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, 2004, 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: 000-20086
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.) |
7700 France Avenue South, Suite 275
Edina, Minnesota 55435-5228
(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. x
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
The number of shares outstanding of common stock, $.01 par value, as of March 16, 2005, was 123,435,607.96.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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| ITEM 1: | Business |
OUR COMPANY
Universal Hospital Services, Inc. (“we”, “our” or “UHS”) is a leading, nationwide provider of medical equipment outsourcing and services to the health care industry. Our customers include national, regional and local acute care hospitals, alternate site providers (such as nursing homes and home care providers) and medical equipment manufacturers. Our diverse customer base includes more than 3,100 acute care hospitals and approximately 3,150 alternate site providers. We also have extensive and long-standing relationships with over 200 major medical equipment manufacturers and many of the nation’s largest group purchasing organizations (GPOs) and integrated delivery networks (IDNs). All of our services leverage our nationwide network of 75 district offices, 62 technical service locations (most of which are co-located with the district offices) and our more than 65 years of experience managing and servicing all aspects of movable medical equipment. These services are paid for by our customers and not directly through reimbursement from governmental or other third-party payors. We commenced operations in 1939, originally incorporated in Minnesota in 1954 and reincorporated in Delaware in 2001. Our revenue, profits, and assets for the prior five years are described in “Item 6 – Selected Financial Data.”
As a leading medical equipment lifecycle services company, we design and offer comprehensive solutions for our customers that increase equipment and staff productivity and support optimal patient care.
Effective January 1, 2004, we began reporting our financial results in three segments, to reflect how we manage our business. Our operating segments consist of Medical Equipment Outsourcing, Technical and Professional Services, and Medical Equipment Sales and Remarketing. We evaluate the performance of our operating segments based on gross margin. The accounting policies of the individual operating segments are the same as those of the entire company.
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Medical Equipment Outsourcing Segment- Manage & Utilize
Our flagship business is our Medical Equipment Outsourcing Segment which accounted for $156.5 million, or approximately 78.4%, of our revenues for the year ended December 31, 2004. We own approximately 150,000 pieces of movable medical equipment, primarily in the categories of respiratory therapy, newborn care, critical care, patient monitors, and bariatric and pressure area management. During the second quarter of 2004, we began an initiative to take a leadership position in bariatric equipment outsourcing (patient handling equipment for morbidly obese patients) by reentering this market with the acquisition of certain assets from Galaxy Medical Products, Inc., the acquisition of substantially all of the assets of Advanced Therapeutics of Wisconsin, Inc. and a geographic product rollout.
In our outsourcing programs we provide our customers with the use of movable medical equipment and we maintain the equipment for our customers by performing preventative maintenance, repairs, cleaning and testing, and maintaining certain reporting records. We also provide prompt replacement of any defective equipment and the flexibility to upgrade their equipment as technology changes. We have three primary outsourcing programs:
| • | Supplemental and Peak Needs Usage. Our basic outsourcing program is renting patient-ready, movable medical equipment to our customers on a supplemental or peak needs basis. Many of our customers have traditionally owned only the amounts and types of such equipment necessary to service their usual and customary bed census and range of treatment offerings. When our customers experience a peak in census or require equipment for less common treatments, they rely on us to fulfill many of their equipment needs, often within two hours (plus drive time) of receiving a customer’s request. Supplemental and peak needs activity is impacted by changes in hospital patient census, which typically fluctuates on a seasonal basis. |
| • | Long-Term Outsourcing Agreements. We also offer our customers the opportunity to obtain movable medical equipment through long-term outsourcing agreements. By executing a long-term outsourcing agreement, our customers are able to secure the availability of an identified pool of patient-ready equipment and to pay for it on a daily, weekly, monthly or a Pay-Per-Use basis; and |
| • | Asset Management Partnership Programs (AMPP). Our AMPP program allows our customers to outsource the responsibilities and costs of effectively managing their movable medical equipment, with the added benefit of enhancing equipment utilization. This program allows the customers to adjust their equipment and technology for changes to patient census and acuity. Our employees work at the customers’ sites to integrate our equipment management process and technology tools into our customers’ day-to-day operations. We assume full responsibility for delivering equipment where and when it is needed, removing equipment that is no longer in use and cleaning equipment between every patient use. Our highly |
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| skilled and trained equipment technicians maintain and service our AMPP customers’ equipment to our 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. |
Our AMPP programs include management of our equipment at the customer’s facility and/or management of customer-owned equipment. As of December 31, 2004, we had 36 AMPP programs.
Our medical equipment programs enable health care 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; |
| • | increase productivity of available equipment; |
| • | reduce maintenance and management costs through the 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 |
| • | facilitate compliance with regulatory and record keeping requirements and manufacturers’ specifications on tracking and maintenance of medical equipment. |
We currently provide outsourcing services to more than 3,100 acute care hospitals in the United States, including such premier institutions as UCLA Medical Center, Brigham and Women’s Hospital, Johns Hopkins Medical Center, Baylor University and Kansas University Medical Center. Our reentry into the bariatric market has given us new opportunities with many of our existing customers.
We have contracts in place with many of the leading national GPOs for both the acute care and alternate site markets. We also have agreements with national alternate site providers. We expect much of our future growth in this segment to be driven by our customers outsourcing more of their movable medical equipment needs and taking full advantage of our expanded offering of Long Term Outsourcing Agreements and AMPPs.
Technical and Professional Services Segment – Plan & Acquire; Maintain & Repair
The Technical and Professional Services segment accounted for $25.5 million, or approximately 12.8%, of our revenues for the year ended December 31, 2004. We leverage our 65 plus years of experience and our extensive equipment database in repairing and maintaining medical equipment. We offer a broad range of inspection, preventative maintenance, repair, logistic and consulting services through our team of over 250 technicians and professionals located in our nationwide network of district offices and service centers.
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| • | Supplemental Maintenance and Repair Services. We provide maintenance and repair services that supplement the customer’s current maintenance management practices on a scheduled and unscheduled basis. As part of these services, we provide service documentation that supports the customer’s regulatory reporting requirements. These maintenance and repair services include: |
| • | Unscheduled Service: Repair and other services provided on an uncontracted, fee-for-service basis. |
| • | Scheduled Service: Equipment maintenance and inspection services on a defined set of equipment. |
| • | Full Service: Equipment maintenance, inspection and repair services on a defined set of equipment. |
| • | Vendor Management Service: Vendor management services in which we manage the manufacturer and/or third party vendors for service delivery, typically on high end lab and radiology equipment. |
| • | Resident Programs. We also provide full and part-time resident-based equipment maintenance programs that provide all the benefits of our supplemental maintenance and repair programs, but with the addition of onsite UHS employees, coordinated management of subcontractors, and a broad range of equipment management consulting services. UHS coordinates the service and maintenance needs of an entire facility for all clinical equipment. Under this comprehensive program, we may: |
| • | perform all equipment repairs and inspections, including parts; |
| • | manage all regulatory and safety compliance policies; |
| • | provide onsite 24 x 7 coverage; and |
| • | provide equipment management consulting services. |
As of December 31, 2004, we have 74 resident-based maintenance programs and CHAMP® (Community Hospital Asset Management Program) part-time resident programs within this segment.
| • | Consulting Services. We provide equipment consulting services as part of our other equipment management programs or as stand alone services. Some examples of our consulting services include technology baseline assessments, product comparison research and equipment utilization studies. |
Our technical and professional service offerings are less capital intensive than our Medical Equipment Outsourcing segment, and provide a complementary alternative for customers that wish to own their medical equipment, or lack the expertise, funding or scale to perform maintenance, repair and analytical functions.
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Our technicians are trained and certified on an ongoing basis directly by equipment manufacturers to enable them to be skilled in servicing a wide spectrum of medical equipment. They are required 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. All equipment maintenance, inspection and repair services are performed to our specifications. We utilize our proprietary record keeping software to record these services which meets the applicable standards of the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), the National Fire Protection Association (NFPA) and the Food and Drug Administration (FDA). These maintenance records are available to our customers and to regulatory agencies to verify the 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 medical equipment manufacturers that either do not have a nationwide support or logistics network to service their products, or who find our offerings superior to their own in quality or cost. Our offerings include logistics and loaner management programs, depot or on-site warranty, non-warranty, product recall, 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 and expertise with movable medical equipment and to alleviate the increasing workload demands on in-house departments; |
| • | Small Hospitals and Critical Access Hospitals. We offer full lifecycle asset management services, including professional and technical services, to small hospitals (those with less than 150 beds) and Critical Access Hospitals. (Critical Access Hospitals are rural community hospitals that receive cost based Medicare reimbursement.) 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 service to these customers is our CHAMP® program; and |
| • | Alternate Site Providers. 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 and repaired in one of our district offices or repair service centers. |
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While our contracts with GPOs once were solely to provide medical equipment outsourcing services, we have expanded some of our agreements with these organizations to include Technical and Professional Services. We believe this trend will continue as GPOs look to provide their members with services covering the entire medical equipment lifecycle.
Medical Equipment Sales and Remarketing Segment- Redeploy & Remarket
This segment accounted for $17.6 million, or approximately 8.8%, of our revenues for the year ended December 31, 2004. This segment includes three distinct business activities:
| • | Medical Equipment Remarketing and Disposal. We are one of the nation’s largest buyers and sellers of movable medical equipment, primarily for our own account. We also buy, source, remarket and dispose of pre-owned medical equipment for our customers through our Asset Recovery Program. This program allows our customers to maximize trade-in value on equipment upgrades, participate in a risk shared remarketing program or receive immediate cash payment for their unneeded equipment. Customers can also take advantage of our disposal services, removing equipment that has no remaining economic value in a safe and efficient manner. We educate hospitals on the optimal opportunity to evaluate upgrades based on the changes in technology and market conditions for their current equipment. We remarket used medical equipment to secondary market buyers. Our remarketing and asset disposal programs represent some of our best opportunities for growth in this segment, given our expertise, knowledge, and relationships in this area. |
| • | Specialty Medical Equipment Sales and Distribution. We use our national infrastructure to provide sales and distribution to manufacturers of specialty medical equipment. Our distribution services include demo services and product maintenance services. We act as distributors only for a limited number of products that are particularly suited to our national distribution network, or for those products that fit with our ability to provide technical support. We currently sell product lines in the following areas: patient monitors, rehabilitation products, patient transfer systems, infant security systems and respiratory therapy. |
| • | Disposables Sales. We offer our customers single use disposable items. Most of these items are used in connection with our outsourced equipment. Although we do not view this as a core growth business, we offer these products as a convenience to customers and to complement our full medical equipment lifecycle offerings. Historically we made a wide range of disposables available to our customers. We have begun an initiative to limit the number of items we carry, and to more closely tie the items we do carry to our high volume moveable medical equipment provided in our Medical Equipment Outsourcing segment. |
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BUSINESS OPERATIONS
District Offices
We currently operate 75 district offices throughout the United States, allowing us to service customers in all 50 states. Each district office maintains an inventory of equipment and other items tailored to accommodate the needs of individual customers within its geographical area. Should additional or unusual equipment be required by one of our customers, a district office can draw upon the resources of all of our other districts, with access to approximately 150,000 owned pieces of equipment, and is often able to obtain the necessary equipment within 24 hours.
Our district offices are staffed by multi-disciplined teams of sales professionals, customer service representatives and technicians trained to provide the spectrum of services we offer our customers.
Service Centers
Our district offices are supported by our network of 62 technical service centers. A majority of our service centers are co-located in shared space with our district offices. At these locations our technicians perform technical services on UHS owned equipment and on customer-owned equipment. Our service centers also enable us to offer warranty, non-warranty, upgrades and other services to our healthcare and equipment manufacturer customers. During 2004 six of our large, strategically located regional service centers were designated as “Centers of Excellence” to focus on providing more specialized depot technical services on a regional and national basis. Centers of Excellence also provide overflow support and specialized depot service functions for our other service centers and customized depot service operations for our manufacturer customers.
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Centralized Functions
At the core of our nationwide service is our corporate office located in Edina, Minnesota where 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 contract administration, purchasing, pricing, logistics, and information technology.
Equipment Inventory
We acquire medical equipment to meet our customers’ needs in five primary product areas: respiratory therapy, newborn care, critical care, patient monitors and bariatric and pressure area management. We maintain one of the most technologically advanced equipment fleets in the industry, routinely acquiring new and pre-owned equipment to supplement our fleet. Our specialized equipment portfolio managers evaluate over 100 new products per year to keep abreast of current market technology and determine whether to add new products to our fleet. In making equipment purchases, we consider a variety of factors, including manufacturer credibility, repair and maintenance costs, anticipated user demand, equipment mobility, and anticipated obsolescence. As of December 31, 2004, we owned approximately 150,000 pieces of equipment available for use by our customers.
During 2004, we purchased approximately 85% of our movable medical equipment from over 200 manufacturers and 15% from the used equipment market. We added 34 new types of technology to our fleet during the year. Our ten largest manufacturers of movable medical equipment supplied approximately 70% of our direct movable medical equipment purchases. In 2004 our two largest movable medical equipment suppliers were Baxter Healthcare Corporation, and Tyco International, Ltd. (Mallinckrodt Medical, Puritan Bennet and Kendall Healthcare Products Company) which together accounted for over 20% of our movable medical equipment purchases.
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 our equipment generally ranges from $1,000 to $45,000 per item.
OUR STRENGTHS
We believe our business model presents an attractive value proposition to our customers and has resulted in significant growth in recent years. Our industry leading position in our flagship Medical Equipment Outsourcing segment presents us with considerable competitive advantages, and has facilitated further growth in complementary areas. We service customers across the spectrum of the equipment life cycle as a result of our position as one of the industry’s largest purchasers, outsourcers and resellers of movable medical equipment.
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We attribute our historical success to, and believe that our potential for future growth comes from, the following strengths:
Unique position in the health care arena. We are the only national company providing full movable medical equipment lifecycle services to the health care industry. While there are competitors that may offer various stages of the lifecycle, none provide the comprehensive approach that we do to our customers. Our extensive and long-standing relationships with more than 3,100 hospitals, approximately 3,150 alternate site providers, over 200 medical equipment manufacturers and the nation’s most prominent GPOs and IDNs present a considerable competitive advantage over our smaller regional competitors. We are uniquely positioned in the health care industry as a result of our: 1. investment in the industry’s largest, most extensive and modern fleet of moveable medical equipment; 2. nationwide infrastructure for service and logistics; 3. proprietary medical equipment management software and tools; 4. commitment to customer service that has earned us a reputation as a leader in quality and service in our industry; and 5. extensive knowledge and experience in acquiring, managing, maintaining and remarketing medical equipment.
Superior customer service. We have a long-standing reputation among our customers for service and quality. This reputation is largely due to our customer service culture, which is continuously reinforced through significant investment in hiring and training resources. We strive to seamlessly integrate our employees and service offerings into the operations of our customers. This aggressive focus on customer service has helped us achieve a high customer retention rate.
Large, modern equipment fleet. We own and manage an extensive, modern fleet of movable medical equipment, consisting of approximately 150,000 owned units. This modern equipment fleet, along with our quality assurance programs and tools, minimizes obsolescence risk and places us in a leadership position in the areas of quality and patient safety. It also places us in a unique position to service “high end” acute care hospitals, such as teaching, research or specialty institutions that demand the most current technology to satisfy the increasingly complex needs of their patients. Because we service the full spectrum of care providers, we are able to move equipment along the care spectrum as equipment ages.
Proprietary software and asset management tools. We have used our 65 years of experience and our extensive database of equipment management information to develop sophisticated software technology and management tools. These tools have allowed us to become a leader in meeting the demands of customers by delivering sophisticated asset management and patient safety programs that we use to drive cost efficiencies, equipment productivity and patient safety programs. We believe that our continued and significant investment in new tools and technology will help us to maintain our leadership role in the industry.
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Nationwide infrastructure. We have a broad, nationwide service network coupled with focused and customized operations at the local level. This extensive network of 75 district offices, 62 service centers (6 of which are designated as Centers of Excellence) and our 24-hour-a-day, 365 day-a-year service capabilities have enabled us to compete effectively for large, national contracts as well as to drive growth regionally and locally.
Industry with favorable fundamentals. The attractiveness of our business is driven by the overall favorable trends in health care in general and our segments in particular. The growth in the moveable medical equipment outsourcing industry is being driven by a fundamental shift in the needs of hospitals and alternate site providers from supplemental and peak needs supply of movable medical equipment to full equipment lifecycle asset management programs. This move to full outsourcing is not unlike trends in similar services at hospitals including food services, laundry, professional staffing and technology. The strong fundamentals in medical equipment outsourcing are being driven by the following trends:
| • | Favorable demographic trends. According to the U.S. Census Bureau, individuals aged 65 and older in the United States comprise the fastest growing segment of the population, and that segment is expected to grow to approximately 40 million by 2010. As a result, over time the number of patients and the volume of hospital admissions are expected to grow. The aging population and increasing life expectancy are increasing demand for health care services; |
| • | Increase in obesity. The U.S. population is getting heavier with 64% of the population now considered obese (Source: OECD Health Statistics, 2004). Therefore, health care facilities must be prepared for the needs of obese and morbidly obese patients. In addition, according to the American Society for Bariatric Surgery the number of gastric bypass surgeries rose an estimated 500% between 1993 and 2003. As a result, the demand for bariatrics products is expected to increase; |
| • | Increased capital and operating expense pressures. As hospitals continue to experience tight capital and operating budgets, and while the cost and complexity of medical equipment increases, we expect that hospitals will increasingly look to us to source these capital equipment needs and manage medical equipment to achieve capital operating expense savings and efficiencies; and |
| • | Nursing and professional staffing satisfaction. As hospitals continue to experience staffing pressures, we expect that they will increasingly turn to our programs to alleviate medical equipment duties for nurses and professional staff to increase their overall job satisfaction levels. |
Strong value proposition. With our focus and expertise in medical equipment lifecycle management, we are able to create a strong value proposition for our customers. We provide our customers with the ability to improve their performance with respect to
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equipment acquisition, efficiency, utilization, management, maintenance, repair and disposal. We also can help our customers improve employee satisfaction and regulatory compliance.
No direct reimbursement risk. Generally, health care providers rely on payment from patients or reimbursement from governmental or other third party payors. 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 reduced, as evidenced by our bad debt expense of approximately 0.5% of total revenues for the year ended December 31, 2004.
Proven management team. We have an industry leading management team with an average of approximately 13 years of health care experience. Our management team has successfully supervised the development of our competitive strategy, continually enhanced our service and product offerings, established our nationwide coverage and furthered our reputation as the industry’s service and quality leader.
GROWTH STRATEGY
Historically, we have experienced significant and sustained organic and strategic growth. Our overall growth strategy is to continue to grow both organically and through strategic acquisitions.
Organic Growth
We believe that the following external and market factors will provide us significant growth opportunities: 1. the aging population; 2. increasing life expectancy; 3. continued increase in the number and sophistication of medical technologies; 4. increasing cost and staffing pressures in hospitals; 5. continuing growth of outsourcing of non-core functions by hospitals, alternate site providers and manufacturers; and 6. further penetration of our resident-based programs.
Our organic growth will be driven by the following factors: 1. converting short term supplemental rental business to longer term AMPP and related resident-based programs; 2. aggressively growing our less capital intensive technical and professional services and equipment remarketing services; 3. increasing the number of hospitals, alternative care facilities and manufacturers to which we provide services; 4. expanding our relationships with GPOs and other national account customers; and 5. leveraging our broad range of service offerings to give us opportunities to serve new customers, and to provide new services to existing customers.
Acquisitions
In recent years, we have made and successfully integrated several strategic acquisitions that have helped us expand our business by increasing our market share in existing markets, adding additional service offerings, and enabling us to penetrate new geographic
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regions. We intend to continue to pursue a disciplined course of growing our business with complementary acquisitions. We regularly evaluate potential acquisitions, and we may be evaluating or engaging in acquisition negotiations at any time.
COMPETITION
We analyze our competition as it relates to our three business segments:
Medical Equipment Outsourcing Segment
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 purchasing or leasing equipment and managing that equipment through its full lifecycle. Although we believe that we can demonstrate the cost-effectiveness of outsourcing patient-ready movable medical equipment and its management in the healthcare setting, we believe that many health care providers will continue to purchase or lease and manage internally a substantial portion of their movable medical equipment until they are educated in the advantages and efficiencies of outsourcing.
We have one principal national competitor in the movable medical equipment outsourcing business: MEDIQ, Inc., based in Pennsauken, New Jersey. On February 2, 2004, MEDIQ was acquired by Hillenbrand Industries. Hillenbrand is a publicly traded holding company serving the health care and funeral services industries. Hillenbrand’s Hill-Rom subsidiary is a leading provider of therapy bed rentals and a manufacturer of hospital furniture. Hillenbrand has announced its intention to integrate MEDIQ’s operations into its Hill-Rom subsidiary.
Our other competition consists of regional or local companies and some movable medical equipment manufacturers and dealers that provide equipment outsourcing to augment their movable medical equipment sales. Local and regional companies have difficulty matching our technology pool or service levels and, therefore, have a propensity to compete on price. This can negatively impact our margins. We believe that our extensive and modern equipment fleet, national infrastructure and superior service allow us to compete effectively with these entities.
Technical and Professional Services Segment
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 choose to perform these functions using their own personnel. We believe that through our nationwide network of highly trained technicians, strong customer relations and extensive equipment database we offer customers an attractive alternative for performing biomedical repair services on their equipment.
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Medical Equipment Sales and Remarketing Segment
In medical equipment sales, we face significant direct competition from a variety of manufacturers and distributors 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. The equipment remarketing market is highly fragmented with low barriers to entry. In addition to manufacturers seeking to control the remarketing and disposal of their own products, we compete with a number of localized or more specialized providers of remarketing and disposal services.
EMPLOYEES
We had 1,188 employees as of December 31, 2004, including 1,096 full-time and 92 part-time employees. Of such employees, 133 are sales representatives, 295 are technical support personnel, 110 are employed in the areas of corporate and marketing, 188 are hospital service personnel and 462 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.
INTELLECTUAL PROPERTY
We use “UHS” and “CHAMP” as service marks in connection with our services and have registered these marks with the United States Patent and Trademark Office. We use the UHS logo, “Equipment Lifecycle Services”, and the Equipment Lifecycle Services logo as service marks in connection with our services. We have applied for federal trademark registration of these and other marks with the United States Patent and Trademark Office. We have also registered the domain name UHS.com which serves as our main website and my.UHS.com which is a web-based tool that provides 24 hour on-demand access to equipment reports for all equipment outsourced from us
We have developed proprietary software programs including the Asset Information Management System for Central Services (AIMS/CS), Resource for Equipment Documentation System (REDS) and Operator Error Identification System (OEIS). AIMS/CS is a medical equipment inventory management system that allows customers to track the location and usage of their leased and owned medical equipment using barcodes and hand held laser scanners. Our proprietary REDS and OEIS programs are specifically designed to help customers meet medical equipment documentation and reporting needs under applicable regulations and standards, such as those promulgated by the Food and Drug Administration and Joint Commission on Accreditation of Healthcare Organizations.
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MARKETING
We market our programs primarily through our direct sales force, which consisted of 133 professional sales representatives as of December 31, 2004. In the third quarter of 2004, we separated sales and customer service in the field to provide focused responsibility for each function.
We also market through a website that was redesigned in 2004, participation in numerous national and regional conventions, and placement of articles and advertisements in industry-leading publications.
In our marketing efforts, we primarily target key decision makers, such as administrators, chief executive officers and chief financial officers as well as materials managers, department heads and directors of purchasing, nursing and central supply. We also promote our programs and services to hospital, manufacturer and alternate care provider groups and associations.
REGULATORY MATTERS
Sarbanes Oxley. During 2005 we anticipate that we will incur additional expenses related to the management’s report, attestation and other requirements under Section 404 of the Sarbanes-Oxley Act of 2002. On March 2, 2005, the SEC announced that the compliance date for non-accelerated filers (such as UHS) was extended to December 31, 2006.
Regulation of Medical Equipment. Our customers are subject to documentation and safety reporting regulations and standards with respect to the medical equipment they use, including those established by the Food and Drug Administration (FDA), the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), and the National Fire Protection Association (NFPA). Some states and municipalities also have similar regulations.
Our REDS and OEIS programs (see description in “Intellectual Property” section of this Form 10-K) are specifically designed to help customers meet documentation and reporting needs under such regulations and standards. We also monitor changes in regulations and standards and work to accommodate the needs of customers by providing specific product and manufacturer information upon request. Manufacturers of medical equipment are subject to regulation by agencies and organizations such as the FDA, Underwriters Laboratories, and the NFPA. We believe that all movable medical equipment we outsource conforms to these regulations.
The Safe Medical Devices Act of 1990 (SMDA), which amended the Food, Drug and Cosmetic Act (FDCA), requires manufacturers, user facilities, and importers of medical devices to report deaths and serious injuries which a device has or may have caused or contributed to. The SMDA also requires the establishment and maintenance of adverse event files and various other FDA reports. Manufacturers and importers are also required
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to report certain device malfunctions. We 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. 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.
In addition, we are required to provide information to the manufacturer regarding the permanent disposal or any change in ownership of certain categories of medical outsourcing equipment. We believe our medical tracking systems are in material compliance with these regulations.
The Health Insurance Portability and Accountability Act of 1996, commonly known as HIPAA, applies to certain covered entities, including health plans, health care clearinghouses and health care providers. HIPAA regulations protect individually identifiable health information by, among other things, setting forth specific standards under which such information may be used and disclosed, furnishing patient rights to obtain and amend their health information, and establishing certain administrative requirements for covered entities. On February 20, 2003, the Department of Health and Human Services published new security standards addressing the security of electronic protected health information. The general deadline for compliance with these new security standards is April 21, 2005.
Because of our self-insured health plans, we are a covered entity under the HIPAA regulations. Also, we may be obligated contractually to comply with certain HIPAA requirements as a business associate of various health care providers. In addition, various state legislatures may enact additional privacy legislation that is not preempted by the federal law, which may impose additional burdens on us. Accordingly, we have made and, as new standards go into effect, we expect to continue to make administrative, operational and information infrastructure changes in order to comply with these rules.
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Third Party Reimbursement
Our fees are paid directly by our customers rather than through direct reimbursement from private insurers or governmental entities, such as Medicare or Medicaid. We do not bill the patient, the insurer or other third party payors directly for services provided for hospital inpatients or outpatients. Payment to health care providers by third party payors for our services depends substantially upon the reimbursement policies of these payors. Consequently, those policies have a direct effect on the ability of health care providers to pay for our services and an indirect effect on our level of charges. Also, in certain circumstances third party payors may take regulatory or other action against service providers even though the service provider does not receive direct reimbursement from third party payors.
Hospitals and alternate site providers are facing increased cost containment pressures from public and private insurers and other managed care providers, such as health maintenance organizations, preferred provider organizations and managed fee-for-service plans, as these organizations attempt to reduce the cost and utilization of healthcare services. We believe that these payors have followed or will follow the federal government in limiting reimbursement through preferred provider contracts, discounted fee arrangements and capitated (fixed patient care reimbursement) managed care arrangements. In addition to promoting managed care plans, employers are increasingly self funding their benefit programs and shifting costs to employees through increased deductibles, co-payments and employee contributions. We believe that these cost reduction efforts will place additional pressures on health care providers’ operating margins and will encourage efficient equipment management practices, such as use of our Pay-Per-Use outsourcing and AMPP services.
Liability and Insurance
Although we do not manufacture any medical equipment, our business entails the risk of claims related to the outsourcing, sale and service of medical equipment. In addition, our instruction of hospital employees with respect to the equipment’s use and our professional consulting services are sources of potential claims. We have not suffered a material loss due to a claim; however, any such claim, if made, could have a material adverse effect on our business. We maintain commercial general liability coverage, including product and premises liability insurance. We also maintain excess liability coverage. Our policies are subject to annual renewal. We believe that our current insurance coverage is adequate. Claims exceeding such coverage may be made and we may not be able to continue to obtain liability insurance at acceptable levels of cost and coverage.
FORWARD LOOKING STATEMENTS
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
We believe statements in this Annual Report on Form 10-K looking forward in time involve risks and uncertainties. The following factors, among others, could adversely
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affect our business, operations and financial condition causing our actual results to differ materially from those expressed in any forward-looking statements: our history of net losses and substantial interest expense; our need for substantial cash to operate and expand the business as planned; our substantial outstanding debt and debt service obligations; restrictions imposed by the terms of our debt; a decrease in the number of patients our customers are serving; our ability to effect change in the manner in which healthcare providers traditionally procure medical equipment; the absence of long-term commitments with customers; our ability to renew contracts with group purchasing organizations and integrated delivery networks; changes in reimbursement rates and policies by third-party payors; the impact of health care reform initiatives; the impact of significant regulation of the health care industry and the need to comply with those regulations; difficulties or delays in our continued expansion into certain of our businesses/geographic markets and developments of new businesses/geographic markets; additional credit risks in increasing business with home care providers and nursing homes; and other Risk Factors as set forth below.
We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events included in this Annual Report on Form 10-K might not occur.
RISK FACTORS
If the patient census of our customers decreases, the revenues generated by our business could decrease.
Our operating results are dependent in part upon the amount and types of equipment necessary to service our customers’ needs which are heavily influenced by the total number of patients our customers are serving at any time (which we refer to as patient census). At times of lower patient census, our customers have a decreased need for our services on a supplemental or peak needs basis. Our operating results can vary depending on the timing and severity of the cold and flu season and the impact of national catastrophes, as well as other factors affecting census.
If we are unable to fund our significant cash needs, we may be unable to expand our business as planned or to service our debt.
We require substantial cash to operate our Medical Equipment Outsourcing programs and service our debt. Our outsourcing programs 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 senior secured credit facility or other financing sources, we may not be able to grow as currently planned. We currently expect that over the next 12 months we will invest approximately $45 million in new equipment. This estimate is subject to numerous assumptions, including revenue growth and the number of AMPP signings. In addition, a substantial portion of our cash flow from operations must be dedicated to servicing our debt and there are significant restrictions on our ability to incur additional indebtedness under the
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indenture governing our 10.125% senior notes due 2011 and our senior secured credit facility.
Primarily because of our debt service obligations and debt refinancing charges, we have had a history of net losses. If we continue to incur net losses, this could result in our inability to finance our business in the future. We had net losses of $5.1 million, $3.6 million, $0.2 million, $19.5 million and $3.6 million for the years ended 2000, 2001, 2002, 2003 and 2004, respectively.
If we are unable to meet certain financial and operating covenants contained in our Senior Secured Credit Facility or Senior Notes, our creditors could accelerate the debt or restrict further borrowing.
Our Senior Secured Credit Facility and our Senior Notes contain financial and operating covenants. (For a summary of the covenants under the Senior Secured Credit Facility, see “Covenants Under Our Secured Credit Facility” in Item 7 of this Form 10-K). If we fail to meet these covenants or obtain appropriate waivers, our creditors have a number of remedies including, but not limited to, acceleration of our debt or placement of restrictions on further borrowing.
If we are unable to change the manner in which health care providers traditionally procure medical equipment, we may not be able to achieve significant revenue growth.
We believe that the strongest competition to our outsourcing programs is the traditional purchase or lease alternative 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, effective and cost efficient alternative to purchasing or leasing equipment. Many health care providers may continue to purchase or lease a substantial portion of their movable medical equipment.
Our competitors may engage in significant price competition or liquidate significant amounts of surplus equipment, thereby decreasing the demand for outsourcing services and possibly causing us to reduce the rates we charge for our services.
In a number of our geographic and product markets, we compete with one principal competitor and various smaller equipment outsourcing companies that compete primarily on the basis of price. These competitors may offer certain customers lower prices depending on utilization levels and other factors. Our largest movable medical equipment outsourcing competitor, MEDIQ, Inc. was acquired by Hillenbrand Industries on February 2, 2004. Hillenbrand is a publicly traded holding company serving the healthcare and funeral services industries. Hillenbrand’s Hill-Rom subsidiary is a leading provider of therapy bed rentals and a manufacturer of hospital furniture. Hillenbrand has announced its intention to integrate MEDIQ’s operations into its Hill-Rom subsidiary. MEDIQ may engage in competitive practices that may undercut our pricing. In addition, MEDIQ or another competitor may liquidate significant amounts of surplus equipment,
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thereby decreasing the demand for outsourcing services and possibly causing us to reduce the rates we may charge for our services.
We have relationships with certain key suppliers, and adverse developments concerning these suppliers could delay our ability to procure equipment or increase our cost of purchasing equipment.
We purchased our movable medical equipment from over 200 manufacturers in 2004. Our ten largest manufacturers of movable medical equipment accounted for approximately 70% of our direct movable medical equipment purchases in 2004. 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. If we are unable to have access to parts or if manufacturers do not provide access to equipment manuals or training, we may not be able to provide certain technical and professional services.
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 decrease the amount of revenues we generate, thereby reducing our ability to operate and expand our business.
We derived approximately 67% of our outsourcing revenues for the year ended December 31, 2004, 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. A large number of such terminations may adversely affect our ability to generate revenue growth and sufficient cash flows to support our growth plans.
If we are unable to renew our contracts with GPOs or IDNs, we may lose existing customers, thereby reducing the amount of revenues we generate.
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 GPOs and IDNs. In the past, we have been able to renew such contracts when they are up for renewal. If we are unable to renew our current GPO contracts, we may lose a portion of existing business with the customers who are members of such GPOs.
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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 or to our maintenance or repair of a customer’s moveable medical equipment. Any such claims, if made and upheld, could make our business more expensive to operate and therefore less profitable. 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 revenue growth, thereby weakening our position in the industry with respect to our competitors.
As part of our growth strategy, we intend to pursue acquisitions or other strategic relationships within the health care industry that we believe will enable us to generate revenue growth and enhance our competitive position. During 2004 we have acquired several new businesses for an aggregate purchase price of $15.1 million. Future acquisitions may involve significant cash expenditures that could impede our future revenue growth. 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 regularly evaluate potential acquisitions, and we may be evaluating or engaging in acquisition negotiations at any time. 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 personnel and integrating distinct business cultures; |
| • | diversion of management’s time and resources from existing operations; |
| • | 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 may be impaired.
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We depend on our sales professionals and service specialists, and may lose customers when any of our sales professionals and service specialists leave us.
Our revenue growth has been supported by hiring and developing new sales professionals and service specialists and adding, through acquisitions, established sales professionals and service specialists whose existing customers generally have become our customers. We have experienced and will continue to experience intense competition for these resources. The success of our programs depends on the relationships developed between our sales professionals and service specialists and our customers.
Our cash flow fluctuates during the year because operating income as a percentage of revenue fluctuates with our quarterly operating results and we make semi-annual debt service payments.
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 quarters 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. In addition, semi-annual interest payments on our 10.125% senior notes are paid in the second and fourth quarters, thus leading to significant fluctuations in cash flow from operations.
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, requiring us to reduce our rates or putting our ability to collect payments at risk.
Our health care provider customers who pay us directly for the services we provide to them rely on reimbursement from third party payors for a substantial portion of 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 health care 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 providers’ actual costs or require health care providers to provide services on a discounted basis. Consequently, these reimbursement policies have a direct effect on health care providers’ ability to pay us for our services and an indirect effect on our level of charges. Ongoing concerns about rising health care costs may cause more
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restrictive reimbursement policies to be implemented in the future. Restrictions on the amounts or manner of reimbursements to health care providers may affect their willingness and ability to pay for the services we provide and may adversely affect our customers.
In periods when significant health care reform initiatives were under consideration and uncertainty remained as to their likely outcome, our profits decreased as the cost of doing business increased. If other significant health care reform initiatives occur, they may have a similar, negative effect.
Because the regulatory and political environment for health care significantly influences the capital equipment procurement decisions of health care providers, our ability to generate profits has historically been adversely affected in periods when significant health care reform initiatives were under consideration and uncertainty remained as to their likely outcome.
A portion of our revenues are derived from home care providers and nursing homes, and these health care providers may pose additional credit risks.