Company hereunder or as otherwise expressly required in
connection with court process. "Confidential Information" will not include any
information which is in the public domain
5
<PAGE>
during or after the term, provided such information is not in the public domain
as a consequence of disclosure by you in violation of this Employment Agreement.
7. Non-competition. During the Prohibition Period (as hereinafter defined), you
will not, in any capacity, whether for your own account or for any other person
or organization, directly or indirectly, within North America (a) own, operate,
manage or control, (b) serve as an officer, director, partner, employee, agent,
consultant, advisor or developer or in any similar capacity to, or (c) have any
financial interest in, or aid or assist anyone else in the conduct of, any
person or enterprise which is engaged in a business substantially competitive
with the activities of the business actually conducted by the Company. As used
herein, "Prohibition Period" means the period from and after the date hereof to
and including the later of (i) the date which is twelve months from the Date of
Termination and (ii) the [third anniversary of start date].
The non-competition agreement contained in this Paragraph 7 will not prevent you
from owning, directly or indirectly, up to five percent (5%) of the publicly
traded stock in any corporation which is engaged in a business competitive with
the activities of the business actually conducted by the Company. For purposes
of this Agreement, the term "publicly traded" will mean traded on a recognized
national exchange or quoted on the NASDAQ National Market System in the United
States of America.
8. Non-solicitation. During the Prohibition Period, you will not, directly or
indirectly, hire, recruit, solicit, call upon, divert, take away, entice or in
any other manner persuade or attempt to do any of the foregoing with respect to,
any employee, independent contractor, dealer, supplier, client, customer or
business contact of the Company or any of its subsidiaries to discontinue his or
her position or relationship, or violate any agreement, with the Company or any
of its subsidiaries as employee, independent contractor, dealer, supplier,
client, customer or business contact, except with the prior written consent of
the Board, which consent will be given at the sole discretion of the Board.
The non-solicitation agreement contained in this Paragraph 7 will not apply to
(i) any employee of the Company whose employment relationship with the Company
has been terminated for at least three months prior to the date of such hiring,
recruitment or solicitation and (ii) any such employee whose employment is
terminated for any reason by the Company.
9. Modification; Equitable Relief.
(a) You agree and acknowledge that the duration, scope and geographic area
of the covenants described in Paragraphs 6, 7 and 8 are fair, reasonable
and necessary in order to protect the good will and other legitimate
interest of the Company and its subsidiaries, that adequate consideration
has been received by you for such obligations, and that these obligations
do not prevent you from earning a livelihood. If, however, for any reason
any court of competent jurisdiction determines that any restriction
contained in Paragraphs 6, 7 or 8 are not reasonable, that consideration is
inadequate or that you have been prevented unlawfully from earning a
livelihood, such restriction will be interpreted, modified or rewritten to
include as much of the duration,
6
<PAGE>
scope and geographic area identified in such Paragraphs 6, 7 or 8 as will
render such restrictions valid and enforceable.
(b) You acknowledge that the Company will suffer irreparable harm as a
result of a breach of this Employment Agreement by you for which an
adequate monetary remedy does not exist and a remedy at law may prove to be
inadequate. Accordingly, in the event of any actual or threatened breach by
you of any provision of this Employment Agreement, the Company will, in
addition to any other remedies permitted by law, be entitled to obtain
remedies in equity, including without limitation specific performance,
injunctive relief, a temporary restraining order and/or a permanent
injunction in any court of competent jurisdiction, to prevent or otherwise
restrain any such breach without the necessity of proving damages, posting
a bond or other security, and to recover any and all costs and expenses,
including reasonable counsel fees, incurred in enforcing this Employment
Agreement against you, and you hereby consent to the entry of such relief
against you and agree not to contest such entry. Such relief will be in
addition to and not in substitution of any other remedies available to the
Company. The existence of any claim or cause of action by you against the
Company or any of its subsidiaries, whether predicated on this Employment
Agreement or otherwise, will not constitute a defense to the enforcement by
the Company of this Employment Agreement. You agree not to defend on the
basis that there is an adequate remedy at law.
10. Stockholders' Agreement. In connection with the acquisition of any equity
securities, or options therefore, of the Company, you will be expected to enter,
and you agree to enter, into a stockholders' agreement with the other equity
investors in the Company, substantially in the form attached hereto as Exhibit B
(the "Stockholders' Agreement"). Up to 60 days after your start date, you will
have an opportunity to purchase a minimum of $5,000 and an unlimited maximum
dollar amount of UHS stock @ 3.31per share. This share acquisition, if you so
choose, will be governed by the aforementioned stockholders agreement.
11. Life Insurance. The Company may, at its discretion and at any time after the
execution of this Employment Agreement, apply for and procure, as owner and for
its own benefit, and at its own expense, insurance on your life, in such amount
and in such form or forms as the Company may determine. You will have no right
or interest whatsoever in such policy or policies, but you agree that you will,
at the request of the Company, submit yourself to such medical examinations,
supply such information and execute and deliver such documents as may be
required by the insurance company or companies to which the Company or any such
subsidiary has applied for such insurance.
12. Successors; Assigns; Amendment; Notice. This Employment Agreement will be
binding upon and will inure to the benefit of the Company and will not be
assigned by the Company without your prior written consent. This Employment
Agreement will be binding upon you and will inure to the benefit of your heirs,
executors, administrators and legal representatives, but will not be assignable
by you. This Employment Agreement may be amended or altered only by the written
agreement of the Company and you. All notices or other communications permitted
or required under this
7
<PAGE>
Employment Agreement will be in writing and will be deemed to have been duly
given if delivered by hand, by facsimile transmission to the Company (if
confirmed) or mailed (certified or registered mail, postage prepaid, return
receipt requested) to you or the Company at the respective addresses on the
first page of this Employment Agreement, or such other address as will be
furnished in writing by like notice by you or the Company to the other.
13. Entire Agreement. This Employment Agreement, together with the Stockholders'
Agreement as executed in accordance with Paragraph 10 hereof, embodies the
entire agreement and understanding between you and the Company with respect to
the subject matter hereof and supersedes all such prior agreements and
understandings.
14. Severability. If any term, provision, covenant or restriction of this
Employment Agreement is held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Employment Agreement will remain in full force and effect
and will in no way be affected, impaired or invalidated.
15. Governing Law. This Employment Agreement will be governed by and construed
and enforced in accordance with the laws of state of Minnesota applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws thereof.
16. Counterparts. This Employment Agreement may be executed in two or more
counterparts, each of which will be deemed an original but all of which together
will constitute one and the same instrument, and all signatures need not appear
on any one counterpart.
17. Headings. All headings in this Employment Agreement are for purposes of
reference only and will not be construed to limit or affect the substance of
this Employment Agreement.
If you accept and agree to the foregoing, please sign and return a counterpart
of this letter to the Company at the above address, whereupon this letter will
become a binding Employment Agreement between you and the Company as of the date
hereof.
Very truly yours,
UNIVERSAL HOSPITAL SERVICES, INC.
By /s/ David E. Dovenberg
-------------------------------------
Name: David E. Dovenberg
Title: President and Chief Executive
Officer
Accepted and agreed to:
/s/John A. Gappa
- ----------------------------------
John A. Gappa
8
<PAGE>
Exhibit 12.1
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
DETERMINATION OF RATIO OF EARNINGS TO FIXED CHARGES:
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Loss) Income before (benefit) provision for income $(5,977) ($6,737) $5,046 $1,851 $4,699
taxes and extraordinary
Write-down of DPAP inventories 2,213
Loss on disposition of Bazooka Beds 2,866
Recapitalization and transaction costs 5,099 1,719 306
Fixed charges
Amortization of deferred financing costs 1,181 858 12 - -
Interest expense 18,013 11,234 3,012 2,518 1,784
---------------------------------------------------------
Earnings before fixed charges 13,217 13,320 9,789 6,888 6,483
Fixed charges
Amortization of deferred financing costs 1,181 858 12 - -
Interest expense 18,013 11,234 3,012 2,518 1,784
---------------------------------------------------------
Total fixed charges 19,194 12,092 3,024 2,518 1,784
Ratio of earnings to fixed charges 0.7x 1.1x 3.2x 2.7x 3.6x
---------------------------------------------------------
</TABLE>
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 28,788,595
<ALLOWANCES> 1,450,000
<INVENTORY> 3,527,161
<CURRENT-ASSETS> 32,767,401
<PP&E> 192,620,239
<DEPRECIATION> 95,863,250
<TOTAL-ASSETS> 176,736,024
<CURRENT-LIABILITIES> 21,230,328
<BONDS> 0
0
6,206,969
<COMMON> 160,632
<OTHER-SE> 41,576,237
<TOTAL-LIABILITY-AND-EQUITY> 176,736,024
<SALES> 10,478,780
<TOTAL-REVENUES> 92,223,030
<CGS> 8,353,623
<TOTAL-COSTS> 49,616,929
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,339,348
<INTEREST-EXPENSE> 18,012,479
<INCOME-PRETAX> (5,976,623)
<INCOME-TAX> (1,655,000)
<INCOME-CONTINUING> (4,321,623)
<DISCONTINUED> 0
<EXTRAORDINARY> 811,649
<CHANGES> 0
<NET-INCOME> (5,133,271)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
