UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
| [x] | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2002, or |
| [ ] | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to . |
Commission File Number: 0-20086
UNIVERSAL HOSPITAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
| Delaware |
41-0760940 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
3800 West 80th Street, Suite 1250
Bloomington, Minnesota 55431-4442
(Address of principal executive offices)
(Zip Code)
(952) 893-3200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of Form 10-K or any amendment to this Form 10-K. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
None.
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| PART I |
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| ITEM 2 |
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| ITEM 3 |
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| ITEM 4 |
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| PART II |
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| ITEM 5 |
Market for Registrant’s Common Equity and Related Stockholder Matters |
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| ITEM 6 |
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| ITEM 7 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| ITEM 7A |
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| ITEM 8 |
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| ITEM 9 |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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| PART III |
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| ITEM 10 |
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| ITEM 11 |
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| ITEM 12 |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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| ITEM 13 |
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| ITEM 14 |
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| PART IV |
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| ITEM 15 |
Exhibits, Financial Statements, Schedule and Reports on Form 8-K |
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ITEM 1: Business
GENERAL
We are a leading, nationwide provider of medical technology outsourcing and services to the healthcare industry. Our diverse customer base includes more than 2,770 of the 5,800 acute care hospitals, approximately 3,110 alternate site providers and major medical equipment manufacturers. Unlike many other companies in the healthcare services sector, our fees are paid directly by our customers rather than by reimbursement from government or other third-party payors. Our services fall into three general categories: Medical Equipment Outsourcing, Technical and Professional Services, and Medical Equipment Sales and Remarketing. We commenced operations in 1939, originally incorporated in Minnesota in 1954 and reincorporated in Delaware in 2001.
Medical Equipment Outsourcing
Our flagship business is our medical equipment outsourcing unit accounting for over 85% of our revenues in 2002. We own or manage a pool of approximately 150,000 pieces of movable medical equipment in four primary categories: critical care, respiratory therapy, monitoring and newborn care. We are able to maintain high utilization of our equipment by pooling and redeploying that equipment among a diverse customer base and adjusting pricing on a customer-by-customer basis to compensate for their varying usage rates.
Our medical equipment programs enable healthcare providers to replace the fixed costs of owning and/or leasing medical equipment with variable costs that are more closely related to their revenues and current equipment needs. The increased flexibility and services provided to our customers allows them to:
| · | Access our extensive data and expertise on the cost, performance, features and functions of all major items of medical equipment to assist them in making acquisition, management and disposition decisions; |
| · | Increase productivity of available equipment, reducing the overall costs of acquisition and maintenance of medical equipment; |
| · | Reduce maintenance and management costs through use of our dedicated and knowledgeable outsourcing staff and technology; |
| · | Increase the productivity and satisfaction of their nursing staff by allowing them to focus on primary patient care responsibilities; |
| · | Reduce equipment obsolescence risk; and |
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| · | Comply with regulatory requirements and manufacturers’ specifications on tracking and maintenance of medical equipment. |
Our outsourcing programs differ from traditional purchase or lease alternatives for obtaining movable medical equipment. With our outsourcing programs, customers are able to draw on our large, nationwide fleet of movable medical equipment that includes some of the most modern equipment available. Our outsourcing programs include the following range of services:
| · | Supplemental and Peak Needs Usage. One of our basic outsourcing programs is providing equipment to our customers on a supplemental or peak needs basis. A number of our customers have traditionally owned only those amounts and types of equipment necessary to service their usual and customary bed census and range of treatment offerings. When our customers experience a census increase or require equipment for less common treatments, they can rely on us to fulfill many of their equipment needs, often within one hour or less of receiving their call or request. We have developed an innovative “Pay-Per-Use” method of charging our customers for outsourced equipment under which they incur charges for the use of our equipment only at such times as the equipment is actually in use on a patient. |
| · | Long-Term/Exclusive Outsourcing Agreements. We also offer our customers the opportunity to obtain moveable medical equipment through a long-term or exclusive outsourcing agreement. By executing a long-term outsourcing agreement, our customers are able to secure the availability of an identified pool of patient-ready equipment, delivered to their facility upon demand and to pay for it on a daily, weekly, monthly or a Pay-Per-Use basis. |
| · | Asset Management Partnership or “In-House” Programs. The asset management partnership program (AMPP) or “in-house” program provides our customers the ability to completely outsource the responsibilities and costs of effectively managing their moveable medical equipment. For our AMPP customers, we place our employees experienced in equipment management on the customer site. We integrate our equipment management process and technology tools into our customer’s day-to-day operations to manage the utilization of equipment within our customer’s facility. Our employees assume full responsibility for delivering equipment to the areas needed, removing equipment no longer in use and cleaning equipment between every patient use. Our highly skilled and trained equipment technicians maintain and service our AMPP customers’ equipment to our exacting standards. They also perform required training and “in service” sessions to keep our customers’ staffs fully trained and knowledgeable about the use and operation of key equipment. |
We currently provide outsourcing services to approximately 48% of all acute care hospitals in the United States, including UCLA Medical Center, Brigham and Women’s Hospital, Johns Hopkins Medical Center, Baylor University and Bon Secours Health
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System. We also have contracts in place with several of the leading national group purchasing organizations for both the acute care business and alternative site business. These contracts include Premier Technology Management L.L.C., Novation, LLC, MedAssets HSCA, Inc. and Amerinet, Inc. Alternative site agreements with national providers include Omnicare, Inc., Apria Healthcare Group Inc. and Beverly Enterprises, Inc.
Technical and Professional Services
We offer medical equipment repair, inspection, preventative maintenance, logistic and consulting services for our customers through our nationwide network of more than 150 highly qualified technicians and professionals. Our technicians are trained and certified on an ongoing basis directly by equipment manufacturers to enable them to be skilled in servicing the latest equipment. Our technicians are required and encouraged to maintain current certifications, to be cross-trained across equipment lines and to refresh their training on a regular basis.
We also operate a quality assurance department to develop and document our own quality standards for our equipment. Typically our standards exceed those published by the equipment’s manufacturer. All equipment maintenance, inspection and repair is performed to our specifications and recorded utilizing our proprietary record keeping software. These maintenance records are available to our customers and to regulatory agencies to demonstrate the exacting maintenance of our equipment throughout its useful life.
We provide our technical and professional services to four distinct categories of customers:
| · | Manufacturers. We provide our services to manufacturers that either do not have a nationwide support or logistical network to service their products, or who find our offerings superior to their own in quality and cost. Our offerings include logistics and loaner management programs, depot or on-site warranty, field upgrades, maintenance or repairs, and onsite installation and in-service education. |
| · | Large Hospitals. We provide our services to large hospitals on a supplemental and fully outsourced basis. Our services are requested by in-house hospital biomedical departments on a supplemental basis because of our wealth of experience with movable medical equipment and to alleviate the increasing work load demands on in-house departments. |
| · | Small and Critical Access Hospitals. We offer full lifecycle asset management services, including professional and technical services, to small (hospitals with less than 150 beds) and critical access hospitals. These customers typically lack the resources to evaluate, acquire, manage, maintain, repair and dispose of medical equipment or technology and draw upon our vast experience in these areas to assist them. Our premier services to these customers is our Equipment |
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Lifecycle Services program (ELS), under which we assist our customers in managing their equipment resources throughout the life of the equipment in their facility.
| · | Alternate Sites. We offer our technical and repair services to alternate site providers, such as nursing homes and home care providers. Our nationwide service and repair network allows equipment to be repaired on site, or picked up by us and repaired in one of our district offices or repair service centers. |
Medical Equipment Sales and Remarketing
We offer three areas of medical equipment sales and remarketing services:
Specialty Medical Equipment. On a selective basis, we provide sales distribution and support for specialty medical equipment products. We typically offer this service only for products particularly suited to our national distribution network, or for those products that fit with our ability to provide technical support. We currently distribute certain bed and monitoring products and a brand of infant security systems.
Remarketing and Asset Disposal. We remarket and dispose of used medical equipment both for our customers and on our own behalf. Our most significant service in the sales and remarketing arena is our Asset Recovery Program.
Disposables and Parts. We offer for sale to our clients disposable items, parts and accessories in order to accommodate their full service equipment needs. We offer these products as part of our complete outsourcing services and as a convenience to our customers. Our activity in this area is limited and typically relates directly to medical equipment or technical services which we are providing to a customer.
OPERATIONS
District Offices
We currently operate 65 district offices throughout the United States allowing us to effectively service customers all 50 states. Each district office maintains an inventory of equipment and other items tailored to accommodate the needs of the individual customers within its geographical area. Should additional or unusual equipment be required, a district office can draw upon the resources of all of our other districts, a pool of approximately 150,000 pieces of equipment, to obtain the necessary equipment within 24 hours.
Our district offices are staffed by multi-disciplined teams of account managers, service representatives and technicians to provide the full spectrum of services we offer our customers. Each office is under the guidance of a district manager with responsibility for the overall operation of the office, as well as providing direction to the sales, technical and professional employees. Our district offices are also managed on a centralized basis
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to ensure a high standard of quality and service while taking advantage of economies of scale.
Service Centers
Our district offices are supported by our network of 13 regional service centers. Our service centers support our district offices with their ability to perform more sophisticated maintenance and repair on equipment. In addition to providing advanced technical capabilities, our service centers provide overflow capacity to ensure that we meet our customers repair and maintenance needs in a timely manner. Our service centers also enable us to offer warranty and recall services to our equipment manufacturer customers.
Centralized Functions
At the core of our nationwide service is our corporate office located in Bloomington, Minnesota. We have centralized many of the key elements of our equipment and service offerings in order to maximize our operating efficiencies and uniformity of service. Some of the critical aspects of our business that we have centralized include the administration of certain contracts, purchasing, pricing, logistics and information technology.
Equipment Inventory
We purchase movable medical equipment in the areas of critical care, respiratory therapy, monitoring and newborn care. Equipment acquisitions may be made to expand our pool of existing equipment or to add new equipment technologies to our existing equipment pool. In making equipment purchases, we consider a variety of factors including equipment mobility, anticipated utilization level, service intensiveness and anticipated obsolescence. Of additional consideration are the relative safety of and the risks associated with such equipment.
As of December 31, 2002, we owned approximately 138,000 pieces of equipment available for use by our customers. The cost of each category of equipment in our outsourcing pool relative to the entire pool as of December 31, 2002 was: critical care, 54%; respiratory therapy, 28%; monitoring, 16%; and newborn care, 2%.
During 2002, we purchased 87% of our movable medical equipment from approximately 112 manufacturers and 13% from the used equipment market. Our ten largest manufacturers of movable medical equipment, which supplied approximately 59% of our direct movable medical equipment purchases for 2002, were: Tyco International, Ltd. (Mallinckrodt and Kendall Healthcare Products Company);Baxter Healthcare Corporation; Alaris Medical Systems; Abbott Laboratories; Gaymar Industries, Inc.; Datascope Corporation; Tri-Anim Health Services, Inc.; Siemens Business Services, Inc.; Sims Deltec, Inc.; and Respironics, Inc. Although our top ten manufacturers remain relatively constant from year to year, the relative ranking of suppliers within this group may vary over time. We believe that alternative sources of movable medical equipment are available to us should they be needed.
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We seek to ensure availability of equipment at favorable prices. Although we do not generally enter into long-term fixed price contracts with suppliers of our equipment, we may receive price discounts related to the volume of our purchases. The purchase price for equipment generally ranges from $2,000 to $50,000.
In order to fully serve our customers, we also sell disposable medical supplies for use in conjunction with our medical equipment. We currently acquire substantially all of our medical disposables from approximately 138 suppliers. The five largest current suppliers of disposables to us, accounting for over 47% of our disposable purchases for 2002, were: Tyco International, Ltd. (The Kendall Healthcare Products Company); Sims Deltec, Inc.; Huntleigh Healthcare, Inc.; B. Braun McGaw, Inc. and Maven Medical Manufacturing, Inc. We believe that alternative sources of disposable medical supplies are available to us should they be needed.
OUR STRENGTHS
We attribute our historical revenue growth to, and believe that our potential for future growth comes from, the following strengths:
Superior service and strong customer relationships. We distinguish ourselves as the recognized leader in our industry in providing service. We compete on the basis of the value-added, full-service features of our programs, the most modern and well-maintained fleet of equipment in the industry, our unique data and reporting technologies that strengthen our competitive advantage over the competition.
The heart of our outsourcing services include 24-hour-a-day, 365-day-a-year delivery of “patient ready” equipment, technical support, training in equipment use, quality assurance services, regular inspections and maintenance of all our equipment and assistance in documentation compliance needs. We also provide our customers with testing, inspection and user-error reports that comply with the standards of accreditation organizations. Our industry-leading outsourcing offerings include access to our proprietary management reporting and software tools, and to our consulting professionals who focus on acquisition, upgrades and disposition. We believe that as a result of our service focus, we enjoy committed and longstanding strong customer relationships. Of our 1,000 largest customers based on revenues as of January 1, 2001, 98% remained customers on December 31, 2002.
Significant and sustained investment in people and technology. We have made significant and sustained investments in our two key assets – our people and our technology – allowing us to increase the depth and breath of our offerings and enhance our reputation as a service leader. We believe that our capital expenditures for new movable medical equipment have exceeded that of the industry for the past four years. Our access to capital has placed us in a unique position to offer new equipment technologies to our customers, including scheduled upgrades and technology refreshing. Finally, we have invested in significant development and upgrades to our suite of asset
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management software and tools. This has allowed us to achieve significant advances in asset tracking and utilization management.
National scope and leading market position. We are one of only two national companies providing movable medical equipment outsourcing programs to the healthcare industry. We are the only nationwide provider that maintains ownership and management control of its nationwide network (see competition), allowing us to deliver unmatched quality and service anywhere in the U.S. Our network of 65 district offices and 13 regional service centers allows us to meet the equipment outsourcing, service and sales needs of independent healthcare facilities, national and regional acute care hospitals, group purchasing organizations, alternate site providers and equipment manufacturers. Our national network also enables us to redeploy equipment, people and resources throughout our system in order to maintain high levels of equipment utilization and customer service.
No direct reimbursement risk. Generally, healthcare providers rely on payment from patients or reimbursement from third party payors. Virtually all of our fees are paid directly by our acute care hospital, alternate site and manufacturer customers rather than through third party payors. Accordingly, our exposure to uncollectible patient or reimbursement receivables is minimized, as evidenced by our bad debt expense of only 0.6% of total revenues for the year ended December 31, 2002.
Age, depth and breadth of equipment pool. We own and manage a pool of approximately 150,000 pieces of movable medical equipment purchased from approximately 112 leading manufacturers in four primary categories: critical care, respiratory therapy, monitoring and newborn care. The average age of our equipment based on the net book value at December 31, 2002, is less than three years a significant competitive advantage. Our diversified equipment pool enables us to offer customers numerous equipment models from leading manufacturers within each primary equipment category. On a continuous basis, we evaluate new technology to add to our equipment pool. In most cases, manufacturers view UHS as the best alternative to make their product available on a national outsourcing basis. This allows us to partner with our customers to offer state of the art technology and better patient care regardless of customer capital constraints. Based on our experience in the industry, we believe the breadth of our product offerings give us a competitive strength compared to manufacturers and regional equipment outsourcing firms that may offer a limited range of models within an equipment category, or in a more limited geographic area. In addition, the magnitude of our annual equipment purchases enables us to obtain favorable pricing terms from many equipment vendors.
Patient safety first. We have a long standing history of patient safety excellence, which is a result of our unwavering commitment to quality. Our quality standards follow from our continued investment in dedicated professionals and technicians and in one of the most modern, up-to-date equipment fleets in the industry.
Attractive return on movable medical equipment. Our pricing strategy is designed to generate a payback period that is substantially shorter than the useful life of a particular piece of equipment. We generally achieve an 18 to 24-month revenue payback on the
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original purchase price of our entire equipment pool. In contrast, because of our high standards in maintaining our fleet the average useful life of the equipment in our pool (excluding that acquired from companies) has historically been 7.7 years.
Sophisticated use of information technology. Through our commitment to information technology, we have developed and continue to enhance our proprietary systems designed to improve both our and our customers’ operating efficiencies. Our database of medical equipment purchases, repairs, maintenance, performance, utilization and disposition dates back more than 20 years, and provides us with unique and proprietary knowledge about the use and performance of virtually every make and model of moveable medical equipment. This database has been instrumental in the development of programs and processes that help us drive better management and utilization of both UHS’ and/or customers’ medical equipment.
Experienced and committed management team. We have a management team with both extensive and diverse healthcare experience. Our senior management represents over 100 years of combined healthcare experience in leading healthcare service businesses.
Large, diversified and loyal customer base. We provide movable medical equipment to more than 2,770 acute care hospitals approximately 3,110 alternate site providers, (home care providers, nursing homes, surgery centers, sub-acute care facilities and outpatient center), and many medical equipment manufacturers throughout the United States. Our top ten customers accounted for approximately 10% of total equipment outsourcing revenues for the year ended December 31, 2002. Our hospital customers range in size from under 10 beds to over 2,000 beds and are located geographically in all 50 states. Our manufacturer clients range in size from small, emerging growth companies with a single product line and limited revenues, to large, multinational, multi product companies with revenues in excess of $32 billion. Out alternate site customers range in size from small local or regional providers focusing on a single area of patient care, to large, national providers servicing a diverse spectrum of patient care.
GROWTH STRATEGY
We believe that the following external and market factors will provide us significant growth opportunities for medical equipment outsourcing, services and sales:
| · | the aging population |
| · | increasing life expectancy |
| · | continued increase in the number and sophistication of medical technologies |
| · | and continued growth of outsourcing by hospitals, alternate site providers and manufacturers. |
We have enjoyed significant and sustained growth over our recent history. Our strategy is to achieve continued growth both organically and by strategic acquisition.
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Organic Growth
Our strategy is to continue to grow our flagship medical equipment outsourcing business by continuing to expand the outsourcing marketplace. Our strategy is to leverage our extensive existing customer relationships and unique market position to grow our technology and professional services and medical equipment sales and remarketing business.
We believe that because of the depth and breadth of our services, we are uniquely positioned to increase the marketplace, as well as our market share, through the simultaneous execution of three organic growth strategies: 1) offering additional products and services to our existing customer base, especially fully-outsourced asset management services; 2) increasing the number of acute care and alternate care facilities to whom we provide services; and 3) expanding our relationships with group purchasing organizations and the smaller alliances of facilities operating within those groups.
Strategic Growth
Since our 1998 recapitalization, we have made and successfully integrated six strategic acquisitions that have helped us expand our business by increasing our market share in existing markets and enabling us to penetrate new geographic regions. They have also allowed us to expand our offerings of full equipment lifecycle services. All of these acquisitions were regional or local businesses and have been fully integrated into our overall operations. On October 25, 2001 we consummated our acquisition of all of the outstanding stock of Narco Medical Services, Inc. The acquisition of Narco contributed a unique focus on the small and critical access hospital marketplace. We are currently expanding this small hospital strategy across our nationwide network. We intend to continue to pursue a disciplined yet aggressive course of growing our business with complementary acquisitions.
COMPETITION
We analyze our competition as it relates to our three primary categories of business.
Medical Equipment Outsourcing
We believe that the strongest competition to our outsourcing programs is the traditional purchase and lease alternatives for obtaining movable medical equipment. Currently, many acute care hospitals and alternate site providers view outsourcing primarily as a means of meeting short-term or peak supplemental needs, rather than as a long-term alternative to purchase. Although we believe that we can demonstrate the cost-effectiveness of outsourcing movable medical equipment on a long-term per-use basis, we believe that many healthcare providers will continue to purchase a substantial portion of their movable medical equipment.
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We have one principal national competitor in the movable medical equipment outsourcing business: MEDIQ/PRN, a subsidiary of MEDIQ, based in Pennsauken, New Jersey. Although MEDIQ’s Chapter 11 bankruptcy filing in 2001 has caused them to revise their strategies and approach, they remain as our only significant national competitor in the movable medical equipment outsourcing market.
Our other competition consists of regional or local companies and some movable medical equipment manufacturers and dealers who provide equipment outsourcing to augment their movable medical equipment sales. We believe that our technology and inventory allows us to effectively compete with these entities in the geographic regions in which we operate.
Technical and Professional Services
We face significant and direct competition in the technical and professional services area from many national, regional and local service providers, as well as from manufacturers. In addition, many of our customers chose to perform these functions using their own personnel.
Medical Equipment Sales & Remarketing
In the area of equipment sales we face significant direct competition from a variety of manufacturers and distributors. Similarly, we face intense competition for the sale of disposable medical products and parts on a nationwide basis. As a result, we are selective in our pursuit of these opportunities. We believe our competition in the remarketing and asset recovery business is less intense. In addition to manufacturers seeking to control the remarketing and disposal of their own products, we compete with a number of localized or narrowly focused providers of remarketing and disposal services.
EMPLOYEES
We had 827 employees as of December 31, 2002, including 767 full-time and 60 part-time employees. Of such employees, 144 are sales representatives, 154 are technical support personnel, 84 are employed in the areas of corporate and marketing, 100 are hospital service personnel and 345 are district office support personnel.
None of our employees is covered by a collective bargaining agreement, and we have experienced no work stoppages to date. We believe that our relations with our employees are good.
RISK FACTORS
This annual report contains statements that are forward-looking. These forward-looking statements may be identified by the use of terminology such as “may,” “will,” “expect,” “anticipate,” “predict,” “intend,” “designed,” “estimate,” “should” or “continue” or comparable terminology. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ
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materially because of risks and uncertainties such as those described below, which should be considered in evaluating our financial outlook.
We face certain risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this Form 10-K.
We have a history of net losses and may not be profitable in the future.
Primarily because of our debt service obligations, we have had a history of net losses. If we continue to incur net losses, this could adversely affect our ability to finance our business in the future. Our net losses of $5.1 million, $5.1 million, $3.6 million and $0.2 million for the years ended 1999, 2000, 2001 and 2002, respectively, were primarily attributable to interest costs we must pay under the indenture related to our senior notes and our revolving credit facility. We anticipate that our debt service obligations will continue to be substantial as we continue to aggressively grow our business and to affect our results of operations in future periods.
We will require substantial cash to operate and expand our business as planned, and failure to obtain needed financing from anticipated sources could impede our growth.
We require substantial cash to operate our medical equipment outsourcing programs and service our debt. Our outsourcing programs, particularly our AMPP total medical equipment outsourcing program, require us to invest a significant amount of cash in movable medical equipment purchases. To the extent that such expenditures cannot be funded from our operating cash flow, borrowings under our revolving credit facility or other financing sources, we may not be able to conduct our business or to grow as currently planned. We currently expect that over the next 12 months we will invest approximately $38 million to $42 million in new equipment. Upon entering into AMPP agreements, we generally are required to purchase all, or a significant portion, of a customer’s movable medical equipment, requiring large portions of such capital expenditures to be made at the commencement of the program. In addition, a substantial portion of our cash flow from operations must be dedicated to servicing our existing debt and there are significant restrictions on our ability to incur additional indebtedness under our existing indenture and revolving credit facility.
We have substantial debt, and we may be required to take action that would adversely affect our business in order to meet our debt service obligations. If we fail to meet those obligations, our secured lenders could take and sell our assets.
We are highly leveraged and will continue to have significant debt. As of December 31, 2002, we have total long term debt of $200.6 million. Our debt service requirements may adversely affect our ability to conduct our business as planned. We may draw down from
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our revolving credit facility in the future or incur other debt. The degree to which we are leveraged may also have the following effects:
| · | a substantial portion of our cash flow from operations must be dedicated to debt service and will not be available for other purposes; |
| · | a portion of our borrowings are at variable rates of interest, making us vulnerable to increases in interest rates; |
| · | we may not be able to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions; |
| · | our flexibility to react to changes in the industry and economic conditions may be limited, and we may be more vulnerable to a downturn in our business or the economy generally; and |
| · | we may be at a competitive disadvantage to our competitors with less debt. |
Borrowings made as part of our February 1998 recapitalization and subsequent acquisitions resulted in a significant increase in our interest expense in 1998 through 2002 relative to prior periods, resulting in net losses for those years. Our ability to make cash payments with respect to our senior notes and to satisfy or refinance our other debt obligations will depend upon our future operating performance. If we are unable to generate sufficient cash flow from operations in order to service our debt, we will be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our debt or seeking equity capital. If we are unable to repay our debt at maturity, we may have to obtain alternative financing, which may not be available to us. The debt under our revolving credit facility is secured by our working capital and our pool of movable medical equipment. If we default on our requirements under our revolving credit facility, our secured lenders could proceed against our working capital or our pool of movable medical equipment.
Our debt agreements significantly restrict our ability to engage in certain activities.
The indenture related to our senior notes and our revolving credit facility each restricts our ability to do the following:
| · | pay cash dividends or make certain other payments; |
| · | incur liens; |
| · | enter into leases; |
| · | incur additional indebtedness; |
| · | use proceeds from sales of assets and subsidiary stock; and |
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| · | enter into certain sale and leaseback transactions and transactions with affiliates. |
Additionally, our revolving credit facility requires us to maintain specified financial ratios and satisfy certain financial condition tests. We may be unable to meet those financial ratios and tests because of events beyond our control. A violation of any of these restrictions or a failure to meet the ratios and tests could result in a default under our revolving credit facility and the indenture. If an event of default should occur under our revolving credit facility, the lenders can accelerate repayment of the debt, plus accrued interest. Our working capital and pool of movable medical equipment are pledged as security under our revolving credit facility. If we fail to repay amounts due under our revolving credit facility, the lenders could proceed against the collateral granted to them to secure that debt and other of our debt which could substantially hinder our ability to conduct our business.
To achieve significant revenue growth, we must change the manner in which healthcare providers traditionally procure medical equipment. Our inability to effect such change could adversely affect our revenue growth.
We believe that the strongest competition to our medical equipment outsourcing programs is the traditional purchase or lease alternative for obtaining movable medical equipment. Currently, many healthcare providers view outsourcing primarily as a means of meeting short-term or peak supplemental needs, rather than as a long-term, effective, cost efficient alternative to purchase or lease. We may not be able to convince healthcare providers of the operational advantages and cost-effectiveness of outsourcing movable medical equipment needs on a long-term basis. As a result, many healthcare providers may continue to purchase or lease a substantial portion of their movable medical equipment. If we fail to change the manner in which healthcare providers procure their medical equipment, we may not be able to achieve significant growth.
Our competitors providing medical equipment outsourcing services may engage in significant price competition or liquidate significant amounts of surplus equipment, thereby decreasing the demand for outsourcing services.
In a number of our geographic and product markets, we compete with one principal competitor and various smaller equipment outsourcing companies that may compete primarily on the basis of price. These competitors may offer certain customers lower prices depending on utilization levels and other factors. Our largest outsourcing competitor, MEDIQ/PRN Life Support Services, Inc., a subsidiary of MEDIQ Incorporated, has recently emerged from bankruptcy and is currently under the control of its lenders. MEDIQ/PRN may engage in competitive practices that may undercut our pricing. In addition, MEDIQ/PRN may liquidate significant amounts of surplus equipment, thereby decreasing the demand for outsourcing services and possibly causing us to reduce the rates we may charge for our services.
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We have relationships with certain key suppliers, and adverse developments concerning these suppliers could adversely affect our business.
We purchased our movable medical equipment from approximately 112 manufacturers and our disposable medical supplies from approximately 138 suppliers in 2002. Our ten largest suppliers of movable medical equipment, which supplied approximately 59% of our direct movable medical equipment purchases for 2002, were: Tyco International, Ltd. (Mallinckrodt and Kendall Healthcare Products Company);Baxter Healthcare Corporation; Alaris Medical Systems; Abbott Laboratories; Gaymar Industries, Inc.; Datascope Corporation; Tri-Anim Health Services, Inc.; Siemens Business Services, Inc.; Sims Deltec, Inc.; and Respironics, Inc. Adverse developments concerning key suppliers or our relationships with them could force us to seek alternative sources for our movable medical equipment or to purchase such equipment on unfavorable terms. A delay in procuring equipment or an increase in the cost to purchase equipment could limit our ability to provide equipment to our customers on a timely and cost-effective basis.
A substantial portion of our revenues come from customers with whom we do not have long term commitments, and cancellations by or disputes with customers could adversely affect our cash flows and results of operations.
We derived approximately 62% of our outsourcing revenues for the year ended December 31, 2002 from customers with whom we do not have any formal long term commitment to use our programs. Our customers are generally not obligated to outsource our equipment under long-term commitments. In addition, many of our customers do not sign written agreements with us fixing the rights and obligations of the parties regarding matters such as billing, liability, warranty or use. Therefore, we face risks such as fluctuations in usage, inaccurate or false reporting of usage by customers and disputes over liabilities related to equipment use. Some of our AMPP total outsourcing programs with customers, under which we own substantially all of the movable medical equipment that they use and provide substantial staffing resources, are not subject to a written contract and could be terminated by the healthcare provider without notice or payment of any termination fee. Any such termination would have an adverse effect on our revenues and operating results.
We may lose existing customers if we are unable to renew our contracts with Group Purchasing Organizations or Integrated Delivery Networks.
Our past revenue growth and our strategy for future growth depends, in part, on access to the new customers granted by our major contracts with group purchasing organizations (GPOs) or Integrated Delivery Networks (IDNs) such as Premier, Novation, AmeriNet and MedAssets. The MedAssets contract expires in 2005, Premier in 2004, and Novation and AmeriNet in 2003. In the past, we have been able to renew such contracts. If we are unable to renew or replace our current GPO contracts when they are up for renewal, we may lose the existing business with the customers who are members of such GPOs.
If we were required to write down our goodwill if impaired, our operations and shareholders’ equity would be adversely affected.
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As described in the notes to our financial statements included elsewhere in this 10-K, we have $35.6 million of goodwill recorded on our balance sheet as of December 31, 2002. Until January 1, 2002, we amortized this goodwill on a straight-line basis over periods ranging from 15 to 40 years. Under new accounting rules, beginning January 1, 2002, we are no longer able to amortize goodwill on a yearly basis. Instead, we are required to periodically determine if our goodwill has become impaired, in which case we would be required to write off the impaired portion of goodwill. The amount of goodwill that we would write off in any given year is treated as a charge against operations under generally accepted accounting principles in the United States. If we were required to write off our goodwill, we could incur significant charges against operations, which would adversely affect our results of operations and shareholders’ equity.
Although we do not manufacture any medical equipment, our business entails the risk of claims related to the medical equipment that we outsource and service. We may not have adequate insurance to cover a claim, and it may be more expensive or difficult for us to obtain adequate insurance in the future.
We may be liable for claims related to the use of our movable medical equipment. Any such claims, if made, could have a material adverse effect on our business, financial condition or results of operations. We may be subject to claims exceeding our insurance coverage or we may not be able to continue to obtain liability insurance at acceptable levels of cost and coverage. In addition, litigation relating to a claim could adversely affect our existing and potential customer relationships, create adverse public relations and divert management’s time and resources from the operation of the business.
Our growth strategy depends in part on our ability to successfully identify and manage our acquisitions and a failure to do so could impede our future growth and adversely affect our competitive position.
As part of our growth strategy we intend to pursue acquisitions or other strategic relationships within our industry that we believe will enable us to generate revenue growth and enhance our competitive position. Since July 1998, we have acquired six new businesses. Future acquisitions may involve significant cash expenditures and operating losses that could have a material adverse effect on our financial condition and results of operations. In addition, our efforts to execute our acquisition strategy may be affected by our ability to identify suitable candidates and negotiate and close acquisitions. We may not be successful in acquiring other businesses, and the businesses we do acquire in the future may not ultimately produce returns that justify our related investment.
Acquisitions may involve numerous risks, including:
| · | difficulties assimilating acquired personnel and integrating distinct business cultures; |
| · | diversion of management’s time and resources from existing operations; |
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| · | potential loss of key employees or customers of acquired companies; and |
| · | exposure to unforeseen liabilities of acquired companies. |
If we are unable to continue to grow through acquisitions, our ability to generate revenue growth and enhance our competitive position would be impaired.
We depend on our sales representatives and service specialists, and may lose customers when any of our sales representatives and service specialists leave us.
Our sales growth has been supported by hiring and developing new sales representatives and adding, through acquisitions, established sales representatives whose existing customers generally have become our customers. We have experienced and will continue to experience intense competition for managers and experienced sales representatives. The success of our outsourcing programs, including AMPP, depends on the relationships developed between our sales representatives and our customers.
Our quarterly operating results have varied and we expect them to continue to vary.
Our results of operations have been and can be expected to be subject to quarterly fluctuations. We may experience increased revenues in the first and fourth quarter of the year, depending upon the timing and severity of the cold and flu season and the related increased hospital census and movable medical equipment usage during that season. Because a significant portion of our expenses are relatively fixed over these periods, our operating income as a percentage of revenue tends to increase during the first and fourth quarter of each year. If the cold and flu season is delayed by as little as one month, or is less severe than in prior periods, our quarterly operating results for a current period can vary significantly from prior periods. Our quarterly results can also fluctuate as a result of other factors such as the timing of acquisitions, new AMPP agreements or new office openings.
Changes in reimbursement rates and policies by third-party payors for medical equipment costs may reduce the rates that providers can pay for our services and adversely affect our operating results and financial condition.
Our healthcare provider customers, who pay us directly for the services we provide to them, substantially rely on reimbursement from third party payors for their operating revenue. These third party payors include both governmental payors, such as Medicare and Medicaid, and private payors, such as insurance companies and managed care organizations. There are widespread efforts to control healthcare costs in the United States by all of these payor groups. These cost containment initiatives have resulted in reimbursement policies based on fixed rates for a particular patient treatment that are unrelated to the provider’s actual costs or require healthcare providers to provide services on a discounted basis. Consequently, these reimbursement policies have a direct effect on healthcare providers’ ability to pay us for our services and an indirect effect on our level of charges. Ongoing concerns about rising healthcare costs may cause more restrictive
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reimbursement policies to be implemented in the future. Restrictions on the amounts or manner of reimbursements to healthcare providers may affect their willingness and ability to pay for the services we provide and may adversely affect our customers’ financial condition. Such restrictions could require us to reduce the rates we charge or could put at risk our ability to collect payments owed to us.
Our operating results historically have been adversely affected in periods when significant healthcare reform initiatives were under consideration and uncertainty remained as to their likely outcome. If other significant healthcare reform initiatives occur, they may have a similar, negative effect.
Because the regulatory and political environment for healthcare significantly influences the capital equipment procurement decisions of healthcare providers, our operating results historically have been adversely affected in periods when significant healthcare reform initiatives were under consideration and uncertainty remained as to their likely outcome. To the extent general cost containment pressures on healthcare spending and reimbursement reform, or uncertainty as to possible reform, causes acute care hospitals and alternate site 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 financial condition and results of operations.
A portion of our revenues are derived from home care providers and nursing homes, and these healthcare providers may pose additional credit risks.
We may incur losses in the future due to the bankruptcy filings of our nursing home and home care customers. We derived approximately 18% of our revenues for the year ended December 31, 2001 and 17% of our revenues for the year ended December 31, 2002 from alternate site providers such as home care providers and nursing homes. We expect that we will continue to derive a portion of our revenues from alternative care providers. Such providers may pose additional credit risks, since such providers are generally less financially sound than hospitals. Nursing homes in particular have experienced significant financial problems since the implementation of Balanced Budget Act of 1997.
A part of our future growth strategy involves growing our Technical & Professional Services and Equipment Sales & Remarketing businesses, both areas where we have significant competitors.
Approximately 15% of our revenues in 2002 come from Technical & Professional Services and Medical Equipment Sales & Remarketing areas. While this represented a significant historical increase, there can be no assurance that we will be able to continue to grow these areas, and expect to encounter increased and significant competition as we do so.
Consolidation in the healthcare industry may lead to a reduction in the outsourcing rates we charge.
In recent years, many acute care hospitals and alternate site providers have consolidated to create larger healthcare organizations. We believe that this consolidation trend may
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continue. Any resulting consolidated healthcare organization may have greater bargaining power over us, which could lead to a reduction in the outsourcing rates that we are able to charge. A reduction in our outsourcing rates will decrease our revenues.
Our customers operate in a highly regulated environment and the regulations affecting them could adversely affect our business.
The healthcare industry is required to comply with extensive and complex laws and regulations at the federal, state and local government levels. While the majority of these regulations do not directly apply to us, there are some that do, including the Food, Drug and Cosmetics Act, or FDCA, and certain state pharmaceutical licensing requirements. Although we believe we are in compliance with the FDCA, if the FDA expands the reporting requirements under the FDCA, we may be required to comply with the expanded requirements and may incur substantial additional expenses in doing so. With respect to state pharmaceutical licensing requirements, we are currently licensed in 11 states and may be required to be licensed in additional states. Our failure to possess such licenses for our existing operations may subject us to certain additional expenses.
Given that our industry is heavily regulated, we may be subject to additional regulatory requirements. If our operations are found to be in violation of any governmental regulations to which we or our clients are subject, we may be subject to the applicable penalty associated with the violation. Any penalties, damages, fines or curtailment of our operations would adversely affect our ability to operate our business and our financial results.
HEALTHCARE REGULATION
Our customers are subject to documentation and safety reporting standards with respect to the movable medical equipment they use, as established by the following organizations and laws: JCAHO; the Association for Advancement of Medical Instrumentation; and the FDCA. Some states and municipalities also have similar regulations. Our REDS and OEIS programs are specifically designed to help customers meet their documentation and reporting needs under such standards and laws. We also monitor changes in law and accommodate the needs of customers by providing specific product information, manufacturers’ addresses and contacts to these customers upon their request. Manufacturers of our movable medical equipment are subject to regulation by agencies and organizations such as the Food and Drug Administration, or FDA, Underwriters Laboratories, the National Fire Protection Association and the Canadian Standards Association. We believe that all movable medical equipment we outsource conforms to these regulations.
The Safe Medical Devices Act of 1980, or SMDA, which amended the FDCA, requires manufacturers, user facilities, and importers of medical devices to report deaths and serious injuries to which a device has or may have caused or contributed; establish and maintain adverse event files; and submit to the FDA follow-up and summary reports. Manufacturers and importers are also required to report certain device malfunctions. We
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work with our customers to assist them in meeting their reporting obligations under the FDCA, including those requirements added by the SMDA. As a distributor of medical devices, we are required by the FDCA to maintain device complaint records containing any incident information regarding the identity, quality, durability, reliability, safety, effectiveness or performance of a device. We are required to retain copies of these records for a period of two years from the date of inclusion of the record in the file or for a period of time equivalent to the expected life of the device, whichever is greater, even if we cease to distribute the device. Finally, we are required to provide authorized FDA employees access to copy and verify these records upon their request. We have current compliance records regarding maintenance, repairs, modification, and user-error, with respect to all of the equipment.
Besides the FDA, a number of states regulate medical device distributors and wholesalers either through pharmacy or device distributor licensure. Currently, we hold licenses in 11 states. Some licensure regulations and statutes in additional states may apply to our activities. We are currently in the process of obtaining distributor licenses in approximately five other states in which we believe we may be required to be licensed. Although our failure to possess such licenses in these states for our existing operations may subject us to certain monetary fines, we do not believe the extent of such fines, in the aggregate, will be material to our liquidity, financial condition or results of operation.