Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****                Quarterly Reportpursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 for the quarterly period ended September 30, 2010**

 

**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**

 

**UNIVERSALHOSPITAL 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 275Edina, Minnesota 55435-5228**

(Addressof principal executive offices, including zip code)

 

**(952)893-3200**

(Registrant’stelephone number, including area code)

 

**NotApplicable**

(Formername, former address, and former fiscal year, if changed since last report)

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  o   No  x

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate 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

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes  o   No  x

 

Number of shares of common stock outstanding as of November 1,2010:  1,000

 

 

 

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**Universal Hospital Services, Inc.**

**Table of Contents**

 
| ** **                              | ** **                                                                                                                                   | **Page** |
|-----------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I - FINANCIAL INFORMATION** |                                                                                                                                         |
|                                    |                                                                                                                                         |     |
| **ITEM 1.**                             | Financial  Statements                                                                                                                        |     |
|                                    |                                                                                                                                         |     |
|                                    | Balance  Sheets — September 30, 2010 and December 31, 2009                                                                    | 1        |
|                                    |                                                                                                                                         |     |
|                                    | Statements  of Operations — Three months ended September 30, 2010 and 2009 and Nine  months ended September 30, 2010 and 2009 | 2        |
|                                    |                                                                                                                                         |     |
|                                    | Statements  of Cash Flows — Nine months ended September 30, 2010 and 2009                                                          | 3        |
|                                    |                                                                                                                                         |     |
| **ITEM 2.**                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                  | 15       |
|                                    |                                                                                                                                         |     |
| **ITEM 3.**                             | Quantitative  and Qualitative Disclosures About Market Risk                                                                                  | 30       |
|                                    |                                                                                                                                         |     |
| **ITEM 4T.**                            | Controls and  Procedures                                                                                                                     | 30       |
|                                    |                                                                                                                                         |     |
| **PART II  - OTHER INFORMATION**   |                                                                                                                                         |
|                                    |                                                                                                                                         |     |
| **ITEM  1.**                            | Legal Proceedings                                                                                                                            | 31       |
|                                    |                                                                                                                                         |     |
| **ITEM  1A.**                           | Risk Factors                                                                                                                                 | 31       |
|                                    |                                                                                                                                         |     |
| **ITEM 2.**                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                 | 31       |
|                                    |                                                                                                                                         |     |
| **ITEM 3.**                             | Defaults  Upon Senior Securities                                                                                                             | 31       |
|                                    |                                                                                                                                         |     |
| **ITEM 4.**                             | *Removed and Reserved*                                                                                                                       |     |
|                                    |                                                                                                                                         |     |
| **ITEM  5.**                            | Other Information                                                                                                                            | 31       |
|                                    |                                                                                                                                         |     |
| **ITEM 6.**                             | Exhibits                                                                                                                                     | 32       |
|                                    |                                                                                                                                         |     |
| **Signatures**                          | 33                                                                                                                                           |

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements —Unaudited**

 

**Universal Hospital Services, Inc.**

** **

**BalanceSheets**

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

*(unaudited)*

* *
| ** **                                                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                             | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **Assets**                                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                        |       |                   |       |                  |       |
| Accounts receivable, less allowance for doubtful  accounts of $2,000 at September 30, 2010 and $2,450 at December 31,  2009  |       | $                      | 55,499     |                  | $          | 60,079 |   |
| Inventories                                                                                                                            |       | 4,510                  |       | 5,236                 |       |
| Deferred income taxes                                                                                                                  |       | 9,848                  |       | 8,733                 |       |
| Other current assets                                                                                                                   |       | 3,479                  |       | 2,983                 |       |
| Total current assets                                                                                                                   |       | 73,336                 |       | 77,031                |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Property and equipment, net:                                                                                                           |       |                   |       |                  |       |
| Medical equipment, net                                                                                                                 |       | 205,445                |       | 197,859               |       |
| Property and office equipment, net                                                                                                     |       | 19,696                 |       | 19,406                |       |
| Total property and equipment, net                                                                                                      |       | 225,141                |       | 217,265               |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Other long-term assets:                                                                                                                |       |                   |       |                  |       |
| Goodwill                                                                                                                               |       | 280,211                |       | 280,211               |       |
| Other intangibles, net                                                                                                                 |       | 238,317                |       | 248,653               |       |
| Other, primarily deferred financing costs, net                                                                                         |       | 12,225                 |       | 12,243                |       |
| Total assets                                                                                                                           |       | $                      | 829,230    |                  | $          | 835,403 |   |
|                                                                                                                                   |       |                   |       |                  |       |
| **Liabilities and Shareholders’  Equity**                                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                   |       |                   |       |                  |       |
| Current portion of long-term debt                                                                                                      |       | $                      | 3,848      |                  | $          | 4,062 |   |
| Book overdrafts                                                                                                                        |       | 810                    |       | 3,302                 |       |
| Accounts payable                                                                                                                       |       | 17,648                 |       | 18,075                |       |
| Accrued compensation                                                                                                                   |       | 10,650                 |       | 10,432                |       |
| Accrued interest                                                                                                                       |       | 13,796                 |       | 3,696                 |       |
| Other accrued expenses                                                                                                                 |       | 12,153                 |       | 9,174                 |       |
| Total current liabilities                                                                                                              |       | 58,905                 |       | 48,741                |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Long-term debt, less current portion                                                                                                   |       | 514,770                |       | 514,557               |       |
| Pension and other long-term liabilities                                                                                                |       | 6,360                  |       | 6,465                 |       |
| Interest rate swap                                                                                                                     |       | 19,187                 |       | 21,286                |       |
| Payable to Parent                                                                                                                      |       | 11,435                 |       | 6,342                 |       |
| Deferred income taxes                                                                                                                  |       | 63,520                 |       | 64,021                |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Commitments and contingencies (Note 7)                                                                                                 |       |                   |       |                  |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Shareholders’ equity                                                                                                              |       |                   |       |                  |       |
| Common stock, $0.01 par value; 1,000 shares  authorized, issued and outstanding at September 30, 2010 and  December 31, 2009 |       | —                 |       | —                |       |
| Additional paid-in capital                                                                                                             |       | 248,794                |       | 248,794               |       |
| Accumulated deficit                                                                                                                    |       | (78,366                | )          | (58,165               | )          |
| Accumulated other comprehensive loss                                                                                                   |       | (15,375                | )          | (16,638               | )          |
| Total shareholders’ equity                                                                                                        |       | 155,053                |       | 173,991               |       |
| Total liabilities and shareholders’ equity                                                                                        |       | $                      | 829,230    |                  | $          | 835,403 |   |

 

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

 

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**UniversalHospital Services, Inc.**

** **

**Statementsof Operations**

(in thousands)

(unaudited)

 
| ** **                                                                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                                      | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Revenue**                                                                                                                     | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Medical equipment  outsourcing                                                                                                  |       | $                                | 59,393     |                            | $          | 56,043 |   | $ | 185,385 |   | $ | 170,849 |   |
| Technical and professional  services                                                                                            |       | 11,512                           |       | 10,766                          |       | 33,477 |   | 31,874 |   |
| Medical equipment sales  and remarketing                                                                                        |       | 4,900                            |       | 5,428                           |       | 13,850 |   | 16,280 |   |
| Total revenues                                                                                                                  |       | 75,805                           |       | 72,237                          |       | 232,712 |   | 219,003 |   |
|                                                                                                                            |       |                             |       |                            |       |   |   |   |   |
| **Cost of  Sales**                                                                                                              |       |                             |       |                            |       |   |   |   |   |
| Cost of medical equipment  outsourcing                                                                                          |       | 22,998                           |       | 20,920                          |       | 68,067 |   | 61,149 |   |
| Cost of technical and  professional services                                                                                    |       | 8,155                            |       | 7,596                           |       | 24,003 |   | 22,534 |   |
| Cost of medical equipment  sales and remarketing                                                                                |       | 3,725                            |       | 4,294                           |       | 10,796 |   | 13,120 |   |
| Medical equipment  depreciation                                                                                                 |       | 17,229                           |       | 16,285                          |       | 52,044 |   | 48,051 |   |
| Total costs of medical  equipment outsourcing, technical and professional services and medical  equipment sales and remarketing |       | 52,107                           |       | 49,095                          |       | 154,910 |   | 144,854 |   |
| Gross margin                                                                                                                    |       | 23,698                           |       | 23,142                          |       | 77,802 |   | 74,149 |   |
|                                                                                                                            |       |                             |       |                            |       |   |   |   |   |
| Selling, general and  administrative                                                                                            |       | 23,139                           |       | 19,393                          |       | 65,192 |   | 62,565 |   |
| Operating income                                                                                                                |       | 559                              |       | 3,749                           |       | 12,610 |   | 11,584 |   |
|                                                                                                                            |       |                             |       |                            |       |   |   |   |   |
| Interest expense                                                                                                                |       | 11,651                           |       | 11,515                          |       | 35,013 |   | 35,077 |   |
| Loss before income taxes                                                                                                        |       | (11,092                          | )          | (7,766                          | )          | (22,403 | ) | (23,493 | ) |
|                                                                                                                            |       |                             |       |                            |       |   |   |   |   |
| Provision (benefit) for  income taxes                                                                                           |       | 1,688                            |       | (2,884                          | )          | (2,202 | ) | (9,019 | ) |
| Net loss                                                                                                                        |       | $                                | (12,780    | )                               | $          | (4,882 | ) | $ | (20,201 | ) | $ | (14,474 | ) |

 

The accompanying notes arean integral part of the unaudited financial statements.

 

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**Universal Hospital Services, Inc.**

**Statementsof Cash Flows**

*(inthousands)*

*(unaudited)*

 
| ** **                                                                       | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                       | ** ** | **September 30,**          | ** ** |
| ** **                                                                       | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Cash flows from operating activities:                                            |       |                            |       |   |   |
| Net loss                                                                         |       | $                               | (20,201    | ) | $ | (14,474 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |                            |       |   |   |
| Depreciation                                                                     |       | 58,400                          |       | 54,367 |   |
| Amortization of intangibles and deferred financing  costs                        |       | 12,260                          |       | 12,699 |   |
| Provision for doubtful accounts                                                  |       | (7                              | )          | 831 |   |
| Provision for inventory obsolescence                                             |       | 37                              |       | (39 | ) |
| Non-cash stock-based compensation expense                                        |       | 5,094                           |       | 996 |   |
| Loss (gain) on sales and disposals of equipment                                  |       | (715                            | )          | 157 |   |
| Deferred income taxes                                                            |       | (2,452                          | )          | (7,466 | ) |
| Changes in operating assets and liabilities:                                     |       |                            |       |   |   |
| Accounts receivable                                                              |       | 4,586                           |       | (1,248 | ) |
| Inventories                                                                      |       | 690                             |       | (249 | ) |
| Other operating assets                                                           |       | (656                            | )          | (1,260 | ) |
| Accounts payable                                                                 |       | (1,550                          | )          | (629 | ) |
| Other operating liabilities                                                      |       | 13,189                          |       | 9,034 |   |
| Net cash provided by operating activities                                        |       | 68,675                          |       | 52,719 |   |
| Cash flows from investing activities:                                            |       |                            |       |   |   |
| Medical equipment purchases                                                      |       | (56,575                         | )          | (26,744 | ) |
| Property and office equipment purchases                                          |       | (3,800                          | )          | (3,467 | ) |
| Proceeds from disposition of property and  equipment                             |       | 2,134                           |       | 2,513 |   |
| Other                                                                            |       | —                          |       | (142 | ) |
| Net cash used in investing activities                                            |       | (58,241                         | )          | (27,840 | ) |
| Cash flows from financing activities:                                            |       |                            |       |   |   |
| Proceeds under senior secured credit facility                                    |       | 109,929                         |       | 45,500 |   |
| Payments under senior secured credit facility                                    |       | (102,179                        | )          | (74,500 | ) |
| Payments of principal under capital lease  obligations                           |       | (4,001                          | )          | (3,269 | ) |
| Payment of deferred financing costs                                              |       | (1,746                          | )          | 1,500 |   |
| Repayment of 10.125% senior notes                                                |       | (9,945                          | )          | — |   |
| Change in book overdrafts                                                        |       | (2,492                          | )          | (2,316 | ) |
| Net cash provided by (used in) financing  activities                             |       | (10,434                         | )          | (33,085 | ) |
| 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                                                                    |       | $                               | 22,992     |   | $ | 23,136 |   |
| Income taxes paid                                                                |       | $                               | 156        |   | $ | 281 |   |
| Non-cash activities:                                                             |       |                            |       |   |   |
| Medical equipment purchases included in accounts  payable (at end of period)     |       | $                               | 5,819      |   | $ | 4,494 |   |
| Capital lease additions                                                          |       | $                               | 6,195      |   | $ | 2,136 |   |

 

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

 

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**Universal Hospital Services, Inc.**

 

**NOTES TO UNAUDITED QUARTERLYFINANCIAL STATEMENTS**

 

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

 

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

 

Theinterim financial statements presented herein as of September 30, 2010,reflect, in the opinion of management, all adjustments necessary for a fairpresentation of the financial position and the results of operations and cashflows for the periods presented.  Theseadjustments are all of a normal, recurring nature.  The results of operations for any interimperiod are not necessarily indicative of results for the full year.

 

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

 

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

 

Adescription of our critical accounting policies is included in our 2009 Form 10-K.There have been no material changes to these policies for the quarter ended September 30,2010.

 

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

 

Comprehensiveloss is comprised of net loss and other comprehensive income. Othercomprehensive income includes unrealized gains (losses) from derivativesdesignated as cash flow hedges. Accumulated other comprehensive loss isdisplayed separately on the balance sheets. A reconciliation of net loss to comprehensive loss is provided below:

 

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| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(in thousands)**                                | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net loss                                               |       | $                                | (12,780    | )                               | $          | (4,882 | ) | $ | (20,201 | ) | $ | (14,474 | ) |
| Unrealized gain (loss) on cash flow hedge, net of  tax |       | 497                              |       | (449                            | )          | 1,263 |   | 2,453 |   |
| Comprehensive loss                                     |       | $                                | (12,283    | )                               | $          | (5,331 | ) | $ | (18,938 | ) | $ | (12,021 | ) |

 

**3.             Recent Accounting Pronouncement**

 

***Standard Issued Not Yet Adopted***

 

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

 

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

 

Financialassets and liabilities measured at fair value on a recurring basis as of September 30,2010 and December 31, 2009, in accordance with Accounting StandardsCodification (“ASC”) Topic 820, are summarized in the following table by typeof inputs applicable to the fair value measurements:

 
| ** **          | ** ** | **Fair Value at September 30, 2010** | ** ** | **Fair Value at December 31, 2009** | ** ** |
|---------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **(in  thousands)** | ** ** | **Level 1**                                              | ** ** | **Level 2**                                             | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Interest Rate Swap  |       | $                                                             | —     |                                                         | $          | 19,187 |   | $ | — |   | $ | 19,187 |   | $ | — |   | $ | 21,286 |   | $ | — |   | $ | 21,286 |   |
|                     |            |                                                               |            |                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

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

 

Level2 — Inputs include directly or indirectly observable inputs other than Level 1inputs such as quoted prices for similar assets or liabilities exchanged inactive or inactive markets; quoted prices for identical assets or liabilitiesexchanged in inactive markets; other inputs that are considered in fair valuedeterminations of the assets or liabilities, such as interest rates and yieldcurves that are observable at commonly quoted intervals, volatilities,prepayment speeds, loss severities, credit risks and default rates; and inputsthat are derived principally from or corroborated by observable market data bycorrelation or other means.

 

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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 Financial Instruments**

 

TheCompany considers the carrying amount of financial instruments, includingaccounts receivable, accounts payable and accrued liabilities, as theapproximate fair value due to their short maturities. On June 14, 2010,the Company redeemed, at par value plus accrued interest to the date of redemption,all of its 10.125% Senior Notes. See additional information in Note 6, LongTerm Debt. The fair value of our outstanding PIK Toggle Notes, Floating RateNotes and 10.125% Senior Notes as of September 30, 2010 and December 31,2009, based on the quoted market price for the same or similar issues of debt,is approximately:

 
| ** **             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in millions)** | ** ** | **2010**               | ** ** | **2009**              | ** ** |
|                   |       |                   |       |                  |       |
| PIK Toggle Notes       |       | $                      | 231.2      |                  | $          | 227.1 |   |
| Floating Rate Notes    |       | 198.4                  |       | 193.8                 |       |
| 10.125% Senior Notes   |       | N/A                    |       | 9.8                   |       |
|                        |            |                        |            |                       |            |  |  |

 

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

 

Duringthe nine months ended September 30, 2010, activity under the 2007 StockOption Plan (the “2007 Stock Option Plan”), of UHS Holdco, Inc. our parentcompany (“Parent”) was as follows:

 
| **(in thousands except exercise price)** | ** ** | **Number of  Options** | ** ** | **Weighted  average  exercise price** | ** ** | **Aggregate  intrinsic value** | ** ** | **Weighted  average  remaining  contractual  term (years)** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|------------------------------------------------------------------|------------|
| Outstanding at December 31, 2009                        |       | 37,527                      |       | $                                          | 1.00       |                                | $          | 35,651                                                           |       | 7.5 |   |
| Granted                                                      |       | 1,430                       |       | $                                          | 1.83       |                                | $          | —                                                           |       |   |   |
| Exercised                                                    |       | —                      |       |                                       |       |                                |       |                                                             |       |
| Forfeited or expired                                         |       | (428                        | )          | $                                          | 1.09       |                                | $          | 317                                                              |       |   |   |
|                                                         |       |                        |       |                                       |       |                                |       |                                                             |       |
| Outstanding at September 30, 2010                       |       | 38,529                      |       | $                                          | 1.03       |                                | $          | 30,830                                                           |       | 6.9 |   |
|                                                         |       |                        |       |                                       |       |                                |       |                                                             |       |
| Exercisable at September 30, 2010                       |       | 17,907                      |       | $                                          | 1.00       |                                | $          | 14,862                                                           |       | 6.7 |   |
|                                                         |       |                        |       |                                       |       |                                |       |                                                             |       |
| Remaining authorized options available for issue             |       | 5,376                       |       |                                       |       |                                |       |                                                             |       |

 

Theexercise price of each stock option award is equal to the market value ofParent’s common stock on the grant date as determined reasonably and in goodfaith by Parent’s board of directors (the “Parent Board”) and Parent’scompensation committee.  The exercise price of options issued during thenine 

 

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monthsended September 30, 2010 was determined through a variety of factorsincluding peer group multiples, merger and acquisition multiples, anddiscounted cash flow analyses.

 

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

 

Wedetermine the fair value of stock options using the Black-Scholes optionpricing model. The estimated fair value of options, including the effect ofestimated forfeitures, is recognized as expense on a straight-line basis overthe options’ expected vesting periods. The following assumptions were used indetermining the fair value of stock options granted during the nine monthsended September 30, 2010, and of options granted prior to that time butthat were amended on August 11, 2010 as discussed below under “Amendmentto Vesting Provisions of Option Agreements” under the Black-Scholes model:

 
| ** **                   | ** ** | **Nine Months Ended** | ** ** |
|------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **September 30,**          | ** ** |
| ** **                   | ** ** | **2010**                        | ** ** |
|                         |       |                            |       |
| Risk-free interest rate      |       | 0.73% - 3.08%                   |       |
| Expected volatility          |       | 31.9% - 38.1%                   |       |
| Dividend Yield               |       | N/A                             |       |
| Expected option life (years) |       | 3.9 - 6.6                       |       |

 

Expected volatility is basedon an independent valuation of the stock of companies within our peergroup.  Given the lack of a true comparable company, the peer groupconsists of selected public health care companies representing our suppliers,customers and competitors within certain product lines.  The riskfree-interest rate is based on the U.S. Treasury yield curve in effect at thegrant date based on the expected option life.  The expected option life representsthe result of the “simplified” method applied to “plain vanilla” optionsgranted during the period, as provided within ASC Topic 718, *“Compensation - Stock Compensation.”* Parent used the simplified method as Parent does not have sufficient historicalexercise experience to provide a basis upon which to estimate the expectedterm.

 

Although Parent grants stockoptions, the Company recognizes compensation expense related to these optionssince the services are performed for its benefit.  Along with thisexpense, which is primarily included in selling, general and administrativeexpense, the Company records an offsetting payable to Parent liability which isnot expected to be settled within the next twelve months.

 

**Amendmentto Vesting Provisions of Option Agreements**

 

OnAugust 11, 2010, the compensation committee of our board of directorsrecommended, and the Parent Board approved, an amendment (the “Amendment”) tothe vesting provisions contained in all outstanding option agreements ofparticipants in the 2007 Stock Option Plan who were employed by Parent or us asof the effective date of the Amendment, or served on our board of directorsthrough that date.  Performance vestingoptions granted under the 2007 Stock Option Plan vest over a six-year periodwith 16.66% vesting on December 31 of each year of the six-year period,subject to the option holder not ceasing employment with Parent or us, andprior to the effectiveness of the Amendment, subject to our attainment ofeither an adjusted EBITDA target for current fiscal year, or an aggregateadjusted EBITDA target calculated in each subsequent fiscal year, as providedin the respective form of option agreement. The Amendment, among other things, did away with the requirement thatthe EBITDA-

 

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basedperformance objectives be achieved in order for performance vesting options tovest, in effect providing for time-based vesting of these options rather thanperformance vesting.  The Amendment didnot change the number of options granted, the strike price, or any continuedservice requirements.  The Amendment alsoprovided for the acceleration of vesting, for 2007 Stock Option Planparticipants who were employed by Parent or us as of the effective date of theAmendment and who were granted options prior to December 31, 2009, ofoptions (the “Accelerated Options”) to purchase approximately 2,996,000 sharesof common stock of Parent that were eligible for vesting on December 31,2009, but did not vest because we did not achieve the applicable adjustedEBITDA target for the fiscal year ended December 31, 2009.  At the time vesting was accelerated, theAccelerated Options remained eligible for vesting in future years based on ourachievement of an aggregate adjusted EBITDA target.  Except as described above, all other termsand conditions applicable to the Accelerated Options remain in effect. TheAmendment also amended the provisions relating to time vesting options grantedunder the 2007 Stock Option Plan to achieve greater consistency between thetreatment of these options and the treatment of performance vesting options inthe event of a sale of substantially all of the assets of Parent or us.

 

TheParent Board recognized the increased level of difficulty in achieving theoriginal performance targets relating to performance vesting options (whichwere established in 2007), taking into consideration continued economic challenges,and authorized the Amendment in an effort to ensure that Parent continues toprovide long-term incentives that drive core operating performance, whilecreating a meaningful retention benefit.

 

Aggregateperformance vesting options affected by the Amendment, including theAccelerated Options, are detailed below by original grant date:

 

**Summary of Performance VestingOptions**

*(in thousands)*

 
| ** **               | ** ** | ** **               | ** ** | **Vested**                    | ** ** | ** **             | ** ** | ** **           | ** ** |
|--------------------------|------------|--------------------------|------------|-------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **               | ** ** | ** **               | ** ** | **Performance**               | ** ** | ** **             | ** ** | ** **           | ** ** |
| ** **               | ** ** | ** **               | ** ** | **Options**                   | ** ** | ** **             | ** ** | ** **           | ** ** |
| ** **               | ** ** | **Performance**          | ** ** | **Outstanding at**       | ** ** | ** **             | ** ** | ** **           | ** ** |
| ** **               | ** ** | **Options**              | ** ** | **August 10, 2010** | ** ** | **Options**            | ** ** | ** **           | ** ** |
| ** **               | ** ** | **Outstanding at**  | ** ** | **(Prior to**            | ** ** | **Affected by**   | ** ** | **Accelerated**      | ** ** |
| **Grant Date**      | ** ** | **August 10, 2010** | ** ** | **Amendment)**                | ** ** | **Amendment (1)** | ** ** | **Options (2)** | ** ** |
| June 18,  2007      |       | 17,109                   |       | 5,707                         |       | 11,402                 |       | 2,850                |       |
| December 3,  2007   |       | 283                      |       | 48                            |       | 235                    |       | 47                   |       |
| April 1,  2008      |       | 28                       |       | 5                             |       | 23                     |       | 5                    |       |
| April 1,  2009      |       | 564                      |       | —                        |       | 564                    |       | 94                   |       |
| April 13,  2010 (3) |       | 707                      |       | —                        |       | 707                    |       | N/A                  |       |
| Total                    |       | 18,691                   |       | 5,760                         |       | 12,931                 |       | 2,996                |       |

 

----

(1) IncludesAccelerated Options

(2) AcceleratedOptions vesting on August 11, 2010

(3) Options issuedsubsequent to December 31, 2009 were not affected by the acceleratedvesting

 

Anaggregate of approximately 2,996,000 options vested on August 11, 2010 asa result of the Parent Board’s acceleration of vesting performance vestingoptions.  The remaining unvested optionsaffected by the Amendment will vest and become exercisable on each December 31,in accordance with the vesting schedule provided in the option agreements,through the remaining term of the applicable option. The amendment accounts for$4.1 million of the $4.4 million of non-cash stock compensation expenserecorded for the three months ended September 30, 2010.

 

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At September 30, 2010, unearned non-cashstock-based compensation related to our time vesting options, that we expect torecognize as expense over a weighted average period of 2.8 years, totalsapproximately $3.5 million, net of our estimated forfeiture rate of 2.0%. Unearnednon-cash stock-based compensation related to the remaining options totalingapproximately $7.9 million, net of our estimated forfeiture rate of 2.0%, willbe recognized over the a weighted average period of 4.1 years. The expensecould be accelerated upon the sale of Parent or the Company.

 

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

 

Long-term debt consists of the following:

 
| ** **                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in thousands)**                 | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| PIK Toggle Notes                        |       | $                      | 230,000    |                  | $          | 230,000 |   |
| Floating Rate Notes                     |       | 230,000                |       | 230,000               |       |
| Senior secured credit facility          |       | 46,150                 |       | 38,400                |       |
| 10.125% Senior Notes                    |       | —                 |       | 9,945                 |       |
| Capital lease obligations               |       | 12,468                 |       | 10,274                |       |
|                                    |       | 518,618                |       | 518,619               |       |
| Less: Current portion of long-term debt |       | (3,848                 | )          | (4,062                | )          |
| Total long-term debt                    |       | $                      | 514,770    |                  | $          | 514,557 |   |

 

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

 

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semiannuallyin arrears on each June 1 and December 1. Interest on the FloatingRate Notes is reset for each semi-annual interest period and is calculated atthe current LIBOR rate plus 3.375%.  At September 30,2010, our LIBOR-based rate was 4.134%, 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, have covenantsthat restrict, among other things, the incurrence of additional debt, thepayment of dividends and the issuance of preferred stock. The Floating RateNotes are uncollateralized.

 

***Interest Rate Swap.***In June 2007, weentered into an interest rate swap agreement for $230.0 million, which has theeffect 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, 2010 isincluded as a cash flow hedge on our balance sheet.  The change in fair value was recorded as acomponent of accumulated other comprehensive loss on our balance sheet, net oftax, since the instrument was determined to be an effective hedge at September 30,2010.  We expect to reclassifyapproximately $6.7 million into earnings, net of tax, currently recorded inaccumulated other comprehensive loss, in the next 12 months.

 

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

 

***Senior Secured Credit Facility.***On May 6, 2010 weentered into an Amended and Restated Credit Agreement with GE BusinessFinancial Services, Inc., as agent for the lenders, and the lenders partythereto, which amended the senior secured credit facility dated as of May 31,2007. The senior secured credit facility is a first lien senior secured asset basedrevolving credit facility. The Amended and Restated Credit Agreement increasedthe aggregate amount the Company may borrow from $135.0 million to $195.0million and extended the maturity date to November 30, 2014. Additionally,we capitalized deferred financing costs related to the Amended and RestatedCredit Agreement in the amount of $1.7 million. As of September 30, 2010,we had $119.5 million of availability under the senior secured credit facilitybased on a borrowing base of $169.8 million, less borrowings of $46.2 million,and after giving effect to $4.1 million used for letters of credit.  Our obligations under the senior securedcredit facility are secured by a first priority security interest in substantiallyall of our assets, excluding a pledge of our and Parent’s capital stock, anyjoint ventures and certain other exceptions. Our obligations under the seniorsecured credit facility are unconditionally guaranteed by Parent.

 

Thesenior secured credit facility requires our compliance with various affirmativeand negative covenants.  Pursuant to the affirmative covenants, we andParent agreed to, among other things, deliver financial and other informationto the agent, provide notice of certain events (including events of 

 

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default),pay our obligations, maintain our properties, maintain the security interest inthe collateral for the benefit of the agent and the lenders and maintaininsurance.

 

Amongother restrictions, and subject to certain definitions and exceptions, thesenior secured credit facility restricts our ability to:

 

·                  incur indebtedness;

·                  create or permit liens;

·                  declare or pay dividends and certain otherrestricted payments;

·                  consolidate, merge or recapitalize;

·                  acquire or sell assets;

·                  make certain investments, loans or otheradvances;

·                  enter into transactions with affiliates;

·                  change our line of business; and

·                  enter into hedging transactions.

 

Thesenior secured credit facility also contains a financial covenant that istriggered if our available borrowing capacity is less than $15.0 million for acertain period, which consists of a minimum ratio of trailing four-quarterEBITDA to cash interest expense, as such terms are defined in the seniorsecured credit facility.

 

Thesenior secured credit facility specifies certain events of default, including,among others, failure to pay principal, interest or fees, violation ofcovenants, inaccuracy of representations or warranties, bankruptcy events,certain ERISA-related events, cross-defaults to other material agreements,change of control events and invalidity of guarantees or securitydocuments.  Some events of default will be triggered only after certaincure periods have expired, or will provide for materiality thresholds.  Ifsuch a default occurs, the lenders under the senior secured credit facilitywould be entitled to take various actions, including all actions permitted tobe taken by a secured creditor and the acceleration of amounts due under thesenior secured credit facility.

 

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

 

·                  at a per annumrate equal to 1.75% above the rate announced from time to time by the agent asthe “prime rate” payable quarterly in arrears; and

·                  at a per annumrate equal to 2.75% above the adjusted LIBOR rate used by the agent, for therespective interest rate period determined at our option, payable in arrearsupon cessation of the interest rate period elected.

 

AtSeptember 30, 2010, we had borrowings outstanding that were accruinginterest at our prime rate, which was 5.000%, which includes the credit spreadnoted above. At September 30, 2010, we had borrowings outstanding thatwere accruing interest at our LIBOR-based rate of 3.008%, which includes thecredit spread noted above.

 

***10.125% Senior Notes.*** On June 14, 2010, we redeemed, at par value plus accrued interestto the redemption date, all of our 10.125% Senior Notes. The funds used toredeem our 10.125% Senior Notes were obtained from our senior secured creditfacility. The 10.125% Senior Notes were redeemable, at our option, in whole orin part of, at specified redemption prices (as defined) plus accrued interestto the

 

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date of redemption. The transaction resulted in aredemption price of $10.0 million of which $9.9 million related to principaland $0.1 million related to interest.

 

**7.****                                     ****Commitmentsand Contingencies**

 

OnJuly 13, 2010, the U.S. Food and Drug Administration (“FDA”) issued afinal order and transition plan to Baxter Healthcare Corporation (“Baxter”) torecall all Colleague infusion pumps currently in use in the United States. TheFDA order establishes the framework for the recall by providing for a cashrefund, generally, $1,500 for single channel pumps and $3,000 for triplechannel pumps, or a replacement pump to owners within a two-year period.

 

AtSeptember 30, 2010, we owned approximately 11,900 Colleague pumps. We arecurrently in the process of evaluating the course of action that best meets theinfusion technology needs of our customers and our business. As such, we expectto recognize gains and also expect to increase purchases of infusion pumps toreplace recalled units. While the extent of those gains or capital expendituresare not readily estimable, we expect that some may begin in the fourth quarterof 2010 and extend through 2011 and early 2012.

 

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, tortious 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, 2010, 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.

 

**8.****                                     ****RelatedParty Transactions**

 

**Management Agreement**

 

On May 31, 2007, we and Irving Place Capitalentered into a professional services agreement pursuant to which Irving PlaceCapital provides general advisory and management services to us with respect tofinancial and operating matters.  IrvingPlace Capital is a principal owner of Parent, and the following members of ourboard of directors are associated with Irving Place Capital:  John Howard, Robert Juneja, Bret Bowerman andDavid Crane. We paid Irving Place Capital professional services fees of $0.6million for each of the nine-month periods ended September 30, 2010 and2009, respectively.

 

**Business Relationship**

 

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 member of our board of directors isalso a director of Ryan.  We made payments to Ryan totaling $265,000 and$247,000 during the nine months ended September 30, 2010 and 2009,respectively.

 

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Oneof our directors, who joined our 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 30,2010 and 2009, we paid administrative fees to Broadlane of approximately$425,000 and $380,000, respectively. On September 30, 2010, accountspayable includes approximately $40,000 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:

 
| **Medical Equipment Outsourcing** | ** ** |
|---------------------------------------------|------------|
| *(in thousands)*                       | ** ** |

 
| ** **                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                     | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                       |       | $                                                    | 59,393     |                                                | $          | 56,043 |   | $ | 185,385 |   | $ | 170,849 |   |
| Cost of revenue                |       | 22,998                                               |       | 20,920                                              |       | 68,067 |   | 61,149 |   |
| Medical equipment depreciation |       | 17,229                                               |       | 16,285                                              |       | 52,044 |   | 48,051 |   |
| Gross margin                   |       | $                                                    | 19,166     |                                                | $          | 18,838 |   | $ | 65,274 |   | $ | 61,649 |   |

 
| **Technical and Professional Services** | ** ** |
|--------------------------------------------------------|------------|
| *(in thousands)*                                  | ** ** |

 
| ** **      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **      | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues        |       | $                                                    | 11,512     |                                                | $          | 10,766 |   | $ | 33,477 |   | $ | 31,874 |   |
| Cost of revenue |       | 8,155                                                |       | 7,596                                               |       | 24,003 |   | 22,534 |   |
| Gross margin    |       | $                                                    | 3,357      |                                                | $          | 3,170 |   | $ | 9,474 |   | $ | 9,340 |   |

 
| **Medical Equipment Sales and Remarketing** | ** ** |
|-----------------------------------------------------------------|------------|
| *(in thousands)*                                           | ** ** |

 
| ** **      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **      | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues        |       | $                                                    | 4,900      |                                                | $          | 5,428 |   | $ | 13,850 |   | $ | 16,280 |   |
| Cost of revenue |       | 3,725                                                |       | 4,294                                               |       | 10,796 |   | 13,120 |   |
| Gross margin    |       | $                                                    | 1,175      |                                                | $          | 1,134 |   | $ | 3,054 |   | $ | 3,160 |   |

 

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** **
| **Total Gross Margin and Reconciliation to Loss Before Income Tax** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|
| *(in thousands)*                                                                                            | ** ** |

 
| ** **                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Total gross margin                  |       | $                                                    | 23,698     |                                                | $          | 23,142 |   | $ | 77,802 |   | $ | 74,149 |   |
| Selling, general and administrative |       | 23,139                                               |       | 19,393                                              |       | 65,192 |   | 62,565 |   |
| Interest expense                    |       | 11,651                                               |       | 11,515                                              |       | 35,013 |   | 35,077 |   |
| Loss before income tax              |       | $                                                    | (11,092    | )                                                   | $          | (7,766 | ) | $ | (22,403 | ) | $ | (23,493 | ) |

 

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

 

Thecomponents of net periodic pension costs are as follows:

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(in thousands)**        | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest cost                  |       | $                                | 272        |                            | $          | 266 |   | $ | 816 |   | $ | 799 |   |
| Expected return on plan assets |       | (305                             | )          | (303                            | )          | (914 | ) | (910 | ) |
| Recognized net actuarial loss  |       | 38                               |       | 3                               |       | 116 |   | 9 |   |
| Net periodic cost (benefit)    |       | $                                | 5          |                            | $          | (34 | ) | $ | 18 |   | $ | (102 | ) |

 

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

 

**11.****                              ****IncomeTaxes**

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes.  Weevaluate the recoverability of our deferred tax assets by scheduling theexpected reversals of deferred tax assets and liabilities in order to determinewhether net operating loss carry forwards are recoverable prior to expirationin accordance with ASC 740-10-30-18. During the third quarter of 2010, we determined that neither expectedreversals of these deferred tax assets and liabilities nor future earnings orother assumptions assured recoverability of all of our net operating loss carryforwards prior to their expiration. Accordingly, we established a valuation allowance of $6.3 million torecognize this uncertainty and, in future reporting periods, will continue toassess the likelihood that deferred tax assets will be realizable.

 

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Reconciliationsbetween the Company’s effective income tax rate and the U.S. statutory ratefollow:

 
| ** **                                         | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                         | ** ** | **2010**                                                   | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Statutory U.S. Federal income tax rate             |       | -35.0                                                      | %          | -35.0                                                     | %          | -35.0 | % | -35.0 | % |
| State income taxes, net of U.S. Federal income tax |       | -4.8                                                       | %          | -4.8                                                      | %          | -4.8 | % | -4.8 | % |
| Permanent items                                    |       | 0.5                                                        | %          | 0.7                                                       | %          | 1.0 | % | 0.8 | % |
| Valuation allowance                                |       | 56.6                                                       | %          | 0.0                                                       | %          | 28.0 | % | 0.0 | % |
| Other                                              |       | -2.1                                                       | %          | 2.0                                                       | %          | 1.0 | % | 0.6 | % |
| Effective income tax rate                          |       | 15.2                                                       | %          | -37.1                                                     | %          | -9.8 | % | -38.4 | % |

 

AtSeptember 30, 2010, the Company had available unused federal net operating losscarry forwards of approximately $136.8 million. The net operating loss carryforwards will expire at various dates from 2019 through 2029.

 

**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of 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 management and servicesolutions 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 long-term acute care hospitals, skillednursing facilities, specialty hospitals, nursing homes, and home careproviders) and medical equipment manufacturers. We provide our customers equipment management and service solutionsacross the spectrum of the equipment life cycle as a result of our position asone of the industry’s largest purchasers and outsourcers of medical equipment.During the twelve months ended September 30, 2010, we owned or managedover 565,000 pieces of medical equipment consisting of 370,000 owned or managedpieces in our Medical Equipment Outsourcing segment and 195,000 pieces ofcustomer owned equipment we manage in our Technical and Professional Servicessegment. Our diverse medical equipment outsourcing customer base includes morethan 4,250 acute care hospitals and approximately 4,350 alternate siteproviders.  We also have relationshipswith more than 200 medical equipment manufacturers and many of the nation’slargest group purchasing organizations (“GPOs”) and many of the integrateddelivery networks (“IDNs”).  All of oursolutions leverage our nationwide network of 84 offices and our over 70 yearsof experience managing and servicing all aspects of medical equipment.  Our fees are paid directly by our customersrather than from direct reimbursement from third-party payors, such as privateinsurers, Medicare, or Medicaid.  Wecommenced operations in 1939, originally incorporated in Minnesota in 1954 andreincorporated in Delaware in 2001. Historically, we have experienced significant and sustained growth. Ouroverall growth strategy is to continue to grow both organically and throughstrategic acquisitions.  In 2010, theCompany has increased its focus on potential acquisitions and internationalgrowth opportunities.

 

As one of the nation’s leading medical equipmentmanagement  and service solutionscompanies, we design and offer comprehensive solutions for our customers thathelp reduce capital and operating expenses, increase equipment and staffproductivity and support improved patient safety and outcomes.

 

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

 

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

 

**MedicalEquipment Outsourcing Segment - Manage & Utilize**

 

Ourflagship business is our Medical Equipment Outsourcing segment, which accountedfor $59.4 million, or approximately 78.3% of our revenues, for the quarterended September 30, 2010 and $185.4 million, or approximately 79.7% of ourrevenues, for the nine months ended September 30, 2010. As of September 30,2010, we owned or managed over 370,000 pieces of medical equipment in ourMedical Equipment Outsourcing segment, primarily in the categories ofrespiratory therapy, newborn care, critical care, patient monitors, patienthandling (such as beds, stretchers and wheelchairs), pressure area management(such as therapy surfaces) and wound therapy. Historically, we have purchased and directly owned the equipment used inour medical equipment outsourcing programs. During 2007, we entered into “revenuesharing” agreements with a select few manufacturers of equipment where themanufacturers retain ownership of the equipment, but UHS takes possession andmanages the rental of the equipment to customers.   We may enter into more of such arrangementsin the future.  Such arrangements are lesscapital-intensive for us.  In January 2010,one of these agreements was modified such that we purchased $16.6 million ofthe manufacturer’s equipment that we previously managed, but did not own. Withthis January 2010 purchase, the revenue share portion of the agreement wasterminated and we began to recognize 100% of the revenue associated with thisequipment.

 

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Weperform regular and preventative maintenance on the equipment and retain detailedrecords for documentation.  We repair,test and clean the equipment. Our service includes prompt replacement ofnon-working equipment and the flexibility to upgrade technology as a customer’sproduct of choice changes.  We have threeprimary outsourcing programs:

 

·                  Supplemental and Peak Needs Usage;

·                  Customized Outsourcing Agreements; and

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

 

Wehave contracts in place with many of the leading national GPOs for both the acutecare and alternate site markets.  We alsohave agreements directly with national acute care and alternate site providers.We expect much of our future growth in this segment to be driven by ourcustomers outsourcing more of their medical equipment needs and taking fulladvantage of our diversified product offering, customized outsourcingagreements and Asset360 Programs.

 

OnJuly 13, 2010, the U.S. Food and Drug Administration (“FDA”) issued afinal order and transition plan to Baxter Healthcare Corporation (“Baxter”) torecall all Colleague infusion pumps currently in use in the United States. TheFDA order establishes the framework for the recall by providing for a cashrefund, generally, $1,500 for single channel pumps and $3,000 for triplechannel pumps, or a replacement pump to owners within a two-year period.

 

AtSeptember 30, 2010, we owned approximately 11,900 Colleague pumps. We arecurrently in the process of evaluating the course of action that best meets theinfusion technology needs of our customers and our business. As such, we expectto recognize gains and also expect to increase purchases of infusion pumps toreplace recalled units. While the extent of those gains or capital expendituresare not readily estimable, we expect that some may begin in the fourth quarterof 2010 and extend through 2011 and early 2012.

 

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

 

OurTechnical and Professional Services segment accounted for $11.5 million, orapproximately 15.2% of our revenues for the quarter ended September 30,2010 and $33.5 million, or approximately 14.4% of our revenues for the ninemonths ended September 30, 2010. We leverage our over 70 years ofexperience and our extensive equipment database in repairing and maintainingmedical equipment.  We offer a broadrange of inspection, preventative maintenance, repair, logistic and consultingservices through our team of approximately 325 technicians and professionalslocated throughout the United States in our nationwide network of offices.During the twelve months ended September 30, 2010, we managed over 195,000units of customer owned equipment. In addition, during the twelve months ended September 30,2010, we serviced over 370,000 units that we own or directly manage. Ourtechnical and professional service offerings are less capital-intensive thanour Medical Equipment Outsourcing segment, and provide a complementaryalternative for customers that wish to own their medical equipment, but lackthe infrastructure, expertise or scale to perform routine maintenance, repair,record-keeping and lifecycle analysis and planning functions.

 

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

 

OurMedical Equipment Sales and Remarketing segment accounted for $4.9 million, orapproximately 6.5%, of our revenues for the quarter ended September 30,2010 and $13.9 million, or approximately 5.9% of our revenues for the ninemonths ended September 30, 2010. This segment includes three distinctbusiness activities:

 

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

 

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

 

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

 

**RESULTS OF OPERATIONS**

 

Thefollowing discussion addresses:

 

·                  our financial condition asof September 30, 2010 and

·                  the results of operationsfor the three and nine-month periods ended September 30, 2010 and 2009.

 

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 2009 Annual Report on Form 10-K, filed with theSecurities and Exchange Commission (the “2009 10-K”).

 

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, 2010 and 2009. The table below also indicates the percentage increase or decrease overthe prior comparable period.

 

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| ** **                                                                                                                      | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                                      | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | **Percent** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                                                                                                                      | ** ** | **Percent of Total Revenues**             | ** ** | **Increase**                                            | ** ** | **Percent of Total Revenues** | ** ** | **Increase** | ** ** |
| ** **                                                                                                                      | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **(Decrease)** | ** ** | **2010** | ** ** | **2009** | ** ** | **(Decrease)** | ** ** |
| **Revenue**                                                                                                                     | ** ** | ** **                                               | ** ** | ** **                                              |       |   | ** ** | ** ** | ** ** | ** ** |   |   |   |
| Medical equipment outsourcing                                                                                                   |       | 78.3                                                     | %          | 77.6                                                    | %          | 6.0 | % | 79.7 | % | 78.0 | % | 8.5 | % |
| Technical and professional services                                                                                             |       | 15.2                                                     |       | 14.9                                                    |       | 6.9 |   | 14.4 |   | 14.6 |   | 5.0 |   |
| Medical equipment sales and remarketing                                                                                         |       | 6.5                                                      |       | 7.5                                                     |       | (9.7 | ) | 5.9 |   | 7.4 |   | (14.9 | ) |
| Total revenues                                                                                                                  |       | 100.0                                                    | %          | 100.0                                                   | %          | 4.9 |   | 100.0 | % | 100.0 | % | 6.3 |   |
|                                                                                                                            |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| **Cost of Sales**                                                                                                               |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Cost of medical equipment outsourcing                                                                                           |       | 30.3                                                     |       | 29.0                                                    |       | 9.9 |   | 29.3 |   | 27.9 |   | 11.3 |   |
| Cost of technical and professional services                                                                                     |       | 10.8                                                     |       | 10.5                                                    |       | 7.4 |   | 10.3 |   | 10.3 |   | 6.5 |   |
| Cost of medical equipment sales and remarketing                                                                                 |       | 4.9                                                      |       | 5.9                                                     |       | (13.3 | ) | 4.6 |   | 6.0 |   | (17.7 | ) |
| Medical equipment depreciation                                                                                                  |       | 22.7                                                     |       | 22.6                                                    |       | 5.8 |   | 22.4 |   | 21.9 |   | 8.3 |   |
| Total costs of medical equipment outsourcing,  technical and professional services and medical equipment sales and  remarketing |       | 68.7                                                     |       | 68.0                                                    |       | 6.1 |   | 66.6 |   | 66.1 |   | 6.9 |   |
| Gross margin                                                                                                                    |       | 31.3                                                     |       | 32.0                                                    |       | 2.4 |   | 33.4 |   | 33.9 |   | 4.9 |   |
|                                                                                                                            |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative                                                                                             |       | 30.5                                                     |       | 26.8                                                    |       | 19.3 |   | 28.0 |   | 28.6 |   | 4.2 |   |
| Operating income                                                                                                                |       | 0.8                                                      |       | 5.2                                                     |       | (85.1 | ) | 5.4 |   | 5.3 |   | 8.9 |   |
|                                                                                                                            |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Interest expense                                                                                                                |       | 15.4                                                     |       | 15.9                                                    |       | 1.2 |   | 15.0 |   | 16.0 |   | (0.2 | ) |
| Loss before income taxes                                                                                                        |       | (14.6                                                    | )          | (10.7                                                   | )          | 42.8 |   | (9.6 | ) | (10.7 | ) | (4.6 | ) |
|                                                                                                                            |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |
| Provision (benefit) for income taxes                                                                                            |       | 2.2                                                      |       | (4.0                                                    | )          | (158.5 | ) | (0.9 | ) | (4.1 | ) | (75.6 | ) |
| Net loss                                                                                                                        |       | (16.8                                                    | )%         | (6.7                                                    | )%         | 161.8 |   | (8.7 | )% | (6.6 | )% | 39.6 |   |

 

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**Resultsof Operations for the Three months ended September 30, 2010 compared tothe Three months ended September 30, 2009**

 

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

*(in thousands)*

 
| ** **                                                                                                             | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                             | ** ** | **September 30,**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                             | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                                          |       | $                                | 59,393     |       | $          | 56,043     |       | $ | 3,350 |   | 6.0 | % |
| Cost of revenue                                                                                                        |       | 22,998                           |       | 20,920     |       | 2,078      |       | 9.9 |   |
| Medical equipment depreciation                                                                                         |       | 17,229                           |       | 16,285     |       | 944        |       | 5.8 |   |
| Gross margin                                                                                                           |       | $                                | 19,166     |       | $          | 18,838     |       | $ | 328 |   | 1.7 |   |
| Gross margin %                                                                                                         |       | 32.3                             | %          | 33.6       | %          |       |       |   |   |
|                                                                                                                   |       |                             |       |       |       |       |       |   |   |
| Gross margin                                                                                                           |       | $                                | 19,166     |       | $          | 18,838     |       | $ | 328 |   | 1.7 |   |
| Purchase accounting adjustments, primarily  non-cash charges related to step-up in carrying value of medical equipment |       | 3,152                            |       | 3,600      |       | (448       | )          | (12.4 | ) |
| Gross margin, before purchase accounting  adjustments                                                                  |       | $                                | 22,318     |       | $          | 22,438     |       | $ | (120 | ) | (0.5 | ) |
| Gross margin %, before purchase accounting  adjustments                                                                |       | 37.6                             | %          | 40.0       | %          |       |       |   |   |

 

Totalrevenue in the Medical Equipment Outsourcing segment increased $3.4 million, or6.0%, to $59.4 million in the third quarter of 2010 as compared to the sameperiod of 2009.  This increase resultedprimarily from increased activity in our Asset360TM Programs(formerly AMPP), patient handling and wound therapy solutions, partially offsetby sluggish patient census and what we believe has been a sustained customereffort to control outsourcing expenses. Beginning January 2010, ourpatient handling revenues reflect the benefit of recognizing 100% of therevenue previously covered under a revenue share agreement. Our Asset360Programs increased from 58 programs at September 30, 2009 to 68 programsat September 30, 2010.

 

Totalcost of revenue in the segment increased $2.1 million, or 9.9%, to $23.0million in the third quarter of 2010 as compared to the same period of2009.  This increase is attributable tohigher employee-related expenses.

 

Medicalequipment depreciation increased $0.9 million, or 5.8%, to $17.2 million in thethird quarter of 2010 as compared to the same period of 2009. The increase inmedical equipment depreciation primarily relates to the increase in medicalequipment purchases related to select patient handling medical equipment, whichwe previously only managed under a revenue share agreement. Medical equipmentdepreciation for the quarter ended September 30, 2010 and 2009 included$3.2 million and $3.6 million, respectively, of purchase accounting adjustmentsrelated to the step-up in carrying value of our medical equipment.

 

Grossmargin percentage for the Medical Equipment Outsourcing segment decreased from33.6 % in the third quarter of 2009 to 32.3% in the third quarter of 2010.Gross margin percentage, before purchase accounting adjustments, decreased from40.0% in the third quarter of 2009 to at 37.6% in the third quarter of2010.  These decreases resulted primarilyfrom an overall decline in patient census, increased depreciation expense, andwhat we believe to be a sustained customer effort to control outsourcingexpenses, partially offset by increased activity in our Asset360 Programs,patient handling and wound therapy solutions.

 

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

*(in thousands)*

 
| ** **                                                                                          | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                          | ** ** | **September 30,**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                          | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                       |       | $                                | 11,512     |       | $          | 10,766     |       | $ | 746 |   | 6.9 | % |
| Cost of revenue                                                                                     |       | 8,155                            |       | 7,596      |       | 559        |       | 7.4 |   |
| Gross margin                                                                                        |       | $                                | 3,357      |       | $          | 3,170      |       | $ | 187 |   | 5.9 |   |
| Gross margin %                                                                                      |       | 29.2                             | %          | 29.4       | %          |       |       |   |   |
|                                                                                                |       |                             |       |       |       |       |       |   |   |
| Gross margin                                                                                        |       | $                                | 3,357      |       | $          | 3,170      |       | $ | 187 |   | 5.9 |   |
| Purchase accounting adjustments, primarily  non-cash charges related to favorable lease commitments |       | 3                                |       | 4          |       | (1         | )          | (25.0 | ) |
| Gross margin, before purchase accounting  adjustments                                               |       | $                                | 3,360      |       | $          | 3,174      |       | $ | 186 |   | 5.9 |   |
| Gross margin %, before purchase accounting  adjustments                                             |       | 29.2                             | %          | 29.5       | %          |       |       |   |   |

 

Totalrevenue in the Technical and Professional Services segment increased $0.7million, or 6.9%, to $11.5 million in the third quarter of 2010 as compared tothe same period of 2009. Approximately $0.7 million of this increase resultedfrom activity in our manufacturer services unit.

 

Totalcost of revenue in the segment increased $0.6 million, or 7.4%, to $8.2 millionin the third quarter of 2010 as compared to the same period of 2009.  The increase is attributable to an increasein expenses associated with our manufacturer services unit and other expensesof $0.5 and $0.1, respectively.

 

Grossmargin percentage for the Technical and Professional Services segment decreasedfrom 29.5% for the third quarter of 2009 to 29.2% for the same period of 2010.Gross margin percentage will fluctuate based on the variability of third-partyvendor expenses in our BioMed360TM Programs(formerly Customized Healthcare Asset Management Programs, or “CHAMP”) andsupplemental service programs.

 

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

*(in thousands)*

 
| ** **                                                                                                                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                      | ** ** | **September 30,**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                      | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                                                   |       | $                                | 4,900      |       | $          | 5,428      |       | $ | (528 | ) | (9.7 | )% |
| Cost of revenue                                                                                                                 |       | 3,725                            |       | 4,294      |       | (569       | )          | (13.3 | ) |
| Gross margin                                                                                                                    |       | $                                | 1,175      |       | $          | 1,134      |       | $ | 41 |   | 3.6 |   |
| Gross margin %                                                                                                                  |       | 24.0                             | %          | 20.9       | %          |       |       |   |   |
|                                                                                                                            |       |                             |       |       |       |       |       |   |   |
| Gross margin                                                                                                                    |       | $                                | 1,175      |       | $          | 1,134      |       | $ | 41 |   | 3.6 |   |
| Purchase accounting adjustments, primarily  non-cash charges related to the step-up in carrying value of our medical  equipment |       | 51                               |       | 145        |       | (94        | )          | (64.8 | ) |
| Gross margin, before purchase accounting  adjustments                                                                           |       | $                                | 1,226      |       | $          | 1,279      |       | $ | (53 | ) | (4.1 | ) |
| Gross margin %, before purchase accounting  adjustments                                                                         |       | 25.0                             | %          | 23.6       | %          |       |       |   |   |

 

Totalrevenue in the Medical Equipment Sales and Remarketing segment decreased $0.5million, or 9.7%, to $4.9 million in the third quarter of 2010 as compared tothe same period of 2009.  The decrease

 

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wasprimarily driven by decreases in sales of new and pre-owned equipment of $0.9and $0.1 million, respectively, partially offset by an increase in disposableand other sales of $0.3 and $0.2 million.

 

Totalcost of revenue in the segment decreased $0.6 million, or 13.3%, to $3.7million in the third quarter of 2010 as compared to the same period of 2009primarily due to the 9.7% decline in revenues in the segment.  Additionally, the cost of revenue wasaffected by an increase in the cost of disposables sales of $0.3 million. Duringeach of the quarters ended September 30, 2010 and 2009, purchaseaccounting adjustments related to medical equipment sold increased cost ofrevenue by $0.1 million.

 

Grossmargin percentage for the Medical Equipment Sales and Remarketing segmentincreased from 20.9% in the third quarter of 2009 to 24.0% for the same periodof 2010.  Gross margin percentage, beforepurchase accounting adjustments, increased from 23.6% in the third quarter of2009 to 25.0% for the same period of 2010. We expect margins and activity in this segment to fluctuate based on thetransactional nature of the business.

 

***Selling, General and Administrative***

 

**Selling, General and Administrative and InterestExpense**

*(in thousands)*

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **September 30,**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **2010**                         | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Selling, general and administrative |       | $                                | 23,139     |       | $          | 19,393     |       | $ | 3,746 |   | 19.3 | % |
| Interest expense                    |       | 11,651                           |       | 11,515     |       | 136        |       | 1.2 |   |
|                                     |            |                                  |            |            |            |            |            |  |  |  |  |  |

 

Selling,general and administrative expense increased $3.7 million, or 19.3%, to $23.1million for the third quarter of 2010 as compared to the same period of2009.  Selling, general andadministrative expense consists primarily of employee-related expenses,stock-based compensation, professional fees, occupancy charges, bad debtexpense and depreciation and amortization. During the third quarter of 2010,stock compensation expense increased $4.3 million primarily due to an amendmentof option agreement vesting provisions, which resulted in the acceleration ofvesting of options to purchase approximately 2,996,000 shares of stock of ourparent company as described in Note 5, Stock-Based Compensation. This increase,along with an increase of other expense of $0.4 million, was partially offsetby employee-related, bad debt, and vehicle expense of $0.6, $0.2 and $0.2million, respectively. Selling, general and administrative expense as apercentage of total revenue was 30.5% and 26.8% for each of the quarters ended September 30,2010 and 2009, respectively.

 

***Interest Expense***

 

Interestexpense increased $0.1 million to $11.7 million for the third quarter of 2010as compared to the same period of 2009.

 

**IncomeTaxes**

 

Incometaxes reflect the establishment of a valuation allowance of $6.3 million duringthe third quarter of 2010.  Seeadditional information in Item 1 of Part I, Note 11, Income Taxes.

 

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**NetLoss**

 

Netloss increased $7.9 million to $12.8 million in the third quarter of 2010 ascompared to the same period of 2009. This resulted primarily from the establishment of a $6.3 million incometax valuation allowance.

 

**Resultsof Operations for the Nine months ended September 30, 2010 compared to theNine months ended September 30, 2009**

** **

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

*(in thousands)*

 
| ** **                                                                                                             | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                             | ** ** | **September 30,**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                             | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                                          |       | $                               | 185,385    |       | $          | 170,849    |       | $ | 14,536 |   | 8.5 | % |
| Cost of revenue                                                                                                        |       | 68,067                          |       | 61,149     |       | 6,918      |       | 11.3 |   |
| Medical equipment depreciation                                                                                         |       | 52,044                          |       | 48,051     |       | 3,993      |       | 8.3 |   |
| Gross margin                                                                                                           |       | $                               | 65,274     |       | $          | 61,649     |       | $ | 3,625 |   | 5.9 |   |
| Gross margin %                                                                                                         |       | 35.2                            | %          | 36.1       | %          |       |       |   |   |
|                                                                                                                   |       |                            |       |       |       |       |       |   |   |
| Gross margin                                                                                                           |       | $                               | 65,274     |       | $          | 61,649     |       | $ | 3,625 |   | 5.9 |   |
| Purchase accounting adjustments, primarily  non-cash charges related to step-up in carrying value of medical equipment |       | 9,890                           |       | 10,725     |       | (835       | )          | (7.8 | ) |
| Gross margin, before purchase accounting  adjustments                                                                  |       | $                               | 75,164     |       | $          | 72,374     |       | $ | 2,790 |   | 3.9 |   |
| Gross margin %, before purchase accounting  adjustments                                                                |       | 40.5                            | %          | 42.4       | %          |       |       |   |   |

 

Totalrevenue in the Medical Equipment Outsourcing segment increased $14.5 million,or 8.5%, to $185.4 million in the first nine months of 2010 as compared to thesame period of 2009.  This increaseresulted primarily from increased activity in our Asset360TM Programs (formerly AMPP), patient handling andwound therapy solutions, partially offset by sluggish patient census and whatwe believe has been a sustained customer effort to control outsourcingexpenses. Beginning January 2010, our patient handling revenues reflectthe benefit of recognizing 100% of the revenue previously covered under arevenue share agreement. Our Asset360 Programs increased from 58 programs at September 30,2009 to 68 programs at September 30, 2010.

 

Totalcost of revenue in the segment increased $6.9 million, or 11.3%, to $68.1million in the first nine months of 2010 as compared to the same period of2009.  This increase is primarily relatedto employee-related, vehicle-related, and other expenses of $5.9, $0.7, and$0.3 million, respectively.

 

Medicalequipment depreciation increased $4.0 million, or 8.3%, to $52.0 million in thefirst nine months of 2010 as compared to the same period of 2009.  The increase in medical equipmentdepreciation primarily relates to higher medical equipment purchases relatingto Asset360 Programs and purchases of select patient handling medical equipmentwhich we previously only managed under a revenue share agreement. Medicalequipment depreciation for the nine months ended September 30,

 

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2010and 2009 include $9.9 and $10.7 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 decreased from36.1% in the first nine months of 2009 to 35.2% for the same period of 2010.Gross margin percentage, before purchase accounting adjustments, decreased from42.4% in the first nine months of 2009 to 40.5% in the first nine months of2010.  We believe this decrease resultedprimarily from an overall decrease in patient census and what we believe to bea sustained customer effort to control outsourcing expenses and increaseddepreciation, partially offset by increased activity in our Asset360 Programs,patient handling and wound therapy solutions.

 

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

*(in thousands)*

 
| ** **                                                                                          | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                          | ** ** | **September 30,**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                          | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                       |       | $                               | 33,477     |       | $          | 31,874     |       | $ | 1,603 |   | 5.0 | % |
| Cost of revenue                                                                                     |       | 24,003                          |       | 22,534     |       | 1,469      |       | 6.5 |   |
| Gross margin                                                                                        |       | $                               | 9,474      |       | $          | 9,340      |       | $ | 134 |   | 1.4 |   |
| Gross margin %                                                                                      |       | 28.3                            | %          | 29.3       | %          |       |       |   |   |
|                                                                                                |       |                            |       |       |       |       |       |   |   |
| Gross margin                                                                                        |       | $                               | 9,474      |       | $          | 9,340      |       | $ | 134 |   | 1.4 |   |
| Purchase accounting adjustments, primarily  non-cash charges related to favorable lease commitments |       | 9                               |       | 14         |       | (5         | )          | (35.7 | ) |
| Gross margin, before purchase accounting  adjustments                                               |       | $                               | 9,483      |       | $          | 9,354      |       | $ | 129 |   | 1.4 |   |
| Gross margin %, before purchase accounting  adjustments                                             |       | 28.3                            | %          | 29.3       | %          |       |       |   |   |

 

Totalrevenue in the Technical and Professional Services segment increased $1.6million, or 5.0%, to $33.5 million in the first nine months of 2010 as comparedto the same period of 2009. This increase was primarily attributable toincreased activity in our manufacturer services unit.

 

Totalcost of revenue in the segment increased $1.5 million, or 6.5%, to $24.0million in the first nine months of 2010 as compared to the same period of 2009.  This increase was primarily attributable toan increase in expenses associated with our manufacturer services unit,third-party vendor, and other expenses of $0.9, $0.5, and $0.1 million,respectively.

 

Grossmargin percentage for the Technical and Professional Services segment decreasedfrom 29.3% for the first nine months of 2009 to 28.3% for the same period of2010.  Gross margin percentage willfluctuate based on the variability of third-party vendor expenses in ourBioMed360TM Programs (formerly CHAMP) and supplementalservice programs.

 

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

*(in thousands)*

 
| ** **                                                                                                                  | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                  | ** ** | **September 30,**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                  | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                                               |       | $                               | 13,850     |       | $          | 16,280     |       | $ | (2,430 | ) | (14.9 | )% |
| Cost of revenue                                                                                                             |       | 10,796                          |       | 13,120     |       | (2,324     | )          | (17.7 | ) |
| Gross margin                                                                                                                |       | $                               | 3,054      |       | $          | 3,160      |       | $ | (106 | ) | (3.4 | ) |
| Gross margin %                                                                                                              |       | 22.1                            | %          | 19.4       | %          |       |       |   |   |
|                                                                                                                        |       |                            |       |       |       |       |       |   |   |
| Gross margin                                                                                                                |       | $                               | 3,054      |       | $          | 3,160      |       | $ | (106 | ) | (3.4 | ) |
| Purchase accounting adjustments, primarily  non-cash charges related to step-up in carrying value of our medical  equipment |       | 208                             |       | 747        |       | (539       | )          | (72.2 | ) |
| Gross margin, before purchase accounting  adjustments                                                                       |       | $                               | 3,262      |       | $          | 3,907      |       | $ | (645 | ) | (16.5 | ) |
| Gross margin %, before purchase accounting  adjustments                                                                     |       | 23.6                            | %          | 24.0       | %          |       |       |   |   |

 

Totalrevenue in the Medical Equipment Sales and Remarketing segment decreased $2.4million, or 14.9%, to $13.9 million in the first nine months of 2010 ascompared to the same period of 2009.  Thedecrease was primarily driven by a decrease in new and pre-owned equipmentsales of $2.6 and $0.9 million, respectively, partially offset by an increasein disposables and other sales $1.0 and $0.1 million, respectively.

 

Totalcost of revenue in the segment decreased $2.3 million, or 17.7%, to $10.8million in the first nine months of 2010 as compared to the same period of2009.  The decrease was primarily due tothe 14.9% decline in revenue in the segment. Additionally, the cost of revenue was offset by an increase in the costof disposables and other sales of $0.9 and $0.5 million, respectively.  During the nine-month periods ended September 30,2010 and 2009, the cost of medical equipment sold included purchase accountingadjustments related to medical equipment sold impacted cost of revenue by $0.2million and $0.7 million, respectively.

 

Grossmargin percentage for the Medical Equipment Sales and Remarketing segmentincreased from 19.4% in the first nine months of 2009 to 22.1% for the sameperiod of 2010.  Gross margin percentage,before purchase accounting adjustments, decreased from 24.0% in the first ninemonths of 2009 to 23.6% for the same period of 2010.  We expect margins and activity in thissegment to fluctuate based on the transactional nature of the business.

 

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

*(in thousands)*

 
| ** **                          | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------|------------|---------------------------------|------------|------------|------------|-------------------|------------|
| ** **                          | ** ** | **September 30,**          | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                          | ** ** | **2010**                        | ** ** | **2009**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Selling, general and administrative |       | $                               | 65,192     |       | $          | 62,565            |       | $ | 2,627 |   | 4.2 | % |
| Interest expense                    |       | 35,013                          |       | 35,077     |       | (64               | )          | (0.2 | ) |
|                                     |            |                                 |            |            |            |                   |            |  |  |  |  |  |

 

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***Selling, General and Administrative***

 

Selling,general and administrative expense increased $2.6 million, or 4.2%, to $65.2million for the first nine months of 2010 as compared to the same period of2009. Selling, general and administrative expense consists primarily ofemployee-related expenses, stock-based compensation, professional fees,occupancy charges, bad debt expense and depreciation and amortization. Duringthe nine months ended September 30, 2010, stock compensation expenseincreased $4.0 million primarily due to an amendment of option agreementvesting provisions, which resulted in the acceleration of vesting of options topurchase approximately 2,996,000 shares of stock of our parent company, asdescribed in Note 5, Stock-Based Compensation. This increase, along with anincrease of outside service and other expense of $0.7 and $0.8 million,respectively, is partially offset by lower bad debt expense, amortization,vehicle-related, employee-related, and travel and entertainment expenses of$0.9, $0.6, $0.5, $0.5, and $0.4 million, respectively. Selling, general andadministrative expense as a percentage of total revenue was 28.0% and 28.6% forthe nine-month periods ended September 30, 2010 and 2009, respectively.

 

***Interest Expense***

 

Interestexpense remained relatively flat at $35.0 million for first nine months of 2010as compared to the same period of 2009.

 

**IncomeTaxes**

 

Incometaxes reflect the establishment of a valuation allowance of $6.3 million duringthe third quarter of 2010.  Seeadditional information in Item 1 of Part I, Note 11, Income Taxes.

 

**NetLoss**

 

Netloss increased $5.7 million to $20.2 million in the first nine months of 2010as compared to the same period of 2009. This resulted primarily from theestablishment of a $6.3 million income tax valuation allowance offset byincreased activity in our Asset360 Programs, patient handling and wound therapysolutions, partially offset by an overall decrease in patient census and whatwe believe to be a sustained customer effort to control outsourcing expenses.

 

**EBITDA**

 

EarningsBefore Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $81.3 and$76.8 million for the nine months ended September 30, 2010 and 2009,respectively.  EBITDA for the nine monthsended September 30, 2010, was primarily driven by increased activity inour Asset360 Programs, patient handling and wound therapy solutions.

 

EBITDAis defined as earnings before interest expense, income taxes, depreciation andamortization. In addition to using EBITDA internally as a measure ofoperational performance, we disclose it externally to assist analysts,investors and lenders in their comparisons of operational performance, valuationand debt capacity across companies with differing capital, tax and legalstructures.  Management also understandsthat some industry analysts and investors consider EBITDA as a supplementarynon-GAAP financial measure useful in analyzing a company’s ability to servicedebt.  EBITDA, however, is not a measureof financial performance under GAAP and should not be considered as analternative to, or more meaningful than, net income as a measure of operatingperformance or to cash flows from operating, investing or financing activitiesor as a measure of liquidity.  SinceEBITDA is not a measure

 

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determinedin accordance with GAAP and is thus susceptible to varying interpretations andcalculations, EBITDA, as presented, may not be comparable to other similarlytitled measures of other companies. EBITDA does not represent an amount of funds that is available formanagement’s discretionary use. A reconciliation of EBITDA to net cash providedby operating activities is included below:

 
| ** **                                  | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **September 30,**          | ** ** |
| **(in thousands)**                     | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Net cash provided by operating activities   |       | $                               | 68,675     |   | $ | 52,719 |   |
| Changes in operating assets and liabilities |       | (16,259                         | )          | (5,648 | ) |
| Other non-cash expenses                     |       | (3,881                          | )          | 3,716 |   |
| Provision (benefit) for income taxes        |       | (2,202                          | )          | (9,019 | ) |
| Interest expense                            |       | 35,013                          |       | 35,077 |   |
| EBITDA                                      |       | $                               | 81,346     |   | $ | 76,845 |   |

 
| ** **                                                         | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **September 30,**          | ** ** |
| **(in thousands)**                                            | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| EBITDA                                                             |       | $                               | 81,346     |   | $ | 76,845 |   |
|                                                               |       |                            |       |   |   |
| **Other Financial Data:**                                          |       |                            |       |   |   |
| Net cash provided by operating activities                          |       | $                               | 68,675     |   | $ | 52,719 |   |
| Net cash used in investing activities                              |       | (58,241                         | )          | (27,840 | ) |
| Net cash provided by (used in) financing  activities               |       | (10,434                         | )          | (33,085 | ) |
|                                                               |       |                            |       |   |   |
| **Other Operating Data (as of end  of period):**                   |       |                            |       |   |   |
| Medical equipment (approximate number of owned outsourcing  units) |       | 227,000                         |       | 217,000 |   |
| District offices                                                   |       | 84                              |       | 84 |   |
| Number of outsourcing hospital customers                           |       | 4,250                           |       | 4,175 |   |
| Number of total outsourcing customers                              |       | 8,600                           |       | 8,375 |   |

 

**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,cash flows from operating activities, and borrowings under our senior securedcredit facility, which provides for loans in an amount of up to $195.0 million,subject to our borrowing base. See Note 6, Long-Term Debt for details relatedto our Amended and Restated Credit Agreement. It is anticipated that ourprincipal uses of liquidity will be to fund capital expenditures related topurchases of medical equipment, provide working capital, meet debt servicerequirements and finance our 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 operatingcash flow, borrowing under our senior secured credit facility or otherfinancing sources, we

 

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maynot be able to conduct our business or grow as currently planned. We anticipateadditional capital investment of approximately $28.0 million during theremaining three months of 2010.

 

Ifwe are unable to service our debt obligations through our cash and cashequivalents, generating sufficient cash flow from operations, and additionalborrowings under our first lien senior secured asset-based revolving creditfacility, we will be forced to take actions such as reducing or delayingcapital expenditures, selling assets, restructuring or refinancing our debt, electingto pay PIK interest on our PIK Toggle Notes, or seeking additional equitycapital.  This, to a certain extent, issubject to general economic, financial, competitive, legislative, regulatoryand other factors that are beyond our control. If we are unable to repay our debt at maturity, we may have to obtainalternative financing, which may not be available to us.

 

Netcash provided by operating activities was $68.7 and $52.7 million for the ninemonths ended September 30, 2010 and 2009, respectively. Net cash providedby operating activities during the nine months ended September 30, 2010primarily benefited from favorable changes in operating assets and liabilitiesas compared to the same period of 2009.

 

Netcash used in investing activities was $58.2 and $27.8 million for the ninemonths ended September 30, 2010 and 2009, respectively.  Net cash used in investing activitiesincreased during the 2010 period when compared to the same period in the prioryear primarily as a result of our purchase of select patient handling equipmentthat was formerly managed under a revenue share agreement as well as medicalequipment purchases related to Asset360 Programs.

 

Netcash used in financing activities was $10.4 and $33.1 million for the ninemonths ended September 30, 2010 and 2009, respectively.  During the nine months ended September 30,2010, net cash used in financing activities was impacted by net draws under oursenior secured credit facility of $7.8 million compared to net borrowings of$29.0 million during the same period of 2009. Additionally, we redeemed our10.125% Senior Notes in June 2010 for $9.9 million.

 

Therewas no cash on-hand as of September 30, 2010 compared to $3.8 million asof September 30, 2009.

 

Based on the level of operating performance expected in2010, 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 30,2010, we had $119.5 million of availability under our senior secured creditfacility, based on a borrowing base of $169.8 million, less borrowings of $46.2million and after giving effect to $4.1 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 described in Note 6, Long-Term Debt.  As of September 30, 2010, the Companywas in compliance with all covenants under the senior secured credit facility.

 

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**RECENT ACCOUNTING PRONOUNCEMENT**

 

***Standard Issued Not Yet Adopted***

 

InOctober 2009, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605): *Multiple Deliverable Revenue Arrangements — A Consensus of the FASBEmerging Issues Task Force.* This update provides applicationguidance on whether multiple deliverables exist, how the deliverables should beseparated and how the consideration should be allocated to one or more units ofaccounting. This update establishes a selling price hierarchy for determiningthe selling price of a deliverable. The selling price used for each deliverablewill be based on vendor-specific objective evidence, if available, third-partyevidence if vendor-specific objective evidence is not available, or estimatedselling price if neither vendor-specific or third-party evidence is available.The Company will be required to apply this guidance prospectively for revenuearrangements entered into or materially modified after January 1, 2011. Weare currently evaluating the impact of the provisions of ASU 2009-13.

 

**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 substantial outstanding debt and debtservice obligations;

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

·                  restrictions imposed by the terms of ourdebt;

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

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

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

·                  the absence of long-term commitments withcustomers;

·                  difficulties or delays in our continuedexpansion into certain of our businesses/geographic markets and developments ofnew businesses/geographic markets;

·                  the impact of health care reform initiatives;

·                  changes in third-party payor reimbursementrates for health care items and services;

·                  our ability to maintain existing contractswith GPOs and IDNs and enter into new contracts with additional GPOs and IDNs;

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

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

·                  impacts of equipment product recalls orobsolescence;

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

·                  the risk factors as set forth in Item 1A of Part IIof this Quarterly Report on Form 10-Q.

 

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

 

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

 

**InterestRates**

 

Weuse both fixed and variable rate debt as sources of financing.  At September 30, 2010, we hadapproximately $518.6 million of total debt outstanding.  After taking into account the effect of ourinterest rate swap agreement, we had $46.2 million of debt bearing interest atvariable rates averaging 3.123%.  Basedon variable debt levels at September 30, 2010, a 1.0 percentage pointchange in interest rates on variable rate debt would result in annual interestexpense fluctuating by approximately $0.5 million.

 

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

 

Theinterest rate swap agreement qualifies for cash flow hedge accounting underAccounting Standards Codification (“ASC”) Topic 815, *Derivativesand Hedging.* Both at inception and on an on-going basis, we mustperform an effectiveness test.  Inaccordance with ASC Topic 815, the fair value of the interest rate swapagreement at September 30, 2010 is included as a cash flow hedge on ourbalance sheet.  The change in fair valuewas recorded as a component of accumulated other comprehensive loss, net oftax, on our balance sheet since the instrument was determined to be aneffective hedge at September 30, 2010. We have not recorded any amounts due to ineffectiveness for any periodspresented. We expect to reclassify approximately $6.7 million into earnings,net of tax, currently recorded in accumulated other comprehensive loss, in thenext 12 months. As a result of our interest rate swap agreement, we expect theeffective interest rate on our $230.0 million Floating Rate Notes to be 9.065%through May 2012.

 

**FuelCosts**

 

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 thirdquarter of 2010 average price of unleaded gasoline, assuming gasoline usagelevels for the quarter ended September 30, 2010, would lead to an annualincrease in fuel costs of approximately $0.4 million.

 

**OtherMarket Risk**

 

Ourpension obligations are also affected by market risk as discussed in Item 7A ofPart II of our 2009 Form 10-K. Continued distress in the financial markets may impact the fair value ofdebt and equity securities in our pension trust.

 

Asof September 30, 2010, we have no other material exposure to market risk.

 

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

 

(a)           *Evaluation of disclosurecontrols and procedures*

 

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Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated 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, 2010, that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**PART II - OTHER INFORMATION**

 

**Item 1.    Legal Proceedings**

 

The Company, from time to time, may become involved inlitigation arising out of operations in the normal course of business,including the matters discussed in Item 3 of Part I of the 2009 Form 10-K.As of September 30, 2010, we were not a party to any other pending legalproceedings the adverse outcome of which could reasonably be expected to have amaterial adverse effect on our operating results, financial position or cashflows. See additional information in Item 1 of Part I, Note 7, Commitmentsand Contingencies.

 

Asserted claims are subject to many uncertainties andthe outcome of individual matters is not predictable with assurance.

 

**Item 1A.  Risk Factors**

 

Ourbusiness is subject to various risks and uncertainties.  Any of the risks discussed elsewhere in thisQuarterly Report on Form 10-Q or our other filings with the Securities andExchange Commission, including the risk factors set forth in our 2009 Form 10-K,could materially adversely affect our business, financial condition or resultsof operations.

 

**Item 2.    Unregistered Sales ofEquity Securities and Use of Proceeds**

 

None.

 

**Item 3.    Defaults upon SeniorSecurities**

 

Notapplicable.

 

**Item 5.    Other Information**

 

*Grantof Options*

 

OnAugust 11, 2010, our board of directors elected John B. Grotting to serveas a new member of the board of directors, at which time, the board ofdirectors (the “Parent Board”) of UHS Holdco, Inc., our

 

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parentcompany (“Parent”), authorized the grant of options to purchase 300,000 sharesof Parent common stock. These options were to be made during the 2010 thirdquarter under Parent’s 2007 Stock Option Plan, with a strike price to bedetermined pending a planned valuation of Parent’s common stock. On November 10,2010, the Parent Board approved the foregoing grant of options to Mr. Grottingat a strike price of $1.83 per share, the fair market value of each stockoption as of the date of grant as determined by the Parent Board and ourcompensation committee using the Black-Scholes option pricing model.  The options will vest over a six-year periodof service, with 16.66% vesting on December 31 of each year of thesix-year period in accordance with the provisions of the 2007 Stock Option Planand the related option agreement, which is in the form approved by the ParentBoard on August 11, 2010 and filed as Exhibit 10.4 to the Company’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2010.

 

**Item 6.    Exhibits**

 
| **Number ** | ** ** | **Description**                                                                                                                                                                                                                                           |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1        |       | Amendment  to Option Agreements, dated as of August 11, 2010, executed by UHS  Holdco, Inc. (incorporated by reference to Exhibit 10.4 for  Form 10-Q filed with the Securities and Exchange Commission on  August 11, 2010). ** |
|             |       |                                                                                                                                                                                                                                                      |
| 10.2             |       | Form of  Option Agreement Evidencing a Grant of an Option Under the 2007 Stock Option  Plan (incorporated by reference to Exhibit 10.5 for Form 10-Q filed  with the Securities and Exchange Commission on August 11, 2010).**        |
|             |       |                                                                                                                                                                                                                                                      |
| 31.1*            |       | Certification  of Principal Executive Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                            |
|             |       |                                                                                                                                                                                                                                                      |
| 31.2*            |       | Certification  of Principal Financial Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                            |
|             |       |                                                                                                                                                                                                                                                      |
| 32.1*            |       | Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                            |
|             |       |                                                                                                                                                                                                                                                      |
| 32.2*            |       | Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                            |

 

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* Filed Herewith

** Indicates management contracts, compensatory plans or arrangementsrequired to be filed pursuant to Item601(b)(10)(iii)(A) of Regulation S-K.

 

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**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 10, 2010

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

 

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