FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________
Commission file Number: 333-49743
UNIVERSAL HOSPITAL SERVICES, INC.
--------------------------------
(Exact Name of Registrant as specified in its charter)
Minnesota 41-0760940
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1250 Northland Plaza
3800 West 80/th/ Street
Bloomington, Minnesota 55431-4442
---------------------------------
(Address of principal executive offices)
(Zip Code)
612-893-3200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Universal Hospital Services, Inc.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues:
Equipment rentals $ 19,011,360 $ 14,022,692 $ 39,356,950 $ 29,159,874
Sales of supplies and equipment, and other 2,962,254 1,069,825 6,049,945 2,366,436
------------ ------------ ------------ ------------
Total revenues 21,973,614 15,092,517 45,406,895 31,526,310
Costs of rentals and sales:
Cost of equipment rentals 5,655,803 3,657,219 10,596,467 7,276,389
Rental equipment depreciation 4,330,000 4,020,000 8,305,000 7,845,000
Cost of supplies and equipment sales 2,058,786 733,885 4,059,025 1,557,860
------------ ------------ ------------ ------------
Total cost of rentals and sales 12,044,589 8,411,104 22,960,492 16,679,249
------------ ------------ ------------ ------------
Gross profit 9,929,025 6,681,413 22,446,403 14,847,061
Selling, general and administrative 7,205,880 4,435,368 14,930,779 9,419,237
Recapitalization and transaction costs 5,027,905
------------ ------------ ------------ ------------
Operating income 2,723,145 2,246,045 7,515,624 399,919
Interest expense 4,395,968 2,876,107 8,578,747 4,392,314
------------ ------------ ------------ ------------
Loss before benefit for income taxes and extraordinary charge (1,672,823) (630,062) (1,063,123) (3,992,395)
Benefit for income taxes (1,656,000) (338,000) (1,297,000) (678,000)
------------ ------------ ------------ ------------
Net (loss) income before extraordinary charge (16,823) (292,062) 233,877 (3,314,395)
Extraordinary charge, net of deferred tax benefit of
$1,300,000 1,863,020
------------ ------------ ------------ ------------
Net (loss) income ($16,823) ($292,062) $ 233,877 ($5,177,415)
============ ============ ============ ============
The accompanying notes are an integral part of the unaudited financial
statements.
2
Universal Hospital Services, Inc.
BALANCE SHEETS
ASSETS
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
Current assets:
Accounts receivable, less allowance for doubtful accounts of $1,040,000
and $964,000 at June 30, 1999 and December 31, 1998, respectively $ 21,641,448 $ 17,900,816
Inventories 3,551,239 2,617,019
Deferred income taxes 2,180,000 499,000
Other current assets 1,400,154 1,669,790
------------ ------------
Total current assets 28,772,841 22,686,625
Property and equipment:
Rental equipment, at cost less accumulated depreciation 84,382,166 73,057,730
Property and office equipment, at cost less accumulated depreciation 4,073,313 3,496,370
------------ ------------
Total property and equipment, net 88,455,479 76,554,100
Intangible and other assets:
Goodwill, less accumulated amortization 37,092,320 37,924,246
Other primarily deferred financing costs, less accumulated amortization 7,714,010 7,055,695
------------ ------------
Total assets $162,034,650 $144,220,666
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 299,875 $ 306,093
Accounts payable 4,799,488 10,127,962
Accrued compensation and pension 3,408,380 3,139,062
Accrued interest 4,787,037 3,675,921
Accrued expenses 647,254 648,500
Bank overdraft 911,119 2,129,795
------------ ------------
Total current liabilities 14,853,153 20,027,333
Long-term debt, less current portion 171,889,606 149,809,706
Deferred compensation and pension 2,048,846 1,842,948
Deferred income taxes 3,331,000 2,966,000
Series B, 13% Cumulative Preferred Stock, $0.01 par value; 25,0000 shares
authorized, 6,246 shares issued and outstanding at June 30, 1999 and
December 31, 1998, net of unamortized discount, including accrued stock
Dividends 5,738,648 5,277,000
Commitments and contingencies
Shareholders' deficiency:
Common Stock, $.01 par value; 50,000,000 authorized at June 30, 1999, and
December 31, 1998, 16,028,450 shares issued and outstanding at
June 30, 1999 and December 31, 1998 160,285 160,285
Additional paid-in capital 2,051,026 2,051,026
Accumulated deficit (38,037,914) (37,864,701)
Stock subscription receivable (48,931)
------------ ------------
Total shareholders' deficiency (35,826,603) (35,702,321)
------------ ------------
Total liabilities and shareholders' deficiency $162,034,650 $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)
Six Months Ended June 30,
----------------------------------------
1999 1998
------------- ------------
Cash flows from operating activities:
Net income (loss) $ 233,877 $ (5,177,415)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 8,767,186 8,178,447
Amortization 1,893,035 776,304
Provision for doubtful accounts 501,301 57,976
Loss on sale of equipment 601,043 532,996
Extraordinary charge less cash paid 303,314
Deferred income taxes (1,316,000) (1,578,000)
Changes in operating assets and liabilities, net of impact of
acquisitions:
Accounts receivable (3,916,412) (996,040)
Inventories and other operating assets (628,584) (1,922,269)
Accounts payable and accrued expenses 3,132,852 2,600,387
------------- ------------
Net cash provided by operating activities 9,268,298 2,775,700
------------- ------------
Cash flows from investing activities:
Rental equipment purchases (27,670,945) (11,914,970)
Property and office equipment purchases (1,035,570) (294,750)
Proceeds from disposition of rental equipment 1,273,254 265,385
Acquisitions (845,000)
Other (434,329) 27,080
------------- ------------
Net cash used in investing activities (28,712,590) (11,917,255)
------------- ------------
Cash flows from financing activities:
Proceeds under loan agreements 57,175,000 20,713,096
Payments under loan agreements (35,331,360) (84,734,914)
Proceeds from issuance of common stock, net of offering costs 124,578,000
Repurchase of common stock (45,557,865)
Prepayment of deferred loan costs (1,180,672) (6,237,189)
Tax benefit of nonqualified stock options 1,042,000
Change in book overdraft (1,218,676) (661,573)
------------- ------------
Net cash provided by financing activities 19,444,292 9,141,555
------------- ------------
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 $ 7,183,000 $ 1,044,000
============= ============
Income taxes (received) paid ($223,000) $ 425,000
============= ============
Rental equipment purchases included in accounts payable $ 1,814,000 $ 787,000
============= ============
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 June 30, 1999 and
1998, and for the three and six months ended June 30, 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.
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.
5
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 with the respiratory equipment.
Proforma Information
The following summarizes unaudited proforma results of operations for the
three months and six months ended June 30, 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 Six Months Ended
June 30, 1998 June 30, 1998
------------- -------------
Total Revenues $19,569,000 $40,468,000
Net loss before extraordinary charge $ 188,000 $ 3,180,000
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.
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 $5.0 million 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
6
semiannually in arrears on March 1 and September 1 of each year, commencing
March 1, 1999.
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 for the three months and six months ended June 30, 1999 of
approximately $0.8 million and $1.6 million, respectively.
7
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 Six Months Ended Qtr 2 1999 Six Months
June 30, June 30, 1999
1999 1998 1999 1998 Over Qtr 2 Over Six Months
1998 1998
-------------------- ---------------------- ----------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Equipment rentals 86.5% 92.9% 86.7% 92.5% 35.6% 35.0%
Sales of supplies and equipment, and other 13.5% 7.1% 13.3% 7.5% 176.9% 155.7%
-------------------- ----------------------
Total revenues 100.0% 100.0% 100.0% 100.0% 45.6% 44.0%
Costs of rentals and sales:
Cost of equipment rentals 25.7% 24.2% 23.3% 23.1% 54.6% 45.6%
Rental equipment depreciation 19.7% 26.6% 18.3% 24.9% 7.7% 5.9%
Cost of supplies and equipment sales 9.4% 4.9% 9.0% 4.9% 180.5% 160.6%
-------------------- ----------------------
Total cost of rentals and sales 54.8% 55.7% 50.6% 52.9% 43.2% 37.7%
-------------------- ----------------------
Gross profit 45.2% 44.3% 49.4% 47.1% 48.6% 51.2%
Selling, general and administrative 32.8% 29.4% 32.8% 29.9% 62.5% 58.5%
Recapitalization and transaction costs 0.0% 0.0% 0.0% 15.9% NM NM
-------------------- ----------------------
Operating income 12.4% 14.9% 16.6% 1.3% 21.2% NM
Interest expense 20.0% 19.1% 18.9% 14.0% 52.8% 95.3%
-------------------- ----------------------
Loss before income taxes and extraordinary charge (7.6%) (4.2%) (2.3%) (12.7%) NM NM
-------------------- ----------------------
Benefit for income taxes: (7.5%) (2.3%) (2.8%) (2.2%) NM NM
Net (loss) income before extraordinary charge (0.1%) (1.9%) 0.5% (10.5%) NM NM
Extraordinary charge, net of tax benefit 0.0% 0.0% 0.0% 5.9% NM NM
-------------------- ----------------------
Net (loss) income (0.1%) (1.9%) 0.5% (16.4%) NM NM
==================== ======================
8
General
We are a leading nationwide provider of moveable medical equipment to more than
4,400 hospitals and alternate care providers through our equipment rental and
outsourcing programs.
The following discussion addresses our financial condition as of June 30, 1999
and the results of operations and cash flows for the three months and six months
ended June 30, 1999 and 1998. 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 certain adverse operating trends in
periods when significant health care reform initiatives were under consideration
and uncertainty remained as to their likely outcome. To the extent general cost
containment pressures 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.
9
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 (See footnote 2 to the financial statements).
On July 30, 1998, we completed the purchase of Home Care Instruments, Inc.
(HCI), a privately held company headquartered in St. Louis, Missouri.
On August 17, 1998, we completed the purchase of Patient's Choice Healthcare,
Inc, (PCH), a privately held company headquartered in Columbus, Ohio.
On November 5, 1998, we completed the purchase of Medical Rentals Stat, Inc.
(MRS), a privately held company headquartered in Oklahoma City, Oklahoma.
On March 31, 1999, we completed the purchase of Express Medical Supply, Inc.
(EMS), a privately held company headquartered in Nashville, Tennessee.
Equipment Rental Revenues
Equipment rental revenues were $19.0 million for the second quarter of 1999,
representing a $5.0 million, or 35.6% increase from equipment rental revenues of
$14.0 million for the same period of 1998. For the first six months of 1999,
equipment rental revenues were $39.4 million, representing a $10.2 million, or
35.0% increase from rental revenues of $29.2 million for the same period of
1998. After giving affect to the acquisitions of HCI, PCH, MRS and EMS,
equipment rental revenue would have increased 15.2% for both the second quarter
and first six months of 1999, compared to the same periods in the prior year.
The rental revenue increase resulted from the acquisitions of HCI, PCH, MRS and
EMS, which contributed approximately $2.8 million during the second quarter and
$5.5 million during the first half of 1999, combined with the 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 $3.0 million for the second
quarter of 1999, representing a $1.9 million, or 176.9%, increase from sales of
supplies and equipment, and other of $1.1 million for the same period of 1998.
For the first six months of 1999, sales of supplies and equipment, and other
were $6.0 million, representing a $3.7 million, or 155.7% increase from sales of
supplies and equipment, and other of $2.4 million for the same period of 1998.
These increases are the result of the acquisitions of HCI, PCH, MRS and EMS,
which have generated sales of supplies and equipment, and other of approximately
$1.7 million in the second quarter and $3.5 million in the first half of 1999.
PCH placed a greater emphasis on and generated approximately two thirds of its
revenue from sales of disposables to health care providers.
Cost of Equipment Rentals
Cost of equipment rentals were $5.7 million for the second quarter of 1999,
representing a $2.0 million, or 54.6%, increase from cost of equipment rentals
of $3.7 million for the same period of 1998. For the first six months of 1999,
cost of equipment rentals was $10.6 million, representing a $3.3 million, or
45.6% increase from cost of equipment rentals of $7.3 million for the same
period of 1998. Cost of equipment rentals, as a percentage of equipment rental
revenues, increased to 29.7% for the second quarter of 1999 from 26.1% for the
same period of 1998. For the first six months of 1999, cost of equipment
rentals, as a percentage of equipment rental revenues, increased to 26.9% from
25.0% for the same period of 1998. During the first six months of 1999, we
experienced an increased amount of freight
10
expense due to the movement of ventilators, as well as additional replacement
costs resulting from used equipment purchases. As a percentage of equipment
rental revenues, the cost of equipment rentals increased because the support
staff salaries in the first quarter of 1998 were at a reduced level due to the
high turnover during the 1997 period of ownership uncertainty.
Rental Equipment Depreciation
Rental equipment depreciation was $4.3 million for the second quarter of 1999,
representing a $0.3 million, or 7.7% increase from rental equipment depreciation
of $4.0 million for the same period of 1998. For the first six months of 1999,
rental equipment depreciation was $8.3 million, representing a $0.5 million, or
5.9% increase from rental equipment depreciation of $7.8 million for the same
period of 1998. Rental equipment depreciation as a percentage of equipment
rental revenues decreased to 22.8% in the second quarter of 1999 from 28.7% for
the same period of 1998. For the first six months of 1999, rental equipment
depreciation, as a percentage of equipment rental revenues, decreased to 21.1%
from 26.9% for the same period of 1998. These decreases were the result of the
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 went into effect July 1, 1998. The change in rental
equipment depreciation lives decreased rental equipment depreciation by
approximately $0.8 million in the second quarter of 1999 and $1.6 million in the
first six months of 1999.
Gross Profit
Total gross profit was $9.9 million for the second quarter of 1999, representing
a $3.2 million, or 48.6% increase from total gross profits of $6.7 million for
the same period of 1998. For the first six months of 1999, total gross profit
was $22.4 million, representing a $7.6 million, or 51.2% increase from total
gross profit of $14.8 million for the same period of 1998. Total gross profit
increased to 45.2% of the total revenues for the second quarter of 1999 from
44.3% of total revenues for the same period of 1998. For the first six months of
1999, total gross profit, as a percentage of total revenues, increased to 49.4%
from 47.1% 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 change 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
increased to 47.5% for the second quarter of 1999 from 45.3% for the same period
in 1998. For the first six months of 1999, gross profit on rental revenue
increased to 52.0% from 48.1% for the same period of 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 30.5% in
the second quarter of 1999 from 31.4% for the same period of 1998. For the first
six months of 1999, gross profit on sales of supplies and equipment and other
decreased to 32.9% from 34.2%. Gross profit dollars increased predominantly due
to the increase in alternate care sales from PCH, HCI, MRS and EMS of
approximately $2.2 million in the second quarter of 1999 and $4.9 million in the
first six months of 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $7.2 million in the second
quarter of 1999, representing a $2.8 million, or 62.5% increase from selling,
general and administrative expenses of $4.4 million for the same period of 1998.
For the first six months of 1999, selling, general and administrative expenses
were $14.9 million, representing a $5.5 million, or 58.5% increase from $9.4
million for the same period of 1998. The increase in the second quarter of 1999,
over the comparable quarter in 1998, and the increase for the six month period,
is a result of the acquisitions of HCI, PCH, MRS and EMS, an increase in
employee count in 1999 over 1998, the impact of the promotional employee
incentive plan and the impact of group administration fees. Selling, general and
administrative expenses as a percentage of total revenue increased to 32.8% for
the second quarter of 1999 from 29.4% for the same period in 1998. For the first
six months of 1999, selling, general and administrative expenses as a percentage
of total revenue increased to 32.9% from 29.9% for the same period of 1998.
These increases are the result of amortization of goodwill from the acquisitions
and debt financing costs in addition to the previously mentioned items.
11
Recapitalization and Transaction Costs
During 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 $4.4 million for the second quarter of 1999, representing a
$1.5 million, or 52.8% increase from interest expense of $2.9 million in the
same period of 1998. For the first six months of 1999, interest expense was $8.6
million, representing a $4.2 million, or 95.3% increase from $4.4 million for
the same period of 1998. These increases primarily reflect our recapitalization,
incremental borrowings associated with capital equipment additions and the
acquisitions of HCI, PCH, MRS and EMS. Average borrowings increased to $174.8
million during the second quarter of 1999 from $113.0 million for the same
period in 1998 and from $90.4 million during the first six months of 1998, to
$167.5 million for the first six months of 1999.
Income Taxes
Our effective income tax rate for the first six months of 1999 was 122.0%
compared to a 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 Loss
The Company incurred a net loss of $0.02 million during the second quarter of
1999, as a result of interest expenses due primarily to our recapitalization in
1998. The first six months of 1999 resulted in net income of $0.2 million.
EBITDA
We believe earnings before interest, taxes, depreciation, and amortization
("EBITDA") to be a measurement of operating performance. EBITDA for the second
quarter of 1999 was $8.2 million versus $6.9 million for the same period of
1998. For the first six months of 1999, EBITDA was $18.2 million versus $9.4
million for the same period of 1998. Adjusted EBITDA, which adjusts for
non-recurring recapitalization and transaction costs, for the first six months
of 1999 was $18.2 million and $14.4 million for the corresponding period of
1998. There were no adjustments to EBITDA in the comparable second quarter
periods.
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 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 approximately $40.0 million of rental
equipment in 1999, of which approximately $10.5 million is estimated to be
maintenance capital expenditures.
12
During the first six months of 1999 and 1998, net cash flows provided by
operating activities were $9.3 million and $2.8 million, respectively. Net cash
flows used in investing activities were $28.7 million and $11.9 million, in each
of these periods. Net cash flows provided by financing activities were $19.4
million and $9.1 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 June 30, 1999, we are capitalized with $135.0 million of outstanding notes
and with $40.8 million outstanding loans 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 the option of the
Company, equal to the Base Rate plus a margin of 1.00% (the "Base Rate Margin"),
or the adjusted Eurodollar Rate plus a margin of 2.25% (the "Eurodollar Rate
Margin"). 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 $35.0 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.
Due to our growth in rental revenue, which exceeded our expectations and our
anticipated capital equipment additions of approximately $40 million, we are
exploring additional sources of financing. If we are unsuccessful in finding
such additional financing, we will re-evaluate our capital needs, which will
reflect our financing capacity along with anticipated cash from operations. 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.
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 to 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 the Company, 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:
13
. Equipment that is currently Year 2000 compatible,
. Equipment that does not need date processing and therefore is compatible,
. 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),
. Equipment that will require software or hardware upgrades (The upgrades
will be completed by our technicians. It is estimated that the costs of the
upgrades, will be approximately $310,000, of which approximately $50,000 of
labor and approximately $60,000 in parts and software has been incurred
through June 30, 1999.), and
. 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
two quarters.).
We believe approximately 90% 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
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 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 the computer systems to function
properly in the year 2000 and thereafter. We estimate that we will complete our
Year 2000 compliance program for all of our significant internal systems no
later than 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 year
2000. Also, contacts are being made with our 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 such as utilities, communications,
transportation, banking and government.
The total estimated cost for resolving the Company's Year 2000 IT issues is
approximately $425,000, of which approximately $75,000 was charged to earnings
in 1998 and $185,000 has been charged during the first six months of 1999. The
total cost estimate includes the cost of replacing non-compliant systems as a
remediation cost in cases where the company has accelerated plans to replace
such systems. Estimates of Year 2000 costs are based on numerous assumptions,
and there can be no assurance that the estimates are correct or that the actual
cost will not be materially greater than anticipated.
Based on its 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 customers, or with processing orders and billing. However, if
certain critical third-party providers, such as 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
14
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.
15
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not have any liquid investments. Cash is kept to a minimum
through our use of the Company's Revolving Credit Facility. The Company's
exposure to interest rate risk is mainly through its borrowing under its secured
Senior Revolving Credit Facility. 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.
Part II - Other Information
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(12) Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K:
None
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: August 12, 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