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**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

#### **FORM 10-Q**

#### ** **

**(Mark One)**

 

| **x**                                              | **Quarterly  Report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**  |
|----------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                               |                                                                                                     |
| **for the  quarterly period ended March 31, 2010** |
| ** **                                         |
| **or**                                             |
|                                               |                                                                                                     |
| **o**                                              | **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 itscharter)

 

| **Delaware**                    | ** ** | **41-0760940**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

**7700 France Avenue South, Suite 275**

**Edina,Minnesota 55435-5228**

(Address of principal executive offices,including zip code)

 

**(952) 893-3200**

(Registrant’s telephone number, including areacode)

 

**Not Applicable**

(Former name, former address, and former fiscalyear, if changed since last report)

 

Indicate by checkmark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes   o       No x

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T  (§ 232.405 of this chapter) during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes   o    No o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act (Check one):

 

| Large accelerated filer o                     |   | Accelerated  filer o         |
|-----------------------------------------------|--------|------------------------------|
|                                          |   |                         |
| Non-accelerated filer x                       |   | Smaller  reporting company o |
| (Do not check if a smaller reporting company) |   |                         |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes  o  No x

 

Number of shares ofcommon stock outstanding as of May 1, 2010:  1,000

 

 

 

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**Universal Hospital Services, Inc.**

**Table of Contents**

 
| ** **                               | ** **                                                                                  | **Page** |
|------------------------------------------|---------------------------------------------------------------------------------------------|----------|
| **PART I -  FINANCIAL INFORMATION** |                                                                                        |
|                                     |                                                                                        |     |
| **ITEM 1.**                              | Financial Statements                                                                        |     |
|                                     | Balance Sheets – March 31, 2010 and  December 31, 2009                       | 3        |
|                                     |                                                                                        |     |
|                                     | Statements of Operations – Three Months Ended  March 31, 2010 and 2009            | 4        |
|                                     |                                                                                        |     |
|                                     | Statements of Cash Flows – Three Months Ended  March 31, 2010 and 2009            | 5        |
|                                     |                                                                                        |     |
| **ITEM 2.**                              | Management’s Discussion  and Analysis of Financial Condition and Results of Operations | 15       |
|                                     |                                                                                        |     |
| **ITEM 3.**                              | Quantitative  and Qualitative Disclosures About Market Risk                                 | 27       |
|                                     |                                                                                        |     |
| **ITEM 4T.**                             | Controls and Procedures                                                                     | 27       |
|                                     |                                                                                        |     |
| **PART II  - OTHER INFORMATION**    |                                                                                        |
|                                     |                                                                                        |     |
| **ITEM 1.**                              | Legal Proceedings                                                                           | 28       |
|                                     |                                                                                        |     |
| **ITEM 1A.**                             | Risk Factors                                                                                | 28       |
|                                     |                                                                                        |     |
| **ITEM 2.**                              | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 28       |
|                                     |                                                                                        |     |
| **ITEM 3.**                              | Defaults Upon  Senior Securities                                                            | 28       |
|                                     |                                                                                        |     |
| **ITEM  4.**                             | *Removed  and Reserved*                                                                     |     |
|                                     |                                                                                        |     |
| **ITEM 5.**                              | Other Information                                                                           | 28       |
|                                     |                                                                                        |     |
| **ITEM 6.**                              | Exhibits                                                                                    | 30       |
|                                     |                                                                                        |     |
| **Signatures**                           | 31                                                                                          |
|                                          |                                                                                             |          |  |

 

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**PART I- FINANCIAL INFORMATION**

 

**Item 1. Financial Statements –Unaudited**

 

**Universal Hospital Services, Inc.**

 

**BalanceSheets**

*(in thousands, except share and per share information)*

*(unaudited)*

 
| ** **                                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                         | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| **Assets**                                                                                                                         | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                    |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                          |       | $                  | 122        |                  | $          | — |   |
| Accounts receivable, less allowance for doubtful  accounts of $2,450 at March 31, 2010 and December 31, 2009             |       | 58,528             |       | 60,079                |       |
| Inventories                                                                                                                        |       | 5,195              |       | 5,236                 |       |
| Deferred income taxes                                                                                                              |       | 8,040              |       | 8,733                 |       |
| Other current assets                                                                                                               |       | 3,285              |       | 2,983                 |       |
| Total current assets                                                                                                               |       | 75,170             |       | 77,031                |       |
|                                                                                                                               |       |               |       |                  |       |
| Property and equipment, net:                                                                                                       |       |               |       |                  |       |
| Medical equipment, net                                                                                                             |       | 210,833            |       | 197,859               |       |
| Property and office equipment, net                                                                                                 |       | 19,939             |       | 19,406                |       |
| Total property and equipment, net                                                                                                  |       | 230,772            |       | 217,265               |       |
|                                                                                                                               |       |               |       |                  |       |
| Other long-term assets:                                                                                                            |       |               |       |                  |       |
| Goodwill                                                                                                                           |       | 280,211            |       | 280,211               |       |
| Other intangibles, net                                                                                                             |       | 245,263            |       | 248,653               |       |
| Other, primarily deferred financing costs, net                                                                                     |       | 11,749             |       | 12,243                |       |
| Total assets                                                                                                                       |       | $                  | 843,165    |                  | $          | 835,403 |   |
|                                                                                                                               |       |               |       |                  |       |
| **Liabilities and Shareholders’  Equity**                                                                                     | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                               |       |               |       |                  |       |
| Current portion of long-term debt                                                                                                  |       | $                  | 3,931      |                  | $          | 4,062 |   |
| Book overdrafts                                                                                                                    |       | 3,414              |       | 3,302                 |       |
| Accounts payable                                                                                                                   |       | 14,752             |       | 18,075                |       |
| Accrued compensation                                                                                                               |       | 9,370              |       | 10,432                |       |
| Accrued interest                                                                                                                   |       | 14,043             |       | 3,696                 |       |
| Other accrued expenses                                                                                                             |       | 9,804              |       | 9,174                 |       |
| Total current liabilities                                                                                                          |       | 55,314             |       | 48,741                |       |
|                                                                                                                               |       |               |       |                  |       |
| Long-term debt, less current portion                                                                                               |       | 519,666            |       | 514,557               |       |
| Pension and other long-term liabilities                                                                                            |       | 6,487              |       | 6,465                 |       |
| Interest rate swap                                                                                                                 |       | 21,133             |       | 21,286                |       |
| Payable to Parent                                                                                                                  |       | 6,680              |       | 6,342                 |       |
| Deferred income taxes                                                                                                              |       | 62,082             |       | 64,021                |       |
|                                                                                                                               |       |               |       |                  |       |
| Commitments and contingencies (Note 7)                                                                                             |       |               |       |                  |       |
|                                                                                                                               |       |               |       |                  |       |
| Shareholders’ equity                                                                                                          |       |               |       |                  |       |
| Common stock, $0.01 par value; 1,000 shares  authorized, issued and outstanding at March 31, 2010 and  December 31, 2009 |       | —             |       | —                |       |
| Additional paid-in capital                                                                                                         |       | 248,794            |       | 248,794               |       |
| Accumulated deficit                                                                                                                |       | (60,445            | )          | (58,165               | )          |
| Accumulated other comprehensive loss                                                                                               |       | (16,546            | )          | (16,638               | )          |
| Total shareholders’ equity                                                                                                    |       | 171,803            |       | 173,991               |       |
| Total liabilities and shareholders’ equity                                                                                    |       | $                  | 843,165    |                  | $          | 835,403 |   |

 

The accompanying notes are an integral part of the unaudited financialstatements.

 

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**Universal Hospital Services, Inc.**

 

Statements of Operations

*(in thousands)*

*(unaudited)*

 
| ** **                                                                                                                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                      | ** ** | **March 31,**     | ** ** |
| ** **                                                                                                                      | ** ** | **2010**               | ** ** | **2009** | ** ** |
| **Revenue**                                                                                                                     | ** ** | ** **             | ** ** | ** ** | ** ** |
| Medical equipment outsourcing                                                                                                   |       | $                      | 65,174     |   | $ | 58,282 |   |
| Technical and professional services                                                                                             |       | 10,813                 |       | 10,412 |   |
| Medical equipment sales and remarketing                                                                                         |       | 4,187                  |       | 5,236 |   |
| Total revenues                                                                                                                  |       | 80,174                 |       | 73,930 |   |
|                                                                                                                            |       |                   |       |   |   |
| **Cost of Sales**                                                                                                               |       |                   |       |   |   |
| Cost of medical equipment outsourcing                                                                                           |       | 22,617                 |       | 20,469 |   |
| Cost of technical and professional services                                                                                     |       | 7,784                  |       | 7,370 |   |
| Cost of medical equipment sales and remarketing                                                                                 |       | 3,347                  |       | 4,386 |   |
| Medical equipment depreciation                                                                                                  |       | 17,457                 |       | 15,862 |   |
| Total costs of medical equipment outsourcing,  technical and professional services and medical equipment sales and  remarketing |       | 51,205                 |       | 48,087 |   |
|                                                                                                                            |       |                   |       |   |   |
| Gross margin                                                                                                                    |       | 28,969                 |       | 25,843 |   |
|                                                                                                                            |       |                   |       |   |   |
| Selling, general and administrative                                                                                             |       | 21,070                 |       | 22,015 |   |
| Operating income                                                                                                                |       | 7,899                  |       | 3,828 |   |
|                                                                                                                            |       |                   |       |   |   |
| Interest expense                                                                                                                |       | 11,507                 |       | 11,717 |   |
| Loss before income taxes                                                                                                        |       | (3,608                 | )          | (7,889 | ) |
|                                                                                                                            |       |                   |       |   |   |
| Benefit for income taxes                                                                                                        |       | (1,328                 | )          | (3,099 | ) |
| Net loss                                                                                                                        |       | $                      | (2,280     | ) | $ | (4,790 | ) |

 

The accompanying notes are an integral part of theunaudited financial statements.

 

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**UniversalHospital Services, Inc.**

**Statements of Cash Flows**

*(inthousands)*

*(unaudited)*

 
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                       | ** ** | **March 31,**     | ** ** |
| ** **                                                                       | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Cash  flows from operating activities:                                           |       |                   |       |   |   |
| Net  loss                                                                        |       | $                      | (2,280     | ) | $ | (4,790 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation                                                                     |       | 19,570                 |       | 17,995 |   |
| Amortization  of intangibles and deferred financing costs                        |       | 3,992                  |       | 4,428 |   |
| Provision  for doubtful accounts                                                 |       | (28                    | )          | 587 |   |
| Provision  for inventory obsolescence                                            |       | 86                     |       | (22 | ) |
| Non-cash  stock-based compensation expense                                       |       | 338                    |       | 623 |   |
| Loss  on sales and disposals of equipment                                        |       | 98                     |       | 137 |   |
| Deferred  income taxes                                                           |       | (1,308                 | )          | (2,705 | ) |
| Changes  in operating assets and liabilities:                                    |       |                   |       |   |   |
| Accounts  receivable                                                             |       | 1,578                  |       | (781 | ) |
| Inventories                                                                      |       | (45                    | )          | 222 |   |
| Other  operating assets                                                          |       | (410                   | )          | (725 | ) |
| Accounts  payable                                                                |       | (1,116                 | )          | (2,795 | ) |
| Other  operating liabilities                                                     |       | 9,937                  |       | 6,377 |   |
| Net  cash provided by operating activities                                       |       | 30,412                 |       | 18,551 |   |
| Cash  flows from investing activities:                                           |       |                   |       |   |   |
| Medical  equipment purchases                                                     |       | (33,328                | )          | (10,164 | ) |
| Property  and office equipment purchases                                         |       | (1,167                 | )          | (674 | ) |
| Proceeds  from disposition of property and equipment                             |       | 602                    |       | 951 |   |
| Net  cash used in investing activities                                           |       | (33,893                | )          | (9,887 | ) |
| Cash  flows from financing activities:                                           |       |                   |       |   |   |
| Proceeds  under senior secured credit facility                                   |       | 42,150                 |       | 42,000 |   |
| Payments  under senior secured credit facility                                   |       | (37,450                | )          | (21,000 | ) |
| Payments  of principal under capital lease obligations                           |       | (1,209                 | )          | (1,171 | ) |
| Change  in book overdrafts                                                       |       | 112                    |       | (7,099 | ) |
| Net  cash provided by financing activities                                       |       | 3,603                  |       | 12,730 |   |
| Net  change in cash and cash equivalents                                         |       | 122                    |       | 21,394 |   |
|                                                                             |       |                   |       |   |   |
| Cash  and cash equivalents at the beginning of period                            |       | —                 |       | 12,006 |   |
| Cash  and cash equivalents at the end of period                                  |       | $                      | 122        |   | $ | 33,400 |   |
|                                                                             |       |                   |       |   |   |
| Supplemental  cash flow information:                                             |       |                   |       |   |   |
| Interest  paid                                                                   |       | $                      | 559        |   | $ | 774 |   |
| Income  taxes paid                                                               |       | $                      | 107        |   | $ | 30 |   |
| Non-cash  activities:                                                            |       |                   |       |   |   |
| Medical  equipment purchases included in accounts payable (at end of period)     |       | $                      | 2,489      |   | $ | 2,256 |   |
| Capital  lease additions                                                         |       | $                      | 1,487      |   | $ | 985 |   |

 

The accompanyingnotes are an integral part of the unaudited financial statements.

 

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**Universal Hospital Services, Inc.**

 

**NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS**

 

**1.             Basis of Presentation**

 

Theinterim financial statements included in this Quarterly Report on Form 10-Qhave been prepared by Universal Hospital Services, Inc. (“we,” “our”,“us”, the “Company”, or “UHS”) without audit, pursuant to the rules andregulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America(“GAAP”) have been condensed or omitted, pursuant to such rules andregulations.  These condensed financialstatements should be read in conjunction with the financial statements andrelated notes included in the Company’s 2009 Annual Report on Form 10-K(“2009 Form 10-K”), filed with the SEC.

 

Theinterim financial statements presented herein as of March 31, 2010,reflect, in the opinion of management, all adjustments necessary for a fairpresentation of the financial position and the results of operations and cashflows for the periods presented.  Theseadjustments are all of a normal, recurring nature.  The results of operations for any interimperiod are not necessarily indicative of results for the full year.

 

TheDecember 31, 2009 balance sheet amounts were derived from auditedfinancial statements, but do not include all disclosures required by GAAP.

 

Weare required to make estimates and assumptions about future events in preparingfinancial statements in conformity with GAAP. These estimates and assumptions affect the amounts of assets,liabilities, revenues and expenses at the date of the unaudited condensedfinancial statements.  While we believethat our past estimates and assumptions have been materially accurate, ourcurrent estimates are subject to change if different assumptions as to theoutcome of future events are made.  Weevaluate our estimates and judgments on an ongoing basis and predicate thoseestimates and judgments on historical experience and on various other factorsthat we believe to be reasonable under the circumstances.  We make adjustments to our assumptions andjudgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolutecertainty, actual results may differ from the estimates used in preparing theaccompanying unaudited condensed financial statements.

 

Adescription of our critical accounting policies is included in our 2009 Form 10-K.There have been no material changes to these policies for the quarter ended March 31,2010.

 

**2.             Comprehensive Loss**

 

Comprehensiveloss is comprised of net loss and other comprehensive income (loss). Othercomprehensive income (loss) includes unrealized gains from derivatives designatedas cash flow hedges and minimum pension liability adjustments.  Accumulated other comprehensive loss isdisplayed separately on the balance sheets. A reconciliation of net loss to comprehensive loss is provided below:

 

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| ** **                                      | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **March 31,**     | ** ** |
| **(in thousands)**                              | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net  loss                                       |       | $                      | (2,280     | ) | $ | (4,790 | ) |
| Unrealized  gain on cash flow hedge, net of tax |       | 92                     |       | 622 |   |
| Comprehensive  loss                             |       | $                      | (2,188     | ) | $ | (4,168 | ) |

 

**3.             Recent AccountingPronouncement**

 

***Standard Issued Not Yet Adopted***

 

InOctober 2009, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”), 2009-13, Revenue Recognition (Topic 605):Multiple Deliverable Revenue Arrangements — A Consensus of the FASB EmergingIssues Task Force.” This update provides application guidance on whethermultiple deliverables exist, how the deliverables should be separated and how theconsideration should be allocated to one or more units of accounting. Thisupdate establishes a selling price hierarchy for determining the selling priceof a deliverable. The selling price used for each deliverable will be based onvendor-specific objective evidence, if available, third-party evidence ifvendor-specific objective evidence is not available, or estimated selling priceif neither vendor-specific or third-party evidence is available. The Companywill be required to apply this guidance prospectively for revenue arrangementsentered into or materially modified after January 1, 2011. The Company iscurrently evaluating the impact of the provisions of ASU 2009-13 on theCompany’s Financial Statements.

 

**4.****                                     ****FairValue Measurements**

 

Financialassets and liabilities measured at fair value on a recurring basis as of March 31,2010 and December 31, 2009, in accordance with Accounting StandardsCodification (“ASC”) Topic 820, are summarized in the following table by typeof inputs applicable to the fair value measurements:

 
| ** **          | ** ** | **Fair Value at March 31, 2010** | ** ** | **Fair Value at December 31, 2009** | ** ** |
|---------------------|------------|---------------------------------------|------------|------------------------------------------|------------|
| **(in thousands)**  | ** ** | **Level 1**                           | ** ** | **Level 2**                              | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Interest  Rate Swap |       | $                                     | —     |                                     | $          | 21,133 |   | $ | — |   | $ | 21,133 |   | $ | — |   | $ | 21,286 |   | $ | — |   | $ | 21,286 |   |
|                     |            |                                       |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Adescription of the inputs used in the valuation of assets and liabilities issummarized as follows:

 

Level1 – Inputs represent unadjusted quoted prices for identical assets orliabilities exchanged in active markets.

 

Level2 – Inputs include directly or indirectly observable inputs other than Level 1inputs such as quoted prices for similar assets or liabilities exchanged inactive or inactive markets; quoted prices for identical assets or liabilitiesexchanged in inactive markets; other inputs that are considered in fair valuedeterminations of the assets or liabilities, such as interest rates and yieldcurves that are observable at commonly quoted intervals, volatilities,prepayment speeds, loss severities, credit risks and default rates;

 

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andinputs that are derived principally from or corroborated by observable marketdata by correlation or other means.

 

Level3 – Inputs include unobservable inputs used in the measurement of assets andliabilities. Management is required to use its own assumptions regardingunobservable inputs because there is little, if any, market activity in theassets or liabilities or related observable inputs that can be corroborated atthe measurement date. Measurements of nonexchange traded derivative contractassets and liabilities are primarily based on valuation models, discounted cashflow models or other valuation techniques that are believed to be used bymarket participants. Unobservable inputs require management to make certainprojections and assumptions about the information that would be used by marketparticipants in pricing assets or liabilities.

 

**Fair Value of Other FinancialInstruments**

 

TheCompany considers the carrying amount of financial instruments, includingaccounts receivable, accounts payable and accrued liabilities, as theapproximate fair value due to their short maturities.  The fair value of our outstanding PIK ToggleNotes, Floating Rate Notes and 10.125% Senior Notes, based on the quoted marketprice for the same or similar issues of debt, is approximately:

 
| ** **            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------|------------|--------------------|------------|-----------------------|------------|
| **(in millions)**     | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| PIK  Toggle Notes     |       | $                  | 229.4      |                  | $          | 227.1 |   |
| Floating  Rate Notes  |       | 195.5              |       | 193.8                 |       |
| 10.125%  Senior Notes |       | 9.8                |       | 9.8                   |       |
|                       |            |                    |            |                       |            |  |  |

 

**5.             Stock-Based Compensation**

 

Duringthe quarter ended March 31, 2010, activity under the 2007 Stock OptionPlan of UHS Holdco, Inc., our parent company (“Parent”) was as follows:

 
| **(in thousands except exercise price)**          | ** ** | **Number of  Options** | ** ** | **Weighted  average  exercise price** | ** ** | **Aggregate  intrinsic value** | ** ** | **Weighted  average  remaining  contractual  term (years)** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|---------------------------------------|------------|--------------------------------|------------|-------------------------------------------------------------|------------|
| Outstanding  at December 31, 2009            |       | 37,527                 |       | $                                     | 1.00       |                           | $          | 35,651                                                      |       | 7.5 |   |
| Forfeited  or expired                             |       | (117                   | )          | $                                     | 1.00       |                           |       |                                                        |       |   |
|                                              |       |                   |       |                                  |       |                           |       |                                                        |       |
| Outstanding  at March 31, 2010               |       | 37,410                 |       | $                                     | 1.00       |                           | $          | 31,050                                                      |       | 7.3 |   |
|                                              |       |                   |       |                                  |       |                           |       |                                                        |       |
| Exercisable  at March 31, 2010               |       | 15,003                 |       | $                                     | 1.00       |                           | $          | 12,452                                                      |       | 7.2 |   |
|                                              |       |                   |       |                                  |       |                           |       |                                                        |       |
| Remaining  authorized options available for issue |       | 6,495                  |       |                                  |       |                           |       |                                                        |       |

 

The intrinsic value of astock award is the amount by which the market value of the underlying stockexceeds the exercise price of the award.

 

Although Parent grants stockoptions, the Company recognizes compensation expense related to these optionssince the services are performed for its benefit.  For the quarters ended March 31,2010 and

 

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2009, we recognized non-cashstock compensation expense of $0.3 and $0.6 million, respectively, which isprimarily included in selling, general and administrative expenses.  At March 31,2010, unearned non-cash stock-based compensation related to our fixed vestingoptions, that we expect to recognize as expense over the next 3.0 years, totalsapproximately $3.7 million, net of our estimated forfeiture rate of 2.0%.Unearned non-cash stock-based compensation related to the performance vestingoptions totaling approximately $4.8 million, net of our estimated forfeiturerate of 2.0%, would be recognized over the next 5.8 years only if theperformance targets are met.  The expense could be accelerated upon thesale of Parent or the Company.

 

Compensation expense related to service provided bythe Company’s employees is recognized in the accompanying Statements ofOperations with an offsetting Payable to Parent liability, which is notexpected to be settled within the next twelve months.

 

**6.****                                     ****Long-TermDebt**

 

Long-term debt consists of the following:

 
| ** **                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(in thousands)**                      | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| PIK Toggle Notes                        |       | $                  | 230,000    |                  | $          | 230,000 |   |
| Floating Rate Notes                     |       | 230,000            |       | 230,000               |       |
| Senior secured credit facility          |       | 43,100             |       | 38,400                |       |
| 10.125% Senior Notes                    |       | 9,945              |       | 9,945                 |       |
| Capital lease obligations               |       | 10,552             |       | 10,274                |       |
|                                    |       | 523,597            |       | 518,619               |       |
| Less: Current portion of long-term debt |       | (3,931             | )          | (4,062                | )          |
| Total long-term debt                    |       | $                  | 519,666    |                  | $          | 514,557 |   |

 

***PIK Toggle Notes. ***Our 8.50% / 9.25% PIK Toggle Notes (the“PIK Toggle Notes”) were issued on May 31, 2007 in the aggregate principalamount of $230.0 million under a Second Lien Senior Indenture dated as of May 31,2007, between the Company and Wells Fargo Bank, National Association, astrustee (the “Second Lien Senior Indenture”). ThePIK Toggle Notes mature on June 1, 2015. Interest on the PIK Toggle Notes is payable semiannually inarrears on each June 1 and December 1.  For any interest payment period through June 1,2011, the Company may, at its option, elect to pay interest on the PIK ToggleNotes entirely in cash (“Cash Interest”), entirely by increasing the principalamount of the outstanding PIK Toggle Notes, by issuing additional PIK ToggleNotes (“PIK Interest”) or 50% Cash Interest and 50% PIK Interest.  Cash Interest on the PIK Toggle Notes accruesat the rate of 8.50% per annum.  PIK Interest on the PIK Toggle Notesaccrues at the rate of 9.25% per annum.  After June 1, 2011, theCompany is required to make all interest payments on the PIK Toggle Notesentirely as Cash Interest.  The PIK Toggle Notes are redeemable, at theCompany’s option, in whole or in part, at specified redemption prices (asdefined in the Second Lien Senior Indenture) plus accrued interest to the dateof redemption. In addition, the PIK Toggle Notes have a change of controlprovision, which gives each holder the right to require the Company to purchaseall or a portion of such holders’ PIK Toggle Notes upon a change in control, asdefined in the Second Lien Senior Indenture, at a purchase price equal to 101%of the principal amount plus accrued interest to the date of purchase. The PIKToggle Notes, subject to certain definitions and exceptions, have covenantsthat restrict, among other things, the

 

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incurrenceof additional debt, the payment of dividends and the issuance of preferredstock. The PIK Toggle Notes are uncollateralized.

 

***Floating Rate Notes. ***Our-Floating Rate Notes (the “Floating Rate Notes”)were issued on May 31, 2007 in the aggregate principal amount of $230.0million under the Second Lien Senior Indenture. The Floating Rate Notes mature on June 1, 2015.  Interest on the FloatingRate Notes is payable semiannually in arrears on each June 1 and December 1.Interest on the Floating Rate Notes is reset for each semi-annual interestperiod and is calculated at the current LIBOR rate plus 3.375%.  At March 31, 2010, our LIBOR-based ratewas 3.859%, which includes the credit spread. The Floating Rate Notes are redeemable, at the Company’s option, inwhole or in part, at specified redemption prices (as defined in the Second LienSenior Indenture) plus accrued interest to the date of redemption. In addition,the Floating Rate Notes have a change of control provision, which gives each holderthe right to require the Company to purchase all or a portion of such holders’Floating Rate Notes upon a change in control, as defined in the Second LienSenior Indenture, at a purchase price equal to 101% of the principal amountplus accrued interest to the date of purchase. The Floating Rate Notes, subjectto certain definitions and exceptions, have covenants that restrict, amongother things, the incurrence of additional debt, the payment of dividends andthe issuance of preferred stock. The Floating Rate Notes are uncollateralized.

 

***Interest Rate Swap.***In June 2007,we entered into an interest rate swap agreement for $230.0 million, which hasthe effect of converting the interest rate applicable to our $230.0 million ofFloating Rate Notes to a fixed interest rate. The effective date for the interest rate swap agreement was December 2007and the expiration date is May 2012.

 

Theinterest rate swap agreement qualifies for cash flow hedge accounting under ASCTopic 815, *“Derivatives and Hedging.”* Both atinception and on an on-going basis, we must perform an effectiveness test.  In accordance with ASC Topic 815, the fairvalue of the interest rate swap agreement at March 31, 2010 is included asa cash flow hedge on our balance sheet. The change in fair value was recorded as a component of accumulatedother comprehensive loss on our balance sheet, net of tax, since the instrumentwas determined to be an effective hedge at March 31, 2010.  We expect to reclassify approximately $6.2million into earnings, currently recorded in accumulated other comprehensiveloss, in the next 12 months.

 

Asa result of our interest rate swap agreement, we expect the effective interestrate on our $230.0 million Floating Rate Notes to be 9.065% through May 2012.

 

***Senior Secured CreditFacility.***Our senior secured credit facility is a first liensenior secured asset-based revolving credit facility that allows for borrowingsup to $135.0 million, as defined in the credit agreement dated May 31,2007 between the Company and a group of financial institutions.  The senior secured credit facility terminateson May 31, 2013.  As of March 31,2010, we had $88.3 million of availability under the senior secured creditfacility based on a borrowing base of $135.0 million, less borrowings of $43.1million, and after giving effect to $3.6 million used for letters ofcredit.  Our obligations under the seniorsecured credit facility are secured by a first priority security interest insubstantially all of our assets, excluding a pledge of our and Parent’s capitalstock, any joint ventures and certain other exceptions. Our obligations underthe senior secured credit facility are unconditionally guaranteed by Parent.

 

Borrowingsunder the senior secured credit facility accrue interest (including a creditspread varying with facility usage):

 

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·                  at a per annum rate equal to 0.50% above therate announced from time to time by the agent as the “prime rate” payablequarterly in arrears; and

·                  at a per annum rate equal to 1.50% above theadjusted LIBOR rate used by the agent, for the respective interest rate perioddetermined at our option, payable in arrears upon cessation of the interestrate period elected.

 

AtMarch 31, 2010, we had an outstanding balance under our prime rate whichwas accruing interest at 3.750%, which includes the credit spread noted above.At March 31, 2010, we had outstanding balances under LIBOR-based rateswhich were accruing interest at rates ranging from 1.730% to 1.748%, each ofwhich include the credit spread noted above.

 

OnMay 6, 2010 we extended, amended and restated our senior secured creditfacility. For additional information, see Note 11, Subsequent Events.

 

***10.125% Senior Notes.***  Our 10.125% SeniorNotes (the “Senior Notes”) mature on November 1, 2011.  Interest on the Senior Notes is payablesemiannually, in arrears, on May 1 and November 1.  Interest accrues at the rate of 10.125% perannum.  The Senior Notes are redeemable,at the Company’s option, in whole or in part of, at specified redemption prices(as defined) plus accrued interest to the date of redemption.  The Senior Notes are uncollateralized.

 

**7.             Commitments and Contingencies**

 

The Company, from time to time, may become involved inlitigation arising out of operations in the normal course of business. Assertedclaims are subject to many uncertainties and the outcome of individual mattersis not predictable with assurance.

 

On October 19, 2009,Freedom Medical, Inc. filed a lawsuit against the Company and others inU.S. District Court for the Eastern District of Texas. The federal complaintalleges violation of state and federal antitrust laws, tortuous interferencewith business relationships, business disparagement and common law conspiracy.Freedom Medical, Inc. is seeking unspecified damages and injunctiverelief. Although it is not possible to reliably predict the outcome of thelawsuit, we believe that we have meritorious defenses against the claims andwill vigorously defend against them.

 

As of March 31, 2010, we were not a party to anyother pending legal proceedings the adverse outcome of which could reasonablybe expected to have a material adverse effect on our operating results,financial position or cash flows.

 

**8.             Related Party Transactions**

 

**ManagementAgreement**

On May 31, 2007, we and Irving Place Capitalentered into a professional services agreement pursuant to which Irving PlaceCapital provides general advisory and management services to us with respect tofinancial and operating matters.  IrvingPlace Capital is a principal owner of Parent, and the following members of ourboard of directors are associated with Irving Place Capital:  John Howard, Robert Juneja, Bret Bowerman andDavid Crane. We paid Irving Place Capital professional services fees of $0.2million and $0.2 million for the quarters ended March 31, 2010 and 2009,respectively.

 

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**BusinessRelationship**

Inthe ordinary course of business, we entered into an operating lease for ourMinneapolis, Minnesota district office with Ryan Companies US, Inc.(“Ryan”), which began on May 1, 2007.  One of our board of directorsis also a director of Ryan.  We made payments to Ryan totaling $84,000 and$78,000 during the quarters ended March 31, 2010 and 2009, respectively.

 

Oneof our directors, who joined the Board of Directors on April 1, 2008, isalso a director of Broadlane, Inc. (“Broadlane”), a health care grouppurchasing organization that serves many of our customers.  During the quarters ended March 31, 2010and 2009, we paid administrative fees to Broadlane of approximately $155,000and $130,000, respectively. On March 31, 2010, accounts payable includesapproximately $53,000 in amounts due to Broadlane.

 

TheCompany believes that the aforementioned arrangements and relationships wereprovided in the ordinary course of business at prices and on terms similar tothose that would result from arm’s length negotiation between unrelatedparties.

 

**9.             Segment Information**

 

Ourreporting segments consist of Medical Equipment Outsourcing, Technical andProfessional Services, and Medical Equipment Sales and Remarketing. Certainoperating information for our segments as well as a reconciliation of totalCompany gross margin to loss before income tax was as follows:

 
| **Medical  Equipment Outsourcing**

*(in  thousands)* |       |
|-------------------------------------------------------|------------|
|                                                  |       |   |   |   |   |
| ** **                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
| ** **                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                                              |       | $ | 65,174 |   | $ | 58,282 |   |
| Cost  of revenue                                      |       | 22,617 |   | 20,469 |   |
| Medical  equipment depreciation                       |       | 17,457 |   | 15,862 |   |
| Gross  margin                                         |       | $ | 25,100 |   | $ | 21,951 |   |

 
| **Technical  and Professional Services**

*(in  thousands)* |
|-------------------------------------------------------------|
|                                                        |   |   |   |   |   |
| ** **                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
| ** **                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                                                    |   | $ | 10,813 |   | $ | 10,412 |   |
| Cost  of revenue                                            |   | 7,784 |   | 7,370 |   |
| Gross  margin                                               |   | $ | 3,029 |   | $ | 3,042 |   |

 

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| **Medical  Equipment Sales and Remarketing**

*(in  thousands)* |
|-----------------------------------------------------------------|
|                                                            |   |   |   |   |   |
| ** **                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
| ** **                                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                                                        |   | $ | 4,187 |   | $ | 5,236 |   |
| Cost  of revenue                                                |   | 3,347 |   | 4,386 |   |
| Gross  margin                                                   |   | $ | 840 |   | $ | 850 |   |

 
| **Total  Gross Margin and Reconciliation to Loss Before Income Tax**

*(in  thousands)* |
|-----------------------------------------------------------------------------------------|
|                                                                                    |   |   |   |   |   |
| ** **                                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
| ** **                                                                              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Total  gross margin                                                                     |   | $ | 28,969 |   | $ | 25,843 |   |
| Selling,  general and administrative                                                    |   | 21,070 |   | 22,015 |   |
| Interest  expense                                                                       |   | 11,507 |   | 11,717 |   |
| Loss  before income tax                                                                 |   | $ | (3,608 | ) | $ | (7,889 | ) |

 

**10.          Pension Plan**

 

Thecomponents of net periodic pension costs are as follows:

 
| ** **                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| **(in thousands)**              | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Interest  cost                  |       | $                                      | 270        |   | $ | 266 |   |
| Expected  return on plan assets |       | (301                                   | )          | (303 | ) |
| Recognized  net actuarial loss  |       | 37                                     |       | 2 |   |
| Net  periodic cost (benefit)    |       | $                                      | 6          |   | $ | (35 | ) |

 

Futurebenefit accruals for all participants were frozen as of December 31, 2002.

 

**11.          Subsequent Events**

 

*Amendedand Restated Credit Agreement*

 

OnMay 6, 2010 we entered into an Amended and Restated Credit Agreement with GEBusiness Financial Services, Inc., as agent for the lenders, and the lendersparty thereto (the “Amended Credit Agreement”), which amended the seniorsecured credit facility dated as of May 31, 2007. The amendment increasedthe aggregate amount the Company may obtain under revolving loans from $135.0million to $195.0 million and extended the maturity date to November 30,2014. The Company’s obligations under the Amended Credit Agreement are securedby a first priority security interest in substantially all of the Company’sassets, excluding a pledge of its and Parent’s stock, any joint ventures andcertain other exceptions. The Company’s obligations under the Amended CreditAgreement are unconditionally guaranteed by Parent.

 

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Underthe Amended Credit Agreement, up to $195.0 million is available for workingcapital and general corporate purposes, including permitted investments,capital expenditures and debt repayments, on a fully revolving basis, subjectto the terms and conditions set forth in the credit documents in the form ofrevolving loans, swing line loans and letters of credit. The availability underthe Amended Credit Agreement is subject to a borrowing base calculated on thebasis of certain of the Company’s eligible accounts receivable, inventory andequipment.

 

Borrowingsunder the Amended Credit Agreement bear interest at a floating per annum rate,at our election, equal to LIBOR plus 2.75% or prime rate plus 1.75%, each ofwhich are subject to credit facility usage.

 

TheAmended Credit Agreement requires our compliance with various affirmative andnegative covenants.  Pursuant to the affirmative covenants, we and Parentwill, among other things, deliver financial and other information to the agent,provide notice of certain events (including events of default), pay ourobligations, maintain our properties, maintain the security interest in thecollateral for the benefit of the agent and the lenders and maintain insurance.

 

Amongother restrictions, and subject to certain definitions and exceptions, theAmended Credit Agreement restricts our ability to:

 

·                  incurindebtedness;

·                  create orpermit liens;

·                  declare or paydividends and certain other restricted payments;

·                  consolidate,merge or recapitalize;

·                  acquire or sellassets;

·                  make certain investments,loans or other advances;

·                  enter intotransactions with affiliates;

·                  change our lineof business; and

·                  enter intohedging transactions.

 

TheAmended Credit Agreement also contains a financial covenant that is triggeredif our available borrowing capacity is less than $15.0 million for a certainperiod, which consists of a minimum ratio of trailing four-quarter EBITDA tocash interest expense, as such terms are defined in the Amended CreditAgreement.

 

TheAmended Credit Agreement specifies certain events of default, including, amongothers, failure to pay principal, interest or fees, violation of covenants,inaccuracy of representations or warranties, bankruptcy events, certainERISA-related events, cross-defaults to other material agreements, change ofcontrol events and invalidity of guarantees or security documents.  Someevents of default will be triggered only after certain cure periods haveexpired, or will provide for materiality thresholds.  If such a defaultoccurs, the lenders under the Amended Credit Agreement would be entitled totake various actions, including all actions permitted to be taken by a securedcreditor and the acceleration of amounts due under the Amended CreditAgreement.

 

Theforegoing description of the Amended Credit Agreement is not complete and isqualified in its entirety by reference to the Amended Credit Agreement, whichis filed as Exhibit 10.1 hereto and is incorporated herein by reference.

 

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*EquipmentRecall*

 

OnMay 3, 2010, Baxter Healthcare Corporation (“Baxter”) announced a Food andDrug Administration (“FDA”) recall of certain Baxter infusion pumps. The recallnotice provides for monetary or replacement consideration to be provided to usand states that devices may continue to be used until an orderly recall plan isfinalized between Baxter and the FDA. While we do not believe the recall willhave a material adverse effect on our financial statements, we will continue toevaluate this potential impact as more information becomes available.

 

**Item 2.  Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

** **

**The following should be read in conjunction with theaccompanying financial statements and notes.**

** **

**BUSINESS OVERVIEW**

 

**OurCompany**

 

UniversalHospital Services, Inc. (“we”, “our”, “us”, the “Company”, or “UHS”) is aleading nationwide provider of medical equipment management and service solutionsto the United States health care industry. Our customers include national,regional and local acute and long-term acute care hospitals, alternate siteproviders (such as long-term acute care hospitals, skilled nursing facilities,specialty hospitals, nursing homes, and home care providers) and medicalequipment manufacturers.  We provide ourcustomers equipment management and service solutions across the spectrum of theequipment life cycle as a result of our position as one of the industry’slargest purchasers and outsourcers of medical equipment. During the twelvemonths ended March 31, 2010, we owned or managed over 550,000 pieces ofmedical equipment consisting of 360,000 owned or managed pieces in our MedicalEquipment Outsourcing segment and 190,000 pieces of customer owned equipment wemanage in our Technical and Professional Services segment. Our diverse medicalequipment outsourcing customer base includes more than 4,225 acute carehospitals and approximately 4,275 alternate site providers.  We also have relationships with more than 200medical equipment manufacturers and many of the nation’s largest grouppurchasing organizations (“GPOs”) and many of the integrated delivery networks(“IDNs”).  All of our solutions leverageour nationwide network of 84 offices and our 70 years of experience managingand servicing all aspects of medical equipment. Our fees are paid directly by our customers rather than from directreimbursement from third-party payors, such as private insurers, Medicare, orMedicaid.  We commenced operations in1939, originally incorporated in Minnesota in 1954 and reincorporated inDelaware in 2001.

 

***As one of the nation’s leading medical equipment managementand service solutions companies, we design and offer comprehensive solutionsfor our customers that help reduce capital and operating expenses, increaseequipment and staff productivity and support improved patient safety andoutcomes.***

 

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Ourreporting segments consist of Medical Equipment Outsourcing, Technical andProfessional Services and Medical Equipment Sales andRemarketing.  We evaluate the performance of our reporting segmentsbased on gross margin and gross margin before purchase accounting adjustments.The accounting policies of the individual reporting segments are the same asthose of the entire Company.

 

Wepresent the non-generally accepted accounting principles (“GAAP”) financialmeasure gross margin, before purchase accounting adjustments, because we usethis measure to monitor and evaluate the operational performance of ourbusiness and to assist analysts, investors and lenders in their comparisons ofoperational performance across companies, many of whose results will notinclude similar adjustments. A reconciliation of the non-GAAP financial measureto its equivalent GAAP measure is included in the respective tables.

 

**Medical Equipment Outsourcing Segment - Manage & Utilize**

 

Ourflagship business is our Medical Equipment Outsourcing segment, which accountedfor $65.2 million, or approximately 81.3% of our revenues, for the quarterended March 31, 2010. As of March 31, 2010, we owned or managed over360,000 pieces of medical equipment in our Medical Equipment Outsourcingsegment, primarily in the categories of respiratory therapy, newborn care,critical care, patient monitors, patient handling (such as beds, stretchers andwheelchairs), pressure area management (such as therapy surfaces) and woundtherapy.  Historically, we have purchasedand directly owned the equipment used in our medical equipment outsourcingprograms. During 2007, we entered into “revenue sharing” agreements with aselect few manufacturers of equipment where the manufacturers retain ownershipof the equipment, but UHS takes possession and manages the rental of theequipment to customers.   We may enterinto more of such arrangements in the future. Such arrangements are less capital-intensive for us.  In January 2010, one of these agreementswas modified such that we purchased $16.6 million of the manufacturer’sequipment that we previously managed, but did not own. With this January 2010purchase, the revenue share portion of the agreement was terminated and webegan to recognize 100% of the revenue associated with this equipment.

 

Weperform regular and preventative maintenance on the equipment and retaindetailed records for documentation.  Werepair, test and clean the equipment. Our service includes prompt replacementof

 

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non-workingequipment and the flexibility to upgrade technology as a customer’s product ofchoice changes.  We have three primaryoutsourcing programs:

 

·                  Supplemental and Peak NeedsUsage;

·                  Customized OutsourcingAgreements; and

·                  Asset360TM Program (formerly Asset Management PartnershipProgram, “AMPP”).

 

Wehave contracts in place with many of the leading national GPOs for both theacute care and alternate site markets. We also have agreements directly with national acute care and alternatesite providers. We expect much of our future growth in this segment to bedriven by our customers outsourcing more of their medical equipment needs andtaking full advantage of our diversified product offering, customizedoutsourcing agreements and Asset360 Programs.

 

**Technical and Professional Services Segment - Plan & Acquire;Maintain & Repair**

 

OurTechnical and Professional Services segment accounted for $10.8 million, orapproximately 13.5% of our revenues for the quarter ended March 31, 2010.We leverage our 70 years of experience and our extensive equipment database inrepairing and maintaining medical equipment. We offer a broad range of inspection, preventative maintenance, repair,logistic and consulting services through our team of approximately 325technicians and professionals located throughout the United States in ournationwide network of offices. During the twelve months ended March 31,2010, we managed over 190,000 units of customer owned equipment. In addition,during the twelve months ended March 31, 2010, we serviced over 360,000units that we own or directly manage. Our technical and professional serviceofferings are less capital-intensive than our Medical Equipment Outsourcingsegment, and provide a complementary alternative for customers that wish to owntheir medical equipment, but lack the infrastructure, expertise or scale toperform routine maintenance, repair, record-keeping and lifecycle analysis andplanning functions.

 

**Medical Equipment Sales and Remarketing Segment - Redeploy &Remarket**

 

OurMedical Equipment Sales and Remarketing segment accounted for $4.2 million, orapproximately 5.2%, of our revenues for the quarter ended March 31, 2010.This segment includes three distinct business activities:

 

***Medical Equipment Remarketing and Disposal.*********We are one of the nation’slargest buyers and sellers of pre-owned medical equipment.  We buy,source, remarket and dispose of pre-owned medical equipment for our customersand on our own behalf. We provide our customers with the ability to sell theirunneeded medical equipment for immediate cash or credit. Customers can alsotake advantage of our disposal services, where we dispose of equipment that hasno remaining economic value in a safe and environmentally appropriate manner.

 

***Specialty Medical Equipment Sales and Distribution.*********We use our nationalinfrastructure to provide sales and distribution services to manufacturers ofspecialty medical equipment on a limited basis.  Our distribution servicesinclude providing demonstrations services and product maintenanceservices.  We act as a distributor for only a limited number of productsthat are particularly suited to our national distribution network or that fitwith our ability to provide technical support.  We currently sellequipment in selected product lines including, but not limited to, respiratorypercussion vests,

 

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continuouspassive motion machines, patient monitors, patient handling equipment andinfant security systems.

 

***Sales of Disposables******.***We offer our customerssingle use disposable items.  Most of these items are used in connectionwith our outsourced equipment.  We offer these products as a convenienceto customers and to complement our full medical equipment lifecycle solutions.

 

**RESULTS OF OPERATIONS**

 

**The following discussionaddresses:**

** **

**·**                  ourfinancial condition as of March 31, 2010 and

**·**                  theresults of operations for the three month periods ended March 31, 2010 and2009.

** **

**This discussion should be read inconjunction with the financial statements included elsewhere in this QuarterlyReport on Form 10-Q and the Management’s Discussion and Analysis ofFinancial Condition and Results of Operations section included in our 2009Annual Report on Form 10-K, filed with the Securities and ExchangeCommission.**

** **

Thefollowing table provides information on the percentages of certain items ofselected financial data compared to total revenues for the three month periodsended March 31, 2010 and 2009.  Thetable below also indicates the percentage increase or decrease over the priorcomparable period.

 

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| ** **                                                                                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                      | ** ** | ** **                             | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                                                                                                                      | ** ** | **Percent of Total Revenues**          | ** ** | **Increase** | ** ** |
| ** **                                                                                                                      | ** ** | **2010**                               | ** ** | **2009** | ** ** | **(Decrease)** | ** ** |
| ** **                                                                                                                      |       |                                   |       |   |   |   |   |
| **Revenue**                                                                                                                     |       |                                   |       |   |   |   |   |
| Medical equipment outsourcing                                                                                                   |       | 81.3                                   | %          | 78.8 | % | 11.8 | % |
| Technical and professional services                                                                                             |       | 13.5                                   |       | 14.1 |   | 3.9 |   |
| Medical equipment sales and remarketing                                                                                         |       | 5.2                                    |       | 7.1 |   | (20.0 | ) |
| Total revenues                                                                                                                  |       | 100.0                                  | %          | 100.0 | % | 8.4 |   |
|                                                                                                                            |       |                                   |       |   |   |   |   |
| **Cost of Sales**                                                                                                               |       |                                   |       |   |   |   |   |
| Cost of medical equipment outsourcing                                                                                           |       | 28.2                                   |       | 27.7 |   | 10.5 |   |
| Cost of technical and professional services                                                                                     |       | 9.7                                    |       | 10.0 |   | 5.6 |   |
| Cost of medical equipment sales and remarketing                                                                                 |       | 4.2                                    |       | 5.9 |   | (23.7 | ) |
| Medical equipment depreciation                                                                                                  |       | 21.8                                   |       | 21.5 |   | 10.1 |   |
| Total costs of medical equipment outsourcing,  technical and professional services and medical equipment sales and  remarketing |       | 63.9                                   |       | 65.1 |   | 6.5 |   |
| Gross margin                                                                                                                    |       | 36.1                                   |       | 34.9 |   | 12.1 |   |
|                                                                                                                            |       |                                   |       |   |   |   |   |
| Selling, general and administrative                                                                                             |       | 26.2                                   |       | 29.8 |   | (4.3 | ) |
| Operating income                                                                                                                |       | 9.9                                    |       | 5.1 |   | 106.3 |   |
|                                                                                                                            |       |                                   |       |   |   |   |   |
| Interest expense                                                                                                                |       | 14.4                                   |       | 15.8 |   | (1.8 | ) |
| Loss before income taxes                                                                                                        |       | (4.5                                   | )          | (10.7 | ) | (54.3 | ) |
|                                                                                                                            |       |                                   |       |   |   |   |   |
| Benefit for income taxes                                                                                                        |       | (1.7                                   | )          | (4.2 | ) | (57.1 | ) |
| Net loss                                                                                                                        |       | (2.8                                   | )%         | (6.5 | )% | (52.4 | ) |

 

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**Results of Operations for the three month period ended March 31,2010 compared to the three month period ended March 31, 2009**

** **

**MedicalEquipment Outsourcing Segment — Manage & Utilize**

*(inthousands)*

 
| ** **                                                                                                             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                             | ** ** | **March 31,**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                             | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                                          |       | $                      | 65,174     |       | $          | 58,282     |       | $ | 6,892 |   | 11.8 | % |
| Cost of revenue                                                                                                        |       | 22,617                 |       | 20,469     |       | 2,148      |       | 10.5 |   |
| Medical equipment depreciation                                                                                         |       | 17,457                 |       | 15,862     |       | 1,595      |       | 10.1 |   |
| Gross margin                                                                                                           |       | $                      | 25,100     |       | $          | 21,951     |       | $ | 3,149 |   | 14.3 |   |
|                                                                                                                   |       |                   |       |       |       |       |       |   |   |
| Gross margin %                                                                                                         |       | 38.5                   | %          | 37.7       | %          |       |       |   |   |
|                                                                                                                   |       |                   |       |       |       |       |       |   |   |
| Gross margin                                                                                                           |       | $                      | 25,100     |       | $          | 21,951     |       | $ | 3,149 |   | 14.3 |   |
| Purchase accounting adjustments, primarily non-cash  charges related to step-up in carrying value of medical equipment |       | 3,457                  |       | 3,581      |       | (124       | )          | (3.5 | ) |
| Gross margin, before purchase accounting adjustments                                                                   |       | $                      | 28,557     |       | $          | 25,532     |       | $ | 3,025 |   | 11.8 | % |
|                                                                                                                   |       |                   |       |       |       |       |       |   |   |
| Gross margin %, before purchase accounting  adjustments                                                                |       | 43.8                   | %          | 43.8       | %          |       |       |   |   |

 

Totalrevenue in the Medical Equipment Outsourcing segment increased $6.9 million, or11.8%, to $65.2 million in the first quarter of 2010 as compared to the sameperiod of 2009.  This increase wasprimarily driven by increased activity in our Asset360TM Programs (formerly Asset ManagementPartnership Program, “AMPP”), patient handling and wound therapy, partiallyoffset by sluggish customer census. Beginning January 2010, our patienthandling revenues reflect the benefit of recognizing 100% of the revenue previouslycovered under a revenue share agreement. Our Asset360 Programs increased from51 programs at March 31, 2009 to 64 programs at March 31, 2010.

 

Totalcost of revenue in the segment increased $2.1 million, or 10.5%, to $22.6million in the first quarter of 2010 as compared to the same period of2009.  This increase is primarilyattributable to higher employee-related, auto-related, and other expenses of$1.6, $0.4, and $0.5 million, respectively, partially offset by a decrease infleet equipment repair expense of $0.4 million.

 

Medicalequipment depreciation increased $1.6 million, or 10.1%, to $17.5 million inthe first quarter of 2010 as compared to the same period of 2009. The increasein medical equipment depreciation primarily relates to the increase in medicalequipment purchases related to our patient handling medical equipment, which wepreviously only managed under the revenue share agreement noted above.  Depreciation for the quarters ended March 31,2010 and 2009 include $3.1 and $3.4 million, respectively, of purchaseaccounting adjustments related to the step-up in carrying value of our medicalequipment.

 

Grossmargin percentage for the Medical Equipment Outsourcing segment increased from37.7% in the first quarter of 2009 to 38.5% in the first quarter of 2010. Thisincrease resulted primarily from increased operating efficiencies associatedwith higher levels of medical equipment utilization. Gross margin percentage,before purchase accounting adjustments, remained consistent at 43.8% in thefirst quarter of 2009 and the first quarter of 2010.

 

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**Technical and Professional ServicesSegment — Plan & Acquire; Maintain & Repair**

*(inthousands)*

 
| ** **                                                                                          | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                          | ** ** | **March 31,**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                          | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                       |       | $                      | 10,813     |       | $          | 10,412     |       | $ | 401 |   | 3.9 | % |
| Cost of revenue                                                                                     |       | 7,784                  |       | 7,370      |       | 414        |       | 5.6 |   |
| Gross margin                                                                                        |       | $                      | 3,029      |       | $          | 3,042      |       | $ | (13 | ) | (0.4 | ) |
|                                                                                                |       |                   |       |       |       |       |       |   |   |
| Gross margin %                                                                                      |       | 28.0                   | %          | 29.2       | %          |       |       |   |   |
|                                                                                                |       |                   |       |       |       |       |       |   |   |
| Gross margin                                                                                        |       | $                      | 3,029      |       | $          | 3,042      |       | $ | (13 | ) | (0.4 | ) |
| Purchase accounting adjustments, primarily non-cash  charges related to favorable lease commitments |       | 3                      |       | 5          |       | (2         | )          | (32.6 | ) |
| Gross margin, before purchase accounting adjustments                                                |       | $                      | 3,032      |       | $          | 3,047      |       | $ | (15 | ) | (0.5 | )% |
|                                                                                                |       |                   |       |       |       |       |       |   |   |
| Gross margin %, before purchase accounting  adjustments                                             |       | 28.0                   | %          | 29.3       | %          |       |       |   |   |

 

Totalrevenue in the Technical and Professional Services segment increased $0.4million, or 3.9%, to $10.8 million in the first quarter of 2010 as compared tothe same period of 2009. This increase resulted from increases in ourmanufacturer services unit and BioMed360TM Programs(formerly Customized Healthcare Asset Management Programs, “CHAMP”) of $0.3 and$0.6 million, respectively offset by decreases in our supplemental serviceprograms of $0.5 million.

 

Totalcost of revenue in the segment increased $0.4 million, or 5.6%, to $7.8 millionin the first quarter of 2010 as compared to the same period of 2009.  The increase is primarily attributable toincreases in our 3rd party vendor costs.

 

Grossmargin percentage for the Technical and Professional Services segment decreasedfrom 29.2% for the first quarter of 2009 to 28.0% for the same period of2010.  We expect gross margin percentageto fluctuate based on the variability of third party vendor expenses in ourBioMed360 Programs and supplemental service programs.

 

**MedicalEquipment Sales and Remarketing Segment — Redeploy & Remarket**

*(inthousands)*

 
| ** **                                                                                                                     | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                     | ** ** | **March 31,**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                     | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                                                  |       | $                      | 4,187      |       | $          | 5,236      |       | $ | (1,049 | ) | (20.0 | )% |
| Cost of revenue                                                                                                                |       | 3,347                  |       | 4,386      |       | (1,039     | )          | (23.7 | ) |
| Gross margin                                                                                                                   |       | $                      | 840        |       | $          | 850        |       | $ | (10 | ) | (1.2 | ) |
|                                                                                                                           |       |                   |       |       |       |       |       |   |   |
| Gross margin %                                                                                                                 |       | 20.1                   | %          | 16.2       | %          |       |       |   |   |
|                                                                                                                           |       |                   |       |       |       |       |       |   |   |
| Gross margin                                                                                                                   |       | $                      | 840        |       | $          | 850        |       | $ | (10 | ) | (1.2 | ) |
| Purchase accounting adjustments, primarily non-cash  charges related to the step-up in carrying value of our medical equipment |       | 77                     |       | 324        |       | (247       | )          | (76.2 | ) |
| Gross margin, before purchase accounting adjustments                                                                           |       | $                      | 917        |       | $          | 1,174      |       | $ | (257 | ) | (21.9 | )% |
|                                                                                                                           |       |                   |       |       |       |       |       |   |   |
| Gross margin %, before purchase accounting  adjustments                                                                        |       | 21.9                   | %          | 22.4       | %          |       |       |   |   |

 

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Totalrevenue in the Medical Equipment Sales and Remarketing segment decreased $1.0million, or 20.0%, to $4.2 million in the first quarter of 2010 as compared tothe same period of 2009.  The decreasewas primarily driven by decreases in new, pre-owned, and other equipment salesof $1.0, $0.5, and $0.1 million, respectively, partially offset by an increasein disposable sales and other equipment sales of $0.4 and $0.2 million,respectively.

 

Totalcost of revenue in the segment decreased $1.0 million, or 23.7%, to $3.3million in the first quarter of 2010 as compared to the same period of2009.  The decrease was primarily due todecreases in the costs of new, pre-owned, and other equipment of $0.7, $0.5,and $0.2 million, respectively, partially offset by an increase in the cost ofdisposables and other expenses of $0.3 and $0.1 million, respectively.  During the quarters ended March 31, 2010and 2009, purchase accounting adjustments related to medical equipment soldincreased cost of revenue by $0.1 and $0.3 million, respectively.

 

Grossmargin percentage for the Medical Equipment Sales and Remarketing segmentincreased from 16.2% in the first quarter of 2009 to 20.1% for the same periodof 2010.  Gross margin percentage, beforepurchase accounting adjustments, decreased from 22.4% in the first quarter of2009 to 21.9% for the same period of 2010. We expect margins and activity in this segment to fluctuate based on thetransactional nature of the business.

 

***Selling,General and Administrative***

 

**Selling, General and Administrativeand Interest Expense**

*(inthousands)*

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **March 31,**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **2010**               | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Selling, general and administrative |       | $                      | 21,070     |       | $          | 22,015     |       | $ | (945 | ) | (4.3 | )% |
| Interest expense                    |       | 11,507                 |       | 11,717     |       | (210       | )          | (1.8 | ) |
|                                     |            |                        |            |            |            |            |            |  |  |  |  |  |

 

Selling,general and administrative expense decreased $0.9 million, or 4.3%, to $21.1million for the first quarter of 2010 as compared to the same period of2009.  Selling, general andadministrative expense consists primarily of employee-related expenses,professional fees, occupancy charges, bad debt expense and depreciation andamortization.  Selling, general andadministrative expense during the quarter ended March 31, 2010 benefitedfrom lower bad debt expense, amortization, and stock-based compensation of$0.6, $0.4, and $0.3 million, respectively, offset by other expense increasesof $0.4 million. Selling, general and administrative expense as a percentage oftotal revenue was 26.2% and 29.8% for each of the quarters ended March 31,2010 and 2009, respectively.

 

***InterestExpense***

** **

Interestexpense decreased $0.2 million, or 1.8%, to $11.5 million during the firstquarter of 2010 as compared to the same period of 2009.  The decrease wasprimarily driven by lower levels of outstanding debt on our senior securedcredit facility and lower average interest rate on our revolving creditagreement.

 

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**Income Taxes**

 

Benefitfor income taxes decreased $1.8 million to $1.3 million during the firstquarter of 2010 as compared to the same period of 2009.  The decrease is attributable to the change inloss before income taxes.

 

**Net Loss**

 

Netloss decreased $2.5 million to $2.3 million in the first quarter of 2010 ascompared to the same period of 2009. This decrease was primarily driven by increased activity in our Asset360Program, patient handling and wound therapy solutions coupled with increasedoperating efficiencies associated with higher levels of medical equipmentutilization.

 

**EBITDA**

** **

EarningsBefore Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $30.9 and$25.7 million for the quarters ended March 31, 2010 and 2009,respectively.  EBITDA for the quarterended March 31, 2010, was primarily driven by increased activity in ourAsset360 Programs, patient handling and wound therapy solutions.

 

EBITDAis defined as earnings before interest expense, income taxes, depreciation andamortization. In addition to using EBITDA internally as measure of operationalperformance, we disclose it externally to assist analysts, investors andlenders in their comparisons of operational performance, valuation and debtcapacity across companies with differing capital, tax and legalstructures.  Management also understandsthat some industry analysts and investors consider EBITDA as a supplementarynon-GAAP financial measure useful in analyzing a company’s ability to servicedebt.  EBITDA, however, is not a measureof financial performance under GAAP and should not be considered as analternative to, or more meaningful than, net income as a measure of operatingperformance or to cash flows from operating, investing or financing activitiesor as a measure of liquidity.  SinceEBITDA is not a measure determined in accordance with GAAP and is thussusceptible to varying interpretations and calculations, EBITDA, as presented,may not be comparable to other similarly titled measures of othercompanies.  EBITDA does not represent anamount of funds that is available for management’s discretionary use. Areconciliation of EBITDA to net cash provided by operating activities isincluded below:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **March 31,**     | ** ** |
| **(in thousands)**                          | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net cash provided by operating activities   |       | $                      | 30,412     |   | $ | 18,551 |   |
| Changes in operating assets and liabilities |       | (9,944                 | )          | (2,298 | ) |
| Other non-cash expenses                     |       | 212                    |       | 778 |   |
| Benefit for income taxes                    |       | (1,328                 | )          | (3,099 | ) |
| Interest expense                            |       | 11,507                 |       | 11,717 |   |
| EBITDA                                      |       | $                      | 30,859     |   | $ | 25,649 |   |

 

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| ** **                                                         | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                         | ** ** | **March 31,**     | ** ** |
| **(in thousands)**                                                 | ** ** | **2010**               | ** ** | **2009** | ** ** |
| EBITDA                                                             |       | $                      | 30,859     |   | $ | 25,649 |   |
|                                                               |       |                   |       |   |   |
| **Other Financial Data:**                                          |       |                   |       |   |   |
| Net cash provided by operating activities                          |       | $                      | 30,412     |   | $ | 18,551 |   |
| Net cash used in investing activities                              |       | (33,893                | )          | (9,887 | ) |
| Net cash provided by (used in) financing activities                |       | 3,603                  |       | 12,730 |   |
|                                                               |       |                   |       |   |   |
| **Other Operating Data (as of end of  period):**                   |       |                   |       |   |   |
| Medical equipment (approximate number of owned outsourcing  units) |       | 227,000                |       | 217,000 |   |
| District offices                                                   |       | 84                     |       | 84 |   |
| Number of outsourcing hospital customers                           |       | 4,225                  |       | 4,150 |   |
| Number of total outsourcing customers                              |       | 8,500                  |       | 8,250 |   |

 

**SEASONALITY**

** **

Quarterlyoperating results are typically affected by seasonal factors.  Historically, our first and fourth quartersare the strongest, reflecting increased customer utilization during the falland winter months.

 

**LIQUIDITYAND CAPITAL RESOURCES**

** **

Ourprincipal sources of liquidity are expected to be cash and cash equivalents,cash flows from operating activities, and borrowings under our first liensenior secured asset-based revolving credit facility providing for loans in anamount of up to $135.0 million, pursuant to a credit agreement dated as of May 31,2007 with a group of financial institutions (the “senior secured creditfacility”).  Our senior secured creditfacility matures in May 2013.  It isanticipated that our principal uses of liquidity will be to fund capitalexpenditures related to purchases of medical equipment, provide workingcapital, meet debt service requirements and finance our strategic plans.

 

OnMay 6, 2010 we extended, amended and restated our senior secured creditfacility. For additional information, see Note 11, Subsequent Events. Duringthe second quarter, Management intends to use the amended and restated senior secured facility to redeem, atpar, the remaining $9.9 million amount outstanding of our 10.125% Senior Notes.

 

Werequire substantial cash to operate our Medical Equipment Outsourcing programsand service our debt.  Our outsourcingprograms require us to invest a significant amount of cash in medical equipmentpurchases.  To the extent that suchexpenditures cannot be funded from cash and cash equivalents, our operatingcash flow, borrowing under our senior secured credit facility or otherfinancing sources, we may not be able to conduct our business or grow ascurrently planned. We anticipate an additional capital investment ofapproximately $55.0 million during the remaining nine months of 2010.

 

Ifwe are unable to service our debt obligations through our cash and cashequivalents, generating sufficient cash flow from operations, and additionalborrowings under our first lien senior secured asset-based revolving creditfacility, we will be forced to take actions such as reducing or delayingcapital expenditures, selling assets, restructuring or refinancing our debt,electing to pay PIK interest on our PIK Toggle Notes, or seeking additionalequity capital.  This, to a certainextent, is subject to general

 

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economic,financial, competitive, legislative, regulatory and other factors that arebeyond our control.  If we are unable torepay our debt at maturity, we may have to obtain alternative financing, whichmay not be available to us.

 

Netcash provided by operating activities was $30.4 and $18.6 million for thequarters ended March 31, 2010 and 2009, respectively. Net cash provided byoperating activities during the quarter ended March 31, 2010 primarilybenefited from favorable changes in operating assets and liabilities and a decreasein net loss as compared to the same period of 2009.

 

Netcash used in investing activities was $33.9 and $9.9 million for the quartersended March 31, 2010 and 2009, respectively.  Net cash used in investing activitiesincreased during the 2010 period when compared to the same period in the prioryear primarily as a result of an increase in capital expenditures for medicalequipment.

 

Netcash provided by financing activities was $3.6 and $12.7 million for thequarters ended March 31, 2010 and 2009, respectively.  During the quarter ended March 31, 2010,net cash used in financing activities was impacted by a decrease in net drawsunder our senior secured credit facility of $16.3 million partially offset byan increase of the change in book overdrafts of $7.2 million. The change inbook overdrafts of $7.2 million during the three months ended March 31,2009 resulted from our net operating account cash position at March 31,2009 as compared to our net book overdraft position at other period ends.

 

Cashon-hand was $0.1 million as of March 31, 2010 compared to $33.4 million asof March 31, 2009.  The decreaseprimarily resulted from a draw of $31.0 million from our senior secured creditfacility during the quarter ended March 31, 2009 to, among other things,pre-borrow for our then upcoming interest payments due June 1, 2009 on ourFloating Rate Notes and PIK Toggle Notes.

 

Based on the level of operating performance expected in2010, we believe our cash and cash equivalents, cash from operations, and additionalborrowings under our senior secured credit facility, will meet our liquidityneeds for the foreseeable future, exclusive of any borrowings that we may maketo finance potential acquisitions. However, if during that period or thereafter we are not successful ingenerating sufficient cash flows from operations or in raising additionalcapital when required in sufficient amounts and on terms acceptable to us, ourbusiness could be adversely affected.  As of March 31,2010, we had $88.3 million of availability under our senior secured creditfacility, based on a borrowing base of $135.0 million, less borrowings of $43.1million and after giving effect to $3.6 million used for letters of credit.

 

Our levels of borrowing are further restricted by thefinancial covenants set forth in our senior secured credit facility agreementand the second lien senior indenture governing our PIK Toggle Notes andFloating Rate Notes.  As of March 31,2010, the Company was in compliance with all covenants under the senior securedcredit facility.

 

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**RECENT ACCOUNTING PRONOUNCEMENT**

 

***Standard Issued Not Yet Adopted***

 

InOctober 2009, the FASB issued Accounting Standards Update (“ASU”),2009-13, Revenue Recognition (Topic 605): Multiple Deliverable RevenueArrangements — A Consensus of the FASB Emerging Issues Task Force.” This updateprovides application guidance on whether multiple deliverables exist, how thedeliverables should be separated and how the consideration should be allocatedto one or more units of accounting. This update establishes a selling pricehierarchy for determining the selling price of a deliverable. The selling priceused for each deliverable will be based on vendor-specific objective evidence,if available, third-party evidence if vendor-specific objective evidence is notavailable, or estimated selling price if neither vendor-specific or third-partyevidence is available. The Company will be required to apply this guidanceprospectively for revenue arrangements entered into or materially modifiedafter January 1, 2011. We are currently evaluating the impact of theprovisions of ASU 2009-13.

 

**SAFEHARBOR STATEMENT**

** **

**Safe Harbor Statement under the Private Securities Litigation ReformAct of 1995:** We believe statements in this Quarterly Report on Form 10-Qlooking forward in time involve risks and uncertainties.  The following factors, among others, couldadversely affect our business, operations and financial condition, causing ouractual results to differ materially from those expressed in any forward-lookingstatements:

 

·                  our history of net lossesand substantial interest expense;

·                  our substantial outstandingdebt and debt service obligations;

·                  our need for substantialcash to operate and expand our business as planned;

·                  restrictions imposed by theterms of our debt;

·                  a decrease in the number ofpatients our customers are serving;

·                  the effect of prolongednegative changes in domestic and global economic conditions;

·                  our ability to effect changein the manner in which health care providers traditionally procure medicalequipment;

·                  the absence of long-termcommitments with customers;

·                  difficulties or delays inour continued expansion into certain of our businesses/geographic markets and developmentsof new businesses/geographic markets;

·                  the impact of health carereform initiatives;

·                  changes in third-party payorreimbursement rates for health care items and services;

·                  our ability to maintainexisting contracts with GPOs and IDNs and enter into new contracts withadditional GPOs and IDNs;

·                  additional credit risks inincreasing business with home care providers and nursing homes;

·                  the impact of significantregulation of the health care industry and the need to comply with thoseregulations;

·                  impacts of equipment productrecalls or obsolescence;

·                  increases in vendor coststhat cannot be passed through to our customers; and

·                  the risk factors as setforth in Item 1A of Part II of this Quarterly Report on Form 10-Q

 

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**Item 3.  Quantitative andQualitative Disclosures about Market Risk**

 

Weare exposed to market risk arising from adverse changes in interest rates, fuelcosts, and pension valuation.  We do notenter into derivatives or other financial instruments for speculative purposes.

 

**Interest Rates**

 

Weuse both fixed and variable rate debt as sources of financing.  At March 31, 2010, we had approximately$523.6 million of total debt outstanding. After taking into account the effect of our interest rate swapagreement, we had $43.1 million of debt bearing interest at variable ratesaveraging 1.86%.  Based on variable debtlevels at March 31, 2010, a 1.0 percentage point change in interest rateson variable rate debt would result in annual interest expense fluctuating byapproximately $0.4 million.

 

InJune 2007, we entered into an interest rate swap agreement for $230.0million, which has the effect of converting the interest rate applicable to our$230.0 million of Floating Rate Notes to a fixed interest rate.  The effective date for the interest rate swapagreement was December 2007; the expiration date is May 2012.

 

The interest rate swap agreement qualifies for cashflow hedge accounting under ASC Topic 815, “*Derivatives and Hedging.”*Both at inception and on an on-going basis, we must perform an effectivenesstest.  In accordance with ASC Topic 815,the fair value of the interest rate swap agreement at March 31, 2010 isincluded as a cash flow hedge on our balance sheet.  The change in fair value was recorded as acomponent of accumulated other comprehensive loss, net of tax, on our balancesheet since the instrument was determined to be an effective hedge at March 31,2010.  We have not recorded any amountsdue to ineffectiveness for any periods presented. We expect to reclassifyapproximately $6.2 million into earnings, currently recorded in accumulatedother comprehensive loss, in the next 12 months. As a result of our interestrate swap agreement, we expect the effective interest rate on our $230.0million Floating Rate Notes to be 9.065% through May 2012.

 

**Fuel Costs**

 

We are also exposed to market risks related tochanges in the price of gasoline used to fuel our fleet of delivery and salesvehicles.  A hypothetical 10% increase inthe first quarter of 2010 average price of unleaded gasoline, assuming gasolineusage levels for the quarter ended March 31, 2010, would lead to an annualincrease in fuel costs of approximately $0.3 million.

 

**Other Market Risk**

 

Our pension obligations are also affected by marketrisk as discussed in Item 7A of Part II of our 2009 Form 10-K.  Continued distress in the financial marketsmay impact the fair value of debt and equity securities in our pension trust.

 

As of March 31, 2010, we have no other materialexposure to market risk.

 

**Item 4(T).  Controls andProcedures**

 

(a)           *Evaluation of disclosure controls and procedures*

 

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Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated the effectivenessof the design and operation of our disclosure controls and procedures (asdefined in Rule 13a-15(e) and Rule 15d-15(e) promulgatedunder the Securities Exchange Act of 1934 as amended (the “Exchange Act”)).  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of the end ofthe period covered by this report, our disclosure controls and procedures wereeffective.

 

(b)           *Changes in internal control over financial reporting*

 

Therewere no changes in our internal control over financial reporting during thequarter ended March 31, 2010, that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**PART II - OTHER INFORMATION**

 

**Item1.    Legal Proceedings**

** **

The Company, from time totime, may become involved in litigation arising out of operations in the normalcourse of business, including the matters discussed in Item 3 of Part I ofthe 2009 Form 10-K.

 

Asserted claims are subject tomany uncertainties and the outcome of individual matters is not predictablewith assurance.

 

As of March 31, 2010, wewere not a party to any other pending legal proceedings the adverse outcome ofwhich could reasonably be expected to have a material adverse effect on ouroperating results, financial position or cash flows.

 

**Item 1A.  Risk Factors**

 

Our business is subject to various risks anduncertainties.  Any of the risksdiscussed elsewhere in this Quarterly Report on Form 10-Q or our otherfilings with the Securities and Exchange Commission, including the risk factorsset forth in our 2009 Form 10-K, could materially adversely affect ourbusiness, financial condition or results of operations.

 

**Item2.    Unregistered Sales of EquitySecurities and Use of Proceeds**

** **

None.

 

**Item3.    Defaults upon Senior Securities**

** **

Notapplicable.

 

**Item5.    Other Information**

** **

OnMay 6, 2010 we entered into an Amended and Restated Credit Agreement with GEBusiness Financial Services, Inc., as agent for the lenders, and the lendersparty thereto (the “Amended Credit Agreement”), which amended the seniorsecured credit facility dated as of May 31, 2007. The amendment increasedthe aggregate amount the Company may obtain under revolving loans from

 

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$135.0million to $195.0 million and extended the maturity date to November 30,2014. The Company’s obligations under the Amended Credit Agreement are securedby a first priority security interest in substantially all of the Company’sassets, excluding a pledge of its and Parent’s stock, any joint ventures andcertain other exceptions. The Company’s obligations under the Amended CreditAgreement are unconditionally guaranteed by Parent.

 

Under the Amended Credit Agreement, up to $195.0million is available for working capital and general corporate purposes,including permitted investments, capital expenditures and debt repayments, on afully revolving basis, subject to the terms and conditions set forth in thecredit documents in the form of revolving loans, swing line loans and lettersof credit. The availability under the Amended Credit Agreement is subject to aborrowing base calculated on the basis of certain of the Company’s eligibleaccounts receivable, inventory and equipment.

 

Borrowings under the Amended Credit Agreement bearinterest at a floating per annum rate, at our election, equal to LIBOR plus2.75% or prime rate plus 1.75%, each of which are subject to credit facilityusage.

 

The Amended Credit Agreement requires our compliancewith various affirmative and negative covenants.  Pursuant to theaffirmative covenants, we and Parent will, among other things, deliverfinancial and other information to the agent, provide notice of certain events(including events of default), pay our obligations, maintain our properties,maintain the security interest in the collateral for the benefit of the agentand the lenders and maintain insurance.

 

Among other restrictions, and subject to certaindefinitions and exceptions, the Amended Credit Agreement restricts our abilityto:

 

·                  incur indebtedness;

·                  create or permit liens;

·                  declare or pay dividends and certain otherrestricted payments;

·                  consolidate, merge or recapitalize;

·                  acquire or sell assets;

·                  make certain investments, loans or otheradvances;

·                  enter into transactions with affiliates;

·                  change our line of business; and

·                  enter into hedging transactions.

 

The Amended Credit Agreement also contains afinancial covenant that is triggered if our available borrowing capacity isless than $15.0 million for a certain period, which consists of a minimum ratioof trailing four-quarter EBITDA to cash interest expense, as such terms aredefined in the Amended Credit Agreement.

 

The Amended Credit Agreement specifies certainevents of default, including, among others, failure to pay principal, interestor fees, violation of covenants, inaccuracy of representations or warranties,bankruptcy events, certain ERISA-related events, cross-defaults to othermaterial agreements, change of control events and invalidity of guarantees orsecurity documents.  Some events of default will be triggered only aftercertain cure periods have expired, or will provide for materialitythresholds.  If such a default occurs, the lenders under the AmendedCredit Agreement would be entitled to take various

 

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actions, including all actions permitted to be takenby a secured creditor and the acceleration of amounts due under the AmendedCredit Agreement.

 

The foregoing description of the Amended CreditAgreement is not complete and is qualified in its entirety by reference to theAmended Credit Agreement, which is filed as Exhibit 10.1 hereto and isincorporated herein by reference.

** **

**Item6.    Exhibits**

 
| **Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1       |       | Amended and  Restated Credit Agreement, dated as of May 6, 2010, among Universal  Hospital Services, Inc., UHS Holdco, Inc., the lenders party  thereto, GE Business Financial Services, Inc., as administrative agent,  Bank of America, N.A., as documentation agent, and GE Capital  Markets, Inc., and Bank of America Securities, LLC, as co-lead arrangers  and co-bookrunners. |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2       |       | Amended and  Restated Guaranty, dated as of May 6, 2010, among UHS Holdco, Inc.  and the secured parties named therein                                                                                                                                                                                                                                                                               |
| 10.3       |       | First Lien  Security Agreement, dated May 6, 2010, among  UHS Holdco, Inc., Universal Hospital Services, Inc.  and GE Business Financial Services, Inc., as collateral agent                                                                                                                                                                                                          |
| 31.1       |       | Certification of  Principal Executive Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 |
| 31.2       |       | Certification of  Principal Financial Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 |
| 32.1       |       | Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.2       |       | Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                 |

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**SIGNATURES**

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Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

Date:May 10, 2010

 
|   | Universal Hospital Services, Inc.                    |
|--------|-----------------------------------------------------------|
|   |                                                      |
|   | By                                                        | /s/ Gary D. Blackford |
|   | Gary D. Blackford,                                        |
|   | Chairman of the Board and Chief Executive Officer         |
|   | (Principal Executive Officer and Duly Authorized Officer) |
|   |                                                      |
|   | By                                                        | /s/ Rex T. Clevenger |
|   | Rex T. Clevenger,                                         |
|   | Executive Vice President and Chief Financial Officer      |
|   | (Principal Financial Officer)                             |

 

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