-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FO84iJlBx7IFCHNhbfYfWDGlRvb/Nm9p6t62tV3jLJ8liZZXBHQ7PcmRAB0QzRoP jdwmRm6DyCPXlbC3lcFgQw== 0001045969-01-000299.txt : 20010315 0001045969-01-000299.hdr.sgml : 20010315 ACCESSION NUMBER: 0001045969-01-000299 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL HOSPITAL SERVICES INC CENTRAL INDEX KEY: 0000886171 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS EQUIPMENT RENTAL & LEASING [7350] IRS NUMBER: 410760940 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-47220 FILM NUMBER: 1568262 BUSINESS ADDRESS: STREET 1: 1250 NORTHLAND PLZ STREET 2: 3800 W 80TH ST CITY: BLOOMINGTON STATE: MN ZIP: 55431-4442 BUSINESS PHONE: 6128933200 MAIL ADDRESS: STREET 1: 1250 NORTHLAND PLAZA STREET 2: 3800 W 80TH STREET CITY: BLOOMINGTON STATE: MN ZIP: 55431-4442 10-K405 1 0001.txt FORM 10-K405 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, 2000, or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to _________. Commission File Number: 0-20086 UNIVERSAL HOSPITAL SERVICES, INC. --------------------------------- (Exact name of Registrant as specified in its charter) Minnesota 41-0760940 ----------------------- ----------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 3800 West 80th Street, Suite 1250 Bloomington, Minnesota 55431-4442 ------------------------------------------ (Address of principal executive offices) (Zip Code) (952) 893-3200 ------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: 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] FORM 10-K INDEX --------------- PAGE ---- PART I - ------ 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 - ------- 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 21 ITEM 7A Quantitative and Qualitative Disclosures about Market Risk 28 ITEM 8 Financial Statements and Supplementary Data 28 ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28 PART III - -------- ITEM 10 Directors and Executive Officers of the Registrant 29 ITEM 11 Executive Compensation 31 ITEM 12 Principal Shareholders 34 ITEM 13 Certain Relationships and Related Transactions 35 PART IV - ------- ITEM 14 Exhibits, Financial Statements, Schedule and Reports on Form 8-K 37 2 PART I ------ ITEM 1: BUSINESS ---------------- General Universal Hospital Services, Inc. ("UHS" or the "Company"), incorporated in Minnesota, 1954, is a leading nationwide provider of movable medical equipment to more than 5,250 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 Program ("AMPP"), 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, 2000, we had total revenues of approximately $106.0 million, a net loss of $5.1 million and earnings before interest expense, income taxes, depreciation and amortization ("EBITDA") of $43.2 million. 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: . 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(TM) program, allow customers more effectively to match the costs of variable equipment use with actual patient charges. . Outsource Support Services. Our full range of support services is 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. . Minimize Equipment Obsolescence Risk. Health care providers can effectively eliminate the risk of equipment obsolescence through our short-term rental and Pay-Per-Use(TM) programs. Our obsolescence risk is reduced because we can maintain high utilization of our equipment. We own a rental pool of over 101,000 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, 2000, we operated through 60 district offices and 12 regional service centers, serving rental and sales customers in 49 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 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, 85 remain customers as of December 31, 2000. National Network. We are one of only two national providers of a broad range of movable medical equipment rental and outsourcing programs. As of December 31, 2000, our national network of 60 district offices and 12 regional service centers serves hospital and alternate care customers in 49 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 Management Information Systems ("MIS") staff designed these systems and continues to upgrade these systems and develop new applications. Depth and Breadth of Equipment Rental Pool; Purchasing Power. We own a rental pool of over 101,000 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 90 manufacturers in the year ended December 31, 2000, and enables us to offer customers numerous models from different manufacturers within each primary equipment category. During 2000, we purchased 80% of our medical equipment direct from manufacturers while 20% 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, 2000, 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 22% 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 8.2 years. Large and Diversified Customer Base. We provide movable medical equipment to approximately 2,550 hospitals and approximately 2,700 alternate care providers (such as home care providers, nursing homes, surgicenters, 4 subacute care facilities and outpatient centers) throughout the United States. For the year ended December 31, 2000, our top ten customers accounted for approximately 11% of total rental revenues. Strategic Acquisitions. We have made strategic acquisitions that increased 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:
Company Locations Date ------- --------- ---- Biomedical Equipment Rental & Sales, Inc. "BERS"..................... Raleigh, North Carolina August 1996 Home Care Instruments, Inc. "HCI"........ St. Louis, Missouri July 1998 Patient's Choice Healthcare, Inc. "PCH"............................. Columbus, Ohio August 1998 Medical Rentals Stat, Inc. "MRS"......... Oklahoma City, Oklahoma November 1998 Express Medical Supply, Inc. "EMS"....... Nashville, Tennessee March 1999 Vital Choice Medical Systems, Inc."VC"... Fresno, California October 1999
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 average monthly rental revenue per hospital customer census bed (i.e., occupied bed) of approximately $83 for the year ended December 31, 2000, while increasing the number of census beds served by 1.3%. 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 average monthly rental revenue per hospital customer census bed of approximately $22 for 2000, compared to $20 for 1999, while increasing census beds served by 4.7%. Providing Comprehensive Equipment Management and Outsourcing Programs. We offer a total equipment management outsourcing program called Asset Management Partnership, or AMPP. Through this program, we provide, maintain, manage and track substantially all, or a significant portion of, a customer's movable medical equipment. The AMPP 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 AMPP program as well as promote the AMPP program to a target list of potential customers. As of December 31, 2000, we had 20 AMPP accounts, 14 of which we have added since January 1, 1996. The average monthly rental revenue at these 14 accounts increased 139% after conversion to AMPP. 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 members of the GPOs. 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, 2000 from 15% in 1997. Geographic Expansion. In order to expand our geographic coverage, we plan to open three to four new district offices in 2001 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. 5 Pursuing Strategic Alliances. We intend to pursue strategic alliances with 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 manufacturers' sales distribution network. Equipment Management Programs Description Rental Programs. Our primary equipment rental program is the Pay-Per-Use(TM) 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(TM) 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 AMPP 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 AMPP program and are adjusted to reflect actual equipment productivity levels. Our AMPP 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. 6 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 that 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 AMPP program pricing strategy is designed to generate a payback 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 that 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 are 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. 7 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 101,000 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, 2000 was: critical care, 56%; monitoring, 17%; respiratory therapy, 25%; and newborn care, 2%. The following is a list of the principal types of medical equipment available to our customers by category:
Critical Care Monitoring Respiratory Therapy - ------------- ---------- ------------------- 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 Heated Humidifiers Controllers, Infusion Fetal Monitors Air Compressors Electrosurgical Generators Monitoring Systems Cough Stimulators Enteral Infusion Pumps Neonatal Monitors Simple Spirometry Heat Therapy Units Oximeters Hyper-Hypothermia Units PO (2)/CO (2) Monitors Foot Pumps Recorders and Printers Lymphodema Pumps Surgical Monitors Patient Controlled Analgesia (PCA) Telemetry Monitors Newborn Care Minimal Invasive Surgery (MIS) Systems Urine Output/Temperature Monitors ------------ Sequential Compression Devices (SCD) Vital Signs Monitors Incubators Specialty Beds and Support Services Infant Warmers Suction Devices Phototherapy Devices Syringe Pumps Infant Ventilators Tympanic Thermometry Neonate Infusion Pumps Ultrasonic Nebulizers Neonate/Fetal Monitors Wheel Chairs
During 2000, we purchased 80% of our medical equipment directly from approximately 90 manufacturers and 20% from the used equipment market. Our five largest manufacturers of movable medical equipment, which supplied approximately 50% of our direct movable medical equipment purchases for 2000, were: Baxter Healthcare Corporation, Mallinckrodt (Nellcor Puritan Bennett, Inc.), Respironics, Inc., Siemens and Drager Medical 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. The purchase price for equipment generally ranges from $2,000 to $50,000, with some complete monitoring systems costing more than $500,000. 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 particular customer to track location, productivity and availability of all equipment rented, owned or leased by that customer. 8 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 130 suppliers. The five largest current suppliers of disposables to us, accounting for over 50% of our disposable purchases for 2000, were: The Kendall Company; Sims Deltec, Inc.; B. Braun McGaw, Inc.; Huntleigh Healthcare, Inc. and Alaris Medical Systems, 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 108 promotional sales representatives as of December 31, 2000. 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. We have developed specific marketing programs intended to address current market demands. The most significant of such programs include: the AMPP 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, 2000 we operated through 60 district offices, serving rental and sales customers in 49 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 Office Year Opened Office Year Opened - ------ ----------- ------ ----------- Minneapolis, MN....... 1941 Cincinnati, OH....... 1992 Omaha, NE............. 1972 Pasadena, CA......... 1992 Bismarck, ND.......... 1973 Memphis, TN.......... 1992 Fargo, ND............. 1974 Houston, TX.......... 1993 Marquette, MI......... 1975 Wichita, KS.......... 1993 Madison, WI........... 1975 Rochester, NY........ 1993 Duluth, MN............ 1978 New York, NY......... 1994 Kansas City, MO....... 1978 San Diego, CA........ 1994 Sioux Falls, SD....... 1978 Richmond, VA......... 1994 Milwaukee, WI......... 1980 Denver, CO........... 1995 Dallas, TX............ 1981 Indianapolis, IN..... 1995 San Antonio, TX....... 1982 Jacksonville, FL..... 1995 Atlanta, GA........... 1983 Sacramento, CA....... 1995 St. Louis, MO......... 1983 Portland, OR......... 1996 Tampa, FL............. 1984 Knoxville, TN........ 1996 Cleveland, OH......... 1985 Raleigh, NC.......... 1996 Iowa City, IA......... 1985 Columbus, OH......... 1998 Chicago, IL........... 1986 Louisville, KY....... 1998 Boston, MA............ 1986 Oklahoma City, OK.... 1998 Philadelphia, PA...... 1986 Salt Lake City, UT... 1999 Ft. Lauderdale, FL.... 1987 Little Rock, AR...... 1999 Baltimore, MD......... 1988 Nashville, TN........ 1999 San Francisco, CA..... 1989 Fresno, CA........... 1999 Seattle, WA........... 1989 Las Vegas, NV........ 1999 New Orleans, LA....... 1990 Charleston, WV....... 1999 Charlotte, NC......... 1990 Appleton, WI......... 2000 Detroit, MI........... 1990 Hartford, CT......... 2000 Anaheim, CA........... 1990 Tucson, AZ........... 2000 Phoenix, AZ........... 1990 Tulsa, OK............ 2000 Pittsburgh, PA........ 1990 Long Island, NY...... 2000 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, 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 that requires us to provide information to the manufacturer regarding the permanent disposal of medical rental equipment and 10 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. Third Party Reimbursement In recent years, there have been widespread efforts to control health care costs in the United States and abroad. As an example, the Balanced Budget Act of 1997 aimed to significantly reduce the growth of health insurance expenditure by decreasing provider payments and restructuring payment methods for rehabilitation facilities, home health agencies, skilled nursing facilities and outpatient services. These legislative changes have already had a significant adverse financial impact on health care providers, particularly nursing homes and home care agencies. Our business and growth strategy success may be significantly affected by the availability and nature of reimbursements to health care providers for their medical equipment costs under state and federal programs such as Medicare, and by other third party payors. In 1983, the Health Care Finance Administration ("HCFA") implemented a new payment method in hospitals called the prospective payment system ("PPS"). Under this system, hospitals are paid a fixed amount for each patient discharged in a certain treatment category or Diagnosis Related Group ("DRG"). The DRG rate includes any equipment needed to treat the patient. These fixed rates were established by HCFA and may or may not represent the individual hospitals' actual costs. Since the Medicare system, to an increasing extent, reimburses health care providers at fixed rates unrelated to actual equipment costs, hospitals have an increased incentive to manage their capital-related costs more efficiently and effectively. In July 1998, HCFA changed nursing home reimbursement to a prospective payment system similar to the PPS used in hospitals. Under this system, patients are assessed based on their health status. This assessment determines the amount of Medicare reimbursement the facility will receive, 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 new system, nursing homes are faced with even more pressure to control costs. A similar prospective payment system went into effect on August 1, 2000 for hospital outpatient services and a per-discharge PPS is being proposed for inpatient rehabilitation hospitals. As a result of the prospective payment system, the manner in which healthcare facilities incur equipment costs (whether through purchase, lease or rental) does not impact the level of Medicare reimbursement. We believe that one way healthcare facilities 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, co-payments 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(TM) rental and Asset Management Partnership Programs ("AMPP"). 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 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. We also 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. These current, or any future initiatives, may adversely affect our business, financial condition or results of operations. In this event, the value of the Notes could be materially adversely affected. 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. We do not bill 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 11 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. 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. 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 606 employees as of December 31, 2000, including 554 full-time and 52 part-time employees. Of such employees, 108 are promotional sales representatives, 75 are technical support personnel, 86 are employed in the areas of corporate and marketing and 337 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, 2000, we had $193.6 million of debt outstanding, including $61.5 million of secured debt and excluding $16.0 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 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 and subsequent acquisitions resulted in a significant increase in our interest expense in 2000, 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 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 affected 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: . incur additional indebtedness; . pay cash dividends or make certain other restricted payments; . create certain liens; . use proceeds from sales of assets and subsidiary stock; and . 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 Previous 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 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 13 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 operating income 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. In July 1998, HCFA changed the way it reimburses nursing homes to a similar prospective payment system. 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. These current or any future initiatives may adversely affect our business, financial condition or results of operations. 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 "Item 1, Business -- 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. We do not bill 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(TM) 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 Relationships with Key Suppliers. We purchased our movable medical equipment from approximately 90 manufacturers and our disposable medical supplies from approximately 130 suppliers in 2000. Our five largest suppliers of movable medical equipment, which supplied approximately 50% of our direct movable medical equipment purchases for 2000 are: Baxter Healthcare Corporation, Mallinckrodt (Nellcor Puritan Bennett, Inc.), Respironics, Inc., Siemens and Drager Medical 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 certain other 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 affected. 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 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 ------------------- The Company does not have a class of equity securities registered under Section 15(d) or Section 12 of the Securities Exchange Act of 1934, as amended. On February 22, 2000 at a Regular Meeting of Shareholders of the Company, the shareholders (i) elected directors to the Board of Directors of the Company and (ii) approved an amendment (the "Amendment") to the Company bylaws to opt the Company out of Sections 302A.671 and 302A.673 of the Minnesota Business Corporation Act. At the Regular Meeting, the shareholders elected David E. Dovenberg, Jerry D. Horn, Samuel B. Humphries, Steven G. Segal and Edward D. Yun to serve as directors until the next regular meeting of shareholders or until his respective successor is duly elected and qualified and approved the Amendment. The number of shares present by person or by proxy at the Regular Meeting was 15,753,695. The number of shares electing the directors and approving the Amendment was 15,753,695 shares, while no shares were voted against the nominees or the Amendment and no shares abstained. 16 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND ------------------------------------------------- RELATED STOCKHOLDER MATTERS --------------------------- As of December 31, 2000 there were 61 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, 2000, 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 January 17, 2000, the Company sold 10,000 shares of its common stock (the "Common Stock") to John A. Gappa, an officer of the Company, for an aggregate purchase price of $33,100.00. The sale was completed pursuant to the exemption from registration provided by Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"). On January 31, 2000, the Company sold 12,084 shares of Common Stock to an existing shareholder for an aggregate purchase price of $39,998.04. The sale was completed pursuant to an exemption from registration provided under Section 4(2) of the Securities Act. On March 31, 2000, the Company completed an offering (the "Offering") of Common Stock to certain members of the Company's management. The Company offered up to 210,000 shares (the "Offered Shares") of the Common Stock at a purchase price of $3.31 per share. The Offering was conducted pursuant to an exemption from registration provided under Section 4(2) of the Securities Act. At the completion of the offering on March 31, 2000, the Company sold a total of 23,041 shares of the Offered Shares for an aggregate purchase price of $76,267.61. On September 21, 2000, the Company sold 2,000 shares of its common stock to a member of the Company's management, for an aggregate purchase price of $6,620.00. The sale was completed pursuant to an exemption from registration provided under Section 4(2) of the Securities Act. The proceeds from the sale of all such shares were added to the Company's general funds and used for the Company's general corporate purposes. 17 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, 2000 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."
Years Ended December 31, ----------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (dollars in thousands) Statement of Operations Data: Revenues: Equipment rentals .............................. $ 94,028 $ 79,345 $ 61,701 $ 54,489 $ 50,743 Sales of supplies and equipment, and other ..... 11,977 12,878 7,672 5,586 6,198 --------- --------- --------- --------- --------- Total revenues ........................... 106,005 92,223 69,373 60,075 56,941 Cost of rentals and sales: Cost of equipment rentals ..................... 26,092 22,398 16,312 13,577 13,332 Rental equipment depreciation ................. 22,387 18,865 14,432 14,435 12,603 Cost of supplies and equipment sales .......... 8,147 8,354 4,867 3,838 4,423 Loss on disposition of Bazooka Beds(1) ........ -- -- 2,866 -- -- Write-down of DPAP inventories (2) ............ -- -- -- -- 2,213 --------- --------- --------- --------- --------- Total costs of rentals and sales ......... 56,626 49,617 38,477 31,850 32,571 --------- --------- --------- --------- --------- Gross profit .......................................... 49,379 42,606 30,896 28,225 24,370 Selling, general and administrative ................... 33,868 30,570 21,300 18,448 19,695 Recapitalization and transaction costs (3) ............ -- -- 5,099 1,719 306 --------- --------- --------- --------- --------- Operating income ...................................... 15,511 12,036 4,497 8,058 4,369 Interest expense ...................................... 20,747 18,012 11,234 3,012 2,518 --------- --------- --------- --------- --------- (Loss) income before income taxes and extraordinary charge .......................... (5,236) (5,976) (6,737) 5,046 1,851 (Benefit) provision for income taxes .................. (158) (1,655) (1,097) 2,347 919 --------- --------- --------- --------- --------- (Loss) income before extraordinary charge ............. (5,078) (4,321) (5,640) 2,699 932 Extraordinary charge net of deferred tax benefit of $474 and $1,300 ............................ -- 812 1,863 -- -- --------- --------- --------- --------- --------- Net (loss) income ..................................... $ (5,078) $ (5,133) $ (7,503) $ 2,699 $ 932 ========= ========= ========= ========= ========= Other Data: Net cash provided by operating activities ............. $ 28,177 $ 15,192 $ 9,740 $ 20,001 $ 14,657 Net cash used in investing activities ................. (31,504) (49,441) (62,896) (18,026) (26,859) Net cash provided by (used in) financing activities .................................... 3,327 34,249 53,156 (2,172) 12,400 EBITDA (4) ............................................ $ 43,173 $ 35,853 22,145 24,129 18,266 Adjusted EBITDA (5) ................................... $ 30,110 $ 25,848 $ 20,785 Adjusted EBITDA margin (6) ............................ 40.7% 38.9% 43.4% 43.0% 36.5% Pro forma adjusted EBITDA (7) ......................... $ 37,122 $ 34,684 Ratio of earnings to fixed charges (8) ................ 0.8x 0.7x 0.4x 2.7x 1.7x Adjusted ratio of earnings to fixed charges (9) ....... 1.1x 3.2x 2.7x Depreciation and amortization ......................... $ 27,662 $ 23,817 $ 17,648 $ 16,071 $ 13,897 Rental equipment additions (including Acquisitions) ................................. $ 31,158 $ 41,587 $ 42,588 $ 20,397 $ 17,178 Rental equipment (units at end of period) ............. 101,000 88,000 72,000 56,000 52,000
18
As of December 31, ------------------------------------------------------------ (dollars in thousands) 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Balance Sheet Data: Working Capital (10)................. $ 9,833 $ 11,842 $ 2,934 $ 7,617 $ 8,573 Total Assets......................... 180,070 176,736 144,221 81,186 79,707 Total Debt........................... 193,607 187,462 150,116 33,945 37,150 Shareholders' (deficiency) equity.... $ (47,319) $(41,416) $ (35,702) $ 33,000 $ 29,128 Operating Data: Offices (at end of period)........... 60 56 50 46 46
(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 (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. Selected Quarterly Financial Information (Unaudited) (dollars in thousands)
Year Ended December 31, 2000 ------------------------------------------------------ March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- Total Revenues....................................... $ 26,890 $ 25,055 $ 26,099 $ 27,961 Gross Profit......................................... $ 13,026 $ 11,530 $ 11,873 $ 12,950 Gross Margin......................................... 48.4% 46.0% 45.5% 46.3% Net Loss............................................. $ (413) $ (2,174) $ (2,161) $ (330) EBITDA............................................... 11,088 9,751 10,218 12,116 Net cash provided by operating activities............ 5,207 10,932 3,037 9,001 Net cash used in investing activities................ (9,673) (5,034) (9,140) (7,657) Net cash provided by (used in) financing activities.. $ 4,466 $ (5,898) $ 6,103 $ (1,344) Year Ended December 31, 1999 ------------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 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
20 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 5,250 hospitals and alternate care providers through our equipment rental and outsourcing programs. The following discussion addresses our financial condition at December 31, 2000, and the results of operations and cash flows for the years ended December 31, 2000, 1999 and 1998. 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 involves risks and uncertainties. The following factors, among others, could adversely affect 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(TM) 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 regulatory and political environment for health care significantly influences the capital equipment procurement decisions of health care providers, 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. 21 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 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. On March 31, 1999, we completed the purchase of EMS for a purchase price of approximately $0.8 million. 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 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 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. 22 Results of Operations The following table provides information on the percentages of certain items of selected financial data to total revenues.
Percentage ---------- Increase (Decrease) ------------------- Percentage of Total Revenues Year Ended Year Ended ---------------------------- 2000 over 1999 over Years Ended December 31, Year 1999 Year 1998 ------------------------ --------- --------- 2000 1999 1998 ---- ---- ---- Rentals: Equipment rentals........................................ 88.7% 86.0% 88.9% 18.5% 28.6% Sales of supplies and equipment, and other................................................ 11.3 14.0 11.1 (7.0) 67.9 ------ ------ ------ Total Revenues......................................... 100.0 100.0 100.0 14.9 32.9 Cost of rentals and sales: Cost of equipment rentals................................ 24.6 24.3 23.5 16.5 37.3 Rental equipment depreciation............................ 21.1 20.4 20.8 18.7 30.7 Cost of supplies and equipment sales..................... 7.7 9.1 7.0 (2.5) 71.7 Loss on disposition of Bazooka Beds...................... - - 4.2 N/A N/A ------ ------ ------ Gross Profit............................................... 46.6 46.2 44.5 15.9 37.9 Selling, general and administrative........................ 32.0 33.1 30.7 10.8 43.5 Recapitalization and transaction costs..................... - - 7.3 N/A N/A Interest expense........................................... 19.5 19.6 16.2 15.2 60.3 ------ ------ ------ Loss before income taxes and extraordinary charge.................................... (4.9) (6.5) (9.7) N/M N/M ------ ------ ------ Benefit for income taxes................................... 0.1 1.8 1.6 N/M N/M ------ ------ ------ Loss before extraordinary charge........................... (4.8) (4.7) (8.1) N/M N/M Extraordinary charge....................................... - (0.9) (2.7) N/M (43.6) ------ ------ ------ Net loss................................................... (4.8)% (5.6)% (10.8)% N/M N/M ====== ====== ======
2000 Compared to 1999 Equipment Rental Revenues. Equipment rental revenues for the year ended December 31, 2000 were $94.0 million, representing a $14.7 million, or 18.5% increase from rental revenues of $79.3 million for the same period of 1999. Assuming the acquisition of VC occurred on January 1, 1999, equipment rental revenues would have increased 15.8% in 2000, compared to 1999. The rental revenue increase resulted from approximately $31.2 million in rental equipment additions, more efficient utilization of existing rental equipment and growth in our customer base. Year to date, the strong growth in rental revenues was partially offset by price concessions to certain Group Purchasing Organizations ("GPO") to achieve preferred vendor relationships. These GPO agreements started during the first quarter of 1999 and are for terms of two to three years. Sales of Supplies and Equipment, and Other. Sales of supplies and equipment, and other for the year ended December 31, 2000 were $12.0 million, representing a $0.9 million, or 7.0% decrease from sales of supplies and equipment, and other of $12.9 million for the same period of 1999. This decrease is the result of a prior year one-time rental equipment sale resulting in a gain of $0.9 million. Overall sales of disposables were consistent with the prior year. Cost of Equipment Rentals. Cost of equipment rentals for the year ended December 31, 2000 was $26.1 million, representing a $3.7 million, or 16.5%, increase from cost of equipment rentals of $22.4 million for the same period of 1999. These results were in line with the increase in equipment rental revenues supplemented by cost efficiencies. For the year of 2000, cost of equipment rentals, as a percentage of equipment rental revenues, decreased to 27.7% from 28.2% for the same period of 1999. This decrease was a result of equipment rental revenues growing at a faster rate than the cost of equipment rentals. 23 Rental Equipment Depreciation. Rental equipment depreciation for the year ended December 31, 2000 was $22.4 million, representing a $3.5 million, or 18.7% increase from rental equipment depreciation of $18.9 million for the same period of 1999. This increase was a result of current year additions of over $31.2 million. For the year of 2000 and 1999, rental equipment depreciation, as a percentage of equipment rental revenues, remained constant at 23.8%. Gross Profit. Total gross profit for the year ended December 31, 2000 was $49.4 million, representing a $6.8 million, or 15.9% increase from total gross profit of $42.6 million for the same period of 1999. For the year of 2000, total gross profit, as a percentage of total revenues, increased to 46.6% from 46.2% for the same period of 1999. The increase in gross profit is due to rental revenue growth partially offset by the cost of equipment rentals percentage decrease discussed above. Gross profit on rentals represents equipment rental revenues reduced by the cost of equipment rentals and rental equipment depreciation. Gross profit on rentals for 2000 increased to 48.4% from 48.0% in 1999. This increase was due to equipment rental revenues which grew faster than the cost of equipment rentals. Gross margin on sales of supplies and equipment and other for the year of 2000 decreased to 32.0% from 35.1% for the same period of 1999. This decrease in sales gross margin was due to a one-time rental equipment sale in 1999 discussed above. EBITDA. We believe earnings before interest, taxes, depreciation, and amortization ("EBITDA") to be a measurement of operating performance. EBITDA for 2000 was $43.2 million versus $35.9 million for 1999. EBITDA as a percentage of total revenue increased to 40.7% for 2000 from 38.9% for 1999. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2000 were $33.9 million, representing a $3.3 million, or 10.8%, increase from $30.6 million for the same period of 1999. The increase for the year is the result of higher medical, auto and workers compensation insurance expenses, the impact of the promotional employee incentive plan and the impact of the GPO administrative fees. Selling, general and administrative expenses as a percentage of total revenue decreased to 32.0% from 33.1% for the same period in 1999 as a result of selling, general and administrative expenses not growing as fast as total revenue. Interest Expense. Interest expense for the year ended December 31, 2000 was $20.7 million, representing a $2.7 million, or 15.2% increase from interest expense of $18.0 million for the same period of 1999. This increase primarily reflects incremental borrowings associated with capital equipment additions combined with higher interest rates in 2000 over 1999. Average borrowings increased from $180.4 million for the year of 1999 to $195.3 million for the year of 2000. Income Taxes. Our effective income tax rate for 2000 was a benefit of 3.0% compared to a statutory income tax rate of 34.0%. This reduced tax rate is primarily due to the net loss of the Company, amortization of goodwill that is not deductible for income tax purposes and the establishment of a valuation allowance related to our net deferred tax asset primarily resulting from net operating loss carryforwards. 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 GPO's 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 and the result of a one-time rental equipment sale resulting in a gain of $0.9 million. 24 Cost of Equipment Rentals. Cost of equipment rentals for the year ended December 31, 1999 was $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. 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 an $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 partially offset by the one-time sale discussed above. 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. 25 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. 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 affect 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 effect 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 Senior Revolving Credit Facility (the "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. In 2000, we purchased and received $31.2 million, $41.6 million and $44.0 million of rental equipment in 2000, 1999 and 1998, respectively. During the years ended December 31, 2000, 1999 and 1998, net cash flows provided by operating activities were $28.2 million, $15.2 million and $9.7 million, respectively. Net cash flows used in investing activities were $31.5 million, $49.4 million and $62.9 million in 2000, 1999 and 1998, respectively. Net cash flows provided by financing activities were $3.3 million, $34.2 million and $53.2 million in 2000, 1999 and 1998, 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, 2000, we had outstanding $135.0 million of our 10.25% Notes and had borrowed $61.5 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 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 four to eight quarters 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. 26 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 have not experienced 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 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." We must adopt Statement No. 133, as amended, no later than January 1, 2001. We have reviewed the requirements of this standard and expect that it will not affect our financial position or results of operations. 27 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, 2000 we were primarily exposed to the Eurodollar Rate on our 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 41 to 64 of this report. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 28 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... 56 Director, President and Chief Executive Officer Samuel B. Humphries.. 58 Director Steven G. Segal...... 40 Director Edward D. Yun........ 34 Director Robert H. Braun...... 49 Senior Vice President, Sales and Marketing John A. Gappa........ 41 Senior Vice President, Chief Financial Officer Andrew R. Amicon..... 40 Vice President, Disposable Sales & Alternate Care National Accounts Gerald L. Brandt..... 51 Vice President, Finance and Controller Randy C. Engen....... 44 Vice President, Sales-- East Michael R. Johnson... 42 Vice President, Administrative Services Gary L. Preston...... 58 Vice President, National Accounts Jeffrey L. Singer.... 39 Vice President, Purchasing & Logistics Judy M. Slater....... 42 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. Samuel B. Humphries is a Director of the Company and has been since April 1998. He is the Managing Director of The Executive Advisory Group. He also is the Managing Director and on the board of Ascent Medical Technology Fund. 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 also a director of Optical Sensors Inc and LifeSpex Medical. Steven G. Segal is a Director of the Company and has been since the 1998 Recapitalization. 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., National Nephrology Associates, Inc. and Big V Supermarkets, Inc., The NutraSweet Company and is Chairman of the Board of Empire Kosher Poultry, Inc. Edward D. Yun is a Director of the Company and has been since the 1998 Recapitalization. He also is a Managing Director 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 also a director of Jillian's Entertainment Holdings, Inc., Pan Am International Flight Academy Holdings, Inc., National Nephrology Associates, Inc., Equinox Holdings, Inc., Chevys, Inc. and Hartz Mountain Corporation. 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, 29 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 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 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 and after a three-year break, returned in 1997 as Division Manager West. She was promoted to her present position in August 1999. 30 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 2000 exceeded $100,000.
Long-Term Annual Compensation Compensation ------------------- ------------ Awards Stock Payouts Name and Options LTIP All Other Principal Position Year Salary Bonus(1) (Shares)(2) Payouts(3) Compensation(4) ------------------ ---- ------ -------- ----------- ---------- --------------- David E. Dovenberg 2000 $226,062 $113,400 - - $5,100 Chief Executive 1999 226,266 40,000 - - 4,800 Officer and 1998 213,398 163,579 383,758 $32,955 36,039 President John A. Gappa 2000 170,241 90,200 50,000 - 3,930 Senior Vice President & 1999 19,617 30,000 112,430 - - Chief Financial Officer 1998 - - - - - Robert H. Braun 2000 155,039 85,800 - - 4,602 Senior Vice President of 1999 146,253 28,000 10,000 - 4,341 Sales & Marketing 1998 130,028 57,735 191,909 - 3,562 Michael R. Johnson 2000 136,000 70,700 - - 3,988 Vice President, 1999 136,064 25,000 - - 4,042 Administrative Services 1998 128,416 67,879 191,909 - 3,541 Jeffrey L. Singer 2000 136,312 76,200 - - 2,625 Vice President of 1999 134,737 22,000 - - 2,500 Purchasing & Logistics 1998 40,866 17,114 89,944 - -
(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 1998, 1999 and 2000 were all granted pursuant to the 1998 Stock Option Plan. For a discussion of the material terms the options granted in 1998, 1999 and 2000 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, 2000". (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 was $10,630 for Mr. Dovenberg. (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, $31,239 of the amount represents payments made upon termination of the Supplemental Executive Retirement Plan ("SERP") in connection with the Recapitalization. 31 Stock Options The following tables summarize option grants during the year ended December 31, 2000 to the Chief Executive Officer and the executive officers named in the "Summary Compensation Table" above, and the values of the options held by such persons at December 31, 2000.
Option Grants During Year Ended December 31, 2000 ------------------------------------------------- Potential % of Realizable Value Total at Annual Rates Options of Stock Price Granted to Exercise Appreciation for Employees or Base Option Term (3) Options in Fiscal Price Expiration --------------- Name Granted Year 2000 ($/Sh)(2) Date 5% 10% - -------------- ------- --------- --------- ------------- --------- ---------- John A. Gappa 50,000(1) 32.89 $3.31 03/17/08 $104,082 $263,764
(1) Each option represents the right to purchase one share of Common Stock. With such non-incentive stock options, the shares under such options vest on the earlier of (i) the date of a change of control in the Company, (ii) the date on which the original investors following the Recapitalization achieve certain realized values in their original investment, or (iii) six years following the date of grant of such options. (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).
Aggregated Option Exercised During Year Ended December 31, 2000 and Value of Options at December 31, 2000 ---------------------------------------------------------------------------- Number of Unexercised Value of Unexercised Shares Options at In-the-Money Options Acquired December 31, 2000 December 31, 2000 (1) on Value ----------------- ------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ------------------- ---------- ---------- ----------- ------------- ----------- ------------- David E. Dovenberg - - 535,080 343,078 $ 2,070,579 $ 1,052,157 Robert H. Braun - - 20,345 181,564 64,088 554,326 John A. Gappa - - - 162,430 - 225,778 Michael R. Johnson - - 82,885 171,564 309,274 540,426 Jeffrey L. Singer - - 5,572 84,372 10,643 161,150
(1) Based on the fair market value of Common Stock, as of December 31, 2000, of $4.70 as determined by UHS' Board of Directors. 32 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 were $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 $ 25,000 $ 31,500 125,000....... 8,500 16,500 33,000 41,500 150,000....... 10,500 20,500 41,000 51,500 200,000....... 11,000 22,000 44,500 55,500 300,000....... 11,000 22,000 44,500 55,500 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 $170,000 cap in 2000. As of December 31, 2000, Messrs. Dovenberg, Braun, Gappa, Amicon, Brandt, Engen, Johnson, Preston, Singer, and Slater had 12.7, 25.4, 1.1, 2.5, 22.7, 21.6, 21.7, 32.9, 2.5, and 18.7 years of credited service, respectively, under the Pension Plan. Employment Agreements The Company has entered into employment agreements with certain 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." 33 ITEM 12: PRINCIPAL SHAREHOLDERS ------------------------------- The following table sets forth information regarding the beneficial ownership of the Company's Common Stock as of December 31, 2000 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).................................... 2,242,950 13.5% Robert H. Braun(3)....................................... 65,025 0.4% John A. Gappa............................................ 10,000 0.1% Andrew R. Amicon(4)...................................... 77,256 0.5% Gerald L. Brandt(5)...................................... 262,745 1.6% Randy C. Engen(6)........................................ 99,935 0.6% Michael R. Johnson(7).................................... 121,605 0.8% Gary L. Preston(6)....................................... 123,085 0.8% Jeffrey L. Singer(4)..................................... 261,844 1.6% Judy M. Slater(8) ....................................... 8,983 0.1% Samuel B. Humphries...................................... 16,129 0.1% J.W. Childs Equity Partners, L.P......................... 12,466,931 77.5% Steven G. Segal(9)....................................... 12,622,131 78.5% J.W. Childs Equity Partners, L.P. One Federal Street Boston, Massachusetts Edward D. Yun(9)......................................... 12,481,149 77.6% J.W. Childs Equity Partners, L.P. One Federal Street Boston, Massachusetts All Officers & Directors as a group (twelve persons)(10). 15,959,882 93.4%
(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, 2000 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 535,080 shares of Common Stock subject to options exercisable within 60 days after December 31, 2000, 626,530 shares of Common Stock owned by Mr. Dovenberg's wife and 61,200 shares of Common Stock owned by Mr. Dovenberg's children. (3) Includes 20,345 shares of Common Stock subject to options exercisable within 60 days after December 31, 2000. (4) Includes 5,572 shares of Common Stock subject to options exercisable within 60 days after December 31, 2000. (5) Includes 196,645 shares of Common Stock subject to options exercisable within 60 days after December 31, 2000. (6) Includes 79,215 shares of Common Stock subject to options exercisable within 60 days after December 31, 2000. (7) Includes 82,885 shares of Common Stock subject to options exercisable within 60 days after December 31, 2000. (8) Includes 2,533 shares of Common Stock subject to options exercisable within 60 days after December 31, 2000. (9) 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. (10) Includes 1,007,054 shares of Common Stock subject to options exercisable within 60 days after December 31, 2000. 34 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 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/her employment with the Company, other than any such termination by the Company other than for Cause or resignation by him/her 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 and Mr. Yun are affiliates) ("Childs Associates") pursuant to which: 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. 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 either party gives written notice of termination no less than 30 days prior to the renewal date. As of February 28, 2001, the Dovenberg Employment Agreement automatically extended for one year. 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 John A. Gappa, Andrew R. Amicon and Jeff L. Singer. 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 executives receive an annual base salary, subject to annual adjustment based on changes in the consumer price index and Board of 35 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. The Executive Employment Agreements also provide that the 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 the executive's employment is terminated by the Company by reason of death or disability, the Company would continue to pay the executive, or the executive's legal representatives, as the case may be, salary and benefits for a six-month period from the date of termination. If the executive's employment is terminated by the Company for other than cause or by the 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 executive a prorated bonus for the fiscal year in which the termination occurred, and would continue to pay the executive's base salary for a 12-month period from the date of termination. Payments or benefits under the Executive Employment Agreement to the executive within this 12-month period would be offset by the value of compensation from the executive's subsequent employment during this 12-month period. If the executive's employment is terminated for cause or the executive resigns without good reason, then all rights to payments (other than payments for services previously rendered), and all other benefits otherwise due to the 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 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. 36 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, 2000 and 1999 Statements of Operations for the years ended December 31, 2000, 1999, and 1998 Statements of Shareholders' (Deficiency) Equity for the years ended December 31, 2000, 1999, and 1998 Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998 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. 37 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 (Incorporated by reference to Exhibit 3.2(b) to Form 10-K filed March 29, 2000). 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 (Incorporated by reference to Exhibit 10.4 to Form 10-K filed March 29, 2000). 10.5 Form of Executive Employment Agreement for all Executive Officer's having Employment Agreements (Incorporated by reference to Exhibit 10.5 to 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 10.18 38 to Form 10-K filed March 31, 1999). *10.9 Executive Severance Pay Plan dated January 25, 2001 *12.1 Statement regarding the computation of ratio of earnings to fixed charges for the Company *27.1 Financial Data Schedule *Filed herewith. 39 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 14, 2001. 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 16, 2001. /s/ David E. Dovenberg President, Chief Executive ------------------------ David E. Dovenberg Officer and Chairman of the Board of Directors (Principal Executive Officer) /s/ John A. Gappa Senior Vice President and ----------------------- John A. Gappa Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Samuel B. Humphries Director ----------------------- Samuel B. Humphries /s/ Steven G. Segal Director ----------------------- Steven G. Segal /s/ Edward D. Yun Director ----------------------- Edward D. Yun 40 Universal Hospital Services, Inc Index to Financial Statements December 31, 2000 and 1999 - --------------------------------------------------------------------------------
Page(s) Report of Independent Accountants 42 Financial Statements: Balance Sheets at December 31, 2000 and 1999 43 Statements of Operations for the years ended December 31, 2000, 1999 and 1998 44 Statement of Shareholders' (Deficiency) Equity for the years ended December 31, 2000, 1999 and 1998 45-46 Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 47 Notes to Financial Statements 48-63
41 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 operations, 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. PricewaterhouseCoopers LLP Minneapolis, Minnesota February 23, 2001 42 Universal Hospital Services, Inc. Balance Sheets At December 31, 2000 and 1999 - --------------------------------------------------------------------------------
ASSETS 2000 1999 Current assets: Accounts receivable, less allowance for doubtful accounts of $1,625,000 and $1,450,000 at December 31, 2000 and 1999, respectively $ 26,998,166 $ 27,338,595 Inventories 2,767,398 3,527,161 Deferred income taxes 1,593,000 1,063,000 Other current assets 838,679 838,645 ------------ ------------ Total current assets 32,197,243 32,767,401 Property and equipment, net: Rental equipment, net 99,149,482 91,952,914 Property and office equipment, net 5,013,625 4,804,075 ------------ ------------ Total property and equipment, net 104,163,107 96,756,989 Intangible assets: Goodwill, net 37,204,260 39,703,819 Other, primarily deferred financing costs, net 6,505,528 7,507,815 ------------ ------------ Total assets $180,070,138 $176,736,024 ============ ============ LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY Current liabilities: Current portion of long-term debt $ 254,728 $ 304,830 Accounts payable 10,895,678 9,418,960 Accrued compensation and pension 4,332,924 3,349,776 Accrued interest 5,442,284 4,925,010 Other accrued expenses 1,232,721 724,977 Book overdrafts 460,692 2,506,775 ------------ ------------ Total current liabilities 22,619,027 21,230,328 Long-term debt, less current portion 193,352,505 187,156,792 Deferred compensation and pension 2,588,072 2,231,540 Deferred income taxes 1,593,000 1,326,000 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, 2000 and 1999, net of unamortized discount, including accrued stock dividends 7,236,201 6,206,969 Commitments and contingencies (Note 9) Shareholders' (deficiency) equity: Common Stock, $0.01 par value; 50,000,000 shares authorized, 16,089,214 and 16,063,240 shares issued and outstanding at December 31, 2000 and 1999, respectively 160,892 160,632 Additional paid-in capital 2,335,423 2,242,603 Accumulated deficit (49,814,982) (43,818,840) ------------ ------------ Total shareholders' (deficiency) equity (47,318,667) (41,415,605) ------------ ------------ Total liabilities and shareholders' (deficiency) equity $180,070,138 $176,736,024 ============ ============
The accompanying notes are an integral part of the financial statements. 43 Universal Hospital Services, Inc. Statements of Operations For the years ended December 31, 2000, 1999 and 1998 - --------------------------------------------------------------------------------
2000 1999 1998 Revenues: Equipment rentals $ 94,028,335 $79,344,705 $61,700,554 Sales of supplies and equipment, and other 11,976,803 12,878,325 7,672,164 ------------ ----------- ----------- Total revenues 106,005,138 92,223,030 69,372,718 ------------ ----------- ----------- Costs of rentals and sales: Cost of equipment rentals 26,092,014 22,397,867 16,311,608 Rental equipment depreciation 22,386,842 18,865,439 14,432,414 Cost of supplies and equipment sales 8,146,805 8,353,623 4,866,604 Loss on disposition of Bazooka Beds 2,866,119 ------------ ----------- ----------- Total costs of rentals and sales 56,625,661 49,616,929 38,476,745 ------------ ----------- ----------- Gross profit 49,379,477 42,606,101 30,895,973 Selling, general and administrative 33,868,262 30,570,245 21,299,536 Recapitalization and transaction costs 5,099,302 ------------ ----------- ----------- Operating income 15,511,215 12,035,856 4,497,135 Interest expense 20,747,230 18,012,479 11,233,885 ------------ ----------- ----------- Loss before income taxes and extraordinary charge (5,236,015) (5,976,623) (6,736,750) ------------ ----------- ----------- Benefit for income taxes (158,000) (1,655,000) (1,097,000) ------------ ----------- ----------- Net loss before extraordinary charge (5,078,015) (4,321,623) (5,639,750) 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 $ (5,078,015) $(5,133,272) $(7,502,770) ============ =========== ===========
The accompanying notes are an integral part of the financial statements. 44 Universal Hospital Services, Inc. Statement of Shareholders' (Deficiency) Equity For the years ended December 31, 2000, 1999 and 1998 - --------------------------------------------------------------------------------
(Accumulated Total Additional Deficit) Stock Shareholders' Common Paid-in Retained Subscription Equity Stock Capital Earnings Receivable (Deficiency) 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 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)
The accompanying notes are an integral part of the financial statements. 45 Universal Hospital Services, Inc. Statement of Shareholders' (Deficiency) Equity For the years ended December 31, 2000, 1999 and 1998 - --------------------------------------------------------------------------------
(Accumulated Total Additional Deficit) Stock Shareholders' Common Paid-in Retained Subscription Equity Stock Capital Earnings Receivable (Deficiency) 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) Repurchase of 21,151 shares of common stock from employee (211) (54,794) (55,005) Issuance of 47,125 shares of common stock, net of offering cost 471 147,614 148,085 Preferred stock dividends (918,127) (918,127) Net loss (5,078,015) (5,078,015) -------- ------------ ------------ --------- ------------ Balance, December 31, 2000 $160,892 $ 2,335,423 $(49,814,982) $ - $(47,318,667) ======== ============ ============ ========= ============
The accompanying notes are an integral part of the financial statement 46 Universal Hospital Services, Inc. Statements of Cash Flows For the years ended December 31, 2000, 1999 and 1998 - --------------------------------------------------------------------------------
2000 1999 1998 Cash flows from operating activities: Net loss $ (5,078,015) $ (5,133,272) $ (7,502,770) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 23,868,755 19,985,469 15,223,028 Amortization of goodwill 2,715,769 2,650,717 1,567,029 Amortization of other intangibles 1,077,085 1,181,000 858,000 Accretion of bond discount 529,412 494,748 Provision for doubtful accounts 1,249,053 1,339,348 194,512 Loss (gain) on sales of equipment 568,857 (197,336) 3,241,077 Extraordinary charge less cash paid 1,285,649 303,313 Deferred income taxes (263,000) (2,204,000) (2,778,000) Changes in operating assets and liabilities net of impact of acquisitions: Accounts receivable (1,227,705) (9,716,654) (3,151,844) Inventories and other operating assets 759,729 (654,433) (1,020,897) Accounts payable and accrued expenses 3,977,496 6,160,665 2,806,629 ------------ ------------ ------------ Net cash provided by operating activities 28,177,436 15,191,901 9,740,077 ------------ ------------ ------------ Cash flows from investing activities: Rental equipment purchases (30,972,302) (44,388,766) (27,656,279) Property and office equipment purchases (1,714,465) (2,330,720) (927,277) Proceeds from disposition of rental equipment 1,103,072 3,711,799 851,977 Acquisitions (6,293,189) (34,969,417) Other 79,515 (140,234) (194,647) ------------ ------------ ------------ Net cash used in investing activities (31,504,180) (49,441,110) (62,895,643) ------------ ------------ ------------ Cash flows from financing activities: Proceeds under loan agreements 47,800,000 129,975,000 173,287,399 Payments under loan agreements (42,520,253) (93,124,021) (57,141,017) Proceeds from issuance of common stock, net of offering costs 148,085 21,054,955 Proceeds from issuance of Series B preferred stock and common stock 6,246,000 warrants 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 (55,005) (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 Change in book overdraft (2,046,083) 376,980 1,140,945 ------------ ------------ ------------ Net cash provided by financing activities 3,326,744 34,249,209 53,155,566 ------------ ------------ ------------ Net change in cash and cash equivalents - - - Cash and cash equivalents at beginning of period - - - ------------ ------------ ------------ Cash and cash equivalents at end of period $ - $ - $ - ============ ============ ============ Supplemental cash flow information: Interest paid $ 19,589,000 $ 16,153,000 $ 7,791,000 ============ ============ ============ Income taxes paid (received) $ (64,000) $ (207,000) $ 601,000 ============ ============ ============
The accompanying notes are an integral part of the financial statements. 47 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. 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: . 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. . 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, resulting in an extraordinary charge of $1,863,000, net of a deferred tax benefit of $1,300,000. . 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. . 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. . The Company received an equity contribution of approximately $21.3 million from Childs and affiliates and the management investors. . The Company issued $100 million in aggregate principal amount of 10.25% Senior Notes due 2008 (the Senior Notes) (see Note 8). . The Company recognized a tax benefit from the exercise of stock options of approximately $1 million. The transaction was structured as a leveraged recapitalization for accounting purposes, with all assets and liabilities being carried over at historical cost. 48 Universal Hospital Services, Inc. Notes to Financial statements - -------------------------------------------------------------------------------- During the year ended December 31, 1998, the Company incurred $5,099,302 of nonrecurring expenses consisting primarily of legal, investment banking and special committee fees associated with 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 sales of supplies and equipment, and other. 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 operations. 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 $9,916,671 and $7,200,902 at December 31, 2000 and 1999, 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 accounting principles generally accepted in the United State of America. Deferred Financing Costs Deferred financing costs associated with issuing the 10.25% Senior Notes and the new Senior 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 $2,886,401 and $2,021,697 at December 31, 2000 and 1999, respectively. 49 Universal Hospital Services, Inc. Notes to Financial statements - -------------------------------------------------------------------------------- Revenue Recognition 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. The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements," in December 1999. The SAB summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. During the fourth quarter of 2000, the Company performed a comprehensive review of its revenue recognition policies and determined that they are in compliance with SAB 101. 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. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. 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. Segment Information The Company's business is organized, managed and internally reported as a single segment. Stock-Based Compensation The Company measures compensation expense for its stock-based compensation plan using the intrinsic value method. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company provides disclosure of the effect on net income (loss) as if the fair value-based method has been applied in measuring compensation expense. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company must adopt Statement No. 133, as amended, no later than January 1, 2001. The Company has reviewed the requirements of this standard and expects that it will not affect its financial position or results of operations. 50 Universal Hospital Services, Inc. Notes to 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 Revolving Credit Facility. 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. 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. 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 Pay-In-Kind Preferred Stock of the Company (see Note 12). 51 Universal Hospital Services, Inc. Notes to Financial statements - -------------------------------------------------------------------------------- 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. 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): Vital Choice EMS MRS PCH HCI 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 ====== ==== ====== ======= ======= The operations of the acquired entities have been included in the Company's results of operations since the respective dates of acquisition. 52 Universal Hospital Services, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 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. 7. Property and Equipment Property and equipment at December 31, consists of the following: 2000 1999 Rental equipment $ 205,291,670 $182,536,532 Less accumulated depreciation (106,142,188) (90,583,618) ------------- ------------ Rental equipment, net $ 99,149,482 $ 91,952,914 ============= ============ Land $ 120,000 $ 120,000 Buildings and leasehold improvements 2,499,053 2,180,804 Office equipment 8,485,702 7,782,903 ------------- ------------ 11,104,755 10,083,707 Less accumulated depreciation (6,091,130) (5,279,632) ------------- ------------ Property and office equipment, net $ 5,013,625 $ 4,804,075 ============= ============ Total property and equipment, net $ 104,163,107 $ 96,756,989 ============= ============ 53 Universal Hospital Services, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 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 approximately $31,158,000, $41,587,000 and $42,588,000 for the years ended December 31, 2000, 1999 and 1998, respectively. 8. Long-Term Debt Long-term debt at December 31 consists of the following: 2000 1999 10.25% senior notes, net of unamortized discount $130,774,160 $130,266,124 Revolving credit facility 61,525,000 55,950,000 Capital lease obligations 1,308,073 1,245,498 ------------ ------------ 193,607,233 187,461,622 Less current portion of long-term debt (254,728) (304,830) ------------ ------------ Total long-term debt $193,352,505 $187,156,792 ============ ============ The fair value of long-term debt, based on the quoted market price for the same or similar issues of debt would be approximately $158,683,000 and $154,395,000 at December 31, 2000 and 1999, respectively. 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. The Revolving Credit Facility with six banks consists of up to a $77.5 million senior secured Revolving Credit Facility and terminates on October 31, 2004. On December 31, 2000, $61,525,000 was drawn down on the facility, excluding letters of credit outstanding at December 31, 2000, of $680,305. At December 31, 2000, there was $75,700,000 available under the facility, excluding amounts outstanding and outstanding letters of credit. Borrowings under the facility are collateralized by substantially all the assets of the Company. 54 Universal Hospital Services, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Interest on loans outstanding under the 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). 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, 2000, the Base Rate Margin was 11.25% and the Eurodollar Rate Margin was 9.76%. Interest on borrowings are paid quarterly or as defined in the agreement. 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 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 Revolving Credit Facility discussed above. In 1999, the Company incurred an extraordinary charge of $811,649 net of deferred tax benefit of $474,000, for the write-off of the related deferred financing costs. 9. Commitments and Contingencies Rental expenses were approximately $5,000,000, $4,100,000 and $3,300,000 for the years ended December 31, 2000, 1999 and 1998, 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, 2000: 2001 $ 4,649,844 2002 4,033,774 2003 2,842,209 2004 1,827,444 2005 915,183 Thereafter 997,228 ----------- Total $15,265,682 =========== 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 these actions may have an impact on the Company's financial results for a particular reporting period, management believes that any such resolution would not have a material adverse effect on the financial position or results of operations of the Company. 55 Universal Hospital Services, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Management Agreement The Company is a party to management agreement with J. W. Childs Associates, L.P. (an affiliate of 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 pays 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 and is 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. Change in Benefit Obligation 2000 1999 1998 (in thousands) Benefit obligation at beginning of year $10,732 $10,870 $ 9,459 Service cost 470 465 334 Interest cost 859 766 678 Actuarial gain (262) (1,075) 662 Benefits paid (331) (294) (263) ------- ------- ------- Benefit obligation at end of year $11,468 $10,732 $10,870 ======= ======= ======= 2000 1999 1998 (in thousands) Fair value of plan assets at beginning of year $10,420 $ 9,705 $ 8,177 Actual return on plan assets 162 1,009 1,791 Benefits paid (331) (294) (263) ------- ------- ------- Fair value of plan assets at end of year $10,251 $10,420 $ 9,705 ======= ======= ======= 56 Universal Hospital Services, Inc. Notes to Financial Statements - --------------------------------------------------------------------------------
2000 1999 1998 (in thousands) Funded status $ (1,217) $ (312) $ (1,165) Unrecognized net actuarial (loss) gain (1,227) (1,747) (479) Accrued benefit liability (144) (172) (199) -------- --------- -------- Accrued benefit liability included in the balance sheet $ (2,588) $ (2,231) $ (1,843) ======== ========= ========
Components of net periodic benefit cost are as follows: 2000 1999 1998 (in thousands) Service cost $ 470 $ 465 $ 334 Interest cost 859 766 678 Expected return on plan assets (873) (815) (630) Recognized net actuarial gain (72) Amortization of prior service cost (27) (27) (27) ----- ----- ----- Net periodic benefit cost $ 357 $ 389 $ 355 ===== ===== ===== Weighted average assumptions at December 31 are as follows: 2000 1999 1998 Discount rate 8.00% 8.25% 6.75% Expected return on plan assets 8.50% 8.50% 8.50% Rate of compensation increase 4.50% 4.50% 4.50% The Company also sponsors a defined contribution plan, which qualifies under Section 401(k) 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 Internal Revenue Service limitation) or after tax. The Company matches 50% of employee contributions. For the years ended December 31, 2000, 1999 and 1998, approximately $377,000, $330,000 and $241,000, 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 $100,000 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. 57 Universal Hospital Services, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 11. Income Taxes The (benefit) provision for income taxes consisted of the following: 2000 1999 1998 Currently payable: Federal $ - $ - $ - State 105,000 75,000 32,000 --------- ----------- ----------- 105,000 75,000 32,000 --------- ----------- ----------- Deferred: Federal (227,000) (1,495,000) (981,000) State (36,000) (235,000) (148,000) --------- ----------- ----------- (263,000) (1,730,000) (1,129,000) --------- ----------- ----------- $(158,000) $(1,655,000) $(1,097,000) ========= =========== =========== Reconciliations between the Company's effective income tax rate and the U.S. statutory rate follow:
2000 1999 1998 Statutory U.S. Federal income tax rate (34.0)% (34.0)% (34.0)% State income taxes, net of U.S. Federal income tax benefit (4.7) (4.8) (3.3) Recapitalization and transaction costs 14.1 Goodwill amortization 10.5 8.6 4.1 Valuation allowance 21.3 Other 3.9 2.5 2.8 -------- ------- ------- Effective income tax rate (3.0)% (27.7)% (16.3)% ======== ======= =======
58 Universal Hospital Services, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- The components of the Company's overall net deferred tax liability at December 31, 2000 and 1999 are as follows: 2000 1999 Deferred tax assets: Accounts receivable $ 551,000 $ 371,000 Accrued and deferred compensation and pension 1,868,000 1,154,000 Inventories 154,000 272,000 Other assets 71,000 71,000 Net operating loss carryforward 14,570,000 10,119,000 ----------- ----------- Deferred tax assets 17,214,000 11,987,000 Valuation allowance (1,116,000) ----------- ----------- Net deferred tax assets 16,098,000 11,987,000 Deferred tax liabilities: Accelerated depreciation 16,098,000 12,250,000 ----------- ----------- Total deferred tax liabilities 16,098,000 12,250,000 ----------- ----------- Net deferred tax liability $ - $ 263,000 =========== =========== At December 31, 2000, the Company had available unused net operating loss carryforwards of approximately $36,900,000. The net operating loss carryforwards will expire at various dates through 2020. 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 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. 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 59 Universal Hospital Services, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 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. Preferred stock dividends at December 31, 2000, 1999 and 1998 were $918,127, $820,867 and $0, respectively. 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. Amortization was $111,105 and $109,258 for the years ended December 31, 2000 and 1999, respectively. 13. Shareholders' Equity 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 termination for cause or resignation 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. At December 31, 2000 and 1999, there was no redemption value on the common stock owned by certain management shareholders. The amount of any such redemption value will be recorded outside of permanent equity. 14. Stock Option Plans 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. 60 Universal Hospital Services, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 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 are granted with option prices based on the estimated fair market value of the Company's common stock at date of grant as determined by the Company's board of directors. Stock option activity with respect to the 1998 Plan, Incentive and Stock Option Plan and Director Plan is as follows:
Incentive and Stock Director 1998 Plan Option Plan Plan --------------------------------------- --------------- --------------- Year Ended Year Ended Year Ended December 31, December 31, December, 31 ----------------------------------------- Shares 2000 1999 1998 1998 1998 Granted 152,000 261,888 2,096,619 Rollover 1,015,220 (1,015,220) Exercised (3,000) (3,052,010) (290,000) Terminated (93,000) (90,000) (30,000) ---------- ---------- ---------- ----------- ---------- December 31: Outstanding, end of year 3,309,799 3,253,799 3,081,911 - - ========== ========== ========== =========== ========== Exercisable 1,236,911 1,177,164 1,015,220 - - ========== ========== ========== =========== ==========
Incentive and Stock Director 1998 Plan Option Plan Plan --------------------------- --------------- -------------- Weighted Average Year Ended Year Ended Exercise Price Year Ended December 31, December 31, December 31, --------------------------- Per Share 2000 1999 1998 1998 1998 Granted $ 3.31 $ 3.18 $ 1.68 Rollover $ 0.77 Exercised $ 0.80 $ 0.76 $ 0.80 Terminated $ 1.98 $ 1.99 $ 1.55 December 31: Outstanding $ 1.59 $ 1.52 $ 1.38 Exercisable $ 0.92 $ 0.87 $ 0.77
61 Universal Hospital Services, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Options outstanding and exercisable at December 31, 2000 for the 1998 Plan are as follows:
Options Outstanding Options Exercisable -------------------------------------------- ---------------------------- Remaining Weighted Weighted Weighted Average Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life (Years) Price Shares Price $0.54 - $0.94 1,012,220 5.5 $0.76 1,012,220 $0.76 $1.55 - $3.31 2,297,579 8.5 $1.95 224,691 $1.65
Had compensation cost for the 1998 Plan been determined based on the options at the date of grant, net loss for the years ended December 31, 2000, 1999 and 1998 would have been reduced to the following pro forma amounts: Pro Forma --------------------------------------------- 2000 1999 1998 Net loss $(5,397,015) $(5,193,151) $(7,829,799) The weighted-average grant-date fair value of options granted under the plans during 2000, 1999 and 1998 was $1.54, $1.24 and $0.40, respectively. The weighted-average grant-date fair value of options was determined by using the fair value of each option grant on the date of grant, utilizing the Black- Scholes option-pricing model and the following key assumptions: 2000 1999 1998 Risk-free interest rates 5.23% to 6.78% 5.21% to 6.24% 4.40% to 5.66% Expected life 10 years 10 years 10 years Expected volatility 0.00% 0.00% 0.00% Expected dividends None None None 15 Noncash Investing and Financing Transactions . Rental equipment purchases included in accounts payable at December 31, 2000, 1999 and 1998 were $2,975,000, $3,000,243 and $8,405,458, respectively. . Accrued dividends at December 31, 2000, 1999 and 1998 were $918,127, $820,867 and $0. . Amortization of bond discount was $529,412, $494,748 and $0 for the years ended December 31, 2000, 1999 and 1998, respectively. 62 Universal Hospital Services, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- . Accretion of discount on Series B, 13% Cumulative Accruing Pay-In-Kind Stock was $111,272, $108,108 and $4,147 for the years ended December 31, 2000, 1999 and 1998, respectively. . In connection with the Company's acquisition of Vital Choice, the Company issued 40,000 shares of common stock valued at $200,000 in partial consideration. . In connection with the Company's acquisition of HCI, the Company issued 256,272 shares of common stock valued at $714,999 in partial consideration. . During 1998, the Company issued preferred stock as dividends totaling $277,000. 63 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 23, 2000, appearing in the 2000 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 23, 2001 64 UNIVERSAL HOSPITAL SERVICES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions ------------------------------ Balance at Charged to Charged to Deductions Balance beginning costs and other from at end Description of period expense accounts reserves of period - -------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts: Year ended December 31, 2000 $1,450,000 $1,249,053 $ (66,474) $1,007,579 $1,625,000 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 Allowance for inventory obsolescence: Year ended December 31, 2000 551,000 272,910 533,462 290,448 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
65 EX-10.9 2 0002.txt EXECUTIVE SEVERANCE PAY PLAN EXHIBIT 10.9 UNIVERSAL HOSPITAL SERVICES, INC. EXECUTIVE SEVERANCE PAY PLAN January 25, 2001 I. Purpose. ------- To provide a severance pay plan for the Executives (as defined below) of the Company who are not eligible for severance pay under any other plan or agreement with the Company. The provisions of this plan will not apply to any Executive who is covered by an employment agreement. Executives who receive severance under this plan will not be eligible to receive severance under any other plan or agreement of the Company. No severance benefits become payable pursuant to this plan in the event of termination of employment upon an Executive's death or disability. II. Definitions. ----------- A. "Cause" means: (i) Executive's continued failure, whether willful, intentional or grossly negligent, after written notice, to perform substantially Executive's duties (the "Duties") as determined by immediate supervisor (Chief Executive Officer or Senior Vice President of the Company (other than as a result of a disability); (ii) dishonesty in the performance of Executive's Duties; (iii) conviction or confession of an act or acts on Executive's part constituting a felony under the laws of the United States or any state thereof; or (iv) any other willful act or omission on Executive's part which is materially injurious to the financial condition or business reputation of the Company or any of its subsidiaries. B. "Date of Termination" means the date specified as Executive's last date of employment in the Company's notice of termination to Executive or Executive's Notice of Resignation for Good Cause to the Company. C. "Resignation For Good Cause" means: Executive termination of employment upon 30 days' written notice to the company, for Good Cause. Executive shall have "Good Cause" for termination of employment if, other than for cause, any of the following has occurred: (i) the Company has reduced or reassigned a material portion of Executive duties (per Executive job description); (ii) the Executive's 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; or (iii) the Company has required Executive to relocate in excess of fifty (50) miles from the location where the Executive is currently employed. C. "Executive" means the President, any Senior Vice President or any Vice President of the Company as such titles are in use effective 1/25/01. D. "Severance Period" means the period from the Date of Termination through the date, which is 12 months from the Date of Termination. III. Severance Pay. ------------- A. Executives who separate from the Company and who sign the general release and other agreement described in Section IV below are entitled to the severance pay specified below; provided, however, that (1) an Executive that is separated from employment due to dismissal for Cause is not entitled to any severance pay and (2) an Executive that voluntarily resigns, except for Good Cause, from employment is not entitled to severance pay. B. Upon qualifying for severance pay, Executive will be paid the following amounts in the following manner: (i) Executive will continued to be paid his or her base salary through the Severance Period, in the manner and at the times paid during such Executive's employment with the Company. (ii) Company shall provide the Executive continuation of medical and dental insurance benefits for the duration of the Severance Period. (iii) If prior to the date which is 12 months after the Date of Termination, Executive finds other employment, the amount of severance payments payable to Executive after such termination in accordance with B(i) above will be reduced by the value of the compensation Executive receives in his or her new employment through the date which is 12 months after the Date of Termination; B(ii) shall be similarly discontinued if similar medical and dental benefits are secured with new employer through the date which is 12 months after the Date of Termination. (iv) If termination is pursuant to Resignation for Good Cause, The Company shall provide the Executive a prorated portion of the bonus earned for the then current fiscal year, based upon the number of days Executive was employed during that year. Such Executive bonus shall be payable at the time annual bonuses are paid to the other executives employed by the Company, on the last day of the Company's fiscal year. (v) Executive will be paid or otherwise provided such other benefits as may be required by law. (vi) All severance payments are subject to any required withholding. IV. General Release and Other Agreements. ------------------------------------ Executive will not be entitled to receive any of the severance pay described above until such time as Executive signs (A) an effective general release of all claims against the Company and its affiliates in the form and manner prescribed by the Company and (B) an agreement further providing (i) Executive's agreement not to disclose or use confidential information of the Company, (ii) Executive's agreement during the Severance Period not to compete with the Company in the medical equipment rental business, (iii) Executive's agreement during the Severance Period not to solicit for employment or hire any employee of the Company, and (iv) Executive's agreement during the Severance Period not to solicit as a customer or client of medical equipment rental business and customer or client of the Company. A failure to execute such a general release and other agreements within one month of Executive's Date of Termination shall result in the loss of any rights to receive payments or benefits under this plan. VI. Amendment and Modification of Plan. This plan may be modified, ---------------------------------- amended or terminated at any time by the CEO and the Board of Directors of the Company. VII. No Employment Rights. Neither this plan for the benefits hereunder -------------------- shall be a term of the employment of any employee, and the Company shall not be obligated in any way to continue the plan. The terms of this plan shall not give any employee the right to be retained in the employment of the Company. EX-12.1 3 0003.txt DETERMINATION OF RATIO OF EARNINGS Exhibit 12.1
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- DETERMINATION OF RATIO OF EARNINGS TO - ------------------------------------- FIXED CHARGES: - -------------- (Loss) income before (benefit) $(5,236) $(5,977) $(6,737) $ 5,046 $ 1,851 provision for income 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 946 1,181 858 12 - Interest expense 20,747 18,013 11,234 3,012 2,518 --------------------------------------------------------- Earnings before fixed charges 16,457 13,217 13,320 9,789 6,888 Fixed charges Amortization of deferred financing costs 946 1,181 858 12 - Interest expense 20,747 18,013 11,234 3,012 2,518 --------------------------------------------------------- Total fixed charges $21,693 $19,194 $12,092 $ 3,024 $ 2,518 Ratio of earnings to fixed charges 0.8x 0.7x 1.1x 3.2x 2.7x ---------------------------------------------------------
EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
5 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. 1,000 YEAR DEC-31-2000 JAN-01-2000 DEC-31-2000 0 0 28,623 1,625 2,767 32,197 205,292 106,142 180,070 22,619 0 0 7,236 161 (47,480) 180,070 10,301 106,005 8,147 56,626 33,868 1,249 20,747 (5,236) (158) (5,078) 0 0 0 (5,078) 0 0
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