Table of Contents

 

 

 

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x**      | ** ** | **Quarterly Report pursuant to   Section 13 or 15(d) of the Securities Exchange Act of 1934 for the   quarterly period ended March 31, 2011**                                                                                                                                                                                                               |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |
| **or**     |
| ** ** |
| **o**      | ** ** | **Transition Report pursuant to   Section 13 or 15(d) of the Securities Exchange Act of 1934 for the   transition period from                        to                   ** |

 

**Commission File Number: 000-20086**

 

**UNIVERSAL HOSPITAL SERVICES, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**7700 France Avenue South, Suite 275 Edina, Minnesota 55435-5228**

(Address of principal executive offices, including zip code)

 

**(952) 893-3200**

(Registrant’s telephone number, including area code)

 

**Not Applicable**

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange 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 (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Number of shares of common stock outstanding as of May 1, 2011:  1,000

 

 

 

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**Universal Hospital Services, Inc.**

**Table of Contents**

 
| ** **                                | ** **                                                                                   | **Page** |
|-------------------------------------------|----------------------------------------------------------------------------------------------|----------|
| **PART I -   FINANCIAL INFORMATION** |                                                                                         |
| ** **                                |                                                                                         |     |
| **ITEM 1.**                               | Financial   Statements                                                                       |     |
|                                      | Balance Sheets —   March 31, 2011 and December 31, 2010                       | 1        |
|                                      |                                                                                         |     |
|                                      | Statements of   Operations — Three months ended March 31, 2011 and 2010            | 2        |
|                                      |                                                                                         |     |
|                                      | Statements of   Cash Flows — Three months ended March 31, 2011 and 2010            | 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                                 | 26       |
|                                      |                                                                                         |     |
| **ITEM   4.**                             | Controls and   Procedures                                                                    | 27       |
|                                      |                                                                                         |     |
| **PART II   - OTHER INFORMATION**    |                                                                                         |
|                                      |                                                                                         |     |
| **ITEM   1.**                             | Legal Proceedings                                                                            | 27       |
|                                      |                                                                                         |     |
| **ITEM 1A.**                              | Risk   Factors                                                                               | 28       |
|                                      |                                                                                         |     |
| **ITEM 2.**                               | Unregistered   Sales of Equity Securities and Use of Proceeds                                | 29       |
|                                      |                                                                                         |     |
| **ITEM 3.**                               | Defaults Upon   Senior Securities                                                            | 29       |
|                                      |                                                                                         |     |
| **ITEM 4.**                               | *Removed and Reserved*                                                                       |     |
|                                      |                                                                                         |     |
| **ITEM   5.**                             | Other Information                                                                            | 29       |
|                                      |                                                                                         |     |
| **ITEM 6.**                               | Exhibits                                                                                     | 29       |
|                                      |                                                                                         |     |
| **Signatures**                            | 30                                                                                           |

 

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**PART I - FINANCIAL INFORMATION**

** **

**Item 1. Financial Statements — Unaudited**

** **

**Universal Hospital Services, Inc.**

 

**Balance Sheets**

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

*(unaudited)*

 
| ** **                                                                                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                           | ** ** | **2011**           | ** ** | **2010**              | ** ** |
| **Assets**                                                                                                                           | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                      |       |               |       |                  |       |
| Accounts receivable, less allowance for doubtful   accounts of $2,000 at March 31, 2011 and December 31, 2010              |       | $                  | 59,826     |                  | $          | 59,962 |   |
| Inventories                                                                                                                          |       | 4,705              |       | 4,761                 |       |
| Deferred income taxes                                                                                                                |       | 10,293             |       | 10,715                |       |
| Other current assets                                                                                                                 |       | 3,693              |       | 3,342                 |       |
| Total current assets                                                                                                                 |       | 78,517             |       | 78,780                |       |
|                                                                                                                                 |       |               |       |                  |       |
| Property and equipment, net:                                                                                                         |       |               |       |                  |       |
| Medical equipment, net                                                                                                               |       | 219,533            |       | 206,842               |       |
| Property and office equipment, net                                                                                                   |       | 21,596             |       | 20,762                |       |
| Total property and equipment, net                                                                                                    |       | 241,129            |       | 227,604               |       |
|                                                                                                                                 |       |               |       |                  |       |
| Other long-term assets:                                                                                                              |       |               |       |                  |       |
| Goodwill                                                                                                                             |       | 280,211            |       | 280,211               |       |
| Other intangibles, net                                                                                                               |       | 231,514            |       | 234,915               |       |
| Other, primarily deferred financing costs, net                                                                                       |       | 11,029             |       | 11,518                |       |
| Total assets                                                                                                                         |       | $                  | 842,400    |                  | $          | 833,028 |   |
|                                                                                                                                 |       |               |       |                  |       |
| **Liabilities and Shareholders’   Equity**                                                                                      | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                                 |       |               |       |                  |       |
| Current portion of long-term debt                                                                                                    |       | $                  | 3,722      |                  | $          | 3,764 |   |
| Book overdrafts                                                                                                                      |       | 4,657              |       | 3,566                 |       |
| Accounts payable                                                                                                                     |       | 27,125             |       | 26,943                |       |
| Accrued compensation                                                                                                                 |       | 10,101             |       | 11,648                |       |
| Accrued interest                                                                                                                     |       | 13,583             |       | 3,601                 |       |
| Other accrued expenses                                                                                                               |       | 12,461             |       | 9,472                 |       |
| Total current liabilities                                                                                                            |       | 71,649             |       | 58,994                |       |
|                                                                                                                                 |       |               |       |                  |       |
| Long-term debt, less current portion                                                                                                 |       | 522,683            |       | 521,281               |       |
| Pension and other long-term liabilities                                                                                              |       | 6,933              |       | 6,302                 |       |
| Interest rate swap                                                                                                                   |       | 13,560             |       | 16,347                |       |
| Payable to Parent                                                                                                                    |       | 14,800             |       | 13,702                |       |
| Deferred income taxes                                                                                                                |       | 70,481             |       | 69,663                |       |
|                                                                                                                                 |       |               |       |                  |       |
| Commitments and contingencies (Note 7)                                                                                               |       |               |       |                  |       |
|                                                                                                                                 |       |               |       |                  |       |
| Shareholders’ equity                                                                                                            |       |               |       |                  |       |
| Common stock, $0.01 par value; 1,000 shares   authorized, issued and outstanding at March 31, 2011 and   December 31, 2010 |       | —             |       | —                |       |
| Additional paid-in capital                                                                                                           |       | 248,794            |       | 248,794               |       |
| Accumulated deficit                                                                                                                  |       | (93,422            | )          | (87,276               | )          |
| Accumulated other comprehensive loss                                                                                                 |       | (13,078            | )          | (14,779               | )          |
| Total shareholders’ equity                                                                                                      |       | 142,294            |       | 146,739               |       |
| Total liabilities and shareholders’ equity                                                                                      |       | $                  | 842,400    |                  | $          | 833,028 |   |

 

The accompanying notes are an integral part of the unaudited financial statements.

 

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**Universal Hospital Services, Inc.**

 

Statements of Operations

*(in thousands)*

*(unaudited)*

 
| ** **                                                                                                                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                        | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                                        | ** ** | **2011**                         | ** ** | **2010** | ** ** |
| **Revenue**                                                                                                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Medical equipment   outsourcing                                                                                                   |       | $                                | 66,238     |   | $ | 65,174 |   |
| Technical and professional   services                                                                                             |       | 10,870                           |       | 10,813 |   |
| Medical equipment sales   and remarketing                                                                                         |       | 5,606                            |       | 4,187 |   |
| Total revenues                                                                                                                    |       | 82,714                           |       | 80,174 |   |
|                                                                                                                              |       |                             |       |   |   |
| **Cost of   Sales**                                                                                                               |       |                             |       |   |   |
| Cost of medical equipment   outsourcing                                                                                           |       | 24,435                           |       | 22,617 |   |
| Cost of technical and   professional services                                                                                     |       | 7,884                            |       | 7,784 |   |
| Cost of medical equipment   sales and remarketing                                                                                 |       | 4,300                            |       | 3,347 |   |
| Medical equipment   depreciation                                                                                                  |       | 17,166                           |       | 17,457 |   |
| Total costs of medical   equipment outsourcing, technical and professional services and medical   equipment sales and remarketing |       | 53,785                           |       | 51,205 |   |
| Gross margin                                                                                                                      |       | 28,929                           |       | 28,969 |   |
|                                                                                                                              |       |                             |       |   |   |
| Selling, general and   administrative                                                                                             |       | 23,155                           |       | 21,070 |   |
| Operating income                                                                                                                  |       | 5,774                            |       | 7,899 |   |
|                                                                                                                              |       |                             |       |   |   |
| Interest expense                                                                                                                  |       | 11,706                           |       | 11,507 |   |
| Loss before income taxes                                                                                                          |       | (5,932                           | )          | (3,608 | ) |
|                                                                                                                              |       |                             |       |   |   |
| Provision (benefit) for   income taxes                                                                                            |       | 214                              |       | (1,328 | ) |
| Net loss                                                                                                                          |       | $                                | (6,146     | ) | $ | (2,280 | ) |

 

The accompanying notes are an integral part of the unaudited financial statements.

 

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**Universal Hospital Services, Inc.**

**Statements of Cash Flows**

*(in thousands)*

*(unaudited)*

 
| ** **                                                                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                        | ** ** | **March 31,**               | ** ** |
| ** **                                                                        | ** ** | **2011**                         | ** ** | **2010** | ** ** |
| Cash flows from operating activities:                                             |       |                             |       |   |   |
| Net loss                                                                          |       | $                                | (6,146     | ) | $ | (2,280 | ) |
| Adjustments to reconcile net loss to net cash   provided by operating activities: |       |                             |       |   |   |
| Depreciation                                                                      |       | 19,296                           |       | 19,570 |   |
| Amortization of intangibles and deferred financing   costs                        |       | 4,035                            |       | 3,992 |   |
| Provision for doubtful accounts                                                   |       | 164                              |       | (28 | ) |
| Provision for inventory obsolescence                                              |       | 22                               |       | 86 |   |
| Non-cash stock-based compensation expense                                         |       | 1,098                            |       | 338 |   |
| Non-cash gain on trade-in of recalled equipment                                   |       | (710                             | )          | — |   |
| Loss (gain) on sales and disposals of equipment                                   |       | (302                             | )          | 98 |   |
| Deferred income taxes                                                             |       | 2,941                            |       | (1,308 | ) |
| Changes in operating assets and liabilities:                                      |       |                             |       |   |   |
| Accounts receivable                                                               |       | (29                              | )          | 1,578 |   |
| Inventories                                                                       |       | 34                               |       | (45 | ) |
| Other operating assets                                                            |       | (493                             | )          | (410 | ) |
| Accounts payable                                                                  |       | (1,590                           | )          | (1,116 | ) |
| Other operating liabilities                                                       |       | 6,862                            |       | 9,937 |   |
| Net cash provided by operating activities                                         |       | 25,182                           |       | 30,412 |   |
| Cash flows from investing activities:                                             |       |                             |       |   |   |
| Medical equipment purchases                                                       |       | (25,188                          | )          | (33,328 | ) |
| Property and office equipment purchases                                           |       | (1,833                           | )          | (1,167 | ) |
| Proceeds from disposition of property and   equipment                             |       | 538                              |       | 602 |   |
| Net cash used in investing activities                                             |       | (26,483                          | )          | (33,893 | ) |
| Cash flows from financing activities:                                             |       |                             |       |   |   |
| Proceeds under senior secured credit facility                                     |       | 21,500                           |       | 42,150 |   |
| Payments under senior secured credit facility                                     |       | (20,200                          | )          | (37,450 | ) |
| Payments of principal under capital lease   obligations                           |       | (1,090                           | )          | (1,209 | ) |
| Change in book overdrafts                                                         |       | 1,091                            |       | 112 |   |
| Net cash provided by financing activities                                         |       | 1,301                            |       | 3,603 |   |
| Net change in cash and cash equivalents                                           |       | —                           |       | 122 |   |
|                                                                              |       |                             |       |   |   |
| Cash and cash equivalents at the beginning of   period                            |       | —                           |       | — |   |
| Cash and cash equivalents at the end of period                                    |       | $                                | —     |   | $ | 122 |   |
|                                                                              |       |                             |       |   |   |
| Supplemental cash flow information:                                               |       |                             |       |   |   |
| Interest paid                                                                     |       | $                                | 1,090      |   | $ | 559 |   |
| Income taxes paid                                                                 |       | $                                | 87         |   | $ | 107 |   |
| Non-cash activities:                                                              |       |                             |       |   |   |
| Medical equipment purchases included in accounts   payable (at end of period)     |       | $                                | 13,533     |   | $ | 2,489 |   |
| Capital lease additions                                                           |       | $                                | 1,150      |   | $ | 1,487 |   |

 

The accompanying notes are an integral part of the unaudited financial statements.

 

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**Universal Hospital Services, Inc.**

 

**NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS**

 

**1.****                                     ****Basis of Presentation**

 

The interim financial statements included in this Quarterly Report on Form 10-Q have been prepared by Universal Hospital Services, Inc. (“we,” “our”, “us”, the “Company”, or “UHS”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, pursuant to such rules and regulations.  These condensed financial statements should be read in conjunction with the financial statements and related notes included in the Company’s 2010 Annual Report on Form 10-K filed with the SEC.

 

The interim financial statements presented herein as of March 31, 2011, reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented.  These adjustments are all of a normal, recurring nature.  The results of operations for any interim period are not necessarily indicative of results for the full year.

 

The December 31, 2010 balance sheet amounts were derived from audited financial statements, but do not include all disclosures required by GAAP.

 

We are required to make estimates and assumptions about future events in preparing financial statements in conformity with GAAP.  These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses at the date of the unaudited condensed financial statements.  While we believe that our past estimates and assumptions have been materially accurate, our current estimates are subject to change if different assumptions as to the outcome of future events are made.  We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances.  We make adjustments to our assumptions and judgments when facts and circumstances dictate.  Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in preparing the accompanying unaudited condensed financial statements.

 

A description of our critical accounting policies is included in our 2010 Annual Report on Form 10-K. There have been no material changes to these policies for the quarter ended March 31, 2011.

 

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

 

Comprehensive loss is comprised of net loss and other comprehensive income. Other comprehensive loss includes unrealized gains (losses) from derivatives designated as cash flow hedges and minimum pension liability adjustments. Accumulated other comprehensive loss is displayed separately on the balance sheets.  A reconciliation of net loss to comprehensive loss is provided below:

 

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| ** **                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **March 31,**               | ** ** |
| **(in thousands)**                        | ** ** | **2011**                         | ** ** | **2010** | ** ** |
| Net loss                                       |       | $                                | (6,146     | ) | $ | (2,280 | ) |
| Unrealized gain on cash flow hedge, net of tax |       | 1,701                            |       | 92 |   |
| Comprehensive loss                             |       | $                                | (4,445     | ) | $ | (2,188 | ) |

 

**3.****                                     ****Recent Accounting Pronouncement**

 

***Standard Adopted***

 

In October 2009, the Financial Accounting Standards Board issued Accounting Standards Update 2009-13, Revenue Recognition (Topic 605): *Multiple Deliverable Revenue Arrangements — A Consensus of the FASB Emerging Issues Task Force.* This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. We prospectively adopted this standard in January 2011. The adoption did not have a material impact on our financial statements.

 

**4.****                                     ****Fair Value Measurements**

 

Financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010, in accordance with Accounting Standards Codification (“ASC”) Topic 820, are summarized in the following table by type of inputs applicable to the fair value measurements:

 
| ** **              | ** ** | **Fair Value at March 31, 2011** | ** ** | **Fair Value at December 31, 2010** | ** ** |
|-------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **(in thousands)** | ** ** | **Level 1**                                          | ** ** | **Level 2**                                             | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| Interest Rate Swap      |       | $                                                         | —     |                                                         | $          | 13,560 |   | $ | — |   | $ | 13,560 |   | $ | — |   | $ | 16,347 |   | $ | — |   | $ | 16,347 |   |
|                         |            |                                                           |            |                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

A description of the inputs used in the valuation of assets and liabilities is summarized as follows:

 

Level 1 — Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets.

 

Level 2 — Inputs include directly or indirectly observable inputs other than Level 1 inputs such as quoted prices for similar assets or liabilities exchanged in active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that are considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves that are observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

Level 3 — Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, 

 

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if any, market activity in the assets or liabilities or related observable inputs that can be corroborated at the measurement date. Measurements of nonexchange traded derivative contract assets and liabilities are primarily based on valuation models, discounted cash flow models or other valuation techniques that are believed to be used by market participants. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in pricing assets or liabilities.

 

**Fair Value of Other Financial Instruments**

 

The Company considers the carrying amount of financial instruments, including accounts receivable, accounts payable and accrued liabilities, as the approximate fair value due to their short maturities. The fair value of our outstanding PIK Toggle Notes and Floating Rate Notes as of March 31, 2011 and December 31, 2010, based on the quoted market price for the same or similar issues of debt, is approximately:

 
| ** **             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------|------------|--------------------|------------|-----------------------|------------|
| **(in millions)** | ** ** | **2011**           | ** ** | **2010**              | ** ** |
| PIK Toggle Notes       |       | $                  | 239.2      |                  | $          | 240.9 |   |
| Floating Rate Notes    |       | 224.3              |       | 210.9                 |       |
|                        |            |                    |            |                       |            |  |  |

 

**5.****                                     ****Stock-Based Compensation**

 

During the three months ended March 31, 2011, activity under the 2007 Stock Option Plan (the “2007 Stock Option Plan”), of UHS Holdco, Inc. our parent company (“Parent”) was as follows:

 
| **(in thousands except exercise price)** | ** ** | **Number of   Options** | ** ** | **Weighted   average   exercise price** | ** ** | **Aggregate   intrinsic value** | ** ** | **Weighted   average   remaining   contractual   term (years)** | ** ** |
|--------------------------------------------------------------|------------|------------------------------|------------|----------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------------------------------|------------|
| Outstanding at December 31, 2010                        |       | 39,523                       |       | $                                            | 1.06       |                                 | $          | 37,315                                                               |       | 6.8 |   |
| Granted                                                      |       | —                       |       |                                         |       |                                 |       |                                                                 |       |
| Exercised                                                    |       | —                       |       |                                         |       |                                 |       |                                                                 |       |
| Forfeited or expired                                         |       | (263                         | )          | $                                            | 1.03       |                                 |       |                                                                 |       |   |
|                                                         |       |                         |       |                                         |       |                                 |       |                                                                 |       |
| Outstanding at March 31, 2011                           |       | 39,260                       |       | $                                            | 1.06       |                                 | $          | 30,392                                                               |       | 6.5 |   |
|                                                         |       |                         |       |                                         |       |                                 |       |                                                                 |       |
| Exercisable at March 31, 2011                           |       | 24,236                       |       | $                                            | 1.02       |                                 | $          | 19,748                                                               |       | 6.3 |   |
|                                                         |       |                         |       |                                         |       |                                 |       |                                                                 |       |
| Remaining authorized options available for issue             |       | 4,645                        |       |                                         |       |                                 |       |                                                                 |       |

 

The exercise price of each stock option award is equal to the market value of Parent’s common stock on the grant date as determined reasonably and in good faith by Parent’s board of directors and Parent’s compensation committee and based on an analysis of a variety of factors including peer group multiples, merger and acquisition multiples, and discounted cash flow analyses.

 

The intrinsic value of a stock award is the amount by which the market value of the underlying stock exceeds the exercise price of the award.

 

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We determine the fair value of stock options using the Black-Scholes option pricing model. The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straight-line basis over the options’ expected vesting periods. There were no stock options granted during the three months ended March 31, 2011.

 

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

 

Although Parent grants stock options, the Company recognizes compensation expense related to these options since the services are performed for its benefit.  Along with this expense, which is primarily included in selling, general and administrative expense, the Company records an offsetting payable to Parent liability which is not expected to be settled within the next twelve months.

 

At March 31, 2011, unearned non-cash stock-based compensation that we expect to recognize as expense over a weighted average period of 2.4 years, totals approximately $8.8 million, net of our estimated forfeiture rate of 2.0%. The expense could be accelerated upon the sale of Parent or the Company.

 

**6.****                                     ****Long-Term Debt**

 

Long-term debt consists of the following:

 
| ** **                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(in thousands)**                 | ** ** | **2011**           | ** ** | **2010**              | ** ** |
| PIK Toggle Notes                        |       | $                  | 230,000    |                  | $          | 230,000 |   |
| Floating Rate Notes                     |       | 230,000            |       | 230,000               |       |
| Senior secured credit facility          |       | 54,200             |       | 52,900                |       |
| Capital lease obligations               |       | 12,205             |       | 12,145                |       |
|                                    |       | 526,405            |       | 525,045               |       |
| Less: Current portion of long-term debt |       | (3,722             | )          | (3,764                | )          |
| Total long-term debt                    |       | $                  | 522,683    |                  | $          | 521,281 |   |

 

***PIK Toggle Notes. ***Our 8.50% / 9.25% PIK Toggle Notes (the “PIK Toggle Notes”) were issued on May 31, 2007 in the aggregate principal amount of $230.0 million under a Second Lien Senior Indenture dated as of May 31, 2007 (the “Second Lien Senior Indenture”).  The PIK Toggle Notes mature on June 1, 2015.  Interest on the PIK Toggle Notes is payable semiannually in arrears on each June 1 and December 1. Beginning June 1, 2011, the Company is required to make all interest payments on the PIK Toggle Notes entirely as cash interest. Cash interest on the PIK Toggle Notes accrues at the rate of 8.50% per annum. The PIK Toggle Notes are redeemable, at the Company’s option, in whole or in part,

 

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at specified redemption prices (as defined in the Second Lien Senior Indenture) plus accrued interest to the date of redemption.

 

We may redeem some or all of the PIK Toggle Notes at any time prior to June 1, 2011, at a price equal to 100% of the principal amount thereof, plus the applicable premium (as defined by the Second Lien Senior Indenture), plus accrued and unpaid interest, if any, to the date of redemption.

 

After June 1, 2011, we may redeem some or all of the PIK Toggle Notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, on the PIK Toggle Notes redeemed, to the applicable redemption date, if redeemed during the 12-month period beginning on June 1 of the years indicated below, subject to the rights of noteholders:

 
| **Year**            | ** ** | **Percentage** | ** ** |
|---------------------|------------|----------------|------------|
| 2011                |       | 104.250        | %          |
| 2012                |       | 102.125        | %          |
| 2013 and thereafter |       | 100.000        | %          |

 

In addition, the PIK Toggle Notes have a change of control provision, which gives each holder the right to require the Company to purchase all or a portion of such holders’ PIK Toggle Notes upon a change in control, as defined 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 PIK Toggle Notes, subject to certain definitions and exceptions, have covenants that restrict, among other things, the incurrence of additional debt, the payment of dividends and the issuance of preferred stock. The PIK Toggle Notes are uncollateralized.

 

***Floating Rate Notes. ***Our Floating Rate Notes (the “Floating Rate Notes”) were issued on May 31, 2007 in the aggregate principal amount of $230.0 million under the Second Lien Senior Indenture.  The Floating Rate Notes mature on June 1, 2015. Interest on the Floating Rate Notes is payable semiannually in arrears on each June 1 and December 1. Interest on the Floating Rate Notes is reset for each semi-annual interest period and is calculated at the current LIBOR rate plus 3.375%.  At March 31, 2011, our LIBOR-based rate was 3.834%, which includes the credit spread. The Floating Rate Notes are redeemable, at the Company’s option, in whole or in part, at specified redemption prices (as defined in the Second Lien Senior Indenture) plus accrued interest to the date of redemption. In addition, the Floating Rate Notes have a change of control provision, which gives each holder the right to require the Company to purchase all or a portion of such holders’ Floating Rate Notes upon a change in control, as defined in the Second Lien Senior Indenture, at a purchase price equal to 101% of the principal amount plus accrued interest to the date of purchase. The Floating Rate Notes, subject to certain definitions and exceptions, have covenants that restrict, among other things, the incurrence of additional debt, the payment of dividends and the issuance of preferred stock. The Floating Rate Notes are uncollateralized.

 

We may redeem some or all of the Floating Rate Notes at par (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, on the Floating Rate Notes redeemed, to the applicable redemption date, if redeemed in accordance with the schedule below, subject to the rights of noteholders:

 
| **Year**                         | ** ** | **Percentage** | ** ** |
|----------------------------------|------------|----------------|------------|
| Prior to June 1, 2011       |       | 101.000        | %          |
| June 1, 2011 and Thereafter |       | 100.000        | %          |

 

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Upon the occurrence of a change of control, each holder of the Floating Rate Notes has the right to require the Company to repurchase some or all of such holder’s Floating Rate Notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase.

 

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

 

The interest rate swap agreement qualifies for cash flow hedge accounting under ASC Topic 815,*Derivatives and Hedging.*Both at inception and on an on-going basis, we must perform an effectiveness test.  In accordance with ASC Topic 815, the fair value of the interest rate swap agreement at March 31, 2011 is included as a cash flow hedge on our balance sheet.  The change in fair value was recorded as a component of accumulated other comprehensive loss on our balance sheet, net of tax, since the instrument was determined to be an effective hedge at March 31, 2011.  We expect to reclassify approximately $7.2 million into earnings, net of tax, currently recorded in accumulated other comprehensive loss, in the next 12 months.

 

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

 

***Senior Secured Credit Facility.***On May 6, 2010 we entered into an Amended and Restated Credit Agreement with GE Business Financial Services, Inc., as agent for the lenders, and the lenders party thereto, 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 based revolving credit facility. The Amended and Restated Credit Agreement increased the aggregate amount the Company may borrow from $135.0 million to $195.0 million and extended the maturity date to November 30, 2014. Additionally, we capitalized deferred financing costs related to the Amended and Restated Credit Agreement in the amount of $1.7 million. As of March 31, 2011, we had $122.1 million of availability under the senior secured credit facility based on a borrowing base of $180.4 million, less borrowings of $54.2 million, and after giving effect to $4.1 million used for letters of credit.  Our obligations under the senior secured credit facility are secured by a first priority security interest in substantially all of our assets, excluding a pledge of our and Parent’s capital stock, any joint ventures and certain other exceptions. Our obligations under the senior secured credit facility are unconditionally guaranteed by Parent.

 

The senior secured credit facility requires our compliance with various affirmative and negative covenants.  Pursuant to the affirmative covenants, we and Parent agreed to, among other things, deliver financial and other information to the agent, provide notice of certain events (including events of default), pay our obligations, maintain our properties, maintain the security interest in the collateral for the benefit of the agent and the lenders and maintain insurance.

 

Among other restrictions, and subject to certain definitions and exceptions, the senior secured credit facility restricts our ability to:

 

·                  incur indebtedness;

·                  create or permit liens;

·                  declare or pay dividends and certain other restricted payments;

 

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·                  consolidate, merge or recapitalize;

·                  acquire or sell assets;

·                  make certain investments, loans or other advances;

·                  enter into transactions with affiliates;

·                  change our line of business; and

·                  enter into hedging transactions.

 

The senior secured credit facility also contains a financial covenant that is triggered if our available borrowing capacity is less than $15.0 million for a certain period, which consists of a minimum ratio of trailing four-quarter EBITDA to cash interest expense, as such terms are defined in the senior secured credit facility.

 

The senior secured credit facility specifies certain events of default, including, among others, failure to pay principal, interest or fees, violation of covenants, 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 security documents.  Some events of default will be triggered only after certain cure periods have expired, or will provide for materiality thresholds.  If such a default occurs, the lenders under the senior secured credit facility would be entitled to take various actions, including all actions permitted to be taken by a secured creditor and the acceleration of amounts due under the senior secured credit facility.

 

Borrowings under the senior secured credit facility accrue interest (including a credit spread varying with facility usage):

 

·                  at a per annum rate equal to 1.750% above the rate announced from time to time by the agent as the “prime rate” payable quarterly in arrears; and

·                  at a per annum rate equal to 2.750% above the adjusted LIBOR rate used by the agent, for the respective interest rate period determined at our option, payable in arrears upon cessation of the interest rate period elected.

 

At March 31, 2011, we had borrowings outstanding that were accruing interest at our prime rate and our LIBOR-based rate, which were 5.000% and 3.010%, respectively, and which include the credit spread noted above.

 

***10.125% Senior Notes.*** On June 14, 2010, we redeemed, at par value plus accrued interest to the redemption date, all of our 10.125% Senior Notes. The funds used to redeem our 10.125% Senior Notes were obtained from our senior secured credit facility. The 10.125% Senior Notes were redeemable, at our option, in whole or in part of, at specified redemption prices (as defined) plus accrued interest to the date of redemption. The transaction resulted in a redemption price of $10.0 million of which $9.9 million related to principal and $0.1 million related to interest.

 

**7.****                                     ****Commitments and Contingencies**

 

The Company, from time to time, may become involved in litigation arising out of operations in the normal course of business. Asserted claims are subject to many uncertainties and the outcome of individual matters is not predictable with assurance.

 

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On July 13, 2010, the U.S. Food and Drug Administration (“FDA”) issued a final order and transition plan to Baxter Healthcare Corporation (“Baxter”) to recall all Colleague infusion pumps currently in use in the United States. The FDA order establishes the framework for the recall by providing for a cash refund, generally, $1,500 for single channel pumps and $3,000 for triple channel pumps, or a replacement pump to owners within a two-year period. At the time of the recall notice, we owned approximately 11,900 Colleague infusion pumps.

 

For the three months ended March 31, 2011, we recognized recalled equipment net gains of approximately $1.3 million of which $0.7 million were non-cash gains. At March 31, 2011, we owned approximately 8,600 Colleague pumps. We are continuing the process of evaluating the course of action that best meets the infusion technology needs of our customers and our business. As such, we expect to continue to recognize gains and also expect to increase purchases of infusion pumps to replace recalled units as they are accepted by Baxter. While the timing and extent of those gains or capital expenditures are not readily estimable, we expect them to extend through 2011 and mid 2012.

 

On October 19, 2009, Freedom Medical, Inc. filed a lawsuit against the Company and others in U.S. District Court for the Eastern District of Texas. The federal complaint alleges violation of state and federal antitrust laws, tortuous interference with business relationships, business disparagement and common law conspiracy in connection with the biomedical equipment rental market. Freedom Medical, Inc. is seeking unspecified damages and injunctive relief. While we believe these claims are without merit, and will vigorously defend against them, we are unable at this time to determine the ultimate outcome of this matter or determine the effect it may have on our business, financial condition or results of operations.

 

On February 6, 2011, we and our wholly owned subsidiary, Sunrise Merger Sub, Inc. (“Sunrise Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Emergent Group Inc. (“Emergent Group”), pursuant to which we and Sunrise Merger Sub commenced a tender offer (the “Offer”) to purchase all of the issued and outstanding shares of Emergent Group’s common stock at a purchase price of $8.46 per share in cash, followed by a merger of Sunrise Merger Sub with and into Emergent Group with Emergent Group surviving as a wholly owned subsidiary of the Company (the “Merger”).  The Merger was completed on April 1, 2011.  Since February 22, 2011, three putative shareholder class action complaints challenging the transactions contemplated by the Merger Agreement were filed on behalf of three separate plaintiffs (collectively, the “Plaintiffs”) in the Superior Court of the State of California in the County of Los Angeles (the “Court”) against Emergent Group, UHS, Sunrise Merger Sub and the individual members of the Emergent Group Board (collectively, the “Defendants”). The complaints allege, among other things, that the members of the Emergent Group Board breached their fiduciary duties owed to the public shareholders of Emergent Group by attempting to sell Emergent Group by means of an unfair process with preclusive deal protection devices at an unfair price of $8.46 in cash per Share and by entering into the Merger Agreement, approving the Offer and the proposed Merger, engaging in self dealing and failing to take steps to maximize the value of Emergent Group to its public shareholders. The complaints further allege that Emergent Group, UHS and Sunrise Merger Sub aided and abetted such breaches of fiduciary duties. In addition, the complaints allege that certain provisions of the Merger Agreement unduly restricted Emergent Group’s ability to negotiate with rival bidders. The complaints sought, among other things, declaratory and injunctive relief concerning the alleged fiduciary breaches, injunctive relief prohibiting the defendants from consummating the Merger and other forms of equitable relief.

 

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On March 22, 2011, the Court ordered the consolidation of the lawsuits for all purposes, and renamed the consolidated lawsuits “In re Emergent Group Inc. Shareholder Litigation”.  On March 24, 2011, a memorandum of understanding regarding settlement of the consolidated lawsuits (the “MOU”) was agreed to by the Plaintiffs and the Defendants. While the Defendants deny the allegations made in the complaints, they agreed to enter into the MOU to avoid the costs and disruptions of any further litigation and to permit the timely consummation of the Offer and the Merger. The MOU, among other things, provides that Emergent Group will amend its Schedule 14D-9 to include certain supplemental disclosures and that the final settlement agreement concerning the action (the “Settlement Agreement”) will require the Plaintiffs and the Defendants to seek an order enjoining all proceedings in connection with the consolidated lawsuits and any additional actions alleging claims that are released pursuant to the Settlement Agreement. In addition, the MOU provides that the Settlement Agreement will include a release by the Plaintiffs and the settlement class in favor of the Defendants and their related parties from any claims that arose pursuant to or are related to the Offer or the Merger. The Defendants have agreed that Emergent Group or its successor or their respective insurers will pay the Plaintiffs’ attorneys’ fees and expenses as are awarded by the court not to exceed $225,000, subject to court approval of the Settlement Agreement and the consummation of the Offer and the Merger.  The Defendants deny all liability with respect to the facts and claims alleged in the consolidated lawsuits, and specifically deny that any further supplemental disclosure was required under any applicable rule, statute, regulation or law. However, the Defendants considered it desirable that the consolidated lawsuits be settled primarily to avoid the substantial burden, expense, inconvenience and distraction of continued litigation and to fully and finally resolve all of the claims that were or could have been brought in the consolidated lawsuits being settled. In addition, Emergent Group desired to provide additional information to its stockholders at a time and in a manner that would not cause any delay of the Offer or the Merger.

 

As of March 31, 2011, we were not a party to any other pending legal proceedings the adverse outcome of which could reasonably be expected to have a material adverse effect on our operating results, financial position or cash flows.

 

**8.****                                     ****Related Party Transactions**

 

**Management Agreement**

 

On May 31, 2007, we and Irving Place Capital entered into a professional services agreement pursuant to which Irving Place Capital provides general advisory and management services to us with respect to financial and operating matters.  Irving Place Capital is a principal owner of Parent, and the following members of our board of directors are associated with Irving Place Capital:  John Howard, Robert Juneja, Bret Bowerman and David Crane. We paid Irving Place Capital professional services fees of $0.2 million for each of the three-month periods ended March 31, 2011 and 2010, respectively.

 

**Business Relationship**

 

In the ordinary course of business, we entered into an operating lease for our Minneapolis, Minnesota district office with Ryan Companies US, Inc. (“Ryan”), which began on May 1, 2007.  One member of our board of directors is also a director of Ryan.  We made payments to Ryan totaling $87,000 and $84,000 during the three months ended March 31, 2011 and 2010, respectively.

 

The Company believes that the aforementioned arrangements and relationships were provided in the ordinary course of business at prices and on terms similar to those that would result from arm’s length negotiation between unrelated parties.

 

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**9.****                                     ****Segment Information**

 

Our reporting segments consist of Medical Equipment Outsourcing, Technical and Professional Services, and Medical Equipment Sales and Remarketing. Certain operating information for our segments as well as a reconciliation of total Company gross margin to loss before income tax was as follows:

 

**Medical Equipment Outsourcing**

*(in thousands)*

 
| ** **                     | ** ** | **Three Months Ended   March 31,** | ** ** |
|--------------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| Revenues                       |       | $                                                 | 66,238     |   | $ | 65,174 |   |
| Cost of revenue                |       | 24,435                                            |       | 22,617 |   |
| Medical equipment depreciation |       | 17,166                                            |       | 17,457 |   |
| Gross margin                   |       | $                                                 | 24,637     |   | $ | 25,100 |   |

 

**Technical and Professional Services**

*(in thousands)*

 
| ** **      | ** ** | **Three Months Ended   March 31,** | ** ** |
|-----------------|------------|---------------------------------------------------|------------|
| ** **      | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| Revenues        |       | $                                                 | 10,870     |   | $ | 10,813 |   |
| Cost of revenue |       | 7,884                                             |       | 7,784 |   |
| Gross margin    |       | $                                                 | 2,986      |   | $ | 3,029 |   |

 

**Medical Equipment Sales and Remarketing**

*(in thousands)*

 
| ** **      | ** ** | **Three Months Ended   March 31,** | ** ** |
|-----------------|------------|---------------------------------------------------|------------|
| ** **      | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| Revenues        |       | $                                                 | 5,606      |   | $ | 4,187 |   |
| Cost of revenue |       | 4,300                                             |       | 3,347 |   |
| Gross margin    |       | $                                                 | 1,306      |   | $ | 840 |   |

 

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

*(in thousands)*

 
| ** **                          | ** ** | **Three Months Ended   March 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| Total gross margin                  |       | $                                                 | 28,929     |   | $ | 28,969 |   |
| Selling, general and administrative |       | 23,155                                            |       | 21,070 |   |
| Interest expense                    |       | 11,706                                            |       | 11,507 |   |
| Loss before income tax              |       | $                                                 | (5,932     | ) | $ | (3,608 | ) |

 

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**10.****                              ****Pension Plan**

 

The components of net periodic pension costs are as follows:

 
| ** **                     | ** ** | **Three Months Ended   March 31,** | ** ** |
|--------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**        | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| Interest cost                  |       | $                                                 | 273        |   | $ | 270 |   |
| Expected return on plan assets |       | (309                                              | )          | (301 | ) |
| Recognized net actuarial loss  |       | 84                                                |       | 37 |   |
| Net periodic cost              |       | $                                                 | 48         |   | $ | 6 |   |

 

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

 

**11.****                              ****Income Taxes**

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  We evaluate the recoverability of our deferred tax assets by scheduling the expected reversals of deferred tax assets and liabilities in order to determine whether net operating loss carry forwards are recoverable prior to expiration in accordance with ASC Topic 740. We determined that neither expected reversals of these deferred tax assets and liabilities nor future earnings or other assumptions assured recoverability of all of our net operating loss carry forwards prior to their expiration and accordingly established a valuation allowance in the third quarter of 2010.  We increased our valuation allowance by $2.1 million during the first quarter of 2011 to $14.1 million at March 31, 2011 to recognize this uncertainty and, in future reporting periods, will continue to assess the likelihood that deferred tax assets will be realizable.

 

Reconciliations between the Company’s effective income tax rate and the U.S. statutory rate follow:

 
| ** **                                         | ** ** | **Three Months Ended   March 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                         | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| Statutory U.S. Federal income tax rate             |       | (35.0                                             | )%         | (35.0 | )% |
| State income taxes, net of U.S. Federal income tax |       | (2.0                                              | )          | (4.8 | ) |
| Permanent items                                    |       | 4.5                                               |       | 0.9 |   |
| Valuation allowance                                |       | 35.9                                              |       | 0.0 |   |
| Other                                              |       | 0.2                                               |       | 2.1 |   |
| Effective income tax rate                          |       | 3.6                                               | %          | (36.8 | )% |

 

At March 31, 2011, the Company had available unused federal net operating loss carryforwards of approximately $134.8 million.  The net operating loss carryforwards will expire at various dates from 2020 through 2030.

 

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**12.****                              ****Subsequent Event**

 

As described above in Note 7, Commitments and Contingencies, on April 1, 2011, we and Sunrise Merger Sub completed the Merger with Emergent Group. The total enterprise value of the transaction, including debt assumption, was approximately $70.0 million and was primarily funded by drawings under our existing $195.0 million credit facility, which is described above in Note 6, Long-Term Debt.

 

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

 

The following should be read in conjunction with the accompanying financial statements and notes.

 

**BUSINESS OVERVIEW**

 

**Our Company**

 

Universal Hospital Services, Inc. (“we”, “our”, “us”, the “Company”, or “UHS”) is a leading nationwide provider of medical equipment management and service solutions to the United States health care industry. Our customers include national, regional and local acute and long-term acute care hospitals, alternate site providers (such as long-term acute care hospitals, skilled nursing facilities, specialty hospitals, nursing homes, and home care providers) and medical equipment manufacturers.  We provide our customers solutions across the spectrum of the equipment life cycle as a result of our position as one of the industry’s largest purchasers and outsourcers of medical equipment. During the twelve months ended March 31, 2011, we owned or managed over 580,000 pieces of medical equipment consisting of 390,000 owned or managed pieces in our Medical Equipment Outsourcing segment and 190,000 pieces of customer owned equipment we managed in our Technical and Professional Services segment. Our diverse medical equipment outsourcing customer base includes more than 4,325 acute care hospitals and approximately 4,275 alternate site providers.  We also have relationships with more than 200 medical equipment manufacturers and many of the nation’s largest group purchasing organizations (“GPOs”) and many of the integrated delivery networks (“IDNs”).  All of our solutions leverage our nationwide network of 84 offices and our more than 70 years of experience managing and servicing all aspects of medical equipment.  Our fees are paid directly by our customers rather than by direct reimbursement from third-party payors, such as private insurers, Medicare, or Medicaid.

 

We commenced operations in 1939, originally incorporated in Minnesota in 1954 and reincorporated in Delaware in 2001.  Historically, we have experienced significant and sustained growth. Our overall growth strategy is to continue to grow both organically, through strategic acquisitions, and potential international growth opportunities.

 

As one of the nation’s leading medical equipment management and service solutions companies, we focus on offering our customers comprehensive solutions that help reduce capital and operating expenses, increase equipment and staff productivity and support improved patient safety and outcomes.

 

We report our financial results in three segments. Our reporting segments consist of Medical Equipment Outsourcing, Technical and Professional Services, and Medical Equipment Sales and Remarketing. We evaluate the performance of our reporting segments based on gross margin and gross margin, before purchase accounting adjustments. The accounting policies of the individual reporting segments are the same as those of the entire company.

 

We present the non-generally accepted accounting principles (“GAAP”) financial measure gross margin, before purchase accounting adjustments, because we use this measure to monitor and evaluate the 

 

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operational performance of our business and to assist analysts, investors and lenders in their comparisons of operational performance across companies, many of whose results will not include similar adjustments. A reconciliation of the non-GAAP financial measure to its equivalent GAAP measure is included in the respective tables.

 

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

 

Our flagship business is our Medical Equipment Outsourcing segment, which accounted for $66.2 million, or approximately 80.1% of our revenues, for the quarter ended March 31, 2011. As of March 31, 2011, we owned or managed over 390,000 pieces in our Medical Equipment Outsourcing segment, primarily in the categories of respiratory therapy, newborn care, critical care, patient monitors, patient handling (which includes fall management, bariatrics, beds, stretchers and wheelchairs), pressure area management (such as therapy surfaces) and wound therapy.  Historically, we have purchased and owned directly the equipment used in our Medical Equipment Outsourcing programs.  During 2007, we entered into “revenue sharing” agreements with a select few manufacturers of equipment where the manufacturers retain ownership of the equipment, but UHS takes possession and manages the rental of the equipment to customers. Such arrangements are less capital intensive for us. In January 2010, one of these agreements was modified such that the Company purchased the manufacturer’s equipment it had managed and the revenue share portion of the agreement was terminated.

 

We have three primary outsourcing programs:

 

·                  Supplemental and Peak Needs Usage;

·                  Customized Outsourcing Agreements; and

·                  Asset360TM Equipment Management Program (“Asset360 Program”).

 

Our primary customer relationships are with local healthcare providers such as hospitals, surgery centers, long-term care providers, and nursing homes.  These organizations may belong to regional or national groups of facilities, and often participate in GPOs. We contract at the local, regional and national level, as requested by our customers. We expect much of our future growth in this segment to be driven by our customers outsourcing more of their medical equipment needs and taking full advantage of our diversified product offering, customized outsourcing agreements and Asset360 Programs.

 

On July 13, 2010, the U.S. Food and Drug Administration (“FDA”) issued a final order and transition plan to Baxter Healthcare Corporation (“Baxter”) to recall all Colleague infusion pumps currently in use in the United States. The FDA order establishes the framework for the recall by providing for a cash refund, generally, $1,500 for single channel pumps and $3,000 for triple channel pumps, or a replacement pump to owners within a two-year period. At the time of the recall notice, we owned approximately 11,900 Colleague infusion pumps.

 

For the three months ended March 31, 2011, we recognized recalled equipment net gains of approximately $1.3 million of which $0.7 million were non-cash gains. At March 31, 2011, we owned approximately 8,600 Colleague pumps. We are continuing the process of evaluating the course of action that best meets the infusion technology needs of our customers and our business. As such, we expect to continue to recognize gains and also expect to increase purchases of infusion pumps to replace recalled units as they are accepted by Baxter. While the timing and extent of those gains or capital expenditures are not readily estimable, we expect them to extend through 2011 and mid 2012.

 

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

 

Our Technical and Professional Services segment accounted for $10.9 million, or approximately 13.1% of our revenues for the quarter ended March 31, 2011. We leverage our over 70 years of experience and our extensive equipment database in repairing and maintaining medical equipment.  We offer a broad range of inspection, preventative maintenance, repair, logistic and consulting services through our team of over 270 technicians and professionals located throughout the United States in our nationwide network of offices and managed over 190,000 units of customer owned equipment during the twelve months ended March 31, 2011. In addition, during the twelve months ended March 31, 2011, we serviced over 390,000 units that we own or directly manage. Our Technical and Professional Service offerings provide a complementary alternative for customers that wish to own their medical equipment, but lack the infrastructure, expertise or scale to perform routine maintenance, repair, record-keeping and lifecycle analysis and planning functions.

 

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

 

Our Medical Equipment Sales and Remarketing segment accounted for $5.6 million, or approximately 6.8%, of our revenues for the quarter ended March 31, 2011. This segment includes three distinct business activities:

 

***Medical Equipment Remarketing and Disposal.*********We are one of the nation’s largest buyers and sellers of pre-owned medical equipment.  We buy, source, remarket and dispose of pre-owned medical equipment for our customers and for our own behalf. We provide our customers with the ability to sell their unneeded medical equipment for immediate cash or credit. We provide fair market value assessments and buy-out proposals on equipment the customer intends to trade in for equipment upgrades so that the customer can evaluate the manufacturers’ or alternative offers.  Customers can also take advantage of our disposal services, where we dispose of equipment that has no remaining economic value in a safe and environmentally appropriate manner.

 

We remarket pre-owned medical equipment to hospitals, alternate site providers, veterinarians and equipment brokers.  This segment of our business focuses on providing solutions to customers that have capital budget dollars available to purchase equipment. We offer a wide range of equipment including equipment we use in our outsourcing programs and diagnostic, ultrasound and x-ray equipment.

 

***Specialty Medical Equipment Sales and Distribution.*********We use our national infrastructure to provide sales and distribution services to manufacturers of specialty medical equipment on a limited basis.  Our distribution services include providing demonstration services and product maintenance services.  We act as a distributor for only a limited number of products that are particularly suited to our national distribution network or that fit with our ability to provide technical support.  We currently sell equipment in selected product lines including, but not limited to, respiratory percussion vests, continuous passive motion machines, patient monitors, patient handling equipment and infant security systems.

 

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

 

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**RESULTS OF OPERATIONS**

 

The following discussion addresses:

 

·                  our financial condition as of March 31, 2011 and

·                  the results of operations for the three-month periods ended March 31, 2011 and 2010.

 

This discussion should be read in conjunction with the financial statements included elsewhere in this Quarterly Report on Form 10-Q and the Management’s Discussion and Analysis of Financial Condition and Results of Operations section included in our 2010 Annual Report on Form 10-K, filed with the Securities and Exchange Commission.

 

The following table provides information on the percentages of certain items of selected financial data compared to total revenues for the three-month periods ended March 31, 2011 and 2010.  The table below also indicates the percentage increase or decrease over the prior comparable period.

 
| ** **                                                                                                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                                                                                                                        | ** ** | **Percent of Total Revenues**         | ** ** | **Increase** | ** ** |
| ** **                                                                                                                        | ** ** | **2011**                                             | ** ** | **2010** | ** ** | **(Decrease)** | ** ** |
| **Revenue**                                                                                                                       |       |                                                 |       |   |   |   |   |
| Medical equipment outsourcing                                                                                                     |       | 80.1                                                 | %          | 81.3 | % | 1.6 | % |
| Technical and professional services                                                                                               |       | 13.1                                                 |       | 13.5 |   | 0.5 |   |
| Medical equipment sales and remarketing                                                                                           |       | 6.8                                                  |       | 5.2 |   | 33.9 |   |
| Total revenues                                                                                                                    |       | 100.0                                                | %          | 100.0 | % | 3.2 |   |
|                                                                                                                              |       |                                                 |       |   |   |   |   |
| **Cost of Sales**                                                                                                                 |       |                                                 |       |   |   |   |   |
| Cost of medical equipment outsourcing                                                                                             |       | 29.5                                                 |       | 28.2 |   | 8.0 |   |
| Cost of technical and professional services                                                                                       |       | 9.5                                                  |       | 9.7 |   | 1.3 |   |
| Cost of medical equipment sales and remarketing                                                                                   |       | 5.2                                                  |       | 4.2 |   | 28.5 |   |
| Medical equipment depreciation                                                                                                    |       | 20.8                                                 |       | 21.8 |   | (1.7 | ) |
| Total costs of medical equipment outsourcing,   technical and professional services and medical equipment sales and   remarketing |       | 65.0                                                 |       | 63.9 |   | 5.0 |   |
| Gross margin                                                                                                                      |       | 35.0                                                 |       | 36.1 |   | (0.1 | ) |
|                                                                                                                              |       |                                                 |       |   |   |   |   |
| Selling, general and administrative                                                                                               |       | 28.0                                                 |       | 26.2 |   | 9.9 |   |
| Operating income                                                                                                                  |       | 7.0                                                  |       | 9.9 |   | (26.9 | ) |
|                                                                                                                              |       |                                                 |       |   |   |   |   |
| Interest expense                                                                                                                  |       | 14.2                                                 |       | 14.4 |   | 1.7 |   |
| Loss before income taxes                                                                                                          |       | (7.2                                                 | )          | (4.5 | ) | 64.4 |   |
|                                                                                                                              |       |                                                 |       |   |   |   |   |
| Provision (benefit) for income taxes                                                                                              |       | 0.2                                                  |       | (1.7 | ) | (116.1 | ) |
| Net loss                                                                                                                          |       | (7.4                                                 | )%         | (2.8 | )% | 169.6 |   |

 

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**Results of Operations for the three months ended March 31, 2011 compared to the three months ended March 31, 2010**

** **

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

*(in thousands)*

 
| ** **                                                                                                              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                              | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                              | ** ** | **2011**                         | ** ** | **2010**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                                           |       | $                                | 66,238     |       | $          | 65,174     |       | $ | 1,064 |   | 1.6 | % |
| Cost of revenue                                                                                                         |       | 24,435                           |       | 22,617     |       | 1,818      |       | 8.0 |   |
| Medical equipment depreciation                                                                                          |       | 17,166                           |       | 17,457     |       | (291       | )          | (1.7 | ) |
| Gross margin                                                                                                            |       | $                                | 24,637     |       | $          | 25,100     |       | $ | (463 | ) | (1.8 | ) |
|                                                                                                                    |       |                             |       |       |       |       |       |   |   |
| Gross margin %                                                                                                          |       | 37.2                             | %          | 38.5       | %          |       |       |   |   |
|                                                                                                                    |       |                             |       |       |       |       |       |   |   |
| Gross margin                                                                                                            |       | $                                | 24,637     |       | $          | 25,100     |       | $ | (463 | ) | (1.8 | ) |
| Purchase accounting adjustments, primarily   non-cash charges related to step-up in carrying value of medical equipment |       | 2,724                            |       | 3,457      |       | (733       | )          | (21.2 | ) |
| Gross margin, before purchase accounting   adjustments                                                                  |       | $                                | 27,361     |       | $          | 28,557     |       | $ | (1,196 | ) | (4.2 | ) |
|                                                                                                                    |       |                             |       |       |       |       |       |   |   |
| Gross margin %, before purchase accounting   adjustments                                                                |       | 41.3                             | %          | 43.8       | %          |       |       |   |   |

 

Total revenue in the Medical Equipment Outsourcing segment increased $1.1 million, or 1.6%, to $66.2 million in the first quarter of 2011 as compared to the same period of 2010.  The increase was primarily driven through the net addition of eight Asset360TM Equipment Management Programs (“Asset360 Programs”), revenue related to recalled equipment of $1.3 million, and increased revenues driven by incremental business from new and existing technology, both owned and managed, partially offset by sluggish patient census and what we believe has been a sustained customer effort to control outsourcing expenses. Our Asset360 Programs increased from 64 programs at March 31, 2010 to 72 programs at March 31, 2011.

 

Total cost of revenue in the segment increased $1.8 million, or 8.0%, to $24.4 million in the first quarter of 2011 as compared to the same period of 2010.  This increase is attributable to higher employee-related expenses, including costs related to our continued build of clinical resources to support growth initiatives in patient handling and wound therapy.

 

Medical equipment depreciation decreased $0.3 million, or 1.7%, to $17.2 million in the first quarter of 2011 as compared to the same period of 2010. The decrease in medical equipment depreciation was primarily impacted by the decrease in purchase accounting adjustments related to the step-up in the carrying value of our medical equipment. Medical equipment depreciation for the quarter ended March 31, 2011 and 2010 included $2.7 million and $3.1 million, respectively, of purchase accounting adjustments related to the step-up in carrying value of our medical equipment.

 

Gross margin percentage for the Medical Equipment Outsourcing segment decreased from 38.5 % in the first quarter of 2010 to 37.2% in the first quarter of 2011. Gross margin percentage, before purchase accounting adjustments, decreased from 43.8% in the first quarter of 2010 to 41.3% in the first quarter of 2011. These decreases resulted primarily from an overall decline in patient census and what we believe to be a sustained customer effort to control outsourcing expenses coupled with our continued efforts to build clinical resources which support patient handling and wound therapy growth initiatives.

 

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

*(in thousands)*

 
| ** **                                                                                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                           | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                           | ** ** | **2011**                         | ** ** | **2010**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                        |       | $                                | 10,870     |       | $          | 10,813     |       | $ | 57 |   | 0.5 | % |
| Cost of revenue                                                                                      |       | 7,884                            |       | 7,784      |       | 100        |       | 1.3 |   |
| Gross margin                                                                                         |       | $                                | 2,986      |       | $          | 3,029      |       | $ | (43 | ) | (1.4 | ) |
|                                                                                                 |       |                             |       |       |       |       |       |   |   |
| Gross margin %                                                                                       |       | 27.5                             | %          | 28.0       | %          |       |       |   |   |
|                                                                                                 |       |                             |       |       |       |       |       |   |   |
| Gross margin                                                                                         |       | $                                | 2,986      |       | $          | 3,029      |       | $ | (43 | ) | (1.4 | ) |
| Purchase accounting adjustments, primarily   non-cash charges related to favorable lease commitments |       | 1                                |       | 3          |       | (2         | )          | (66.7 | ) |
| Gross margin, before purchase accounting   adjustments                                               |       | $                                | 2,987      |       | $          | 3,032      |       | $ | (45 | ) | (1.5 | ) |
|                                                                                                 |       |                             |       |       |       |       |       |   |   |
| Gross margin %, before purchase accounting   adjustments                                             |       | 27.5                             | %          | 28.0       | %          |       |       |   |   |

 

Total revenue in the Technical and Professional Services segment increased $0.1 million, or 0.5%, to $10.9 million in the first quarter of 2011 as compared to the same period of 2010. The increase was driven by increased activity of $0.7 million in our manufacturer services unit offset by a decrease in other service revenue of $0.6 million. The manufacturer service increase was primarily attributable to securing longer term and higher value contracts.

 

Total cost of revenue in the segment increased $0.1 million, or 1.3%, to $7.9 million in the first quarter of 2011 as compared to the same period of 2010. The increase is attributable to increased expenses to support longer term and higher value contracts associated with our manufacturer services unit of $0.7 million, offset by a decrease in other expenses of $0.6 million.

 

Gross margin percentage for the Technical and Professional Services segment decreased from 28.0% for the first quarter of 2010 to 27.5% for the same period of 2011. Gross margin percentage will fluctuate based on the variability of third-party vendor expenses in our BioMed360TM Equipment Management Programs (“BioMed360 Programs”) and supplemental service programs.

 

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

*(in thousands)*

 
| ** **                                                                                                                        | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                        | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                        | ** ** | **2011**                         | ** ** | **2010**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                                                     |       | $                                | 5,606      |       | $          | 4,187      |       | $ | 1,419 |   | 33.9 | % |
| Cost of revenue                                                                                                                   |       | 4,300                            |       | 3,347      |       | 953        |       | 28.5 |   |
| Gross margin                                                                                                                      |       | $                                | 1,306      |       | $          | 840        |       | $ | 466 |   | 55.5 |   |
|                                                                                                                              |       |                             |       |       |       |       |       |   |   |
| Gross margin %                                                                                                                    |       | 23.3                             | %          | 20.1       | %          |       |       |   |   |
|                                                                                                                              |       |                             |       |       |       |       |       |   |   |
| Gross margin                                                                                                                      |       | $                                | 1,306      |       | $          | 840        |       | $ | 466 |   | 55.5 |   |
| Purchase accounting adjustments, primarily   non-cash charges related to the step-up in carrying value of our medical   equipment |       | 22                               |       | 77         |       | (55        | )          | (71.4 | ) |
| Gross margin, before purchase accounting   adjustments                                                                            |       | $                                | 1,328      |       | $          | 917        |       | $ | 411 |   | 44.8 |   |
|                                                                                                                              |       |                             |       |       |       |       |       |   |   |
| Gross margin %, before purchase accounting   adjustments                                                                          |       | 23.7                             | %          | 21.9       | %          |       |       |   |   |

 

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Total revenue in the Medical Equipment Sales and Remarketing segment increased $1.4 million, or 33.9%, to $5.6 million in the first quarter of 2011 as compared to the same period of 2010.  The increase was primarily driven by disposable and new equipment sales of $1.0 and $0.8 million, respectively, partially offset by decreases in pre-owned sales of $0.4 million.

 

Total cost of revenue in the segment increased $1.0 million, or 28.5%, to $4.3 million in the first quarter of 2011 as compared to the same period of 2010. The cost of revenue was impacted by an increase in the cost of disposable and new equipment sales of $0.7 and $0.6 million, respectively, offset by decreases in the cost of pre-owned sales of $0.3 million.

 

Gross margin percentage for the Medical Equipment Sales and Remarketing segment increased from 20.1% in the first quarter of 2010 to 23.3% for the same period of 2011. Gross margin percentage, before purchase accounting adjustments, increased from 21.9% in the first quarter of 2010 to 23.7% for the same period of 2011.  We expect margins and activity in this segment to fluctuate based on the transactional nature of the business.

 

***Selling, General and Administrative***

 

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

*(in thousands)*

 
| ** **                          | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **2011**                         | ** ** | **2010**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Selling, general and administrative |       | $                                | 23,155     |       | $          | 21,070     |       | $ | 2,085 |   | 9.9 | % |
| Interest expense                    |       | 11,706                           |       | 11,507     |       | 199        |       | 1.7 |   |
|                                     |            |                                  |            |            |            |            |            |  |  |  |  |  |

 

Selling, general and administrative expense increased $2.1 million, or 9.9%, to $23.2 million for the first quarter of 2011 as compared to the same period of 2010.  Selling, general and administrative expense was impacted by increases in outside service fees related to mergers and acquisitions activity, stock-based compensation, bad debt expense, and employee-related expenses of $0.9, $0.8, $0.2, and $0.2 million, respectively. Selling, general and administrative expense as a percentage of total revenue was 28.0% and 26.2% for each of the quarters ended March 31, 2011 and 2010, respectively.

 

***Interest Expense***

 

Interest expense increased $0.2 million to $11.7 million for the first quarter of 2011 as compared to the same period of 2010. This increase results from higher levels of borrowing along with higher interest rates under our Amended Senior Secured Credit Facility.

 

**Income Taxes**

 

Income taxes were an expense of $0.2 million and a benefit of $1.3 million for the three months ended March 31, 2011 and 2010, respectively. The change of $1.5 million is primarily attributable to the presence of an income tax valuation allowance during the first quarter of 2011 versus the absence of an allowance during the comparable 2010 period.

 

**Net Loss**

 

Net loss increased $3.9 million to $6.1 million in the first quarter of 2011 as compared to the same period of 2010.  Net loss was impacted by a higher pre-tax loss and the presence of an income tax

 

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valuation allowance during the first quarter of 2011 versus the absence of an allowance during the comparable 2010 period.

 

**EBITDA**

 

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $28.5 and $30.9 million for the three months ended March 31, 2011 and 2010, respectively.  EBITDA for the three months ended March 31, 2011, was impacted by increased employee-related expenses, including costs related to our continued build of clinical resources to support growth initiatives in patient handling and wound therapy and outside service fees related to mergers and acquisitions activity.

 

EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. In addition to using EBITDA internally as a measure of operational performance, we disclose it externally to assist analysts, investors and lenders in their comparisons of operational performance, valuation and debt capacity across companies with differing capital, tax and legal structures.  Management also understands that some industry analysts and investors consider EBITDA as a supplementary non-GAAP financial measure useful in analyzing a company’s ability to service debt.  EBITDA, however, is not a measure of financial performance under GAAP and should not be considered as an alternative to, or more meaningful than, net income as a measure of operating performance or to cash flows from operating, investing or financing activities or as a measure of liquidity.  Since EBITDA is not a measure determined in accordance with GAAP and is thus susceptible to varying interpretations and calculations, EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.  EBITDA does not represent an amount of funds that is available for management’s discretionary use. A reconciliation of EBITDA to net cash provided by operating activities is included below:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **March 31,**               | ** ** |
| **(in thousands)**                     | ** ** | **2011**                         | ** ** | **2010** | ** ** |
| Net cash provided by operating activities   |       | $                                | 25,182     |   | $ | 30,412 |   |
| Changes in operating assets and liabilities |       | (4,784                           | )          | (9,944 | ) |
| Other non-cash expenses (income)            |       | (3,846                           | )          | 212 |   |
| Provision (benefit) for income taxes        |       | 214                              |       | (1,328 | ) |
| Interest expense                            |       | 11,706                           |       | 11,507 |   |
| EBITDA                                      |       | $                                | 28,472     |   | $ | 30,859 |   |

 

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| ** **                                                          | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **March 31,**               | ** ** |
| **(in thousands)**                                             | ** ** | **2011**                         | ** ** | **2010** | ** ** |
| EBITDA                                                              |       | $                                | 28,472     |   | $ | 30,859 |   |
|                                                                |       |                             |       |   |   |
| **Other Financial Data:**                                           |       |                             |       |   |   |
| Net cash provided by operating activities                           |       | $                                | 25,182     |   | $ | 30,412 |   |
| Net cash used in investing activities                               |       | (26,483                          | )          | (33,893 | ) |
| Net cash provided by financing activities                           |       | 1,301                            |       | 3,603 |   |
|                                                                |       |                             |       |   |   |
| **Other Operating Data (as of end   of period):**                   |       |                             |       |   |   |
| Medical equipment (approximate number of owned outsourcing   units) |       | 236,000                          |       | 227,000 |   |
| District offices                                                    |       | 84                               |       | 84 |   |
| Number of outsourcing hospital customers                            |       | 4,325                            |       | 4,225 |   |
| Number of total outsourcing customers                               |       | 8,600                            |       | 8,500 |   |

 

**SEASONALITY**

 

Quarterly operating results are typically affected by seasonal factors.  Historically, our first and fourth quarters are the strongest, reflecting increased customer utilization during the fall and winter months.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our principal sources of liquidity are expected to be cash and cash equivalents, cash flows from operating activities, and borrowings under our senior secured credit 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 related to our Amended and Restated Credit Agreement. It is anticipated that our principal uses of liquidity will be to fund capital expenditures related to purchases of medical equipment, provide working capital, meet debt service requirements and finance our strategic plans.

 

We require substantial cash to operate our Medical Equipment Outsourcing programs and service our debt.  Our outsourcing programs require us to invest a significant amount of cash in medical equipment purchases.  To the extent that such expenditures cannot be funded from cash and cash equivalents, our operating cash flow, borrowing under our senior secured credit facility or other financing sources, we may not be able to conduct our business or grow as currently planned. We anticipate additional capital investment of approximately $40.0 million during the remaining nine months of 2011.

 

If we are unable to service our debt obligations through our cash and cash equivalents, generating sufficient cash flow from operations, and additional borrowings under our first lien senior secured asset-based revolving credit facility, we will be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our debt or seeking additional equity capital.  This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.  If we are unable to repay our debt at maturity, we may have to obtain alternative financing, which may not be available to us.

 

Net cash provided by operating activities was $25.2 and $30.4 million for the three months ended March 31, 2011 and 2010, respectively. Net cash provided by operating activities during the three months

 

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ended March 31, 2011 was primarily impacted by the increase in net loss as compared to the same period of 2010.

 

Net cash used in investing activities was $26.5 and $33.9 million for the three months ended March 31, 2011 and 2010, respectively.  Net cash used in investing activities decreased during the 2011 period when compared to the same period in the prior year. This resulted primarily from the prior year purchase of select patient handling equipment that was formerly managed under a revenue share agreement and was partially offset by medical equipment purchases related to Asset360 Programs.

 

Net cash provided by financing activities was $1.3 and $3.6 million for the three months ended March 31, 2011 and 2010, respectively.  During the three months ended March 31, 2011, net cash provided by financing activities was impacted by a decrease in net draws under our senior secured credit facility of $3.4 million partially offset by an increase of the change in book overdrafts of $1.0 million.

 

There was no cash on-hand as of March 31, 2011 and 2010, respectively.

 

Based on the level of operating performance expected in 2011, we believe our cash and cash equivalents, cash from operations, and additional borrowings under our senior secured credit facility, will meet our liquidity needs for the foreseeable future, exclusive of any borrowings that we may make to finance potential acquisitions.  However, if during that period or thereafter we are not successful in generating sufficient cash flows from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, our business could be adversely affected.  As of March 31, 2011, we had $122.1 million of availability under our senior secured credit facility, based on a borrowing base of $180.4 million, less borrowings of $54.2 million and after giving effect to $4.1 million used for letters of credit.

 

On February 6, 2011, we and our wholly owned subsidiary, Sunrise Merger Sub, Inc. (“Sunrise Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Emergent Group Inc. (“Emergent Group”), pursuant to which we and Sunrise Merger Sub commenced a tender offer (the “Offer”) to purchase all of the issued and outstanding shares of Emergent Group’s common stock at a purchase price of $8.46 per share in cash, followed by a merger of Sunrise Merger Sub with and into Emergent Group with Emergent Group surviving as a wholly owned subsidiary of the Company (the “Merger”).  The Merger was completed on April 1, 2011.  The total enterprise value of the transaction, including debt assumption was approximately $70.0 million and was primarily funded by drawings under our existing $195.0 million senior secured credit facility.

 

Our levels of borrowing are further restricted by the financial covenants set forth in our senior secured credit facility agreement and the second lien senior indenture governing our PIK Toggle Notes and Floating Rate Notes, as described in Note 6, Long-Term Debt.  As of March 31, 2011, the Company was in compliance with all covenants under the senior secured credit facility.

 

**RECENT ACCOUNTING PRONOUNCEMENT**

 

***Standard Adopted***

 

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605): *Multiple Deliverable Revenue Arrangements — A Consensus of the FASB Emerging Issues Task Force.* This update provides

 

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application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. We prospectively adopted this standard in January 2011. The adoption did not have a material impact on our financial statements.

 

**SAFE HARBOR STATEMENT**

 

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

 

·                  our history of net losses and substantial interest expense;

·                  our substantial outstanding debt and debt service obligations;

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

·                  restrictions imposed by the terms of our debt;

·                  a decrease in the number of patients our customers are serving;

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

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

·                  the absence of long-term commitments with customers;

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

·                  the impact of health care reform initiatives;

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

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

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

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

·                  impacts of equipment product recalls or obsolescence;

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

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

 

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**Item 3.  Quantitative and Qualitative Disclosures about Market Risk**

 

We are exposed to market risk arising from adverse changes in interest rates, fuel costs, and pension valuation.  We do not enter into derivatives or other financial instruments for speculative purposes.

 

**Interest Rates**

 

We use both fixed and variable rate debt as sources of financing.  At March 31, 2011, we had approximately $526.4 million of total debt outstanding.  After taking into account the effect of our interest rate swap agreement, we had $54.2 million of debt bearing interest at variable rates averaging 3.090%.  Based on variable debt levels at March 31, 2011, a 1.0 percentage point change in interest rates on variable rate debt would result in annual interest expense fluctuating by approximately $0.5 million.

 

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

 

The interest rate swap agreement qualifies for cash flow hedge accounting under Accounting Standards Codification (“ASC”) Topic 815, *Derivatives and Hedging.* Both at inception and on an on-going basis, we must perform an effectiveness test.  In accordance with ASC Topic 815, the fair value of the interest rate swap agreement at March 31, 2011 is included as a cash flow hedge on our balance sheet.  The change in fair value was recorded as a component of accumulated other comprehensive loss, net of tax, on our balance sheet since the instrument was determined to be an effective hedge at March 31, 2011.  We have not recorded any amounts due to ineffectiveness for any periods presented. We expect to reclassify approximately $7.2 million into earnings, net of tax, currently recorded in accumulated other comprehensive loss, in the next 12 months. As a result of our interest rate swap agreement, we expect the effective interest rate on our $230.0 million Floating Rate Notes to be 9.065% through May 2012.

 

**Fuel Costs**

 

We are also exposed to market risks related to changes in the price of gasoline used to fuel our fleet of delivery and sales vehicles.  A hypothetical 10% increase in the first quarter of 2011 average price of unleaded gasoline, assuming gasoline usage levels for the quarter ended March 31, 2011, would lead to an annual increase in fuel costs of approximately $0.4 million.

 

**Other Market Risk**

 

Our pension obligations are also affected by market risk as discussed in Item 7A of Part II of our 2010 Annual Report on Form 10-K.  Continued distress in the financial markets may impact the fair value of debt and equity securities in our pension trust.

 

As of March 31, 2011, we have no other material exposure to market risk.

 

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**Item 4.  Controls and Procedures**

 

(a)           *Evaluation of disclosure controls and procedures*

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934 as amended (the “Exchange Act”)).  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

 

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

 

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**Item 1.    Legal Proceedings**

 

On October 19, 2009, Freedom Medical, Inc. filed a lawsuit against the Company and others in U.S. District Court for the Eastern District of Texas. The federal complaint alleges violation of state and federal antitrust laws, tortuous interference with business relationships, business disparagement and common law conspiracy in connection with the biomedical equipment rental market. Freedom Medical, Inc. is seeking unspecified damages and injunctive relief. While we believe these claims are without merit, and will vigorously defend against them, we are unable at this time to determine the ultimate outcome of this matter or determine the effect it may have on our business, financial condition or results of operations.

 

On February 6, 2011, we and our wholly owned subsidiary, Sunrise Merger Sub, Inc. (“Sunrise Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Emergent Group Inc. (“Emergent Group”), pursuant to which we and Sunrise Merger Sub commenced a tender offer (the “Offer”) to purchase all of the issued and outstanding shares of Emergent Group’s common stock at a purchase price of $8.46 per share in cash, followed by a merger of Sunrise Merger Sub with and into Emergent Group with Emergent Group surviving as a wholly owned subsidiary of the Company (the “Merger”). The Merger was completed on April 1, 2011. Three putative shareholder class action complaints challenging the transactions contemplated by the Merger Agreement were filed on behalf of three separate plaintiffs (collectively, the “Plaintiffs”) in the Superior Court of the State of California in the County of Los Angeles (the “Court”) against Emergent Group, UHS, Sunrise Merger Sub and the individual members of the Emergent Group Board (collectively, the “Defendants”). One was filed on February 22, 2011 by Brian McManus, individually and on behalf of others similarly situated, a second was filed on February 28, 2011 by Bryan Lamb, individually and on behalf of others similarly situated, and the third was filed on March 2, 2011 by Leena Dave, individually and on behalf of others similarly situated. Each complaint alleges, among other things, that the members of the Emergent Group Board breached their fiduciary duties owed to the public shareholders of Emergent Group by attempting to sell Emergent Group by means of an unfair process with preclusive deal protection devices at an unfair price of $8.46 in cash per Share and by entering into the Merger Agreement, approving the Offer and the

 

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proposed Merger, engaging in self dealing and failing to take steps to maximize the value of Emergent Group to its public shareholders. The complaints further allege that Emergent Group, UHS and Sunrise Merger Sub aided and abetted such breaches of fiduciary duties. In addition, the complaints allege that certain provisions of the Merger Agreement unduly restricted Emergent Group’s ability to negotiate with rival bidders. The complaints sought, among other things, declaratory and injunctive relief concerning the alleged fiduciary breaches, injunctive relief prohibiting the defendants from consummating the Merger and other forms of equitable relief.

 

On March 22, 2011, the Court ordered the consolidation of the lawsuits for all purposes, and renamed the consolidated lawsuits “In re Emergent Group Inc. Shareholder Litigation”.  On March 24, 2011, a memorandum of understanding regarding settlement of the consolidated lawsuits (the “MOU”) was agreed to by the Plaintiffs and the Defendants. While the Defendants deny the allegations made in the complaints, they agreed to enter into the MOU to avoid the costs and disruptions of any further litigation and to permit the timely consummation of the Offer and the Merger. The MOU, among other things, provides that Emergent Group will amend its Schedule 14D-9 to include certain supplemental disclosures and that the final settlement agreement concerning the action (the “Settlement Agreement”) will require the Plaintiffs and the Defendants to seek an order enjoining all proceedings in connection with the consolidated lawsuits and any additional actions alleging claims that are released pursuant to the Settlement Agreement. In addition, the MOU provides that the Settlement Agreement will include a release by the Plaintiffs and the settlement class in favor of the Defendants and their related parties from any claims that arose pursuant to or are related to the Offer or the Merger. The Defendants have agreed that Emergent Group or its successor or their respective insurers will pay the Plaintiffs’ attorneys’ fees and expenses as are awarded by the court not to exceed $225,000, subject to court approval of the Settlement Agreement and the consummation of the Offer and the Merger.  The Defendants deny all liability with respect to the facts and claims alleged in the consolidated lawsuits, and specifically deny that any further supplemental disclosure was required under any applicable rule, statute, regulation or law. However, the Defendants considered it desirable that the consolidated lawsuits be settled primarily to avoid the substantial burden, expense, inconvenience and distraction of continued litigation and to fully and finally resolve all of the claims that were or could have been brought in the consolidated lawsuits being settled. In addition, Emergent Group desired to provide additional information to its stockholders at a time and in a manner that would not cause any delay of the Offer or the Merger.

 

In addition to the foregoing, the Company, from time to time, may become involved in litigation arising out of operations in the normal course of business, including the matters discussed in Item 3 of Part I of the 2010 Annual Report on Form 10-K. As of March 31, 2011, we were not a party to any other pending legal proceedings the adverse outcome of which could reasonably be expected to have a material adverse effect on our operating results, financial position or cash flows. See the additional information in Item 1 of Part I, Note 7, Commitments and Contingencies.

 

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

 

**Item 1A.  Risk Factors**

 

Our business is subject to various risks and uncertainties.  Any of the risks discussed elsewhere in this Quarterly Report on Form 10-Q or our other filings with the Securities and Exchange Commission, including the risk factors set forth in our 2010 Annual Report on Form 10-K, could materially adversely affect our business, financial condition or results of operations.

 

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

 

None.

 

**Item 3.    Defaults upon Senior Securities**

 

Not applicable.

 

**Item 5.    Other Information**

 

None.

 

**Item 6.    Exhibits**

 
| **Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                         |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1        |       | Agreement   and Plan of Merger, dated February 6, 2011, among Universal Hospital   Services, Inc., Sunrise Merger Sub, Inc. and Emergent   Group Inc. (incorporated by reference to Exhibit 2.1 to Universal   Hospital Services, Inc.’s Form 8-K filed February 7, 2011). |
|       |       |                                                                                                                                                                                                                                                                                                                    |
| 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

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
| Date:   May 11, 2011 |                                                        |
|---------------------------|-------------------------------------------------------------|
|                      | 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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