**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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

 

**(MarkOne)**

 

**x****      QuarterlyReport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

** **

**for the quarterly period ended September 30,2009**

** **

**or**

 

**o****         TransitionReport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

 

**for the transition period from                  to                  **

 

### **Commission File Number:****000-20086**

###  

**UNIVERSAL HOSPITAL SERVICES, INC.**

(Exactname of registrant as specified in its charter)

 

| **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**

(Addressof principal executive offices, including zip code)

 

**(952) 893-3200**

(Registrant’stelephone number, including area code)

 

**NotApplicable**

(Former name,former address and former fiscal year, 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 such filingrequirements 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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o No x

 

Number of sharesof common stock outstanding as of November 1, 2009: 1,000

 

 

 

----

 

**PART I - FINANCIALINFORMATION**

 

**Item 1. FinancialStatements — Unaudited**

 

**Universal Hospital Services, Inc.**

 

**Balance Sheets**

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

*(unaudited)*

 
| ** **                                                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                             | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                        |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                              |       | $                      | 3,800      |                  | $          | 12,006 |   |
| Short-term investments                                                                                                                 |       | —                 |       | 1,500                 |       |
| Accounts receivable, less allowance for doubtful  accounts of $2,450 at September 30, 2009 and December 31, 2008             |       | 54,530                 |       | 54,113                |       |
| Inventories                                                                                                                            |       | 5,915                  |       | 5,627                 |       |
| Deferred income taxes                                                                                                                  |       | 6,744                  |       | 6,025                 |       |
| Other current assets                                                                                                                   |       | 3,327                  |       | 2,815                 |       |
| Total current assets                                                                                                                   |       | 74,316                 |       | 82,086                |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Property and equipment, net:                                                                                                           |       |                   |       |                  |       |
| Medical equipment, net                                                                                                                 |       | 192,112                |       | 215,643               |       |
| Property and office equipment, net                                                                                                     |       | 20,422                 |       | 22,728                |       |
| Total property and equipment, net                                                                                                      |       | 212,534                |       | 238,371               |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Other long-term assets:                                                                                                                |       |                   |       |                  |       |
| Goodwill                                                                                                                               |       | 280,211                |       | 280,211               |       |
| Other intangibles, net                                                                                                                 |       | 252,044                |       | 262,848               |       |
| Other, primarily deferred financing costs, net                                                                                         |       | 13,152                 |       | 14,209                |       |
| Total assets                                                                                                                           |       | $                      | 832,257    |                  | $          | 877,725 |   |
|                                                                                                                                   |       |                   |       |                  |       |
| **Liabilities and Shareholders’  Equity**                                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                   |       |                   |       |                  |       |
| Current portion of long-term debt                                                                                                      |       | $                      | 4,222      |                  | $          | 3,555 |   |
| Book overdrafts                                                                                                                        |       | 4,854                  |       | 7,170                 |       |
| Accounts payable                                                                                                                       |       | 16,148                 |       | 17,976                |       |
| Accrued compensation                                                                                                                   |       | 10,870                 |       | 12,154                |       |
| Accrued interest                                                                                                                       |       | 14,031                 |       | 3,880                 |       |
| Other accrued expenses                                                                                                                 |       | 8,075                  |       | 6,146                 |       |
| Total current liabilities                                                                                                              |       | 58,200                 |       | 50,881                |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Long-term debt, less current portion                                                                                                   |       | 496,988                |       | 527,788               |       |
| Pension and other long-term liabilities                                                                                                |       | 8,107                  |       | 8,248                 |       |
| Interest rate swap                                                                                                                     |       | 23,093                 |       | 27,167                |       |
| Payable to Parent                                                                                                                      |       | 6,008                  |       | 5,012                 |       |
| Deferred income taxes                                                                                                                  |       | 63,431                 |       | 70,178                |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Commitments and contingencies (Note 7)                                                                                                 |       |                   |       |                  |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Shareholders’ equity                                                                                                              |       |                   |       |                  |       |
| Common stock, $0.01 par value; 1,000 shares  authorized, issued and outstanding at September 30, 2009 and  December 31, 2008 |       | —                 |       | —                |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Additional paid-in capital                                                                                                             |       | 248,794                |       | 248,794               |       |
| Accumulated deficit                                                                                                                    |       | (54,066                | )          | (39,592               | )          |
| Accumulated other comprehensive loss                                                                                                   |       | (18,298                | )          | (20,751               | )          |
| Total shareholders’ equity                                                                                                        |       | 176,430                |       | 188,451               |       |
| Total liabilities and shareholders’ equity                                                                                        |       | $                      | 832,257    |                  | $          | 877,725 |   |

 

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

 

2

----

 

**UniversalHospital Services, Inc.**

 

**Statementsof Operations**

*(inthousands)*

*(unaudited)*

 
| ** **                                                                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                                      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                      | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Revenue**                                                                                                                     | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Medical  equipment outsourcing                                                                                                  |       | $                      | 56,043     |                   | $          | 53,469 |   | $ | 170,849 |   | $ | 168,721 |   |
| Technical  and professional services                                                                                            |       | 10,766                 |       | 11,174                 |       | 31,874 |   | 34,588 |   |
| Medical  equipment sales and remarketing                                                                                        |       | 5,428                  |       | 6,336                  |       | 16,280 |   | 14,798 |   |
| Total  revenues                                                                                                                 |       | 72,237                 |       | 70,979                 |       | 219,003 |   | 218,107 |   |
|                                                                                                                            |       |                   |       |                   |       |   |   |   |   |
| **Cost of Sales**                                                                                                               |       |                   |       |                   |       |   |   |   |   |
| Cost  of medical equipment outsourcing                                                                                          |       | 20,920                 |       | 20,605                 |       | 61,149 |   | 61,071 |   |
| Cost  of technical and professional services                                                                                    |       | 7,596                  |       | 8,066                  |       | 22,534 |   | 25,411 |   |
| Cost  of medical equipment sales and remarketing                                                                                |       | 4,294                  |       | 4,587                  |       | 13,120 |   | 11,300 |   |
| Medical  equipment depreciation                                                                                                 |       | 16,285                 |       | 15,809                 |       | 48,051 |   | 46,438 |   |
| Total  costs of medical equipment outsourcing, technical and professional services  and medical equipment sales and remarketing |       | 49,095                 |       | 49,067                 |       | 144,854 |   | 144,220 |   |
| Gross  margin                                                                                                                   |       | 23,142                 |       | 21,912                 |       | 74,149 |   | 73,887 |   |
|                                                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Selling,  general and administrative                                                                                            |       | 19,393                 |       | 21,276                 |       | 62,565 |   | 64,906 |   |
| Operating  income                                                                                                               |       | 3,749                  |       | 636                    |       | 11,584 |   | 8,981 |   |
|                                                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Interest  expense                                                                                                               |       | 11,515                 |       | 11,526                 |       | 35,077 |   | 35,023 |   |
| Loss  before income taxes                                                                                                       |       | (7,766                 | )          | (10,890                | )          | (23,493 | ) | (26,042 | ) |
|                                                                                                                            |       |                   |       |                   |       |   |   |   |   |
| Benefit  for income taxes                                                                                                       |       | (2,884                 | )          | (3,780                 | )          | (9,019 | ) | (9,692 | ) |
| Net  loss                                                                                                                       |       | $                      | (4,882     | )                      | $          | (7,110 | ) | $ | (14,474 | ) | $ | (16,350 | ) |

 

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

 

3

----

 

**UniversalHospital Services, Inc.**

 

**Statementsof Cash Flows**

*(inthousands)*

*(unaudited)*

 
| ** **                                                                       | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                       | ** ** | **September 30,** | ** ** |
| ** **                                                                       | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Cash  flows from operating activities:                                           |       |                   |       |   |   |
| Net  loss                                                                        |       | $                      | (14,474    | ) | $ | (16,350 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation                                                                     |       | 54,367                 |       | 52,629 |   |
| Amortization  of intangibles and deferred financing costs                        |       | 12,699                 |       | 13,639 |   |
| Provision  for doubtful accounts                                                 |       | 831                    |       | 1,136 |   |
| Provision  for inventory obsolescence                                            |       | (39                    | )          | 313 |   |
| Non-cash  stock-based compensation expense                                       |       | 996                    |       | 1,876 |   |
| Loss  on sales and disposals of equipment                                        |       | 157                    |       | 1,224 |   |
| Deferred  income taxes                                                           |       | (7,466                 | )          | (9,968 | ) |
| Changes  in operating assets and liabilities:                                    |       |                   |       |   |   |
| Accounts  receivable                                                             |       | (1,248                 | )          | (3,316 | ) |
| Inventories                                                                      |       | (249                   | )          | (1,458 | ) |
| Other  operating assets                                                          |       | (1,260                 | )          | (567 | ) |
| Accounts  payable                                                                |       | (629                   | )          | 3,580 |   |
| Other  operating liabilities                                                     |       | 9,034                  |       | 8,257 |   |
| Net  cash provided by operating activities                                       |       | 52,719                 |       | 50,995 |   |
| Cash  flows from investing activities:                                           |       |                   |       |   |   |
| Medical  equipment purchases                                                     |       | (26,744                | )          | (50,329 | ) |
| Property  and office equipment purchases                                         |       | (3,467                 | )          | (3,197 | ) |
| Proceeds  from disposition of property and equipment                             |       | 2,513                  |       | 1,875 |   |
| Other                                                                            |       | (142                   | )          | — |   |
| Net  cash used in investing activities                                           |       | (27,840                | )          | (51,651 | ) |
| Cash  flows from financing activities:                                           |       |                   |       |   |   |
| Proceeds  under senior secured credit facility                                   |       | 45,500                 |       | 73,850 |   |
| Payments  under senior secured credit facility                                   |       | (74,500                | )          | (69,025 | ) |
| Payments  of principal under capital lease obligations                           |       | (3,269                 | )          | (3,109 | ) |
| Proceeds  from short term investments used as collateral                         |       | 1,500                  |       |   |   |
| Payment  of deferred financing costs                                             |       | —                 |       | (69 | ) |
| Change  in book overdrafts                                                       |       | (2,316                 | )          | (991 | ) |
| Net  cash provided by (used in) financing activities                             |       | (33,085                | )          | 656 |   |
| Net  change in cash and cash equivalents                                         |       | (8,206                 | )          | — |   |
|                                                                             |       |                   |       |   |   |
| Cash  and cash equivalents at the beginning of period                            |       | 12,006                 |       | — |   |
| Cash  and cash equivalents at the end of period                                  |       | $                      | 3,800      |   | $ | — |   |
|                                                                             |       |                   |       |   |   |
| Supplemental  cash flow information:                                             |       |                   |       |   |   |
| Interest  paid                                                                   |       | $                      | 23,136     |   | $ | 22,904 |   |
| Income  taxes paid                                                               |       | $                      | 281        |   | $ | 404 |   |
| Non-cash  activities:                                                            |       |                   |       |   |   |
| Medical  equipment purchases included in accounts payable (at end of period)     |       | $                      | 4,494      |   | $ | 6,900 |   |
| Capital  lease additions                                                         |       | $                      | 2,136      |   | $ | 4,862 |   |

 

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

 

4

----

 

**Universal Hospital Services, Inc.**

 

**NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS**

 

**1.****                                     ****Basisof Presentation**

 

Theinterim financial statements included in this Quarterly Report on Form 10-Qhave been prepared by Universal Hospital Services, Inc. (the “Company,” “we,”“our” or “us”) without audit, pursuant to the rules and regulations of theSecurities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) have been condensedor omitted, pursuant to such rules and regulations.  These condensed financial statements shouldbe read in conjunction with the financial statements and related notes includedin the Company’s 2008 Annual Report on Form 10-K (“2008 Form 10-K”),filed with the SEC.

 

Theinterim financial statements presented herein as of September 30, 2009,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, 2008 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 2008 Form 10-K.There have been no material changes to these policies for the nine months endedSeptember 30, 2009.

 

**2.****                                     ****Comprehensive Loss**

 

Comprehensiveloss is comprised of net loss and other comprehensive income (loss).  Other comprehensive income (loss) includesunrealized gains and losses from derivatives designated as cash flowhedges.  Accumulated other comprehensiveloss is displayed separately on the balance sheets.  A reconciliation of net loss to comprehensiveloss is provided below:

 

5

----

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(in  thousands)**                        | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  loss                                  |       | $                      | (4,882     | )                      | $          | (7,110 | ) | $ | (14,474 | ) | $ | (16,350 | ) |
| Unrealized  gain (loss) on cash flow hedge |       | (449                   | )          | (433                   | )          | 2,453 |   | 484 |   |
| Comprehensive  loss                        |       | $                      | (5,331     | )                      | $          | (7,543 | ) | $ | (12,021 | ) | $ | (15,866 | ) |

 

**3.             Recent Accounting Pronouncements**

 

***Standards Adopted***

 

InJune 2009, the Financial Accounting Standards Board (“FASB”)issued guidance now codifiedas FASB Accounting Standards Codification (“ASC”) Topic 105, *“Generally Accepted Accounting Principles*,”(thecodification), which establishes the ASC as the single source of authoritativenongovernmental U.S. GAAP, except for SEC rules and interpretive releases,which are sources of authoritative GAAP for SEC registrants. ASC Topic 105 doesnot change current U.S. GAAP, but is intended to simplify user access to allauthoritative U.S. GAAP by providing all authoritative literature related to aparticular topic in one place. These provisions of the standard are effectivefor interim and annual periods ending after September 15, 2009 and theCompany adopted the provisions for the quarter ending September 30, 2009.Accordingly, the provisions are effective for the Company for the currentfiscal reporting period. On the effective date of the standard, theCodification superseded all then-existing non-SEC accounting and reportingstandards, and all other non-grandfathered non-SEC accounting literature notincluded in the Codification became non-authoritative. The adoption of thispronouncement did not have an impact on the Company’s financial condition orresults of operations, but does impact our financial reporting process byeliminating all references to pre-codification standards.

 

InAugust 2009, the FASBissued Accounting Standards Update No. 2009-05 (“ASC Update2009-05”), an update to ASC 820, *Fair ValueMeasurements and Disclosures.* This update provides amendments toreduce potential ambiguity in financial reporting when measuring the fair valueof liabilities. Among other provisions, this update provides clarification thatin circumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using one or more of the valuation techniques described in ASC Update2009-05. The adoption of this update did not have a material impact on theCompany’s financial condition or results of operations.

 

InMay 2009, the FASB issued, and we adopted, guidance now codified as ASCTopic 855, “*Subsequent Events*.” ASC Topic 855established general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued. ASC Topic 855 stipulates the period after thebalance sheet date during which management of a reporting entity shouldevaluate events or transactions that may occur for potential recognition ordisclosure in the financial statements, the circumstances under which an entityshould recognize events or transactions occurring after the balance sheet datein its financial statements and the disclosures that an entity should makeabout events or transactions that occurred after the balance sheet date. ASCTopic 855 also includes a requirement to disclose the date through which thecompany has evaluated subsequent events and whether the date corresponds withthe release of their financial statements. The 

 

6

----

 

pronouncementis effective for interim and annual periods ending after June 15, 2009. Wehave evaluated subsequent events through November 9, 2009, the date onwhich our financial statements were issued.

 

InApril 2009, the FASB issued guidance, now codified, to address concernsabout (1) measuring the fair value of financial instruments when themarkets become inactive and quoted prices may reflect distressed transactionsand (2) recording impairment charges on investments in debt securities.The FASB also issued guidance, now codified, to require disclosures of fairvalues of certain financial instruments in interim financial statements.

 

ASCTopic 820, *“Fair Value Measurements and Disclosures,”*provides additional guidance to highlight and expand on the factors that shouldbe considered in estimating fair value when there has been a significantdecrease in market activity for a financial asset. FASB ASC Topic 820 alsorequires new disclosures relating to fair value measurement inputs andvaluation techniques (including changes in inputs and valuation techniques).

 

ASCTopic 320, *“Investments — Debt and Equity Securities,”*changes (1) the trigger for determining whether an other-than-temporaryimpairment exists and (2) the amount of an impairment charge to berecorded in earnings. To determine whether an other-than-temporary impairmentexists, an entity will be required to assess the likelihood of selling asecurity prior to recovering its cost basis. This is a change from the formerrequirement for an entity to assess whether it has the intent and ability tohold a security to recovery or maturity. ASC Topic 320 also expands andincreases the frequency of existing disclosure about other-than-temporaryimpairments and requires new disclosures of the significant inputs used in determininga credit loss, as well as a roll forward of that amount each period.

 

ASCTopic 825, *“Financial Instruments,”*increases thefrequency of fair value disclosures from annual to quarterly to providefinancial statement users with more timely information about the effects ofcurrent market conditions on their financial instruments.

 

Weadopted the three above ASC Topics during the second quarter of 2009.  The adoption of the above guidance did nothave a material effect on the Company’s financial condition, results ofoperations or cashflows.

 

InMarch 2008, the FASB issued guidance now codified as ASC Topic 815, “*Derivatives and Hedging.”* ASC Topic 815 requires companiesto provide enhanced disclosures about derivative instruments and hedgingactivities to provide a better understanding of their effects on a company’sfinancial position, financial performance, and cash flows. We adopted thedisclosure provisions of ASC Topic 815 on January 1, 2009. The adoption ofthe above standard did not have a material effect on the Company’s financialcondition, results of operations or cashflows.

 

Weenter into derivative instruments for risk management purposes only, includingderivatives designated as hedging instruments under ASC Topic 815, “*Derivatives and Hedging.”*We are a party to an interest rateswap that is designated as a fair value hedge for a portion of our long-termdebt. By using this instrument, we are exposed, from time to time, to creditrisk and market risk. Credit risk is the risk that the counterparty will failto perform under the terms of the derivative contract. When the fair value of aderivative contract is positive, the counterparty owes us, which creates creditrisk for us. We 

 

7

----

 

minimizethis credit risk by entering into transactions with high qualitycounterparties. Market risk is the risk that a change in interest rates willresult in an adverse effect on the value of a financial instrument.

 

InDecember 2007, the FASB issued guidance now codified as ASC Topic 805, *“Business Combinations,”* which establishes principles andrequirements for how an acquirer in a business combination recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any noncontrolling interest; recognizes and measuresthe goodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination. ASC Topic 805 is to be applied prospectively to businesscombinations for which the acquisition date is on or after the beginning of anentity’s fiscal year that begins on or after December 15, 2008. We adoptedASC Topic 805 on January 1, 2009 and apply the provisions to applicablebusiness combinations on a prospective basis.

 

***Standards Issued Not Yet Adopted***

 

InOctober 2009, the FASB issued Accounting Standards Update, 2009-13,Revenue Recognition (Topic 605): *MultipleDeliverable Revenue Arrangements — A Consensus of the FASB Emerging Issues TaskForce.”* This update provides application guidance on whethermultiple deliverables exist, how the deliverables should be separated and howthe consideration 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 Companyintends to apply the guidance of this standard prospectively from the effectivedate of the standard.

 

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

 

InSeptember 2006, the FASB issued guidance now codified as ASC Topic 820, *“Fair Value Measurements and Disclosure,”* which establishesa consistent framework for measuring fair value and expands disclosures on fairvalue measurements. ASC Topic 820 was effective for the Company starting infiscal 2008 with respect to financial assets and liabilities. In addition theCompany adopted the non-financial asset and liability provisions ASC Topic 820on January 1, 2009.  The adoption ofthe non-financial asset and liability provisions of ASC Topic 820 had no impacton our financial statements as of January 1, 2009 and will be applied on aprospective basis.

 

Financialassets and liabilities measured at fair value on a recurring basis as of September 30,2009 and December 31, 2008, in accordance with ASC Topic 820, aresummarized in the following table by type of inputs applicable to the fairvalue measurements:

 

8

----

 
| ** **              | ** ** | **Fair Value at September 30, 2009** | ** ** | **Fair Value at December 31, 2008** | ** ** |
|-------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **              | ** ** | **Level 1**                               | ** ** | **Level 2**                              | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Assets:                 |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Short  term investments |       | $                                         | —     |                                     | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 1,500 |   | $ | — |   | $ | 1,500 |   |
|                    |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:            |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss  on swap contract  |       | $                                         | —     |                                     | $          | 23,093 |   | $ | — |   | $ | 23,093 |   | $ | — |   | $ | 27,167 |   | $ | — |   | $ | 27,167 |   |

 

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; and inputsthat are derived principally from or corroborated by observable market data bycorrelation 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 that the carrying amount of financial instruments, includingaccounts receivable, accounts payable and accrued liabilities, approximate fairvalue due to their short maturities.  Thefair value of our outstanding PIK Toggle Notes, Floating Rate Notes and 10.125%Senior Notes, based on the quoted market price for the same or similar issues ofdebt, is approximately:

 
| ** **            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------|------------|------------------------|------------|-----------------------|------------|
| **(in  millions)**    | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| PIK  Toggle Notes     |       | $                      | 226.0      |                  | $          | 162.4 |   |
| Floating  Rate Notes  |       | 196.4                  |       | 139.4                 |       |
| 10.125%  Senior Notes |       | 9.8                    |       | 9.8                   |       |
|                       |            |                        |            |                       |            |  |  |

 

**5.****                                     ****Stock-BasedCompensation**

 

Underits 2007 Stock Option Plan, our parent corporation, UHS Holdco Inc. (“Parent”),may grant to any of our and Parent’s executives and other key employees, and toconsultants and certain non-

 

9

----

 

employeedirectors, nonqualified options to purchase common stock of Parent at a priceequal to the fair market value of the common stock at the date of grant.Approximately 43.9 million shares of Parent’s common stock are reserved forissuance under the 2007 Stock Option Plan.

 

Optionsgranted under the 2007 Stock Option Plan have a ten-year contractual term andgenerally vest over a period of six years.  Except for options issued tonon-employee directors, option grants are comprised of 50% fixed vesting and50% performance vesting options.  Fixed vesting options vest over asix-year service period, subject to the option holder not ceasing service withParent or the Company.  Performancevesting options vest over a six-year period, subject to the option holder notceasing service with Parent or the Company and to the Company’s attainment ofeither an adjusted Earnings Before Interest, Taxes, Depreciation andAmortization (“EBITDA”) target for the then current year or an aggregateadjusted EBITDA target, as set forth in the respective form of optionagreement.  Options issued tonon-employee directors are 100% fixed vesting options.  Upon a sale ofParent or the Company, all of the unvested options with fixed vesting scheduleswill vest and become exercisable, and the unvested options that vest upon theachievement of established performance targets will vest and become exercisableupon Irving Place Capital’s achievement of a certain internal rate of return onits investment in Parent, subject to certain conditions.  The sharesissued to a grantee upon the exercise of such grantee’s options will be subjectto certain restrictions on transferability as provided in the 2007 Stock OptionPlan.  Grantees are subject to non-competition, non-solicitation andconfidentiality requirements as set forth in their respective stock optiongrant agreements.  Forfeited options are available for future issue.

 

Duringthe nine months ended September 30, 2009, activity under Parent’s 2007Stock Option Plan was as follows:

** **
| **(in  thousands except exercise price)**         | ** ** | **Number of  Options** | ** ** | **Weighted  average  exercise price** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|---------------------------------------|------------|
| Outstanding  at December 31, 2008            |       | 36,740                 |       | $                                     | 1.00       |   |
| Granted                                           |       | 1,569                  |       | $                                     | 1.00       |   |
| Exercised                                         |       | —                 |       |                                  |       |
| Forfeited  or expired                             |       | (672                   | )          | $                                     | 1.00       |   |
|                                              |       |                   |       |                                  |       |
| Outstanding  at September 30, 2009           |       | 37,637                 |       | $                                     | 1.00       |   |
|                                              |       |                   |       |                                  |       |
| Exercisable  at September 30, 2009           |       | 11,841                 |       | $                                     | 1.00       |   |
|                                              |       |                   |       |                                  |       |
| Remaining  authorized options available for issue |       | 6,268                  |       |                                  |       |

 

Our Parent’s compensationcommittee determined the exercise price for options issued during the ninemonths ended September 30, 2009 by reference to an estimated fair market valueof the Parent’s stock as determined reasonably and in good faith by the Parent’sboard of directors. Additionally, the exercise price for options was approvedby the Parent’s board of directors.

 

We determine the fair value of options using theBlack-Scholes option pricing model. The estimated fair value of options,including the effect of estimated forfeitures, is recognized as expense on astraight-line

 

10

----

 

basis over the options’ expected vesting periods. Thefollowing assumptions were used in determining the fair value of stock optionsgranted during the nine months ended September 30, 2009, under theBlack-Scholes model:

 
| Risk-free  interest rate      |   | 2.2   | %      |
|-------------------------------|--------|-------|--------|
| Expected  volatility          |   | 37.90 | %      |
| Dividend Yield                |   | None  |   |
| Expected option  term (years) |   | 6.6   |   |

 

Although Parent grants stockoptions, the Company recognizes compensation expense related to these optionssince the services are performed for its benefit.  For the nine monthperiods ended September 30, 2009 and 2008, we recognized non-cash stockcompensation expense of $1.0 and $1.9 million, respectively, which is primarilyincluded in selling, general and administrative expenses.  At September 30,2009, unearned non-cash stock-based compensation related to our fixed vestingoptions, that we expect to recognize as expense over the next 3.5 years, totalsapproximately $4.4 million, net of our estimated forfeiture rate of 2.0%.Unearned non-cash stock-based compensation related to the performance vestingoptions totaling approximately $5.0 million, net of our estimated forfeiturerate of 2.0%, would be recognized over the next 3.9 years only if theperformance targets are met.  The expense could be accelerated upon the saleof 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:

 
| ** **                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in thousands)**                 | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| PIK  Toggle Notes                       |       | $                      | 230,000    |                  | $          | 230,000 |   |
| Floating  Rate Notes                    |       | 230,000                |       | 230,000               |       |
| Senior  secured credit facility         |       | 20,000                 |       | 49,000                |       |
| 10.125%  Senior Notes                   |       | 9,945                  |       | 9,945                 |       |
| Capital  lease obligations              |       | 11,265                 |       | 12,398                |       |
|                                    |       | 501,210                |       | 531,343               |       |
| Less: Current portion of long-term debt |       | (4,222                 | )          | (3,555                | )          |
| Total long-term debt                    |       | $                      | 496,988    |                  | $          | 527,788 |   |

 

***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 

 

11

----

 

paymentperiod through June 1, 2011, the Company may, at its option, elect to payinterest on the PIK Toggle Notes entirely in cash (“Cash Interest”), entirelyby increasing the principal amount of the outstanding PIK Toggle Notes, by issuingadditional PIK Toggle Notes (“PIK Interest”) or 50% Cash Interest and 50% PIKInterest.  Cash Interest on the PIKToggle Notes accrues at the rate of 8.50% per annum.  PIK Interest on thePIK Toggle Notes accrues at the rate of 9.25% per annum.  After June 1,2011, the Company is required to make all interest payments on the PIK ToggleNotes entirely as Cash Interest.  The PIK Toggle Notes are redeemable, atthe Company’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 incurrence of additional debt, thepayment of dividends and the issuance of preferred stock. The PIK Toggle Notesare 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 September 30, 2009, our LIBOR-basedrate was 4.635%, which includes the credit spread.  The Floating Rate Notes are redeemable, atthe Company’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 Floating Rate Notes have a change of controlprovision, which gives each holder the right to require the Company to purchaseall or a portion of such holders’ Floating Rate Notes upon a change in control,as defined in the Second Lien Senior Indenture, at a purchase price equal to101% of the principal amount plus accrued interest to the date of purchase. TheFloating Rate Notes, subject to certain definitions and exceptions, havecovenants that restrict, among other things, the incurrence of additional debt,the payment of dividends and the issuance of preferred stock. The Floating RateNotes 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 September 30, 2009 isincluded as a cash flow hedge on our balance sheet.  The change in fair value was recorded as acomponent of accumulated other comprehensive loss on our balance sheet, net oftax, since the instrument was determined to be an effective hedge at September 30,2009.  We do not expect any amounts to bereclassified into current earnings in the future due to ineffectiveness.

 

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% from December 2007through May 2012.

 

12

----

 

***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 September 30,2009, we had $111.4 million of availability under the senior secured creditfacility based on a borrowing base of $135.0 million, less borrowings of $20.0million, 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):

 

·                  at a per annum rate equal to 0.75% 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 1.75% 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.

 

AtSeptember 30, 2009, our LIBOR-based rate was 1.999%, which includes thecredit spread noted above.  As of September 30,2009, we had no outstanding balances under our prime rate based agreement.

 

***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,Contingencies and Subsequent Event**

 

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 September 30, 2009, we were not a party toany other pending legal proceedings the adverse outcome of which couldreasonably be expected to have a material adverse effect on our operatingresults, financial position or cash flows.

 

13

----

 

**8.****                                     ****RelatedParty 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 and BretBowerman.  In addition, David Crane, adirector, provides consulting services to Irving Place Capital.  We paid Irving Place Capital professionalservices fees of $0.6 million and $0.5 million for the nine-month periods endedSeptember 30, 2009 and 2008, respectively.

 

**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 directors is also adirector of Ryan.  We made payments to Ryan totaling $247,000 and $231,000during the nine months ended September 30, 2009 and 2008, 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 nine months ended September 30,2009 and the six month period from April 1, 2008 through September 30,2008, we paid administrative fees to Broadlane of approximately $380,000 and$291,000, respectively. On September 30, 2009, accounts payable includesapproximately $44,000 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.****                                     ****SegmentInformation**

 

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:

 

14

----

 

**MedicalEquipment Outsourcing**

*(inthousands)*

** **

| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **2009**                              | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                        |       | $                                     | 56,043     |                                 | $          | 53,469 |   | $ | 170,849 |   | $ | 168,721 |   |
| Cost  of revenue                |       | 20,920                                |       | 20,605                               |       | 61,149 |   | 61,071 |   |
| Medical  equipment depreciation |       | 16,285                                |       | 15,809                               |       | 48,051 |   | 46,438 |   |
| Gross  margin                   |       | $                                     | 18,838     |                                 | $          | 17,055 |   | $ | 61,649 |   | $ | 61,212 |   |

 

**Technicaland Professional Services**

*(inthousands)*

 

| ** **       | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **       | ** ** | **2009**                               | ** ** | **2008**                              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues         |       | $                                      | 10,766     |                                  | $          | 11,174 |   | $ | 31,874 |   | $ | 34,588 |   |
| Cost  of revenue |       | 7,596                                  |       | 8,066                                 |       | 22,534 |   | 25,411 |   |
| Gross  margin    |       | $                                      | 3,170      |                                  | $          | 3,108 |   | $ | 9,340 |   | $ | 9,177 |   |

 

**MedicalEquipment Sales and Remarketing**

*(inthousands)*

** **

| ** **       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **       | ** ** | **2009**                              | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues         |       | $                                     | 5,428      |                                 | $          | 6,336 |   | $ | 16,280 |   | $ | 14,798 |   |
| Cost  of revenue |       | 4,294                                 |       | 4,587                                |       | 13,120 |   | 11,300 |   |
| Gross  margin    |       | $                                     | 1,134      |                                 | $          | 1,749 |   | $ | 3,160 |   | $ | 3,498 |   |

 

**TotalGross Margin and Reconciliation to Loss Before Income Tax**

*(inthousands)*

 

| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2009**                              | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Total  gross margin                  |       | $                                     | 23,142     |                                 | $          | 21,912 |   | $ | 74,149 |   | $ | 73,887 |   |
| Selling,  general and administrative |       | 19,393                                |       | 21,276                               |       | 62,565 |   | 64,906 |   |
| Interest  expense                    |       | 11,515                                |       | 11,526                               |       | 35,077 |   | 35,023 |   |
| Loss  before income tax              |       | $                                     | (7,766     | )                                    | $          | (10,890 | ) | $ | (23,493 | ) | $ | (26,042 | ) |

 

**10.****                              ****PensionPlan**

 

Thecomponents of net periodic pension costs are as follows:

 

15

----

 

| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**              | ** ** | **2009**                              | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest  cost                  |       | $                                     | 266        |                                 | $          | 258 |   | $ | 799 |   | $ | 774 |   |
| Expected  return on plan assets |       | (303                                  | )          | (308                                 | )          | (910 | ) | (923 | ) |
| Recognized  net actuarial loss  |       | 3                                     |       | —                               |       | 9 |   | — |   |
| Net  periodic cost (benefit)    |       | $                                     | (34        | )                                    | $          | (50 | ) | $ | (102 | ) | $ | (149 | ) |

 

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

 

16

----

 

**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

**Thefollowing should be read in conjunction with the accompanying financialstatements and notes.**

 

**BUSINESS OVERVIEW**

 

**OurCompany**

 

UniversalHospital Services, Inc. (“we”, “our”, “us”, the “Company”, or “UHS”) is aleading nationwide provider of medical equipment outsourcing and lifecyclesolutions to the United States health care industry. Our customers includenational, regional and local acute and long-term acute care hospitals,alternate site providers (such as skilled nursing facilities, specialtyhospitals, large physician clinics, and home care providers) and medicalequipment manufacturers.  We provide ourcustomers solutions across the spectrum of the equipment life cycle as a resultof our position as one of the industry’s largest purchasers and outsourcers ofmedical equipment.  We currently own ormanage over 515,000 pieces of medical equipment in our Medical EquipmentOutsourcing and Technical and Professional Services segments. Our diversemedical equipment outsourcing customer base includes more than 4,175 acute carehospitals and approximately 4,200 alternate site providers.  We also have relationships with more than 200medical equipment manufacturers and all 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 thenation’s leading medical equipment lifecycle solutions companies, we design andoffer comprehensive solutions for our customers that help reduce capital andoperating expenses while increasing equipment and staff productivity andsupporting improved patient safety and outcomes.***

 

 

17

----

 

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 operating segments are the same asthose of the entire Company.

 

Wepresent the non-Generally Accepted Accounting Principals (“GAAP”) financialmeasure gross margin, before purchase accounting adjustments, because we usethis measure to monitor and evaluate the performance of our business and believethat the presentation of this measure will enhance users’ ability to analyzetrends in our business and evaluate our performance relative to other companiesin our industry.  A reconciliation of the non-GAAP financial measureto its equivalent GAAP measure is included in the respective tables.

 

**MedicalEquipment Outsourcing Segment - Manage & Utilize**

 

Ourflagship business is our Medical Equipment Outsourcing segment, which accountedfor $56.0 million, or approximately 77.6% of our revenues, for the quarterended September 30, 2009 and $170.8 million, or approximately 78.0%, ofour revenues for the nine months ended September 30, 2009.  As of September 30, 2009, we owned ormanaged over 325,000 pieces of medical equipment in our Medical EquipmentOutsourcing segment, primarily in the categories of respiratory therapy,newborn care, critical care, patient monitors, patient handling (such as beds,stretchers and wheelchairs), pressure area management (such as therapysurfaces) and wound therapy.  Historically,we have purchased and directly owned the equipment used in our medicalequipment outsourcing programs. Beginning in 2007, we entered into revenue sharing agreements with twokey manufacturers of equipment where the manufacturers retain ownership of theequipment, but we take possession and manage the rental of the equipment tocustomers.  We may enter into more ofsuch arrangements in the future.  Sucharrangements are less capital-intensive for the Company.

 

Weperform regular and preventative maintenance on the equipment and retaindetailed records for documentation.  Werepair, test and clean the equipment. Our service includes prompt replacementof non-working equipment and the flexibility to upgrade technology as acustomer’s product of choice changes.  Wehave three primary outsourcing programs:

 

·                  Supplemental and Peak Needs Usage;

·                  Customized Outsourcing Agreements; and

·                  Asset Management Partnership Program (“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 AMPPs.

 

18

----

 

**Technicaland Professional Services Segment - Plan & Acquire; Maintain &Repair**

 

OurTechnical and Professional Services segment accounted for $10.8 million, orapproximately 14.9% of our revenues for the quarter ended September 30,2009 and $31.9 million, or approximately 14.6% of our revenues for the ninemonths ended September 30, 2009.  Weleverage 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.  Wemanaged over 190,000 units of customer owned equipment and serviced over325,000 units that we own or directly manage in our Medical EquipmentOutsourcing segment. Our technical and professional service offerings are lesscapital-intensive than our Medical Equipment Outsourcing segment, and provide acomplementary alternative for customers that wish to own their medicalequipment, but lack the infrastructure, expertise or scale to performmaintenance, repair, and lifecycle analysis and planning functions.

 

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

 

OurMedical Equipment Sales and Remarketing segment accounted for $5.4 million, orapproximately 7.5%, of our revenues for the quarter ended September 30,2009 and $16.3 million, or approximately 7.4%, of our revenues for the ninemonths ended September 30, 2009. 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 remarket pre-owned medical equipment tohospitals, alternate site providers, veterinarians and equipment brokers.  We offer a wide range of equipment from ourstandard medical equipment to diagnostic, ultrasound and x-ray equipment.

 

***Specialty Medical Equipment Sales and Distribution.*********We use our nationalinfrastructure to provide sales and distribution for manufacturers of specialtymedical equipment on a limited and exclusive basis.  We currently sell equipment in selectedproduct lines including, but not limited to, respiratory percussion vests,continuous passive motion machines, patient monitors, patient handling equipmentand infant security systems.

 

***Sales of Disposables******.***We offer our customers single use disposableitems.  Most of these items are used in connection with our outsourcedequipment.  We offer these products as a convenience to customers and tocomplement our full medical equipment lifecycle solutions.

 

**RESULTS OF OPERATIONS**

 

**Thefollowing discussion addresses:**

 

19

----

 

**·**                  ourfinancial condition as of September 30, 2009 and

**·**                  theresults of operations for each of the three and nine-month periods ended September 30,2009 and 2008.

 

**Thisdiscussion should be read in conjunction with the financial statements includedelsewhere in this Quarterly Report on Form 10-Q and the Management’sDiscussion and Analysis of Financial Condition and Results of Operationssection included in our 2008 Annual Report on Form 10-K, filed with theSecurities and Exchange Commission.**

** **

Thefollowing table provides information on the percentages of certain items ofselected financial data compared to total revenues for the three and nine-monthperiods ended September 30, 2009 and 2008. The table below also indicates the percentage increase or decrease overthe prior comparable period.

 
| ** **                                                                                                                      | ** ** | **Three Months Ended September 30,**         | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **Percent of Total Revenues** | ** ** | **Percent  Increase**               | ** ** | **Percent of Total Revenues** | ** ** | **Percent  Increase** | ** ** |
| ** **                                                                                                                      | ** ** | **2009**                                     | ** ** | **2008**                            | ** ** | **(Decrease)** | ** ** | **2009** | ** ** | **2008** | ** ** | **(Decrease)** | ** ** |
| **Revenue**                                                                                                                     |       |                                         |       |                                |       |   |   |   |   |   |   |   |   |
| Medical  equipment outsourcing                                                                                                  |       | 77.6                                         | %          | 75.3                                | %          | 4.8 | % | 78.0 | % | 77.3 | % | 1.3 | % |
| Technical  and professional services                                                                                            |       | 14.9                                         |       | 15.8                                |       | (3.7 | ) | 14.6 |   | 15.9 |   | (7.8 | ) |
| Medical  equipment sales and remarketing                                                                                        |       | 7.5                                          |       | 8.9                                 |       | (14.3 | ) | 7.4 |   | 6.8 |   | 10.0 |   |
| Total  revenues                                                                                                                 |       | 100.0                                        | %          | 100.0                               | %          | 1.8 |   | 100.0 | % | 100.0 | % | 0.4 |   |
|                                                                                                                            |       |                                         |       |                                |       |   |   |   |   |   |   |   |   |
| **Cost of Sales**                                                                                                               |       |                                         |       |                                |       |   |   |   |   |   |   |   |   |
| Cost  of medical equipment outsourcing                                                                                          |       | 29.0                                         |       | 29.0                                |       | 1.5 |   | 27.9 |   | 28.0 |   | 0.1 |   |
| Cost  of technical and professional services                                                                                    |       | 10.5                                         |       | 11.4                                |       | (5.8 | ) | 10.3 |   | 11.6 |   | (11.3 | ) |
| Cost  of medical equipment sales and remarketing                                                                                |       | 5.9                                          |       | 6.5                                 |       | (6.4 | ) | 6.0 |   | 5.2 |   | 16.1 |   |
|                                                                                                                            |       |                                         |       |                                |       |   |   |   |   |   |   |   |   |
| Medical  equipment depreciation                                                                                                 |       | 22.6                                         |       | 22.2                                |       | 3.0 |   | 21.9 |   | 21.3 |   | 3.5 |   |
| Total  costs of medical equipment outsourcing, technical and professional services  and medical equipment sales and remarketing |       | 68.0                                         |       | 69.1                                |       | 0.1 |   | 66.1 |   | 66.1 |   | 0.4 |   |
| Gross  margin                                                                                                                   |       | 32.0                                         |       | 30.9                                |       | 5.6 |   | 33.9 |   | 33.9 |   | 0.4 |   |
|                                                                                                                            |       |                                         |       |                                |       |   |   |   |   |   |   |   |   |
| Selling,  general and administrative                                                                                            |       | 26.8                                         |       | 30.0                                |       | (8.9 | ) | 28.6 |   | 29.8 |   | (3.6 | ) |
| Operating  income                                                                                                               |       | 5.2                                          |       | 0.9                                 |       | 489.5 |   | 5.3 |   | 4.1 |   | 29.0 |   |
|                                                                                                                            |       |                                         |       |                                |       |   |   |   |   |   |   |   |   |
| Interest  expense                                                                                                               |       | 15.9                                         |       | 16.2                                |       | (0.1 | ) | 16.0 |   | 16.1 |   | 0.2 |   |
| Loss  before income taxes                                                                                                       |       | (10.7                                        | )          | (15.3                               | )          | (28.7 | ) | (10.7 | ) | (11.9 | ) | (9.8 | ) |
|                                                                                                                            |       |                                         |       |                                |       |   |   |   |   |   |   |   |   |
| Benefit  for income taxes                                                                                                       |       | (4.0                                         | )          | (5.3                                | )          | (23.7 | ) | (4.1 | ) | (4.4 | ) | (6.9 | ) |
| Net  loss                                                                                                                       |       | (6.7                                         | )%         | (10.0                               | )%         | (31.3 | ) | (6.6 | )% | (7.5 | )% | (11.5 | ) |

 

20

----

 

**Resultsof Operations for the Three Months Ended September 30, 2009 compared tothe Three Months Ended September 30, 2008**

** **

**MedicalEquipment Outsourcing Segment — Manage & Utilize**

*(inthousands)*

 
| ** **                                                                                                              | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                              | ** ** | **2009**                              | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total  revenue                                                                                                          |       | $                                     | 56,043     |       | $          | 53,469     |       | $ | 2,574 |   | 4.8 | % |
| Cost  of revenue                                                                                                        |       | 20,920                                |       | 20,605     |       | 315        |       | 1.5 |   |
| Medical  equipment depreciation                                                                                         |       | 16,285                                |       | 15,809     |       | 476        |       | 3.0 |   |
| Gross  margin                                                                                                           |       | $                                     | 18,838     |       | $          | 17,055     |       | $ | 1,783 |   | 10.5 |   |
|                                                                                                                    |       |                                  |       |       |       |       |       |   |   |
| Gross  margin %                                                                                                         |       | 33.6                                  | %          | 31.9       | %          |       |       |   |   |
|                                                                                                                    |       |                                  |       |       |       |       |       |   |   |
| Gross  margin                                                                                                           |       | $                                     | 18,838     |       | $          | 17,055     |       | $ | 1,783 |   | 10.5 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of medical equipment |       | 3,600                                 |       | 4,937      |       | (1,337     | )          | (27.1 | ) |
| Gross  margin, before purchase accounting adjustments                                                                   |       | $                                     | 22,438     |       | $          | 21,992     |       | $ | 446 |   | 2.0 | % |
|                                                                                                                    |       |                                  |       |       |       |       |       |   |   |
| Gross  margin %, before purchase accounting adjustments                                                                 |       | 40.0                                  | %          | 41.1       | %          |       |       |   |   |

 

Totalrevenue in the Medical Equipment Outsourcing segment increased $2.6 million, or4.8%, to $56.0 million in the third quarter of 2009 as compared to the sameperiod of 2008.  This increase wasprimarily driven by increased activity in our AMPP, patient handling and woundtherapy solutions, partially offset by what we believe has been an increasedcustomer effort to control outsourcing expenses. During the latter portion ofthe 2009 third quarter, we began experiencing increased equipment demandassociated with increased flu activity.

 

Totalcost of revenue in the segment increased $0.3 million, or 1.5%, to $20.9million in the third quarter of 2009 as compared to the same period of2008.  This increase is primarilyattributable to higher employee-related expenses of $0.6 million, partiallyoffset by a decrease in freight expense of $0.2 million and other of $0.1million.

 

Medicalequipment depreciation increased $0.5 million, or 3.0%, to $16.3 million in thethird quarter of 2009 as compared to the same period of 2008.  The increase in medical equipmentdepreciation primarily relates to the increase in medical equipment purchases infiscal year 2008 to meet customer demand. Medical equipment depreciation for the quarters ended September 30,2009 and 2008 include $3.4 and $4.6 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 from31.9% in the third quarter of 2008 to 33.6% for the third quarter of 2009.Gross margin percentage, before purchase accounting adjustments, decreased from41.1% in the third quarter of 2008 to 40.0% in the third quarter of 2009.  This decrease resulted primarily from what webelieve has been increased customer effort to control outsourcing expenses,partially offset by increased activity in our AMPP, patient handling and woundtherapy solutions.

 

21

----

 

**Technicaland Professional Services Segment — Plan & Acquire; Maintain &Repair**

*(inthousands)*

 
| ** **                                                                                           | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                           | ** ** | **2009**                              | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total  revenue                                                                                       |       | $                                     | 10,766     |       | $          | 11,174     |       | $ | (408 | ) | (3.7 | )% |
| Cost  of revenue                                                                                     |       | 7,596                                 |       | 8,066      |       | (470       | )          | (5.8 | ) |
| Gross  margin                                                                                        |       | $                                     | 3,170      |       | $          | 3,108      |       | $ | 62 |   | 2.0 |   |
|                                                                                                 |       |                                  |       |       |       |       |       |   |   |
| Gross  margin %                                                                                      |       | 29.4                                  | %          | 27.8       | %          |       |       |   |   |
|                                                                                                 |       |                                  |       |       |       |       |       |   |   |
| Gross  margin                                                                                        |       | $                                     | 3,170      |       | $          | 3,108      |       | $ | 62 |   | 2.0 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to favorable lease  commitments |       | 4                                     |       | 6          |       | (2         | )          | (32.5 | ) |
| Gross  margin, before purchase accounting adjustments                                                |       | $                                     | 3,174      |       | $          | 3,114      |       | $ | 60 |   | 1.9 | % |
|                                                                                                 |       |                                  |       |       |       |       |       |   |   |
| Gross  margin %, before purchase accounting adjustments                                              |       | 29.5                                  | %          | 27.9       | %          |       |       |   |   |

 

Totalrevenue in the Technical and Professional Services segment declined $0.4million, or 3.7%, to $10.8 million in the third quarter of 2009 as compared tothe same period of 2008. This decrease was primarily attributable to a decreasein episodic business flows in our manufacturer services unit.

 

Totalcost of revenue in the segment declined $0.5 million, or 5.8%, to $7.6 millionin the third quarter of 2009 as compared to the same period of 2008.   This decrease was primarily attributable toa decrease in expenses associated with our manufacturer services unit.

 

Grossmargin percentage for the Technical and Professional Services segment increasedfrom 27.8% for the third quarter of 2008 to 29.4% for the same period of 2009.  We expect gross margin percentage tofluctuate based on the variability of third party vendor expenses in ourCustomized Healthcare Asset Management Programs (“CHAMP®”) and supplementalservice programs.

 

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

*(inthousands)*

 
| ** **                                                                                                                      | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                      | ** ** | **2009**                              | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total  revenue                                                                                                                  |       | $                                     | 5,428      |       | $          | 6,336      |       | $ | (908 | ) | (14.3 | )% |
| Cost  of revenue                                                                                                                |       | 4,294                                 |       | 4,587      |       | (293       | )          | (6.4 | ) |
| Gross  margin                                                                                                                   |       | $                                     | 1,134      |       | $          | 1,749      |       | $ | (615 | ) | (35.2 | ) |
|                                                                                                                            |       |                                  |       |       |       |       |       |   |   |
| Gross  margin %                                                                                                                 |       | 20.9                                  | %          | 27.6       | %          |       |       |   |   |
|                                                                                                                            |       |                                  |       |       |       |       |       |   |   |
| Gross  margin                                                                                                                   |       | $                                     | 1,134      |       | $          | 1,749      |       | $ | (615 | ) | (35.2 | ) |
| Purchase  accounting adjustments, primarily non-cash charges related to the step-up in  carrying value of our medical equipment |       | 145                                   |       | 191        |       | (46        | )          | (24.1 | ) |
| Gross  margin, before purchase accounting adjustments                                                                           |       | $                                     | 1,279      |       | $          | 1,940      |       | $ | (661 | ) | (34.1 | )% |
|                                                                                                                            |       |                                  |       |       |       |       |       |   |   |
| Gross  margin %, before purchase accounting adjustments                                                                         |       | 23.6                                  | %          | 30.6       | %          |       |       |   |   |

 

22

----

 

Totalrevenue in the Medical Equipment Sales and Remarketing segment decreased $0.9million, or 14.3%, to $5.4 million in the third quarter of 2009 as compared tothe same period of 2008.  The decline wasprimarily driven by decreases in new and pre-owned equipment sales of $1.0 and$0.4 million, respectively, partially offset by an increase in disposable salesof $0.5 million.

 

Totalcost of revenue in the segment decreased $0.3 million, or 6.4%, to $4.3 millionin the third quarter of 2009 as compared to the same period of 2008.  The decline was primarily due to decreases inthe costs of new and pre-owned equipment of $0.2 and $0.4 million,respectively, partially offset by an increase in the cost of disposables of $0.3million.  During the quarters ended September 30,2009 and 2008, purchase accounting adjustments related to medical equipmentsold increased cost of revenue by $0.1 and $0.2 million, respectively.

 

Grossmargin percentage for the Medical Equipment Sales and Remarketing segmentdecreased from 27.6% in the third quarter of 2008 to 20.9% for the same periodof 2009.  Gross margin percentage, beforepurchase accounting adjustments, decreased from 30.6% in the third quarter of2008 to 23.6% for the same period of 2009. We expect margins and activity in this segment to fluctuate based on thetransactional nature of the business.

 

**Selling,General and Administrative and Interest Expense**

*(inthousands)*

 
| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **2009**                              | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Selling,  general and administrative |       | $                                     | 19,393     |       | $          | 21,276     |       | $ | (1,883 | ) | (8.9 | )% |
| Interest  expense                    |       | 11,515                                |       | 11,526     |       | (11        | )          | (0.1 | )% |
|                                      |            |                                       |            |            |            |            |            |  |  |  |  |  |

 

***Selling, General andAdministrative***

 

Selling,general and administrative expense decreased $1.9 million, or 8.9%, to $19.4million for the third quarter of 2009 as compared to the same period of2008.  Selling, general andadministrative expense consists primarily of employee-related expenses,professional fees, occupancy charges, bad debt expense and depreciation andamortization.  Selling, general and administrativeexpense during the three months ended September 30, 2009 benefited fromlower stock-based compensation, amortization, bad debt expenses, and otherexpenses of $0.5, $0.4, $0.4, and $0.3 million, respectively. Cost savinginitiatives implemented during 2009 resulted in lower travel and entertainmentexpense of $0.3 million during the third quarter of 2009. Selling, general andadministrative expense as a percentage of total revenue was 26.8% and 30.0% foreach of the quarters ended September 30, 2009 and 2008, respectively.

 

***Interest Expense***

 

Interestexpense remained flat at $11.5 million for the quarter ended September 30,2009 as compared to the same period of 2008.

 

23

----

 

**IncomeTaxes**

 

Benefitfor income taxes decreased $0.9 million to $2.9 million during the thirdquarter of 2009 as compared to the same period of 2008.  The decrease is attributable to the change inloss before income taxes.

 

**NetLoss**

 

Netloss decreased $2.2 million to $4.9 million in the third quarter of 2009 ascompared to the same period of 2008. This decrease was primarily driven by increased activity in our AMPP,patient handling and wound therapy solutions, partially offset by what webelieve has been an increased customer effort to control outsourcing expensesand a decrease in episodic business flows in our Technical and ProfessionalServices segment.

 

**Resultsof Operations for the Nine Months Ended September 30, 2009 compared to theNine Months Ended September 30, 2008**

 

**MedicalEquipment Outsourcing Segment — Manage & Utilize**

*(inthousands)*

 
| ** **                                                                                                              | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                              | ** ** | **2009**                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total  revenue                                                                                                          |       | $                                    | 170,849    |       | $          | 168,721    |       | $ | 2,128 |   | 1.3 | % |
| Cost  of revenue                                                                                                        |       | 61,149                               |       | 61,071     |       | 78         |       | 0.1 |   |
| Medical  equipment depreciation                                                                                         |       | 48,051                               |       | 46,438     |       | 1,613      |       | 3.5 |   |
| Gross  margin                                                                                                           |       | $                                    | 61,649     |       | $          | 61,212     |       | $ | 437 |   | 0.7 |   |
|                                                                                                                    |       |                                 |       |       |       |       |       |   |   |
| Gross  margin %                                                                                                         |       | 36.1                                 | %          | 36.3       | %          |       |       |   |   |
|                                                                                                                    |       |                                 |       |       |       |       |       |   |   |
| Gross  margin                                                                                                           |       | $                                    | 61,649     |       | $          | 61,212     |       | $ | 437 |   | 0.7 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of medical equipment |       | 10,725                               |       | 12,703     |       | (1,978     | )          | (15.6 | ) |
| Gross  margin, before purchase accounting adjustments                                                                   |       | $                                    | 72,374     |       | $          | 73,915     |       | $ | (1,541 | ) | (2.1 | )% |
|                                                                                                                    |       |                                 |       |       |       |       |       |   |   |
| Gross  margin %, before purchase accounting adjustments                                                                 |       | 42.4                                 | %          | 43.8       | %          |       |       |   |   |

 

Totalrevenue in the Medical Equipment Outsourcing segment increased $2.1 million, or1.3%, to $170.8 million in the first nine months of 2009 as compared to thesame period of 2008.  This increaseresulted primarily from increased activity in our AMPP, patient handling andwound therapy solutions, partially offset by an overall decrease in patientcensus and what we believe has been an increased customer effort to controloutsourcing expenses.  During the latterportion of the third quarter of 2009 we began experiencing increased equipmentdemand associated with increased flu activity.

 

Totalcost of revenue in the segment increased $0.1 million, or 0.1%, to $61.1million in the first nine months of 2009 as compared to the same period of2008.

 

Medicalequipment depreciation increased $1.6 million, or 3.5%, to $48.1 million in thefirst nine months of 2009 as compared to the same period of 2008.  The increase in medical equipmentdepreciation primarily relates to the increase in medical equipment purchasesin fiscal year 2008 to meet customer demand. Medical equipment depreciation for the nine months ended September 30,2009 and 

 

24

----

 

2008include $10.2 and $11.7 million, respectively, of purchase accountingadjustments related to the step-up in carrying value of our medical equipment.

 

Grossmargin percentage for the Medical Equipment Outsourcing segment remainedrelatively flat from 36.3% in the first nine months of 2008 to 36.1% for thesame period of 2009. Gross margin percentage, before purchase accountingadjustments, decreased from 43.8% in the first nine months of 2008 to 42.4% inthe first nine months of 2009.  Thisdecrease resulted primarily from an overall decrease in patient census and whatwe believe to be an increased customer effort to control outsourcing expenses,partially offset by increased activity in our AMPP, patient handling and woundtherapy solutions.

 

**Technicaland Professional Services Segment — Plan & Acquire; Maintain &Repair**

*(inthousands)*

 
| ** **                                                                                           | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                           | ** ** | **2009**                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total  revenue                                                                                       |       | $                                    | 31,874     |       | $          | 34,588     |       | $ | (2,714 | ) | (7.8 | )% |
| Cost  of revenue                                                                                     |       | 22,534                               |       | 25,411     |       | (2,877     | )          | (11.3 | ) |
| Gross  margin                                                                                        |       | $                                    | 9,340      |       | $          | 9,177      |       | $ | 163 |   | 1.8 |   |
|                                                                                                 |       |                                 |       |       |       |       |       |   |   |
| Gross  margin %                                                                                      |       | 29.3                                 | %          | 26.5       | %          |       |       |   |   |
|                                                                                                 |       |                                 |       |       |       |       |       |   |   |
| Gross  margin                                                                                        |       | $                                    | 9,340      |       | $          | 9,177      |       | $ | 163 |   | 1.8 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to favorable lease  commitments |       | 14                                   |       | 21         |       | (7         | )          | (33.3 | ) |
| Gross  margin, before purchase accounting adjustments                                                |       | $                                    | 9,354      |       | $          | 9,198      |       | $ | 156 |   | 1.7 | % |
|                                                                                                 |       |                                 |       |       |       |       |       |   |   |
| Gross  margin %, before purchase accounting adjustments                                              |       | 29.3                                 | %          | 26.6       | %          |       |       |   |   |

 

Totalrevenue in the Technical and Professional Services segment declined $2.7million, or 7.8%, to $31.9 million in the first nine months of 2009 as comparedto the same period of 2008. This decrease was primarily attributable to adecrease in episodic business flows in our manufacturer services unit.

 

Totalcost of revenue in the segment declined $2.9 million, or 11.3%, to $22.5million in the first nine months of 2009 as compared to the same period of2008.   This decrease was primarilyattributable to a decrease in expenses associated with our manufacturerservices unit and third party vendor expenses of $2.1 and $1.7 million,partially offset by an increase in labor related charges of $0.9 million.

 

Grossmargin percentage for the Technical and Professional Services segment increasedfrom 26.5% for the first nine months of 2008 to 29.3% for the same period of2009.  Gross margin percentage willfluctuate based on the variability of third party vendor expenses in our CHAMP®and supplemental service programs.

 

25

----

 

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

*(inthousands)*

 
| ** **                                                                                                                  | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                  | ** ** | **2009**                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total  revenue                                                                                                              |       | $                                    | 16,280     |       | $          | 14,798     |       | $ | 1,482 |   | 10.0 | % |
| Cost  of revenue                                                                                                            |       | 13,120                               |       | 11,300     |       | 1,820      |       | 16.1 |   |
| Gross  margin                                                                                                               |       | $                                    | 3,160      |       | $          | 3,498      |       | $ | (338 | ) | (9.7 | ) |
|                                                                                                                        |       |                                 |       |       |       |       |       |   |   |
| Gross  margin %                                                                                                             |       | 19.4                                 | %          | 23.6       | %          |       |       |   |   |
|                                                                                                                        |       |                                 |       |       |       |       |       |   |   |
| Gross  margin                                                                                                               |       | $                                    | 3,160      |       | $          | 3,498      |       | $ | (338 | ) | (9.7 | ) |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of our medical equipment |       | 747                                  |       | 669        |       | 78         |       | 11.7 |   |
| Gross  margin, before purchase accounting adjustments                                                                       |       | $                                    | 3,907      |       | $          | 4,167      |       | $ | (260 | ) | (6.2 | )% |
|                                                                                                                        |       |                                 |       |       |       |       |       |   |   |
| Gross  margin %, before purchase accounting adjustments                                                                     |       | 24.0                                 | %          | 28.2       | %          |       |       |   |   |

 

Totalrevenue in the Medical Equipment Sales and Remarketing segment increased $1.5million, or 10.0%, to $16.3 million in the first nine months of 2009 ascompared to the same period of 2008.  Theincrease was primarily driven by an increase in new equipment and disposablesales of $1.0 and $1.4 million, respectively, partially offset by a decrease inpre-owned equipment sales of $0.9 million.

 

Totalcost of revenue in the segment increased $1.8 million, or 16.1%, to $13.1million in the first nine months of 2009 as compared to the same period of2008.  The increase was primarily due toan increase in the cost of new equipment, disposable sales, and other of $1.1,$1.0, and $0.3 million, respectively, offset by a decrease in the cost ofpre-owned equipment sales of $0.6 million. During the nine month periods ended September 30, 2009 and 2008,purchase accounting adjustments related to medical equipment sold impacted costof revenue by $0.7 million.

 

Grossmargin percentage for the Medical Equipment Sales and Remarketing segmentdecreased from 23.6% in the first nine months of 2008 to 19.4% for the sameperiod of 2009.  Gross margin percentage,before purchase accounting adjustments, decreased from 28.2% in the first ninemonths of 2008 to 24.0% for the same period of 2009.  We expect margins and activity in thissegment to fluctuate based on the transactional nature of the business.

 

**Selling,General and Administrative and Interest Expense**

*(inthousands)*

 
| ** **                           | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **2009**                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Selling,  general and administrative |       | $                                    | 62,565     |       | $          | 64,906     |       | $ | (2,341 | ) | (3.6 | )% |
| Interest  expense                    |       | 35,077                               |       | 35,023     |       | 54         |       | 0.2 | % |
|                                      |            |                                      |            |            |            |            |            |  |  |  |  |  |

 

***Selling, General andAdministrative***

 

Selling,general and administrative expense decreased $2.3 million, or 3.6%, to $62.6million for the first nine months of 2009 as compared to the same period of2008.  Selling, general andadministrative expense consists primarily of employee-related expenses,professional fees, occupancy charges, bad debt 

 

26

----

 

expenseand depreciation and amortization. Selling, general and administrative expense during the nine months endedSeptember 30, 2009 benefited from lower stock-based compensation,amortization, bad debt expenses, and other expenses of $0.9, $0.9, $0.3, and$0.2 million, respectively. Cost savings initiatives implemented during 2009resulted in increased severance charges of $0.4 million, which related to therealignment of our support and operations organizations, offset by travel andentertainment expense reductions of $0.4 million. Selling, general and administrativeexpense as a percentage of total revenue was 28.6% and 29.8% for the nine monthperiods ended September 30, 2009 and 2008, respectively.

 

***Interest Expense***

 

Interestexpense increased $0.1 million, or 0.2%, to $35.0 million during the first ninemonths of 2009 as compared to the same period of 2008.

 

**IncomeTaxes**

 

Benefitfor income taxes decreased $0.7 million to $9.0 million during the first ninemonths of 2009 as compared to the same period of 2008.  The decrease is attributable to the change inloss before income taxes.

 

**NetLoss**

 

Netloss decreased $1.9 million to $14.5 million in the first nine months of 2009as compared to the same period of 2008. This decrease was primarily driven by an overall decrease in patientcensus, an increased customer effort to control outsourcing expenses and adecrease in episodic business flows in our Technical and Professional Servicessegment, partially offset by increased activity in our AMPP, patient handlingand wound therapy solutions.

 

**EBITDA**

 

EarningsBefore Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $76.8 and$73.4 million for the nine months ended September 30, 2009 and 2008,respectively.  EBITDA for the nine monthsended September 30, 2009 was primarily driven by increased activity in ourAMPP, patient handling and wound therapy solutions, partially offset by anoverall decrease in patient census, an increased customer effort to controloutsourcing expenses and a decrease in episodic business flows in our Technicaland Professional Services segment.

 

EBITDAis not intended to represent an alternative to operating income or cash flowsfrom operating, financing or investing activities (as determined in accordancewith GAAP) as a measure of performance, and is not representative of fundsavailable for discretionary use due to our financing obligations.  EBITDA, as defined by us, may not becalculated consistently among other companies applying similar reportingmeasures.  EBITDA is included because itis a widely accepted financial indicator used by certain investors andfinancial analysts to assess and compare companies, and a version of EBITDA isan integral part of our debt covenant calculations.  Management believes that EBITDA provides animportant perspective on our ability to service our long-term obligations, ourability to fund continuing growth, and our ability to continue as a goingconcern.  A reconciliation of operatingcash flows to EBITDA is included below:

 

27

----

 

| ** **                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                                 | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| Net  cash provided by operating activities                         |       | $                                    | 52,719     |   | $ | 50,995 |   |
| Changes  in operating assets and liabilities                       |       | (5,648                               | )          | (6,496 | ) |
| Other  non-cash expenses                                           |       | 3,716                                |       | 3,614 |   |
| Benefit  for income taxes                                          |       | (9,019                               | )          | (9,692 | ) |
| Interest  expense                                                  |       | 35,077                               |       | 35,023 |   |
| EBITDA                                                             |       | $                                    | 76,845     |   | $ | 73,444 |   |
|                                                               |       |                                 |       |   |   |
| ** **                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
| **(dollars in thousands)**                               | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| EBITDA                                                             |       | $                                    | 76,845     |   | $ | 73,444 |   |
|                                                               |       |                                 |       |   |   |
| **Other Financial Data:**                                          |       |                                 |       |   |   |
| Net  cash provided by operating activities                         |       | $                                    | 52,719     |   | $ | 50,995 |   |
| Net  cash used in investing activities                             |       | (27,840                              | )          | (51,651 | ) |
| Net  cash provided by (used in) financing activities               |       | $                                    | (33,085    | ) | $ | 656 |   |
|                                                               |       |                                 |       |   |   |
| **Other Operating Data (as of end of period):**                    |       |                                 |       |   |   |
| Medical  equipment (approximate number of owned outsourcing units) |       | 217,000                              |       | 206,000 |   |
| District  offices                                                  |       | 84                                   |       | 83 |   |
| Number  of outsourcing hospital customers                          |       | 4,175                                |       | 4,050 |   |
| Number  of total outsourcing customers                             |       | 8,375                                |       | 7,975 |   |

 

**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.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Ourprincipal sources of liquidity are expected to be cash and cash equivalents of$3.8 million, cash flows from operating activities, and borrowings under ourfirst lien senior secured asset-based revolving credit facility providing forloans in an amount of up to $135.0 million, pursuant to a credit agreementdated as of May 31, 2007 with a group of financial institutions (the “seniorsecured credit facility”).  Our seniorsecured credit facility matures in May 2013.  It is anticipated that our principal uses ofliquidity will be to fund capital expenditures related to purchases of medicalequipment, provide working capital, meet debt service requirements and financeour strategic plans.

 

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

 

28

----

 

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.

 

Ifwe are unable to service our debt obligations through our cash and cash equivalents,generating sufficient cash flow from operations,  and additional borrowings under our firstlien senior secured asset-based revolving credit facility, we will be forced totake actions such as reducing or delaying capital expenditures, selling assets,restructuring or refinancing our debt or seeking additional equitycapital.  This, to a certain extent, issubject to general economic, financial, competitive, legislative, regulatoryand other factors that are beyond our control. The domestic economy, like the global economy, has deterioratedsignificantly over the past year.  Therecent decrease and any future decrease in domestic economic activity couldsignificantly and adversely affect our results of operations and financialcondition.  If we are unable to repay ourdebt at maturity, we may have to obtain alternative financing, which may not beavailable to us.

 

Netcash provided by operating activities was $52.7 and $51.0 million for the ninemonths ended September 30, 2009 and 2008, respectively.

 

Netcash used in investing activities was $27.8 and $51.7 million for the ninemonths ended September 30, 2009 and 2008, respectively.  Net cash used in investing activitiesdeclined during the 2009 period as a result of a decrease in capitalexpenditures for medical equipment and property and office equipment.

 

Netcash provided by (used in) financing activities was ($33.1) and $0.7 millionfor the nine months ended September 30, 2009 and 2008, respectively.  During the nine months ended September 30,2009, net cash used in financing activities was impacted by a net pay down ofour senior secured credit facility of $29.0 million compared to a net draw fromour senior secured credit facility of $4.8 million for the same period of 2008.

 

Cashon-hand was $3.8 million as of September 30, 2009 compared to no cashon-hand as of September 30, 2008.

 

Based on the level of operating performance expected in2009, we believe our cash and cash equivalents, cash from operations, andadditional borrowings under our senior secured credit facility, will meet ourliquidity needs for the foreseeable future, exclusive of any borrowings that wemay make to 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 September 30,2009, we had $111.4 million of availability under our senior secured creditfacility, based on a borrowing base of $135.0 million, less borrowings of $20.0million 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 September 30,2009, the Company was in compliance with all covenants under the senior securedcredit facility.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

29

----

 

***Standards Adopted***

 

InJune 2009, the Financial Accounting Standards Board (“FASB”)issued guidance now codifiedas FASB Accounting Standards Codification (“ASC”) Topic 105, *“Generally Accepted Accounting Principles*,”(thecodification), which establishes the ASC as the single source of authoritativenongovernmental U.S. GAAP, except for SEC rules and interpretive releases,which are sources of authoritative GAAP for SEC registrants. ASC Topic 105 doesnot change current U.S. GAAP, but is intended to simplify user access to allauthoritative U.S. GAAP by providing all authoritative literature related to aparticular topic in one place. These provisions of the standard are effectivefor interim and annual periods ending after September 15, 2009 and theCompany adopted the provisions for the quarter ended September 30,2009.Accordingly, the provisions are effective for the Company for the currentfiscal reporting period. On the effective date of the standard, theCodification superseded all then-existing non-SEC accounting and reportingstandards, and all other non-grandfathered non-SEC accounting literature notincluded in the Codification became non-authoritative. The adoption of thispronouncement did not have an impact on the Company’s financial condition orresults of operations, but does impact our financial reporting process byeliminating all references to pre-codification standards.

 

InAugust 2009, the FASBissued Accounting Standards Update No. 2009-05 (“ASC Update2009-05”), an update to ASC 820, *Fair ValueMeasurements and Disclosures.* This update provides amendments toreduce potential ambiguity in financial reporting when measuring the fair valueof liabilities. Among other provisions, this update provides clarification thatin circumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using one or more of the valuation techniques described in ASC Update2009-05. The adoption of this update did not have a material impact on theCompany’s financial condition or results of operations.

 

InMay 2009, the FASB issued, and we adopted, guidance now codified as ASC Topic855, “*Subsequent Events*.” ASC Topic 855established general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued. ASC Topic 855 stipulates the period after thebalance sheet date during which management of a reporting entity shouldevaluate events or transactions that may occur for potential recognition ordisclosure in the financial statements, the circumstances under which an entityshould recognize events or transactions occurring after the balance sheet datein its financial statements and the disclosures that an entity should makeabout events or transactions that occurred after the balance sheet date. ASCTopic 855 also includes a requirement to disclose the date through which thecompany has evaluated subsequent events and whether the date corresponds withthe release of their financial statements. The pronouncement is effective forinterim and annual periods ending after June 15, 2009. We have evaluatedsubsequent events through November 9, 2009, the date on which ourfinancial statements were issued.

 

InApril 2009, the FASB issued guidance, now codified, to address concernsabout (1) measuring the fair value of financial instruments when the marketsbecome inactive and quoted prices may reflect distressed transactions and (2) recordingimpairment charges on investments in debt securities. The FASB also issuedguidance, now codified, to require disclosures of fair values of certainfinancial instruments in interim financial statements.

 

ASCTopic 820, *“Fair Value Measurements and Disclosures,”*provides additional guidance to highlight and expand on the factors that shouldbe considered in estimating fair value when there has been a 

 

30

----

 

significantdecrease in market activity for a financial asset. FASB ASC Topic 820 alsorequires new disclosures relating to fair value measurement inputs andvaluation techniques (including changes in inputs and valuation techniques).

 

ASCTopic 320, *“Investments — Debt and Equity Securities,”*changes (1) the trigger for determining whether an other-than-temporaryimpairment exists and (2) the amount of an impairment charge to berecorded in earnings. To determine whether an other-than-temporary impairmentexists, an entity will be required to assess the likelihood of selling asecurity prior to recovering its cost basis. This is a change from the formerrequirement for an entity to assess whether it has the intent and ability tohold a security to recovery or maturity. ASC Topic 320 also expands andincreases the frequency of existing disclosure about other-than-temporaryimpairments and requires new disclosures of the significant inputs used indetermining a credit loss, as well as a roll forward of that amount eachperiod.

 

ASCTopic 825, *“Financial Instruments,”*increases thefrequency of fair value disclosures from annual to quarterly to providefinancial statement users with more timely information about the effects ofcurrent market conditions on their financial instruments.

 

Weadopted the three above ASC Topics during the second quarter of 2009.  The adoption of the above guidance did nothave a material effect on the Company’s financial condition, results of operationsor cashflows.

 

InMarch 2008, the FASB issued guidance now codified as ASC Topic 815, “*Derivatives and Hedging.”* ASC Topic 815 requires companiesto provide enhanced disclosures about derivative instruments and hedgingactivities to provide a better understanding of their effects on a company’sfinancial position, financial performance, and cash flows. We adopted thedisclosure provisions of ASC Topic 815 on January 1, 2009. The adoption ofthe above standard did not have a material effect on the Company’s financialcondition, results of operations or cashflows.

 

Weenter into derivative instruments for risk management purposes only, includingderivatives designated as hedging instruments under ASC Topic 815, “*Derivatives and Hedging.”*We are a party to an interest rateswap that is designated as a fair value hedge for a portion of our long-termdebt. By using this instrument, we are exposed, from time to time, to creditrisk and market risk. Credit risk is the risk that the counterparty will fail toperform under the terms of the derivative contract. When the fair value of aderivative contract is positive, the counterparty owes us, which creates creditrisk for us. We minimize this credit risk by entering into transactions withhigh quality counterparties. Market risk is the risk that a change in interestrates will result in an adverse effect on the value of a financial instrument.

 

InDecember 2007, the FASB issued guidance now codified as ASC Topic 805, *“Business Combinations,”* which establishes principles andrequirements for how an acquirer in a business combination recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any noncontrolling interest; recognizes and measuresthe goodwill acquired in the business combination or a gain from a bargainpurchase; and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination. ASC Topic 805 is to be applied prospectively to businesscombinations for which the acquisition date is on or after the beginning of anentity’s fiscal year that begins on or after December 15, 2008. We adoptedASC Topic 805 on January 1, 2009 and apply the provisions to applicablebusiness combinations on a prospective basis.

 

31

----

 

***Standards Issued Not Yet Adopted***

 

InOctober 2009, the FASB issued Accounting Standards Update, 2009-13,Revenue Recognition (Topic 605): *MultipleDeliverable Revenue Arrangements — A Consensus of the FASB Emerging Issues TaskForce.”* This update provides application guidance on whethermultiple deliverables exist, how the deliverables should be separated and howthe consideration 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; however,earlier application is permitted. The Company has not determined the impactthat this update may have on its financial statements.

 

**SAFE HARBOR STATEMENT**

** **

**SafeHarbor Statement under the Private Securities Litigation Reform Act of 1995:** We believestatements in this Quarterly Report on Form 10-Q looking forward in timeinvolve risks and uncertainties.  Thefollowing factors, among others, could adversely affect our business,operations and financial condition, causing our actual results to differmaterially from those expressed in any forward-looking statements:

 

·                  our history of net losses and substantialinterest expense;

·                  our need for substantial cash to operate andexpand our business as planned;

·                  our substantial outstanding debt and debtservice obligations;

·                  restrictions imposed by the terms of ourdebt;

·                  a decrease in the number of patients ourcustomers are serving;

·                  our ability to effect change in the manner inwhich healthcare providers traditionally procure medical equipment;

·                  the absence of long-term commitments withcustomers;

·                  our ability to renew contracts with GPOs andIDNs;

·                  changes in reimbursement rates and policiesby third-party payors;

·                  the impact of health care reform initiatives;

·                  the impact of significant regulation of thehealth care industry and the need to comply with those regulations;

·                  the effect of prolonged negative changes indomestic and global economic conditions;

·                  difficulties or delays in our continued expansioninto certain of our businesses/geographic markets and developments of newbusinesses/geographic markets;

·                  additional credit risks in increasingbusiness with home care providers and nursing homes;

·                  impacts of equipment product recalls orobsolescence; and

·                  increases in vendor costs that cannot bepassed through to our customers.

 

Seethe risk factors discussed under Part I, Item 1A of our 2008 Form 10-K

 

**Item3.  Quantitative and QualitativeDisclosures about Market Risk**

 

32

----

 

Weare exposed to market risk arising from adverse changes in interest rates andfuel costs.  We do not enter intoderivatives or other financial instruments for speculative purposes.

 

**InterestRates**

 

Weuse both fixed and variable rate debt as sources of financing.  At September 30, 2009, we hadapproximately $501.2 million of total debt outstanding.  After taking into account the effect of ourinterest rate swap agreement, we had $20.0 million of debt bearing interest atvariable rates approximating 2.0%.  Basedon variable debt levels at September 30, 2009, a 1.0 percentage pointchange in interest rates on variable rate debt would have resulted in annualinterest expense fluctuating approximately $0.2 million.

 

InJune 2007, we entered into an interest rate swap agreement for $230.0 million,which has the effect of converting the interest rate applicable to our $230.0million 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.

 

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 September 30, 2009 isincluded as an interest rate swap liability 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 September 30,2009.  We do not expect any amounts to bereclassified into current earnings in the future due to ineffectiveness.  As a result of our interest rate swapagreement, we expect the effective interest rate on our $230.0 million ofFloating Rate Notes to be 9.065% from December 2007 through May 2012.

 

**Fuel Costs**

 

Weare also exposed to market risks related to changes in the price of gasolineused to fuel our fleet of delivery and sales vehicles.  A hypothetical 10% increase in the price ofunleaded gasoline, assuming current gasoline usage and price levels, would leadto an annual change in fuel costs of approximately $0.3 million.

 

**Other Market Risk**

 

Ourpension obligations are also affected by market risk.  Continued distress in the financial marketsmay impact the fair value of debt and equity securities in our pension trust.

 

Asof September 30, 2009, we have no other material exposure to market risk.

 

**Item4(T).  Controls and Procedures**

 

(a)           *Evaluation of disclosurecontrols and procedures*

 

33

----

 

Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined 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 internalcontrol over financial reporting*

 

Therewere no changes in our internal control over financial reporting during thequarter ended September 30, 2009, that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**PART II- OTHER INFORMATION**

 

**Item 1.    LegalProceedings**

** **

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 September 30, 2009, we were not a party toany other pending legal proceedings the adverse outcome of which couldreasonably be expected to have a material adverse effect on our operatingresults, financial position or cash flows.

 

**Item1A.  Risk Factors**

 

Ourbusiness faces many risks.  Any of therisks discussed elsewhere in this Quarterly Report on Form 10-Q or ourother filings with the Securities and Exchange Commission, including our riskfactors set forth in our 2008 Form 10-K, could have a material impact onour business, financial condition or results of operations.  Additional risks and uncertainties notpresently known to us or that we currently believe to be immaterial may alsoimpair our business operations.

 

**Item 2.    UnregisteredSales of Equity Securities and Use of Proceeds**

** **

None.

 

**Item 3.    Defaultsupon Senior Securities**

** **

Notapplicable.

 

34

----

 

**Item 4. Submission of Matters to a Vote of SecurityHolders**

** **

None.

 

**Item 5.    OtherInformation**

** **

Notapplicable.

 

**Item 6.    Exhibits**

 
| **Number** | ** ** | **Description**                                                                                                |
|------------|------------|----------------------------------------------------------------------------------------------------------------|
| 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.                                 |

 

35

----

 

**SIGNATURES**

 

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:  November 9, 2009 |                                                       |
|------------------------------|------------------------------------------------------------|
|                         | 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)                             |

 

36

----