FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 EXCHANGE ACT OF 1934
For the transition period from _______________________
Commission file Number: 333-49743
UNIVERSAL HOSPITAL SERVICES, INC.
---------------------------------
(Exact Name of Registrant as specified in its charter)
Minnesota 41-0760940
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1250 Northland Plaza
3800 West 80th Street
Bloomington, Minnesota 55431-4442
---------------------------------
(Address of principal executive offices)
(Zip Code)
612-893-3200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Universal Hospital Services, Inc.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
----------------------------
1999 1998
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Revenues:
Equipment rentals $ 20,345,590 $ 15,137,182
Sales of supplies and equipment, and other 3,087,691 1,296,611
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Total revenues 23,433,281 16,433,793
Costs of rentals and sales:
Cost of equipment rentals 4,940,664 3,619,170
Rental equipment depreciation 3,975,000 3,825,000
Cost of supplies and equipment sales 2,000,239 823,975
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Total cost of rentals and sales 10,915,903 8,268,145
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Gross profit 12,517,378 8,165,648
Selling, general and administrative 7,724,899 4,983,869
Recapitalization and transaction costs 5,027,905
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Operating income (loss) 4,792,479 (1,846,126)
Interest expense 4,182,779 1,516,207
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Income (loss) before income taxes and extraordinary charge 609,700 (3,362,333)
Provision (benefit) for income taxes 359,000 (340,000)
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Net income (loss) before extraordinary charge 250,700 (3,022,333)
Extraordinary charge, net of deferred tax benefit of $1,300,000 1,863,020
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Net income (loss) $ 250,700 ($ 4,885,353)
============ ============
The accompanying notes are an integral part of the unaudited financial
statements.
2
Universal Hospital Services, Inc.
BALANCE SHEETS
ASSETS
March 31, December 31,
1999 1998
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(Unaudited)
Current assets:
Accounts receivable, less allowance for doubtful accounts of $1,100,000
and $964,000 at March 31, 1999 and December 31, 1998, respectively $ 21,723,472 $ 17,900,816
Inventories 3,670,504 2,617,019
Deferred income taxes 524,000 499,000
Other current assets 1,735,106 1,669,790
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Total current assets 27,653,082 22,686,625
Property and equipment, net:
Rental equipment, at cost less accumulated depreciation 81,452,467 73,057,730
Property and office equipment, at cost less accumulated depreciation 3,699,705 3,496,370
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Total property and equipment, net 85,152,172 76,554,100
Intangible assets:
Goodwill, less accumulated amortization 37,701,958 37,924,246
Other, primarily deferred financing costs, less accumulated amortization 7,994,453 7,055,695
------------ ------------
Total assets $158,501,665 $144,220,666
============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Current liabilities:
Current portion of long-term debt $ 305,641 $ 306,093
Accounts payable 7,657,980 10,127,962
Accrued compensation and pension 2,883,333 3,139,062
Accrued interest 1,357,942 3,675,921
Other accrued expenses 693,731 648,500
Bank overdraft 1,151,769 2,129,795
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Total current liabilities 14,050,396 20,027,333
Long-term debt, less current portion 169,284,218 149,809,706
Deferred compensation and pension 1,951,698 1,842,948
Deferred income taxes 3,331,000 2,966,000
Series B, 13% Cumulative Convertible Preferred Stock, $0.01 par value;
25,000 shares authorized, 6,246 shares issued and outstanding at
March 31, 1999 and December 31, 1998, net of unamortized discount,
including accrued stock dividends 5,504,487 5,277,000
Commitments and contingencies
Shareholders' (deficiency) equity:
Common Stock, $0.01 par value; 50,000,000 shares authorized at March 31,
1999 and December 31, 1998, 16,028,450 shares issued and
outstanding at March 31, 1999 and December 31, 1998 160,285 160,285
Additional paid-in capital 2,051,026 2,051,026
Accumulated deficit (37,814,202) (37,864,701)
Stock subscription receivable (17,243) (48,931)
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Total shareholders' (deficiency) equity (35,620,134) (35,702,321)
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Total liabilities and shareholders' (deficiency) equity $158,501,665 $144,220,666
============ ============
The accompanying notes are an integral part of the unaudited financial
statements.
3
Universal Hospital Services, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
------------------------------
1999 1998
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Cash flows from operating activities:
Net income (loss) $ 250,700 ($ 4,885,353)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 4,202,532 3,998,318
Amortization 941,187 311,795
Provision for doubtful accounts 464,886 40,686
Loss on sales of equipment 296,503 43,295
Extraordinary charge less cash paid 303,314
Deferred income taxes 340,000 (1,186,000)
Changes in operating assets and liabilities, net of impact
of acquisitions:
Accounts receivable (3,797,535) (1,462,060)
Inventories and other operating assets (1,082,801) (1,520,109)
Accounts payable and accrued expenses 671,727 644,654
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Net cash provided by (used in) operating activities 2,287,199 (3,711,460)
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Cash flows from investing activities:
Rental equipment purchases (17,988,386) (6,992,242)
Property and office equipment purchases (417,542) (119,351)
Proceeds from disposition of rental equipment 300,442 133,415
Acquisitions (845,000)
Other (1,734,963) (114,992)
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Net cash used in investing activities (20,685,449) (7,093,170)
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Cash flows from financing activities:
Proceeds under loan agreements 49,875,000 121,628,000
Payments under loan agreements (30,498,724) (40,199,766)
Proceeds from issuance of common stock, net of offering costs 20,743,436
Repurchase of common stock (84,734,914)
Prepayment of deferred loan costs (5,871,418)
Tax benefit of nonqualified stock options 1,042,000
Change in book overdraft (978,026) (717,675)
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Net cash provided by financing activities 18,398,250 11,889,663
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Net change in cash and cash equivalents -- 1,085,033
Cash and cash equivalents at beginning of period -- --
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Cash and cash equivalents at end of period $ -- $ 1,085,033
============= =============
Supplemental cash flow information:
Interest paid $ 9,827 $ 726,189
============= =============
Income taxes paid $ 129,709 $ 48,000
============= =============
Rental equipment purchases in accounts payable $ 2,969,079 $ 446,385
============= =============
The accompanying notes are an integral part of the unaudited financial
statements.
4
Universal Hospital Services, Inc.
NOTES TO UNAUDITED QUARTERLY REPORT FINANCIAL STATEMENTS
1. Basis of Presentation:
The condensed financial statements included in this Form 10-Q have been
prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed, or omitted, pursuant to such rules and
regulations. These condensed financial statements should be read in
conjunction with the financial statements and related notes included in
the Company's Form 10-K filing and Form S-4 filing filed with the
Securities and Exchange Commission on March 31, 1999 and April 26,
1999, respectively.
The interim financial statements presented herein as of March 31, 1999,
and for the three months ended March 31, 1999 and 1998, reflect, in the
opinion of management, all adjustments necessary for a fair
presentation of financial position and the results of operations for
the periods presented. Except as discussed in Notes 3 and 5 below,
these adjustments are all of a normal, recurring nature. The results of
operations for any interim period are not necessarily indicative of
results for the full year.
The December 31, 1998 Balance Sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
2. Acquisitions
Home Care Instruments, Inc.
On July 30, 1998, the Company acquired all of the outstanding capital
stock of HCI Acquisition Corp. (HCI), the parent company of Home Care
Instruments, Inc. for approximately $19.3 million, including the
repayment of approximately $3.6 million of outstanding indebtedness of
HCI.
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.
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), for approximately
$14.6 million, including the repayment of approximately $2.7 million of
outstanding indebtedness of PCH.
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.
5
Medical Rentals Stat, Inc.
On November 5, 1998, the Company acquired Medical Rentals Stat, Inc.
(MRS), for approximately $1.8 million, including the repayment of
approximately $0.4 million of outstanding indebtedness of MRS.
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.
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
Nashville. EMS also supplies disposable respiratory products used in
connection the respiratory equipment.
The following summarizes unaudited proforma results of operations for
the three months ended March 31, 1998 assuming the acquisitions of HCI,
PCH and MRS occurred as of January 1, 1998. The impact of the
acquisition of EMS is not material.
Three Months Ended
March 31, 1998
------------------
Total Revenues $20,900,000
Net loss before extraordinary charge $ 2,992,000
3. Recapitalization of the Company
The Recapitalization was effected through the merger (the "Merger") of
UHS Acquisition Corp., a newly formed Minnesota corporation controlled
by J.W. Childs Equity Partners, L.P. ("Childs") with and into the
Company. The Recapitalization and Merger was effective on February 25,
1998.
In connection with the Recapitalization, (i) the Company's previous
shareholders (other than the new senior management team and certain
other continuing members of management) received, in consideration for
the cancellation of approximately 5.3 million shares of the Company's
Common Stock and options to purchase approximately 344,000 shares of
Common Stock, cash in the aggregate amount of approximately $84.7
million (net of aggregate option exercise price), or $15.50 per share;
(ii) the Company repaid outstanding borrowings of approximately $35.5
million under existing loan agreements; (iii) the Company paid fees and
expenses of approximately $11.5 million related to the Recapitalization
of which approximately $5.9 million was capitalized as deferred
financing costs and $0.6 million which was recorded in equity, and (iv)
the Company paid approximately $3.3 million in severance payments to
certain non-continuing members of management, of which $0.5 million had
already been accrued.
In order to finance the Recapitalization, the Company: (i) received an
equity contribution of approximately $21.3 million in cash from Childs
and affiliates and the management investors; (ii) issued $100.0 million
in aggregate principal amount of 10.25% Senior Notes due 2008, and
(iii) borrowed approximately $14.3 million under a new Revolving Credit
Facility. In addition, the Management Investors retained their existing
shares of Common Stock and options to purchase shares of Common Stock
which had a total value of $3.7 million based upon the Merger
Consideration and represent, together with new investments by such
persons, approximately 20% of the capital stock of the Company on a
fully diluted basis.
6
The transaction was structured as a leveraged recapitalization for
accounting purposes with all assets and liabilities carried over at
historical costs.
During the first three months of 1998, the Company incurred $5,027,905
of non-recurring expenses, consisting of legal, auditing, and other
advisory related fees, associated with the Recapitalization.
4. New Senior Notes
On January 26, 1999, the Company issued an additional $35 million of
its 10.25% Senior Notes and received proceeds of $29.8 million, net of
original issue discount, which mature on March 1, 2008. These proceeds
were used to reduce borrowings under the Revolving Credit Facility.
Interest is payable semiannually in arrears on March 1 and September 1
of each year, commencing March 1, 1999.
7
5. Change in Rental Equipment Depreciation Life
Effective July 1, 1998, the Company changed the estimated remaining
useful lives of all of its rental equipment from a range of five 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 is estimated to have resulted in a reduction of
depreciation expense in the three months ended March 31, 1999 of
approximately $0.8 million.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following should be read in conjunction with the accompanying financial
statements and notes.
Results of Operations
The following table provides information on the percentages of certain items of
selected financial data bear to total revenues and also indicates the percentage
increase or decrease of this information over the prior comparable period:
Percent of Total Revenues Percentage Increase
(Decrease)
------------------------- -------------
Three Months Ended Qtr 1 1999
March 31, Over Qtr 1
1999 1998 1998
-------------------- -----------
(Unaudited) (Unaudited)
Revenues:
Equipment rentals 86.82% 92.11% 34.41%
Sales of supplies and equipment, and other 13.18% 7.89% 138.14%
--------- ---------
Total revenues 100.00% 100.00% 42.59%
Costs of rentals and sales:
Cost of equipment rentals 21.08% 22.02% 36.51%
Rental equipment depreciation 16.96% 23.28% 3.92%
Cost of supplies and equipment sales 8.54% 5.01% 142.75%
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Total cost of rentals and sales 46.58% 50.31% 32.02%
--------- ---------
Gross profit 53.42% 49.69% 53.29%
Selling, general and administrative 32.97% 30.33% 55.00%
Recapitalization and transaction costs 30.59%
--------- ---------
Operating income (loss) 20.45% -11.23% n/a
Interest expense 17.85% 9.23% 175.87%
--------- ---------
Income (loss) before income taxes and extraordinary charge 2.60% -20.46% n/a
--------- ---------
Provision (benefit) for income taxes 1.53% -2.07% n/a
Net income (loss) before extraordinary charge 1.07% -18.39% n/a
Extraordinary charge, net of tax benefit of $1,300,000 11.34%
--------- ---------
Net income (loss) 1.07% -29.73% n/a
========= =========
9
General
We are a leading nationwide provider of moveable medical equipment to more than
4,500 hospitals and alternate care providers through our equipment rental and
outsourcing programs.
The following discussion addresses our financial condition as of March 31, 1999
and the results of operations and cash flows for the three months ended March
31, 1999 and 1998, respectively. This discussion should be read in conjunction
with the financial statements included elsewhere herein and the Management's
Discussion and Analysis and Financial sections of our Form 10-K and Form S-4
filings filed with the Securities and Exchange Commission on March 31, 1999 and
April 26,1999, respectively.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: Statements in this filing looking forward in time involve risk and
uncertainties. The words "believes," "does not believe," "no reason to believe,"
"expects," "plans," "intends," "estimates," "anticipated" or "anticipates," and
similar expressions, as they relate to the Company or our management, are
intended to identify forward-looking statements. The following factors, among
others, could cause our actual results to differ materially from those expressed
in any forward-looking statements: our substantial outstanding debt and high
degree of leverage and the continued availability, terms and deployment of
capital, including our ability to service or refinance debt; restrictions
imposed by the terms of our debt; adverse regulatory developments affecting,
among other things, the ability of our customers to obtain reimbursement of
payments made to us; 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, including inflation and
monetary conditions; actions by competitors; availability of and ability to
retain qualified personnel; and unanticipated costs or difficulties or delays in
implementing our Year 2000 compliance modifications. For a more complete
discussion see the caption "Industry Assessment" and in the company's Form 10-K
filing filed with the Securities and Exchange Commission on March 31, 1999 under
the caption "Business--Risk Factors".
Industry Assessment
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. We believe that market reform
is continuing with movement toward managed care, health care related
consolidations and the formation of integrated health care systems. There is an
effort by providers of health care to coordinate all aspects of patient care
irrespective of delivery location. Likely changes in reimbursement methodology,
and a gradual transition toward fixed, per-capita payment systems and other
risk-sharing mechanisms, will reward health care providers who improve
efficiencies and effectively manage their costs, while providing care in the
most appropriate setting. Although future reimbursement policies remain
uncertain and unpredictable, the Company believes that the approved five-year
budget and Taxpayer Relief Act of 1997, which will be financed largely through
cuts in the growth of Medicare spending, will continue to place focus on cost
containment in health care.
We believe our Pay-Per-Use and other rental programs respond favorably to the
current reform efforts by providing high quality equipment through programs
which help health care providers improve their efficiency while effectively
matching costs to patient needs, wherever that care is being provided. While our
strategic focus appears consistent with health care providers' efforts to
contain costs and improve efficiencies, there can be no assurances as to how
health care reform will ultimately evolve and the impact it will have on us.
Because the capital equipment procurement decisions of health care providers are
significantly influenced by the regulatory and political environment for health
care, historically we have experienced uncertain adverse operating trends in
periods when significant health care reform initiatives were under consideration
and uncertainty remained as to their likely outcome. To the extent general cost
containment pressures on health care spending and reimbursement reform, or
uncertainty as to possible reform, causes hospitals and alternate care providers
to defer the procurement of medical equipment, reduce their capital expenditures
or change significantly their utilization of medical equipment, there could be a
material adverse effect on our business, financial condition and results of
operations.
10
Recapitalization, Financing and Related Transactions
On November 25, 1997, the Board of Directors of the Company entered into the
Merger Agreement with UHS Acquisition Corp. and J.W. Childs Equity Partners,
L.P. and the Recapitalization was completed on February 25, 1998. (See footnote
3 to the financial statements).
Completed Acquisitions
On July 30, 1998, we completed the purchase of Home Care Instruments, Inc.
(HCI), a privately held company headquartered in St. Louis, Missouri. (See
footnote 2 to the financial statements).
On August 17, 1998, we completed the purchase of Patient's Choice Healthcare,
Inc, (PCH), a privately held company headquartered in Columbus, Ohio. (See
footnote 2 to the financial statements).
On November 5, 1998, we completed the purchase of Medical Rentals Stat, Inc.
(MRS), a privately held company headquartered in Oklahoma City, Oklahoma. (See
footnote 2 to the financial statements).
On March 31, 1999, we completed the purchase of Express Medical Supply, Inc.
(EMS), a privately held company headquartered in Nashville, Tennessee. (See
footnote 2 to the financial statements).
Equipment Rental Revenues
Equipment rental revenues were $20.3 million for the first quarter of 1999,
representing a $5.2 million, or 34.4% increase from equipment rental revenues of
$15.1 million for the same period of 1998. After giving affect to the
acquisitions of HCI, PCH and MRS, equipment rental revenue would have increased
15.2% for the first quarter compared to the same period in the prior year. The
rental revenue increase resulted from the acquisitions of HCI, PCH, and MRS,
which contributed during the quarter approximately $2.5 million of rental
revenue growth, combined with continued growth at our acute care hospital
customers and at both established and new district offices.
Sales of Supplies and Equipment, and Other
Sales of supplies and equipment, and other were $3.1 million for the first
quarter of 1999, representing a $1.8 million, or 138.1%, increase from sales of
supplies and equipment, and other of $1.3 million for the same period of 1998.
These increases are the result of the acquisitions of HCI, PCH and MRS. PCH
places a greater emphasis on sales of disposable and generates approximately two
thirds of its revenue from sales of disposables to health care providers.
Cost of Equipment Rentals
Cost of equipment rentals were $4.9 million for the first quarter of 1999,
representing a $1.3 million, or 36.5%, increase from cost of equipment rentals
of $3.6 million for the same period of 1998. Cost of equipment rentals, as a
percentage of equipment rental revenues, increased to 24.3% for the first
quarter of 1999 from 23.9% for the same period of 1998. As a percentage of
equipment rental revenues, cost of equipment rentals increased primarily as a
result of lower support staff salaries in the first quarter of 1998 as a result
of high turnover during the 1997 period of ownership uncertainty.
Rental Equipment Depreciation
Rental equipment depreciation was $3.9 million for the first quarter of 1999,
representing a $0.1 million, or 3.9% increase from rental equipment depreciation
of $3.8 million for the same period of 1998. Rental equipment depreciation as a
percentage of equipment rental revenues decreased to 19.5% in the first quarter
of 1999 from 25.3% for the same period of 1998. These decreases were the result
of our change in rental equipment depreciation lives from a range of five to
seven years to seven years for all rental equipment (See footnote 5 to the
financial statements). This change was effective July 1, 1998. The change in
rental equipment depreciation lives decreased rental equipment depreciation by
approximately $0.8 million in the first quarter of 1999.
11
Gross Profit
Total gross profit was $12.5 million for the first quarter of 1999, representing
a $4.4 million or 53.3% increase from total gross profits of $8.2 million for
the same period of 1998. Total gross profit increased to 53.4% of the total
revenues for the first quarter of 1999 from 49.7% of total revenues for the same
period of 1998. These increases are mainly due to the change in rental equipment
depreciation lives partially offset by the increased cost of equipment rentals
and increased sales 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
increased to 56.1% for the first quarter of 1999 from 50.8% for the same period
in 1998. These increases were predominately due to the previously discussed
change in rental equipment depreciation and cost of equipment rentals.
Gross margin on sales of supplies and equipment and other decreased to 35.2% in
the first quarter of 1999 from 36.5% for the same period of 1998. Gross profit
dollars increased predominantly due to the increase in alternate care sales from
PCH and HCI of approximately $1.8 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $7.7 million in the first
quarter of 1999, representing a $2.7 million, or 55.0% increase from selling,
general and administrative expenses of $5.0 million for the same period of 1998.
The increase in the first quarter of 1999 over the comparable quarter in 1998 is
a result of the acquisitions of HCI, PCH and MRS during the third quarter of
1998, an increase in employee count in 1999 over 1998, the impact of the
promotional employee incentive plan and an increase in bad debt expense during
the quarter. Selling, general and administrative expenses as a percentage of
total revenue increased to 33.0% for the first quarter of 1999 from 30.3% for
the same period in 1998. This was a result of amortization of goodwill from the
acquisitions and the previously mentioned items.
Recapitalization and Transaction Costs
For the first three months of 1998, we incurred $5.0 million of non-recurring
expenses, consisting primarily of legal, accounting, and other advisory related
fees, associated with our recapitalization.
Interest Expense
Interest expense was $4.2 million for the first quarter of 1999, representing an
increase of $2.7 million from interest expense of $1.5 million in the same
period of 1998. These increases primarily reflect our recapitalization, on
February 25, 1998, incremental borrowings associated with capital equipment
additions and the acquisitions of HCI PCH and MRS. Average borrowings increased
to $161.7 million during the first quarter of 1999 from $74.2 million for the
same period in 1998.
Income Taxes
Our effective income tax rate for the first three months of 1999 of 58.9%
differed from the statutory income tax rate of 34.0% primarily due to
amortization of goodwill that is not deductible for income tax purposes.
Extraordinary Charge
As a result of our recapitalization and Senior Note issuance in the first
quarter of 1998, we prepaid existing notes and a credit facility totaling $35.5
million, incurred a prepayment penalty of $2.9 million, and wrote off deferred
finance costs of $0.3 million. This amount was reduced by the tax affect of
these expenses of approximately $1.3 million.
Net Income
Net income was $0.3 million for the first quarter of 1999, representing an
increase of $3.3 million from a net loss of ($3.0) million in the same period of
1998. This change in net income is due primarily to our recapitalization in
1998.
12
EBITDA
We believe earnings before interest, taxes, depreciation, and amortization
("EBITDA") to be a measurement of operating performance. EBITDA for the first
quarter of 1999 was $9.9 million versus $2.5 million for the same period of
1998. Adjusted EBITDA, which adjusts for non-recurring recapitalization and
transaction costs, was $9.9 million and $7.5 million for the first quarter of
1999 and 1998, respectively.
Quarterly Financial Information: Seasonality
Quarterly operating results are typically affected by seasonal factors.
Historically, our first and fourth quarters are the most profitable, reflecting
increased hospital utilization during the fall and winter months.
Liquidity and Capital Resources
Historically, we have financed our equipment purchases primarily through
internally generated funds and borrowings under our existing revolving credit
facility. As an asset intensive business, we have required continued access to
capital to support the acquisition of equipment for rental to our customers.
Exclusive of acquisitions, we expect to purchase $29.0 million of rental
equipment in 1999, of which approximately $10.5 million is estimated to be
maintenance capital expenditures.
During the first three months of 1999 and 1998, net cash flows provided by (used
in) operating activities were $2.2 million and ($3.7) million, respectively. Net
cash flows used in investing activities were $20.7 million and $7.1 million, in
each of these periods. Net cash flows provided by financing activities were
$18.4 million and $11.9 million, respectively.
Our principal sources of liquidity are expected to be cash flows from operating
activities and borrowings under our 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 March 31, 1999, we are capitalized with $135.0 million of Outstanding
Notes and $38.3 million outstanding under our $50.0 million senior revolving
credit facility. Interest on loans outstanding under our revolving credit
facility is payable at a rate per annum, selected at option equal to the Base
Rate plus a margin of 1.00% (the "Base Rate Margin"), or the adjusted Eurodollar
Rate plus a margin of 2.25% (the "Eurodollar Rate Margin"). Commencing September
30, 1998, the Eurodollar Rate Margin and the Base Rate Margin used to calculate
such interest rates may be adjusted if we satisfy certain leverage ratios. Our
revolving credit facility contains restrictive covenants which, among other
things, limit us from entering into additional indebtedness, dividends,
transactions with affiliates, assets sales, acquisitions, mergers, and
consolidations, liens and encumbrances and prepayments of other indebtedness.
On January 26, 1999, we issued an additional $35 million of our 10.25% Senior
Notes and received proceeds of approximately $29.8 million, net of the original
issue discount. The proceeds were used to reduce borrowing under our revolving
credit facility.
We believe that with the proceeds from the issuance of the $35 million of Notes
and based on current levels of operations and anticipated growth, cash from
operations, together with other sources of liquidity, including borrowings
available under our revolving credit facility, will be sufficient over the next
several years to fund anticipated capital expenditures and make required
payments of principal and interest on our debt, including payments due on the
Notes and obligations under our revolving credit facility. We believe that our
ability to repay the Notes and amounts outstanding under our revolving credit
facility at maturity will require additional financing. There can 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. In addition, we continually
evaluate potential acquisitions and expect to fund acquisitions from our
available sources of liquidity, including borrowings under our revolving credit
facility.
Our expansion and acquisition strategy may require substantial capital, and no
assurance can be given 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.
13
In the first quarter of 1998, we incurred non-recurring costs related to our
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).
The Year 2000 Issue
Many currently installed computer systems and software are coded to accept only
two-digit entries in the data code fields. These data code fields will need to
accept four-digit entries to distinguish 21st century dates from 20th century
dates. This problem could result in system failures or miscalculations causing
disruptions of business operations (including, among other things, a temporary
inability to process transactions, send invoices or engage in other similar
business activities). As a result, many companies' computer systems and software
will need to be upgraded or replaced in order to comply with Year 2000
requirements. The potential global impact of the Year 2000 problem is not known,
and, if not corrected in a timely manner, could affect us and the United States
and the world economy generally.
Our Quality Assurance Department procedures currently contain steps to include
Year 2000-compliance verification for all current and future rental products. We
have been contacting the rental equipment manufacturers regarding Year 2000
compliance. The equipment generally falls into four categories:
o Equipment that is currently Year 2000 compatible,
o Equipment that does not need date processing and therefore is
compatible,
o Equipment that will require the date to be manually reset (The
equipment will continue to function but may record or print out the
incorrect year),
o Equipment that will require software or hardware upgrades (The upgrades
will be completed by our technicians at no material additional expense
to us. It is estimated that the costs of the upgrades, which will be
capitalized, will be approximately $275,000.), and
o Equipment that will need to be disposed (We anticipate the net book
value of this equipment will be immaterial and will be disposed of over
the next three quarters.).
Most of our equipment is currently Year 2000 compliant, and we believe that
compliance for all of our products will be achieved prior to January 1, 2000.
We are currently using line management to address internal and external Year
2000 issues. Our internal financial and other computer systems are being
reviewed to assess and remediate Year 2000 problems. Our assessment of internal
systems includes our informational technology ("IT") as well as non-IT systems.
Our Year 2000 IT compliance program includes the following phases: identifying
systems that need to be modified or replaced; carrying out remediation work to
modify existing systems or convert to new systems; and conducting validation
testing of systems and applications to ensure compliance. We are currently in
the carrying out all phases of the compliance program. We formed a project team
in the first quarter of 1999 consisting of representatives from our Information
Technology, Finance, Quality Assurance, Sales, and Legal Departments to address
other internal and external Year 2000 issues.
The amount of remediation work required to address Year 2000 problems is not
expected to be extensive. We have or are currently replacing certain of our
financial and operational systems, and we believe that the new equipment and
software substantially addresses Year 2000 issues. However, we will be required
to modify some of our existing software in order for our computer systems to
function properly in the Year 2000 and thereafter. We estimates that we will
complete our Year 2000 compliance program for all of our significant internal
systems no later that September 30, 1999.
In addition, we are requesting and will continue to gain assurances from our
major suppliers that the suppliers are addressing the Year 2000 issue and that
products purchased by us from such suppliers will function properly in the
14
Year 2000. Also, contacts are being made with our major customers. These actions
are intended to help mitigate the possible external impact of the Year 2000
problem. However, it is impossible to fully assess the potential consequences in
the event service interruptions from suppliers occur or in the event that there
are disruptions in such infrastructure areas as utilities, communications,
transportation, banking and government.
The total estimated cost for resolving our Year 2000 IT issues is approximately
$425,000, of which approximately $180,000 has been charged to earnings through
March 31, 1999. The total cost estimate includes the cost of replacing
non-compliant systems as a remediation cost in cases where we have accelerated
plans to replace such systems. Estimates of Year 2000 cost are based on numerous
assumptions, and there can be no assurance that the estimates are correct or
that actual cost will not be materially greater than anticipated.
Based on our assessments to date, we believe we will not experience any material
disruption as a result of Year 2000 problems in information processing or
interface with major customers, or with processing orders and billing. However,
if certain critical third-party providers, such a those providers supplying
electricity, water or telephone service, experience difficulties resulting in
disruption of service to us, a shutdown of our operations at individual
facilities could occur for the duration of the disruption. We have not yet
developed a contingency plan to provide for continuity of processing in such
event of various problem scenarios, but we will assess the need to develop such
a plan based on the outcome of our validation phase of our Year 2000 compliance
program and the results of surveying our major suppliers and customers. Assuming
no major disruptions in service from utility companies, or other critical
third-party providers, we believe that we will be able to manage our total Year
2000 transition without any material effect on our results of operations or
financial condition.
Item 2A: Quantitative and Qualitative Disclosures about Market Risk
The Company does not have any liquid investments. Cash is kept to a minimum
through use of the Company's Revolving Credit Facility. The Company's exposure
to interest rate risk is mainly through its borrowing under its secured December
31, 1998 the Company was primarily exposed to the London Interbank Offered Rate
(LIBOR) interest rate on its borrowings under the Revolving Credit Facility. The
Company does not use derivative financial instruments.
15
Item 3. Submission of Matters to a Vote of Security Holders
We do not have a class of equity securities registered under Section 15(d) or
Section 12 of the Securities Exchange Act.
On March 10, 1999 at a regular meeting of our shareholders, the shareholders
approved the re-election of the following nominees for the board of directors:
David E. Dovenberg, Jerry D. Horn, Steven G. Segal and Edward Yun and for the
election of Samuel B. Humphries and also adopted our 1998 Stock Option Plan.
There were 15,903,319 shares of stock present by proxy at the meeting. All of
such shares were voted in favor of each of the nominees and the 1998 Stock
Option Plan.
Item 4. Exhibits and Reports on Form 8-K
(a) Exhibits:
(12) Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K:
None
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SIGNATURES
The Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1999
Universal Hospital Services, Inc.
By /s/ David E. Dovenberg
---------------------------
David E. Dovenberg,
President and Chief Executive Officer
By /s/ Gerald L. Brandt
---------------------------
Gerald L. Brandt,
Vice President of Finance and
Chief Financial Officer
17
Universal Hospital Services, Inc.
EXHIBIT INDEX TO REPORT ON FORM 10-Q
Exhibit
Number Description Page
- ------ ----------- ----
12 Ratio of Earnings to Fixed Charges 19
18