July 25, 2007
VIA EDGAR AND OVERNIGHT DELIVERY
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U.S. Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Mail Stop 7010
Washington, D.C. 20549-7010
Attention: Rufus Decker
Jeffrey Gordon
Nudrat Salik
Re: Universal Hospital Services, Inc. (the "Company")
Form 10-K for the fiscal year ended December 31, 2006
Form 10-Q for the period ended March 31, 2007
File No. 0-20086
Dear Mr. Decker:
Set forth below are the Company's responses to the comments raised in the
letter dated July 11, 2007 from the staff (the "Staff") of the Securities and
Exchange Commission (the "Commission") with respect to the above-referenced
filings. The additional disclosures and other revisions contained in our
responses will be included in our future filings. For reference purposes, the
Staff's comments have been reproduced below, followed by the Company's responses
to each comment. We appreciate the time and effort that the Staff has dedicated
to reviewing our disclosures.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006
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General
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1. Staff's Comment: Where a comment below requests additional disclosures or
other revisions to be made, please show us in your supplemental response
what the revisions will look like. These revisions should be included in
your future filings.
Response: Where your comment letter requests additional disclosures or
other revisions for numbered comments 2 through 9 below, we present below
such revisions as we intend them to appear in our future filings.
July 25, 2007
Page 2
Financial Statements
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Statements of Cash Flows, page F-5
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2. Staff's Comment: Please revise your statement of cash flows to present the
changes in inventories separately from the changes in other operating
assets. Also, please revise to present the changes in accounts payable
separately from the changes in accrued expenses and other long-term
liabilities. Please refer to paragraph 29 of SFAS 95.
Response: Per your comment and in accordance with paragraph 29 of SFAS 95,
we will present changes in inventories separately from changes in other
operating assets and will separately present changes in accounts payable
from changes in accrued expenses and other long-term liabilities in future
annual and quarterly filings. We include below a revised changes in
operating assets and liabilities section of the Statements of Cash Flows
for our years ended December 31, 2006, 2005 and 2004, and for the three
months ended March 31, 2007 and 2006:
Three Months Ended
Year Ended December 31, March 31,
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(in thousands) 2006 2005 2004 2007 2006
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Changes in operating assets and
liabilities
Accounts receivable (2,126) (1,999) (5,416) (4,002) (1,824)
Inventories (130) (565) (1,591) (766) (211)
Other operating assets (746) 1,085 (1,271) 281 (344)
Accounts payable (2,344) (983) 5,920 1,169 (13)
Accrued expenses and other long-term
liabilities 4,668 135 115 5,746 7,241
Notes to Financial Statements
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Note 2 - Significant Accounting Policies, page F-6
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3. Staff's Comment: You state that medical equipment sales and remarketing are
recorded at the time of shipment, change of ownership or installation
completion. Please expand your disclosure to describe the different types
of customer arrangements you enter into related to medical sales and
remarketing. For each of these types of arrangements, please clarify at
which time you record revenue and how you determined this is appropriate
pursuant to SAB Topic 13:A.3.
Response: Medical equipment sales and remarketing revenues consist of (1)
sales of moveable medical equipment and related parts and single-use
disposable items to customers and (2) sales of equipment that include
installation services.
July 25, 2007
Page 3
For the first category, we recognize revenue at the point where we either
deliver the equipment, parts or single-use disposable items to the customer
ourselves or at the point of shipment, when risk of loss has passed to the
customer. In either case, we believe the relevant recognition provisions of
SAB 104/SAB Topic 13:A.3 are satisfied as we have performed all but
inconsequential or perfunctory obligations and substantial uncertainties
regarding customer acceptance do not exist, after taking into account an
allowance we have recorded for returns of such equipment that is based on
historical experience.
For the second category, we recognize all revenue when installation is
complete and the equipment is operational for the customer. At this point,
we believe that no substantial uncertainties remain with respect to
customer acceptance and that we have performed all but inconsequential or
perfunctory obligations.
In our future filings, we intend this disclosure to look substantially like
the following:
"Medical equipment sales and remarketing revenues consist of (1) sales
of moveable medical equipment and related parts and single-use
disposable items to customers and (2) sales of medical equipment that
include installation services. The Company follows the provisions of
SAB 104 in recognizing these revenues as they are realized and earned
once an arrangement exists, delivery has occurred and services
rendered, the price is fixed and collectibility is reasonably assured.
Sales of moveable medical equipment as well as related parts and
single-use disposable items are recognized at the point of delivery,
if performed by us, or at the point of shipment, when risk of loss has
passed to the customer. Because of the short-term nature of equipment
installation projects, sales that include installation services are
recognized when the earnings cycle has been completed--installation
has been completed, the equipment becomes operational and the customer
has accepted it. "
Note 7 - Commitments and Contingencies, page F-15
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4. Staff's Comment: Please disclose how you account for (a) step rent
provisions and escalation clauses and (b) capital improvement funding and
other lease concessions, which may be present in your leases. Paragraph
5.n. of SFAS 13, as amended by SFAS 29, discusses how lease payments that
depend on an existing index or rate, such as the consumer price index or
the prime interest rate, should also be included in your minimum lease
payments. If, as we assume, they are taken into account in computing your
minimum lease payments and the minimum lease payments are recognized on a
straight-line basis over the minimum lease term, the note should so state.
If our assumption is incorrect, please tell us how your accounting complies
with SFAS 13 and FTB 88-1.
Response: We will expand our disclosure as follows:
July 25, 2007
Page 4
"The Company leases nearly all of its district, corporate and other
operating locations under operating leases and recognizes rent expense
on a straight-line basis over the lease terms. Rent holidays and rent
escalation clauses, which provide for scheduled rent increases during
the lease term, are taken into account in computing straight-line rent
expense included in our Statements of Operations. The difference
between the rent due under the stated periods of the leases compared
to that of the straight-line basis is recorded as deferred rent within
other accrued expenses and other long-term liabilities in the Balance
Sheets. Landlord funded lease incentives, including tenant improvement
allowances provided for our benefit, are recorded as leasehold
improvement assets and as deferred rent in the Balance Sheets and are
amortized to depreciation expense and as rent expense credits,
respectively."
The Company does not have any leases where payments included in minimum
lease payments are dependent upon an index or rate, such as the Consumer
Price Index.
Note 8 - Employee Benefit Plans, page F-15
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5. Staff's Comment: Please disclose the extent of your self-insurance in each
area that you are self-insured. Please also disclose whether or not you
have excess loss insurance and, if so, the amounts at which this insurance
coverage begins in each area.
Response: We will expand our disclosure to include the following:
"The Company is self-insured for employee health care up to $130,000
per member per plan year and aggregate claims up to 125% of expected
claims per plan year. Also, the Company purchases workers'
compensation and automobile liability coverage with related
deductibles. The Company is liable for workers' compensation and
automobile liability claims up to $250,000 and $100,000 per individual
claim, respectively. Self-insurance and deductible costs are included
in other accrued expenses in the Balance Sheets and are accrued based
upon the aggregate of the liability for reported claims and an
actuarially determined estimated liability for claims development and
incurred but not reported."
Note 12 - Stock-Based Compensation, page F-20
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6. Staff's Comment: Please expand your disclosure to discuss the methodology
you used to estimate the fair value of your common shares for each period
presented, including any significant factors and assumptions used to arrive
at this estimate. Your disclosure in note (3) on page 63 implies that you
applied discounts in your determination of fair value of your common
shares. Please disclose the nature of each of the discounts that you used,
the percentages of these discounts used, and your basis for using these
discounts. Refer to paragraph 64(c) of SFAS 123(R).
July 25, 2007
Page 5
Response: We will expand our disclosure to include the following:
"For each of the periods presented, options were granted with option
strike prices based on the estimated fair market values of the
Company's common stock on the date of the grant, as determined by the
Company's board of directors. Our board of directors considered
multiple valuation metrics and methods and determined that the most
appropriate method for the Company, given its unique attributes, was
an Enterprise Value to EBITDA approach. In order to determine this
fair market value, during 2004, we applied the Enterprise Value to
EBITDA multiple per our sale of equity to new common shareholders as
part of our late 2003 recapitalization. Beginning in 2005, we began
using an average market multiple approach using the average Enterprise
Value to forecasted EBITDA multiple from a comparable group of
publicly traded health care companies. Given the lack of a truly
comparable peer company, our comparable group was determined by using
public market players in a generally capital-intensive settings, with
attributes of our customer base, suppliers and competitors. We then
applied a discount to such multiple in arriving at the fair market
value of our common shares, in order to account for the lack of
liquidity in our shares as well as minority ownership. This discount
rate was determined through an analysis of the restrictions on the
transferability of our stock, our impression of the generally accepted
range for such discount factors for privately held companies based
upon broad capital market discussions, our progress toward a capital
event of some type and the inherent risk that such a capital event
would not be consummated. After considering these factors, the Company
determined appropriate aggregate discounts of 25% during 2004, 2005
and through the first quarter of 2006. Thereafter, the aggregate
discount was reduced to 7.5% in order to account for the increased
likelihood of a capital event."
Note 13 - Segment Information, page F-23
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7. Staff's Comment: Please provide a reconciliation between the total of your
reportable segments' measure of profit or loss to your consolidated income
(loss) before taxes. All significant reconciling items should be separately
identified and described. Refer to paragraphs 32 and 33 of SFAS 131. Please
also separately discuss with quantification business reasons for changes
between periods in the reconciling items in MD&A.
Response: The requested reconciliation consists of two items, selling,
general and administrative expenses and interest expense, both of which are
presented separately in the Statements of Operations. Neither selling,
general and administrative expenses nor interest expense are allocated for
purposes of making operating decisions or assessing segment performance.
Quantification of business reasons for material changes between periods in
these reconciling items are currently disclosed in our MD&A. In our future
annual and quarterly filings, we will include this reconciliation with our
segment information similar to the table below:
July 25, 2007
Page 6
Reconciliation of Total Company Gross Margin to Income (loss) before taxes
Three Months Ended
Year Ended December 31, March 31,
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(in thousands) 2006 2005 2004 2007 2006
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Gross Margin $ 94,203 $ 88,855 $ 85,817 $ 27,754 $ 26,539
Selling, general and administrative
expense (61,940) (58,455) (57,713) (16,294) (14,965)
Interest expense (31,599) (31,127) (30,508) (8,082) (7,817)
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Income (loss) before income tax $ 664 $ (727) $ (2,404) $ 3,378 $ 3,757
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8. Staff's Comment: Your disclosures indicate that the assets allocated to
each segment primarily include goodwill and intangible assets. Please
disclose why you do not allocate any other operating assets for purposes of
reporting segment assets.
Response: The reason we do not allocate any other operating assets other
than goodwill and intangible assets in reporting assets by segment is that
the Company's assets are, predominantly, managed as corporate assets.
Furthermore, we do not report such assets separately to our Chief Operating
Decision Maker ("CODM"), as defined in FAS 131. Since FAS 131 paragraph 29
states that only those assets that are included in the measure of the
segment's assets that is used by the CODM need be reported for that
segment, we do not believe that such allocated asset reporting is required
by the Statement.
We will expand our disclosure, however, to include the following:
"Segment assets for the three business segments (excluding Corporate
and Unallocated) primarily include goodwill and intangible assets.
Consistent with the Company's reporting to its Chief Operating
Decision Maker, other assets are not allocated to the three business
segments. Thus, assets included in Corporate and Unallocated contain
all other Company assets."
FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2007
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General
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9. Staff's Comment: Please address the above comments in your interim filings
as well.
July 25, 2007
Page 7
Response: We have considered whether the annual financial statement
modifications outlined by us in items 2 through 8 above also give rise to
modifications in our quarterly filings. We do believe that comments 2 and 7
give rise to such a quarterly modification. We view the other
modifications, however, to be annual in nature, given our understanding
that we are obligated to provide disclosure in our quarterly filings when
necessary to prevent the interim statements from being misleading. Because
we believe only comments 2 and 7 give rise to this possibility, we will
modify our future quarterly filings to reflect such comments.
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Further to the Staff's request on page 4 of the comment letter, the Company
hereby acknowledges that:
o The Company is responsible for the adequacy and accuracy of the
disclosure in its filings;
o Staff comments or changes to disclosure in response to Staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
o The Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
*****
We hope that the foregoing has been responsive to the Staff's comments.
Please address any questions regarding our responses to these comments to the
undersigned at (952) 893-3254.
Sincerely,
/s/ Rex T. Clevenger
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Rex T. Clevenger
Executive Vice President and
Chief Financial Officer
cc: Christian O. Nagler, Kirkland & Ellis LLP
Diana J. Vance-Bryan, General Counsel