**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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

#### ** **

**(MarkOne)**

 

| **x** | **Quarterly  Report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934 for the quarterly period ended March 31, 2008** |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**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.**

(Exactname of registrant as specified in its charter)

 

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

 

**7700 France Avenue South, Suite 275**

**Edina, Minnesota 55435-5228**

(Addressof principal executive offices, including zip code)

 

**(952) 893-3200**

(Registrant’stelephone number, including area code)

 

**NotApplicable**

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

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes  o       No x

 

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

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 

Yes o       No  x

 

Number of shares of commonstock outstanding as of May 1, 2008: 1,000.0

 

 

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** **

**PART I - FINANCIALINFORMATION**

** **

**Item 1. FinancialStatements — Unaudited**

** **

** **

**Universal Hospital Services, Inc.**

** **

**Balance Sheets**

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

*(unaudited)*

* *
| ** **                                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                         | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                                         | ** ** | **(Successor)**    | ** ** | **(Successor)**       | ** ** |
| **Assets**                                                                                                                         | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                    |       |               |       |                  |       |
| Accounts  receivable, less allowance for doubtful accounts of $1,550 at March 31,  2008 and $1,500 at December 31, 2007  |       | $                  | 58,193     |                  | $          | 51,379 |   |
| Inventories                                                                                                                        |       | 4,711              |       | 4,230                 |       |
| Deferred income  taxes                                                                                                             |       | 6,541              |       | 5,636                 |       |
| Other current  assets                                                                                                              |       | 2,480              |       | 2,426                 |       |
| Total current  assets                                                                                                              |       | 71,925             |       | 63,671                |       |
|                                                                                                                               |       |               |       |                  |       |
| Property and equipment, net:                                                                                                       |       |               |       |                  |       |
| Medical  equipment, net                                                                                                            |       | 224,991            |       | 214,336               |       |
| Property and  office equipment, net                                                                                                |       | 17,857             |       | 18,707                |       |
| Total property  and equipment, net                                                                                                 |       | 242,848            |       | 233,043               |       |
|                                                                                                                               |       |               |       |                  |       |
| Other long-term assets:                                                                                                            |       |               |       |                  |       |
| Goodwill                                                                                                                           |       | 282,913            |       | 282,913               |       |
| Other  intangibles, net                                                                                                            |       | 278,468            |       | 282,507               |       |
| Other, primarily  deferred financing costs, net                                                                                    |       | 16,003             |       | 16,618                |       |
| Total assets                                                                                                                       |       | $                  | 892,157    |                  | $          | 878,752 |   |
|                                                                                                                               |       |               |       |                  |       |
| **Liabilities and Shareholders’ Equity**                                                                                      | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                               |       |               |       |                  |       |
| Current portion  of long-term debt                                                                                                 |       | $                  | 2,968      |                  | $          | 3,120 |   |
| Book overdrafts                                                                                                                    |       | 3,203              |       | 3,420                 |       |
| Accounts payable                                                                                                                   |       | 17,176             |       | 16,518                |       |
| Accrued  compensation                                                                                                              |       | 8,791              |       | 13,527                |       |
| Accrued interest                                                                                                                   |       | 14,136             |       | 3,783                 |       |
| Other accrued  expenses                                                                                                            |       | 8,061              |       | 7,645                 |       |
| Total current  liabilities                                                                                                         |       | 54,335             |       | 48,013                |       |
|                                                                                                                               |       |               |       |                  |       |
| Long-term debt, less current portion                                                                                               |       | 505,016            |       | 494,215               |       |
| Pension and other long-term liabilities                                                                                            |       | 1,705              |       | 1,624                 |       |
| Interest rate swap                                                                                                                 |       | 22,676             |       | 14,681                |       |
| Payable to Parent                                                                                                                  |       | 3,084              |       | 2,471                 |       |
| Deferred income taxes                                                                                                              |       | 89,492             |       | 94,053                |       |
|                                                                                                                               |       |               |       |                  |       |
| Commitments and contingencies (Note 6)                                                                                             |       |               |       |                  |       |
|                                                                                                                               |       |               |       |                  |       |
| Shareholders’ equity                                                                                                          |       |               |       |                  |       |
| Common stock,  $0.01 par value; 1,000 shares authorized, issued and outstanding at  March 31, 2008 and December 31, 2007 |       | —             |       | —                |       |
| Additional  paid-in capital                                                                                                        |       | 248,794            |       | 248,794               |       |
| Accumulated  deficit                                                                                                               |       | (19,282            | )          | (16,096               | )          |
| Accumulated  other comprehensive loss                                                                                              |       | (13,663            | )          | (9,003                | )          |
| Total  shareholders’ equity                                                                                                   |       | 215,849            |       | 223,695               |       |
| Total  liabilities and shareholders’ equity                                                                                   |       | $                  | 892,157    |                  | $          | 878,752 |   |

 

Theaccompanying notes are an integral part of the unaudited financial statements.

** **

** **

**2**

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** **

 

**Universal HospitalServices, Inc.**

** **

**Statements of Operations**

*(in thousands)*

(unaudited)

 
| ** **                                                                                                                      | ** ** | **Three**          | ** ** | ** ** | **Three**          | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|--------------------|------------|
| ** **                                                                                                                      | ** ** | **Months**         | ** ** | ** ** | **Months**         | ** ** |
| ** **                                                                                                                      | ** ** | **Ended**          | ** ** | ** ** | **Ended**          | ** ** |
| ** **                                                                                                                      | ** ** | **March 31,** | ** ** | ** ** | **March 31,** | ** ** |
| ** **                                                                                                                      | ** ** | **2008**           | ** ** | ** ** | **2007**           | ** ** |
| ** **                                                                                                                      | ** ** | **(Successor)**    | ** ** | ** ** | **(Predecessor)**  | ** ** |
| **Revenue**                                                                                                                     | ** ** | ** **         | ** ** | ** ** | ** **         | ** ** |
| Medical equipment outsourcing                                                                                                   |       | $                  | 59,327     |       |               | $          | 50,989 |   |
| Technical and professional services                                                                                             |       | 11,876             |       |       | 8,052              |       |
| Medical equipment sales and remarketing                                                                                         |       | 4,241              |       |       | 4,508              |       |
| Total revenues                                                                                                                  |       | 75,444             |       |       | 63,549             |       |
|                                                                                                                            |       |               |       |       |               |       |
| **Cost of Sales**                                                                                                               | ** ** | ** **         | ** ** | ** ** | ** **         | ** ** |
| Cost of medical equipment outsourcing                                                                                           |       | 19,916             |       |       | 16,522             |       |
| Cost of technical and professional services                                                                                     |       | 8,511              |       |       | 5,323              |       |
| Cost of medical equipment sales and remarketing                                                                                 |       | 3,444              |       |       | 3,688              |       |
| Medical equipment depreciation                                                                                                  |       | 15,178             |       |       | 10,262             |       |
| Total costs of  medical equipment outsourcing, technical and professional services and  medical equipment sales and remarketing |       | 47,049             |       |       | 35,795             |       |
| Gross margin                                                                                                                    |       | 28,395             |       |       | 27,754             |       |
|                                                                                                                            |       |               |       |       |               |       |
| Selling, general and administrative                                                                                             |       | 21,957             |       |       | 15,782             |       |
| Transaction and related costs                                                                                                   |       | —             |       |       | 512                |       |
| Operating income                                                                                                                |       | 6,438              |       |       | 11,460             |       |
|                                                                                                                            |       |               |       |       |               |       |
| Interest expense                                                                                                                |       | 11,620             |       |       | 8,082              |       |
| Income (loss)  before income taxes                                                                                              |       | (5,182             | )          |       | 3,378              |       |
|                                                                                                                            |       |               |       |       |               |       |
| Provision (benefit) for income taxes                                                                                            |       | (1,996             | )          |       | 188                |       |
| Net income  (loss)                                                                                                              |       | $                  | (3,186     | )          |               | $          | 3,190 |   |
|                                                                                                                            |       |               |       |       |               |       |
| The accompanying notes  are an integral part of the unaudited financial statements.                                             |       |

** **

** **

**3**

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** **

 

**UniversalHospital Services, Inc.**

 

**Statementsof Cash Flows**

*(inthousands)*

(unaudited)

 
| ** **                                                                                | ** ** | **Three**          | ** ** | ** ** | **Three**          | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|--------------------|------------|
| ** **                                                                                | ** ** | **Months**         | ** ** | ** ** | **Months**         | ** ** |
| ** **                                                                                | ** ** | **Ended**          | ** ** | ** ** | **Ended**          | ** ** |
| **(in thousands)**                                                                        | ** ** | **March 31,** | ** ** | ** ** | **March 31,** | ** ** |
| ** **                                                                                | ** ** | **2008**           | ** ** | ** ** | **2007**           | ** ** |
| ** **                                                                                | ** ** | **(Successor)**    | ** ** | ** ** | **(Predecessor)**  | ** ** |
| Cash flows from operating activities:                                                     |       |               |       |       |               |       |
| Net income  (loss)                                                                        |       | $                  | (3,186     | )          |               | $          | 3,190 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |               |       |       |               |       |
| Depreciation                                                                              |       | 17,214             |       |       | 12,060             |       |
| Amortization of  intangibles and deferred financing costs                                 |       | 4,642              |       |       | 860                |       |
| Provision for  doubtful accounts                                                          |       | 167                |       |       | 157                |       |
| Provision for  inventory obsolescence                                                     |       | 112                |       |       | 163                |       |
| Non-cash  stock-based compensation expense                                                |       | 612                |       |       | 426                |       |
| Loss (gain) on  sales and disposals of equipment                                          |       | 184                |       |       | (127               | )          |
| Deferred income  taxes                                                                    |       | (2,131             | )          |       | 129                |       |
| Changes in  operating assets and liabilities:                                             |       |               |       |       |               |       |
| Accounts  receivable                                                                      |       | (6,969             | )          |       | (4,002             | )          |
| Inventories                                                                               |       | (593               | )          |       | (766               | )          |
| Other operating  assets                                                                   |       | (52                | )          |       | 281                |       |
| Accounts payable                                                                          |       | 2,784              |       |       | 1,169              |       |
| Other accrued  expenses                                                                   |       | 6,114              |       |       | 5,746              |       |
| Net cash  provided by operating activities                                                |       | 18,898             |       |       | 19,286             |       |
| Cash flows from investing activities:                                                     |       |               |       |       |               |       |
| Medical  equipment purchases                                                              |       | (28,844            | )          |       | (20,489            | )          |
| Property and  office equipment purchases                                                  |       | (1,057             | )          |       | (1,003             | )          |
| Proceeds from  disposition of property and equipment                                      |       | 870                |       |       | 430                |       |
| Other                                                                                     |       | —             |       |       | (1,000             | )          |
| Net cash used in  investing activities                                                    |       | (29,031            | )          |       | (22,062            | )          |
| Cash flows from financing activities:                                                     |       |               |       |       |               |       |
| Proceeds under  amended credit agreement                                                  |       | —             |       |       | 25,900             |       |
| Payments under  amended credit agreement                                                  |       | —             |       |       | (22,650            | )          |
| Proceeds under  senior secured credit facility                                            |       | 30,050             |       |       | —             |       |
| Payments under  senior secured credit facility                                            |       | (18,725            | )          |       | —             |       |
| Payments of  principal under capital lease obligations                                    |       | (915               | )          |       | (809               | )          |
| Payment of  deferred financing costs                                                      |       | (61                | )          |       | —             |       |
| Change in book  overdrafts                                                                |       | (216               | )          |       | 330                |       |
| Proceeds from  issuance of common stock                                                   |       | —             |       |       | 5                  |       |
| Net cash  provided by financing activities                                                |       | 10,133             |       |       | 2,776              |       |
| Net change in  cash and cash equivalents                                                  |       | —             |       |       | —             |       |
| Cash and cash equivalents at the beginning of period                                      |       | —             |       |       | —             |       |
| Cash and cash equivalents at the end of period                                            |       | $                  | —     |       |               | $          | — |   |
|                                                                                      |       |               |       |       |               |       |
| Supplemental cash flow information:                                                       |       |               |       |       |               |       |
| Interest paid                                                                             |       | $                  | 661        |       |               | $          | 1,097 |   |
| Income taxes  paid (received)                                                             |       | $                  | 23         |       |               | $          | 26 |   |
| Non-cash activities:                                                                      |       |               |       |       |               |       |
| Medical  equipment purchases included in accounts payable                                 |       | $                  | 6,886      |       |               | $          | 9,832 |   |
| Deferred  financing costs included in accounts payable                                    |       | $                  | 8          |       |               | $          | — |   |
| Capital lease  additions                                                                  |       | $                  | 239        |       |               | $          | 461 |   |
|                                                                                      |       |               |       |       |               |
| The accompanying notes  are an integral part of the unaudited financial statements.       |       |

** **

 

4

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**Universal Hospital Services, Inc.**

 

**NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS**

 

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

 

OnMay 31, 2007, UHS Holdco, Inc. (“Parent”) acquired all of theoutstanding capital stock of Universal Hospital Services, Inc. (the “Company”,“we”, “our” or “us”) for approximately $712.0 million in cash less debt,tender premium and accrued interest and capitalized leases per the terms of theAgreement and Plan of Merger, dated as of April 15, 2007, by and among theCompany, Parent and Parent’s wholly owned Subsidiary, Merger Sub, and relateddocuments, which we collectively refer to as the “Transaction” or the “Acquisition.”

 

Althoughthe Company continued as the surviving legal entity after the Acquisition, theaccompanying information presents our results preceding the Acquisition (“predecessor”)and the periods following the Acquisition (“successor”).  All references to the quarter ended March 31,2008 refer to our successor results.  Allreferences to the quarter ended March 31, 2007 refer to our predecessorresults.

 

Theinterim financial statements included in this Quarterly Report on Form 10-Qhave been prepared by the Company without audit, pursuant to the rules andregulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted, pursuant to such rules and regulations.  These condensed financial statements shouldbe read in conjunction with the financial statements and related notes includedin the Company’s 2007 Annual Report on Form 10-K/A, Amendment No. 1(the “2007 Form 10-K/A”) filed with the Securities and Exchange Commission(the “SEC”).

 

Theinterim financial statements presented herein as of March 31, 2008,reflect, in the opinion of management, all adjustments necessary for a fairpresentation of the financial position and the results of operations and cashflows for the periods presented.  Theseadjustments are all of a normal, recurring nature.  The results of operations for any interimperiod are not necessarily indicative of results for the full year.

 

TheDecember 31, 2007 balance sheet amounts were derived from auditedfinancial statements, but do not include all disclosures required by accountingprinciples generally accepted in the United States of America.

 

Weare required to make estimates and assumptions about future events in preparingfinancial statements in conformity with generally accepted accountingprinciples (“GAAP”).  These estimates andassumptions affect the amounts of assets, liabilities, revenues and expenses atthe date of the unaudited condensed consolidated financial statements.  While we believe that our past estimates andassumptions have been materially accurate, our current estimates are subject tochange if different assumptions as to the outcome of future events aremade.  We evaluate our estimates and judgmentson an ongoing basis and predicate those estimates and judgments on historicalexperience and on various other factors that we believe to be reasonable underthe circumstances.  We make adjustmentsto our assumptions and judgments when facts and circumstances dictate.  Since future events and their effects cannotbe 

 

 

5

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determinedwith absolute certainty, actual results may differ from the estimates used inpreparing the accompanying unaudited condensed financial statements.

 

Adescription of our critical accounting policies is included in our 2007 Form 10-K/A.

 

Certainprior period amounts have been reclassified to conform to current periodpresentation.  We previously includedtransaction and related costs as a component of selling, general andadministrative expense.  Thereclassifications had no impact on gross margin, operating income , incomebefore income taxes or net income as previously reported.

 

**2.****                                     ****Comprehensive Income (Loss)**

 

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

 
| **(in thousands)**                 | ** ** | **Three Months**   | ** ** | ** ** | **Three Months**   | ** ** |
|------------------------------------|------------|--------------------|------------|------------|--------------------|------------|
| ** **                         | ** ** | **Ended**          | ** ** | ** ** | **Ended**          | ** ** |
| ** **                         | ** ** | **March 31,** | ** ** | ** ** | **March 31,** | ** ** |
| ** **                         | ** ** | **2008**           | ** ** | ** ** | **2007**           | ** ** |
| ** **                         | ** ** | **(Successor)**    | ** ** | ** ** | **(Predecessor)**  | ** ** |
| Net income (loss)                  |       | $                  | (3,186     | )          |               | $          | 3,190 |   |
| Unrealized loss on cash flow hedge |       | (4,660             | )          |       | —             |       |
| Comprehensive  income (loss)       |       | $                  | (7,846     | )          |               | $          | 3,190 |   |

 

**3.****                                     ****Recent Accounting Pronouncements**

 

***Standards Adopted***

 

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Optionfor Financial Assets and Financial Liabilities, which permits entities to electto measure many financial instruments and certain other items at fair valuethat are not currently required to be measured at fair value.  This election is irrevocable.  We adopted the provisions of SFAS No. 159on January 1, 2008.  We did notelect the fair value option for any assets or liabilities.

 

InSeptember 2006, the FASB issued SFAS No. 157, Fair ValueMeasurements, which establishes a consistent framework for measuring fair valueand expands disclosures on fair value measurements. SFAS No. 157 waseffective for the Company starting in fiscal 2008 with respect to financialassets and liabilities. The impact of the initial adoption of SFAS No. 157in 2008 had no impact on our financial statements.

 

Pursuantto the provisions of SFAS No. 157, the Company uses significant otherobservable inputs to value the derivative instrument used to hedge interestrate volatility. The fair market value, which is included as an interest rateswap liability on our balance sheets, follows:

 

 

6

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| **(in thousands)**    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------|------------|--------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **            | ** ** | **(Successor)**    | ** ** | **(Successor)**       | ** ** |
| Loss on swap contract |       | $                  | 22,676     |                  | $          | 14,681 |   |
|                       |            |                    |            |                       |            |  |  |

 

Withrespect to non-financial assets and liabilities, SFAS No. 157 is effectivefor the Company starting in fiscal 2009. We have not determined the impact, ifany, the adoption of this statement as it pertains to non-financial assets andliabilities will have on our financial statements.

 

***Standards Issued Not Yet Adopted***

 

InMarch 2008, the FASB issued SFAS No. 161, Disclosures aboutDerivative Instruments and Hedging Activities. This statement expandsdisclosures but does not change accounting for derivative instruments andhedging activities.  Pursuant to thetransition provisions of the Statement, the company will adopt SFAS No. 161in fiscal year 2009 and will present the required disclosures in the prescribedformat on a prospective basis. This Statement will not impact the financialstatements as it is disclosure-only in nature.

 

InDecember 2007, the FASB issued SFAS No. 141(R), BusinessCombinations, which establishes principles and requirements for how an acquirerin a business combination recognizes and measures in its financial statementsthe identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest; recognizes and measures the goodwill acquired in thebusiness combination or a gain from a bargain purchase; and determines whatinformation to disclose to enable users of the financial statements to evaluatethe nature and financial effects of the business combination. SFAS No. 141(R) isto be applied prospectively to business combinations for which the acquisitiondate is on or after the beginning of an entity’s fiscal year that begins on orafter Dec. 15, 2008. Beginning January 1, 2009, we will apply theprovisions of SFAS No. 141(R) to our accounting for applicablebusiness combinations.

 

**4.****                                     ****Stock-BasedCompensation**

 

***Successor***

 

Duringthe three months ended March 31, 2008, activity under Parent’s 2007 StockOption Plan was as follows:

 

 

7

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| **(in thousands except exercise  price and years)** | ** ** | **Number of   Options** | ** ** | **Weighted   average   exercise price** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|
| Outstanding at December 31, 2007               |       | 36,490                  |       | $                                       | 1.00       |   |
| Granted                                             |       | —                  |       |                                    |       |
| Exercised                                           |       | —                  |       |                                    |       |
| Forfeited or  expired                               |       | (332                    | )          | $                                       | 1.00       |   |
|                                                |       |                    |       |                                    |       |
| Outstanding at March 31, 2008                  |       | 36,158                  |       | $                                       | 1.00       |   |
|                                                |       |                    |       |                                    |       |
| Exercisable at March 31, 2008                  |       | 5,862                   |       | $                                       | 1.00       |   |
|                                                |       |                    |       |                                    |       |
| Remaining authorized options available for issue    |       | 7,747                   |       |                                    |       |

 

Although Parent grants stockoptions, the Company recognizes compensation expense related to these optionssince the services are performed for its benefit.  For the three months ended March 31,2008 we recognized non-cash stock compensation expense of $0.6 million which isprimarily included in selling, general and administrative expenses.  At March 31, 2008, unearned non-cashstock-based compensation that we expect to recognize as expense over the next4.8 years totals approximately $11.0 million, net of our estimated forfeituresof 3.00%.

 

***Predecessor***

 

Duringthe quarter ended March 31, 2007, we recognized non-cash stockcompensation expense related to our 2003 Stock Option Plan of $0.4 million,which is primarily included in selling, general and administrative expense.

 

**5.****                                     ****Long-TermDebt**

 

Long-term debt consists of the following:

 
| ** **                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(in thousands)**                      | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                              | ** ** | **(Successor)**    | ** ** | **(Successor)**       | ** ** |
| PIK Toggle Notes                        |       | $                  | 230,000    |                  | $          | 230,000 |   |
| Floating Rate Notes                     |       | 230,000            |       | 230,000               |       |
| Senior secured credit facility          |       | 30,800             |       | 19,475                |       |
| 10.125% Senior Notes                    |       | 9,945              |       | 9,945                 |       |
| Capital lease obligations               |       | 7,239              |       | 7,915                 |       |
|                                    |       | 507,984            |       | 497,335               |       |
| Less: Current portion of long-term debt |       | (2,968             | )          | (3,120                | )          |
| Total long-term  debt                   |       | $                  | 505,016    |                  | $          | 494,215 |   |

 

***PIK Toggle Notes. ***On May 31, 2007, MergerSub issued $230.0 million aggregate original principal amount of 8.50% / 9.25%PIK Toggle Notes under the Second Lien Senior Indenture dated as of May 31,2007, between us and Wells Fargo Bank, National Association, as trustee (“SecondLien Senior

 

 

8

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Indenture”).  At the closing of the Transaction, as thesurviving corporation in the Acquisition, we assumed all the obligations ofMerger Sub under the Second Lien Senior Indenture.

 

Forany interest payment period through June 1, 2011, the Company may, at itsoption, elect to pay interest on the PIK Toggle Notes entirely in cash (“CashInterest”), entirely by increasing the principal amount of the outstanding PIKToggle Notes, by issuing additional PIK Toggle Notes (“PIK Interest”) or 50%Cash Interest and 50% PIK Interest.  CashInterest on the PIK Toggle Notes accrues at the rate of 8.50% per annum. PIK Interest on the PIK Toggle Notes accrues at the rate of 9.25% perannum.  After June 1, 2011, the Company is required to make allinterest payments on the PIK Toggle Notes entirely as Cash Interest.  AllPIK Toggle Notes mature on June 1, 2015.  Interest on the PIK Toggle Notes is payablesemiannually in arrears on each June 1 and December 1, commencing on December 1,2007.  As of March 31, 2008, weintend to make future payments in the form of Cash Interest.

 

Wemay 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 theapplicable premium (as defined by the Second Lien Senior Indenture), plusaccrued and unpaid interest, if any, to the date of redemption.  In addition, on or before June 1, 2010,we may redeem up to 40% of the aggregate principal amount of the PIK ToggleNotes with the net proceeds of certain equity offerings.

 

Exceptas noted above, we cannot redeem the PIK Toggle Notes until June 1,2011.  Thereafter we may redeem some orall of the PIK Toggle Notes at the redemption prices (expressed as percentagesof principal amount) set forth below plus accrued and unpaid interest, if any,on the PIK Toggle Notes redeemed, to the applicable redemption date, ifredeemed during the twelve-month period beginning on June 1 of the yearsindicated below, subject to the rights of noteholders:

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

 

Uponthe occurrence of a change of control, each holder of the PIK Toggle Notes hasthe right to require the Company to repurchase some or all of such holder’s PIKToggle Notes at a price in cash equal to 101% of the aggregate principal amountthereof plus accrued and unpaid interest, and PIK Interest, if any, to the dateof purchase.

 

***Floating Rate Notes. ***On May 31, 2007, MergerSub issued $230.0 million aggregate original principal amount of Floating RateNotes under the Second Lien Senior Indenture. Interest on the Floating Rate Notes is reset for each semi-annualinterest period and is calculated at the current LIBOR rate plus 3.375%.  At March 31, 2008, our LIBOR-based ratewas 8.288%, which includes the credit spread noted above.  Interest on the Floating Rate Notes ispayable semiannually, in arrears, on each June 1 and December 1.  At the closing of the Transaction, as thesurviving corporation in the Acquisition, we assumed all the obligations ofMerger Sub under the Second Lien Senior Indenture.  The Floating RateNotes mature on June 1, 2015.

 

Wemay redeem some or all of the Floating Rate Notes at any time prior to June 1,2009, at a price equal to 100% of the principal amount thereof, plus theapplicable premium (as defined by the Second Lien Senior Indenture), plusaccrued and unpaid interest, if any, to the date of redemption.  In addition, on or 

 

 

9

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beforeJune 1, 2009, we may redeem up to 40% of the aggregate principal amount ofthe Floating Rate Notes with the net proceeds of certain equity offerings.

 

Exceptas noted above, we cannot redeem the Floating Rate Notes until June 1,2009.  Thereafter we may redeem some orall of the Floating Rate Notes at the redemption prices (expressed aspercentages of principal amount) set forth below plus accrued and unpaidinterest, if any, on the Floating Rate Notes redeemed, to the applicableredemption date, if redeemed during the twelve-month period beginning on June 1of the years indicated below, subject to the rights of noteholders:

 
| **Year**             | ** ** | **Percentage** |
|----------------------|------------|----------------|
| 2009                 |       | 102.000%       |
| 2010                 |       | 101.000%       |
| 2011  and thereafter |       | 100.000%       |

 

Uponthe occurrence of a change of control, each holder of the Floating Rate Noteshas the right to require the Company to repurchase some or all of such holder’sFloating Rate Notes at a price in cash equal to 101% of the aggregate principalamount thereof plus accrued and unpaid interest, if any, to the date ofpurchase.

 

***Interest Rate Swap.***In June 2007we entered into an interest rate swap agreement for $230.0 million, which hasthe effect of converting our $230.0 million of Floating Rate Notes to fixedinterest rates.  The effective date forthe swap agreement is December 2007; the expiration date is May 2012.

 

Theinterest rate swap agreement qualifies for cash flow hedge accounting underSFAS 133, Accounting for Derivative Instruments and Hedging Activities.  Both at inception and on an on-going basis wemust perform an effectiveness test.  Inaccordance with SFAS 133, the fair value of the swap agreement at March 31,2008 is included as an interest rate swap liability on our balance sheet of$22.7 million.  The change in fair valuewas recorded as a component of accumulated other comprehensive loss, net oftax, on our balance sheet since the instrument was determined to be an effectivehedge at March 31, 2008.  We do notexpect any amounts to be reclassified into current earnings in the future dueto ineffectiveness.

 

Asa result of our swap agreement, we expect the effective interest rate on our$230.0 million Floating Rate Notes to be 9.065% from December 2007 throughMay 2012.

 

***Second Lien Senior Indenture.***  Our PIK Toggle Notes and Floating Rate Notes(collectively, the “Notes”) are guaranteed, jointly and severally, on a secondpriority senior secured basis, by certain of our future domesticsubsidiaries.  We do not currently haveany subsidiaries.  The Notes are oursecond priority senior secured obligations and rank:

 

·                  equal in rightof payment with all of our existing and future unsecured and unsubordinatedindebtedness, and effectively senior to any such unsecured indebtedness to theextent of the value of collateral;

·                  senior in rightof payment to all of our and our guarantor’s existing and future subordinatedindebtedness;

 

 

10

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·                  effectivelyjunior to our senior secured credit facility and other obligations that aresecured by first priority liens on the collateral securing the Notes or thatare secured by a lien on assets that are not part of the collateral securingthe Notes, in each case, to the extent of the value of such collateral orassets; and

·                  structurallysubordinated to any indebtedness and other liabilities (including tradepayables) of any of our future subsidiaries that are not guarantors.

 

TheSecond Lien Senior Indenture governing the Notes contains covenants that limitour and our guarantors’ ability, subject to certain definitions and exceptions,and certain of our future subsidiaries’ ability to:

 

·                  incur additional indebtedness;

·                  pay cash dividends or distributions on ourcapital stock or repurchase our capital stock or subordinated debt;

·                  issue redeemable stock or preferred stock;

·                  issue stock of subsidiaries;

·                  make certain investments;

·                  transfer or sell assets;

·                  create liens on our assets to secure debt;

·                  enter into transactions with affiliates; and

·                  merge or consolidate with another company.

 

***Senior Secured Credit Facility. ***In connectionwith the Transaction, the Company and Parent entered into a new first liensenior secured asset-based revolving credit facility providing for loans in anamount of up to $135.0 million pursuant to a credit agreement, dated as of May 31,2007, with a group of financial institutions (the “senior secured creditfacility”). The senior secured credit facility is available for working capital andgeneral corporate purposes, including permitted investments, capitalexpenditures and debt repayments, on a fully revolving basis, subject to theterms and conditions set forth in the credit documents in the form of revolvingloans, swing line loans and letters of credit.

 

Thesenior secured credit facility provides financing of up to $135.0 million,subject to a borrowing base calculated on the basis of certain of our eligibleaccounts receivable, inventory and equipment. As of March 31, 2008, we had $101.9 million of availability underthe senior secured credit facility based on a borrowing base of $135.0 million,less borrowings of $30.8 million, and after giving effect to $2.3 million usedfor letters of credit.

 

Thesenior secured credit facility matures on May 31, 2013.  Our obligations under the senior securedcredit facility are secured by a first priority security interest insubstantially all of our assets, excluding a pledge of our and Parent’s capitalstock, any joint ventures and certain other exceptions.  Our obligations under the senior securedcredit facility are unconditionally guaranteed by Parent.

 

Thesenior secured credit facility provides that we have the right at any time torequest up to $50.0 million of additional commitments, but the lenders areunder no obligation to provide any such additional commitments, and anyincrease in commitments will be subject to customary conditions precedent, suchas an absence of any default or events of default. If we were to request anysuch additional commitments and the existing lenders or new lenders were toagree to provide such 

 

 

11

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commitments,the senior secured credit facility size could be increased to up to$185.0 million, but our ability to borrow would still be limited by theamount of the borrowing base.

 

Borrowings under the seniorsecured credit facility accrue interest:

 

·                  at a per annumrate equal to 0.75% above the rate announced from time to time by the agent asthe “prime rate” payable quarterly in arrears; and

·                  at a per annumrate equal to 1.75% above the adjusted LIBOR rate used by the agent payablemonthly in arrears.

 

At March 31, 2008, our prime-based ratewas 6.000% and our LIBOR-based rate was 4.869%, each of which include thecredit spreads noted above.

 

Overdueprincipal, interest and other amounts will bear interest at a rate per annumequal to 2% in excess of the applicable interest rate.  The applicable margins of the senior securedcredit facility will be subject to adjustment based upon leverage ratios.  The senior secured credit facility alsoprovides for customary letter of credit fees, closing fees, unused line feesand other fees.

 

Thesenior secured credit facility requires our compliance with various affirmativeand negative covenants.  Pursuant to theaffirmative covenants, we and Parent will, among other things, deliverfinancial and other information to the agent, provide notice of certain events(including events of default), pay our obligations, maintain our properties,maintain the security interest in the collateral for the benefit of the agentand the lenders and maintain insurance.

 

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

 

·                  incur indebtedness;

·                  create or permit liens;

·                  declare or pay dividends and certain otherrestricted payments;

·                  consolidate, merge or recapitalize;

·                  acquire or sell assets;

·                  make certain investments, loans or otheradvances;

·                  enter into transactions with affiliates;

·                  change our line of business; and

·                  enter into hedging transactions.

 

The senior secured creditfacility also contains a financial covenant that is calculated if the availableborrowing capacity is less than $15.0 million for a certain period.  Such covenant consists of a minimum ratio oftrailing four-quarter Earnings Before Interest, Tax, Depreciation andAmortization (“EBITDA”) to cash interest expense, as defined in the creditagreement dated May 31, 2007.

 

The senior secured creditfacility specifies certain events of default, including among others, failureto pay principal, interest or fees, violation of covenants, inaccuracy of representationsor warranties, bankruptcy events, certain ERISA-related events, cross-defaultsto other material agreements, change of control events, and invalidity ofguarantees or security documents.  Someevents of default will be triggered only after certain cure periods haveexpired, or will provide for materiality thresholds.  If such 

 

 

12

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a default occurs, thelenders under the senior secured credit facility would be entitled to takevarious actions, including all actions permitted to be taken by a securedcreditor and the acceleration of amounts due under the senior secured creditfacility.

 

***10.125% Senior Notes.***  The 10.125% SeniorNotes (“Senior Notes”) mature on November 1, 2011.  Interest on the Senior Notes accrues at therate of 10.125% per annum and is payable semiannually on each May 1 and November 1.

 

On May 17, 2007, we entered into a supplementalindenture to our Indenture governing our Senior Notes, dated as of October 17,2003, between the Company and Wells Fargo Bank, National Association, astrustee.  The Indenture governs the termsof the Senior Notes.  The supplementalindenture amended our Indenture.

 

The amendments set forth in the supplemental indenture(the “Amendments”) became operative after the Company purchased all of itsSenior Notes validly tendered and not withdrawn pursuant to its tender offerand consent solicitation.  As of May 11,2007, holders of Senior Notes representing an amount greater than a majority ofthe principal amount of outstanding Senior Notes had validly tendered theirSenior Notes and consented to the execution of the supplemental indenture.  The Amendments eliminated from the Indenture:

 

·                  requirements to file reports with the SEC;

·                  requirements to pay taxes;

·                  limitations on the Company to use defensesagainst usury;

·                  the limitation on restricted payments;

·                  the limitation on payment of dividends andother payment restrictions affecting subsidiaries;

·                  limitations on incurrence of indebtedness andissuance of preferred stock;

·                  limitations on asset sales and requirementsto repurchase the Senior Notes with excess proceeds thereof;

·                  limitations on affiliate transactions;

·                  limitations on liens;

·                  limitations on the businesses in which theCompany and its subsidiaries may engage;

·                  requirements to preserve corporate existence;

·                  requirements to purchase the Senior Notesupon a change of control;

·                  limitation on the issuance of guarantees ofindebtedness;

·                  limitations on the payments for consent fromholders of the Senior Notes;

·                  limitations on merger, consolidation and saleof assets with respect to the Company;

·                  limitations on merger or consolidation of, ortransfer of assets of, guarantors; and

·                  certain events of default.

 

 

13

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The Company has the right to redeem some or all of theremaining $9.9 million of Senior Notes at the redemption prices (expressed as apercentage of principal amount) set forth below, plus accrued and unpaidinterest, if any, if redeemed during the twelve-month period beginning on November 1of the years indicated below, subject to the rights of the noteholders:

 
| **Year**            | ** ** | **Percentage** | ** ** |
|---------------------|------------|----------------|------------|
| 2007                |       | 105.063        | %          |
| 2008                |       | 102.531        | %          |
| 2009 and thereafter |       | 100.000        | %          |

 

**6.****                                     ****Commitmentsand Contingencies**

 

The Company, in the ordinary course of business, couldbe subject to liability claims related to employees and the equipment that itrents and services.  Asserted claims aresubject to many uncertainties and the outcome of individual matters is notpredictable with assurance.  While theultimate resolution of these actions may have an impact on the Company’sfinancial results for a particular reporting period, management believes thatany such resolution would not have a material adverse effect on the financialposition, results of operations or cash flows of the Company.

 

**7.****                                     ****RelatedParty Transaction**

 

In the ordinary course of business, we entered into anoperating lease for our Minneapolis, Minnesota district office with RyanCompanies US, Inc. (“Ryan”), which began on May 1, 2007.  On November 29, 2007 we added a newmember to our board of directors who is also a director of Ryan.  During the first quarter of 2008 we made rentpayments to a Ryan affiliate totaling $78,000.

 

**8.****                                     ****SegmentInformation**

 

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

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

 
| ** **                     | ** ** | **Three Months  Ended  March 31,** | ** ** | ** ** | **Three Months  Ended  March 31,** | ** ** |
|--------------------------------|------------|-----------------------------------------|------------|------------|-----------------------------------------|------------|
| ** **                     | ** ** | **2008**                                | ** ** | ** ** | **2007**                                | ** ** |
| ** **                     | ** ** | **(Successor)**                         | ** ** | ** ** | **(Predecessor)**                       | ** ** |
| Revenues                       |       | $                                       | 59,327     |       |                                    | $          | 50,989 |   |
| Cost of revenue                |       | 19,916                                  |       |       | 16,522                                  |       |
| Medical equipment depreciation |       | 15,178                                  |       |       | 10,262                                  |       |
| Gross margin                   |       | $                                       | 24,233     |       |                                    | $          | 24,205 |   |

 

 

14

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

 
| ** **      | ** ** | **Three Months  Ended  March 31,** | ** ** | ** ** | **Three Months  Ended  March 31,** | ** ** |
|-----------------|------------|-----------------------------------------|------------|------------|-----------------------------------------|------------|
| ** **      | ** ** | **2008**                                | ** ** | ** ** | **2007**                                | ** ** |
| ** **      | ** ** | **(Successor)**                         | ** ** | ** ** | **(Predecessor)**                       | ** ** |
| Revenues        |       | $                                       | 11,876     |       |                                    | $          | 8,052 |   |
| Cost of revenue |       | 8,511                                   |       |       | 5,323                                   |       |
| Gross margin    |       | $                                       | 3,365      |       |                                    | $          | 2,729 |   |

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

 
| ** **      | ** ** | **Three Months  Ended  March 31,** | ** ** | ** ** | **Three Months  Ended  March 31,** | ** ** |
|-----------------|------------|-----------------------------------------|------------|------------|-----------------------------------------|------------|
| ** **      | ** ** | **2008**                                | ** ** | ** ** | **2007**                                | ** ** |
| ** **      | ** ** | **(Successor)**                         | ** ** | ** ** | **(Predecessor)**                       | ** ** |
| Revenues        |       | $                                       | 4,241      |       |                                    | $          | 4,508 |   |
| Cost of revenue |       | 3,444                                   |       |       | 3,688                                   |       |
| Gross margin    |       | $                                       | 797        |       |                                    | $          | 820 |   |

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

 
| ** **                          | ** ** | **Three Months  Ended  March 31,** | ** ** | ** ** | **Three Months  Ended  March 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **2008**                                | ** ** | ** ** | **2007**                                | ** ** |
| ** **                          | ** ** | **(Successor)**                         | ** ** | ** ** | **(Predecessor)**                       | ** ** |
| Total gross margin                  |       | $                                       | 28,395     |       |                                    | $          | 27,754 |   |
| Selling, general and administrative |       | 21,957                                  |       |       | 15,782                                  |       |
| Transaction and related costs       |       | —                                  |       |       | 512                                     |       |
| Interest expense                    |       | 11,620                                  |       |       | 8,082                                   |       |
| Income (loss)  before income tax    |       | $                                       | (5,182     | )          |                                    | $          | 3,378 |   |

 

**9.****                                     ****PensionPlan**

 

The components of netperiodic pension costs are as follows:

15

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| * *                       | ** ** | **Three Months  Ended  March 31,** | ** ** | ** ** | **Three Months  Ended  March 31,** | ** ** |
|--------------------------------|------------|-----------------------------------------|------------|------------|-----------------------------------------|------------|
| ** **                     | ** ** | **2008**                                | ** ** | ** ** | **2007**                                | ** ** |
| **(in thousands)**             | ** ** | **(Successor)**                         | ** ** | ** ** | **(Predecessor)**                       | ** ** |
| Interest cost                  |       | $                                       | 260        |       |                                    | $          | 253 |   |
| Expected return on plan assets |       | (308                                    | )          |       | (271                                    | )          |
| Recognized net actuarial loss  |       | —                                  |       |       | 44                                      |       |
| Service cost                   |       | —                                  |       |       | —                                  |       |
| Net Periodic  cost (benefit)   |       | $                                       | (48        | )          |                                    | $          | 26 |   |

 

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

 

**10.****                              ****IncomeTaxes**

 

TheCompany moved from a net deferred tax asset position prior to the Transaction,where tax expense related primarily to minimum state taxes due to valuationallowances established for net operating losses not recognized, to a netdeferred tax liability position after the Transaction.  Management believes the valuation allowanceis no longer necessary as we determined that it was more likely than not thatthe benefits of these deferred tax assets will be realized.

 

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

** **

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

** **

**BUSINESS OVERVIEW**

 

**OurCompany**

 

UniversalHospital Services, Inc. (“we”, “our”, the “Company”, or “UHS”) is theleading nationwide provider of medical equipment outsourcing and lifecycleservices to the United States health care industry. Our customers includenational, regional and local acute care hospitals, alternate site providers(such as nursing homes and home care providers) and medical equipmentmanufacturers.  Our diverse medicalequipment outsourcing customer base includes more than 3,925 acute carehospitals and approximately 3,650 alternate site providers.  We also have relationships with more than 200medical equipment manufacturers and many of the nation’s largest grouppurchasing organizations (“GPOs”) and integrated delivery networks (“IDNs”).  All of our services leverage our nationwidenetwork of offices and our more than 65 years of experience managing andservicing all aspects of medical equipment. Our fees are paid directly by our customers rather than from directreimbursement from third-party payors, such as private insurers or Medicare andMedicaid.  We commenced operations in1939, originally incorporated in Minnesota in 1954 and reincorporated inDelaware in 2001.

** **

**On May 31,2007, UHS Holdco, Inc. (“Parent”) acquired all of the outstanding capitalstock of the Company for approximately $712.0 million in cash less debt,tender premium and accrued interest and capitalized leases per the terms of theAgreement and Plan of Merger, dated as of April 15, 2007, by and**

 

16

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**among theCompany, Parent and Parent’s wholly owned subsidiary, Merger Sub, and relateddocuments, which we collectively refer to as the “Transaction” or the “Acquisition.”**

** **

**Althoughthe Company continued as the surviving legal entity after the Acquisition, theaccompanying information presents our results preceding the Acquisition (“predecessor”)and the periods following the Acquisition (“successor”).  All references to the three months ended March 31,2008 refer to our successor results.  Allreferences to the three months ended March 31, 2007 refer to ourpredecessor results.**

** **

**As thenation’s leading medical equipment lifecycle services company, we design andoffer comprehensive solutions for our customers that reduce capital andoperating expenses and increase equipment and staff productivity and supportimproved patient safety and outcomes.**

** **

 

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

 

Wepresent the non-GAAP financial measure gross margin, before purchase accountingadjustments, because we use this measure to monitor and evaluate theperformance of our business and believe that the presentation of this measurewill enhance users’ ability to analyze trends in our business and evaluate ourperformance relative to other companies in our industry.  Areconciliation of the non-GAAP financial measure to its equivalent GAAP measureis included in the respective tables.

 

**MedicalEquipment Outsourcing Segment - Manage & Utilize**

 

Ourflagship business is our Medical Equipment Outsourcing segment, which accountedfor $59.3 million, or approximately 78.6% of our revenues for the three monthsended March 31, 2008 and $51.0 million, or approximately 80.2% of ourrevenues for the three months ended March 31, 2007.  As of March 31, 2008, we owned andmanaged approximately 222,000 pieces of medical equipment, primarily in thecategories of respiratory therapy, newborn care, critical care, patient monitors,and specialty beds 

 

17

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andpressure area management.  Historically,we have purchased and owned directly the equipment used in our medicalequipment outsourcing programs.  In thelast year, the Company entered into revenue sharing agreements with keymanufacturers of equipment where the manufacturers retain ownership of theequipment, but UHS takes possession and manages the rental of the equipment tocustomers.  The Company may enter intomore of such arrangements in the future. Such arrangements are less capital intensive for the Company.

 

Weperform regular and preventative maintenance on the equipment and retaindetailed records for documentation.  Weare responsible for all repairs, testing and cleaning of the equipment. Ourservice includes prompt replacement of any non-working equipment and theflexibility to upgrade technology as a customer’s product of choicechanges.  We have three primaryoutsourcing programs:

 

·                  Supplemental (Peak Needs) Outsourcing;

·                  Long-Term Outsourcing; and

·                  the Asset Management Partnership Program (“AMPP”).

 

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

 

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

 

OurTechnical and Professional Services segment accounted for $11.9 million, orapproximately 15.8%, of our revenues for the three months ended March 31,2008 and $8.1 million, or approximately 12.7% of our revenues, for the threemonths ended March 31, 2007.  Weleverage our more than 65 years of experience and our extensive equipmentdatabase in repairing and maintaining medical equipment.  We offer a broad range of inspection,preventative maintenance, repair, logistic and consulting services through ourteam of over 350 technicians and professionals located in our nationwidenetwork of district offices and service centers.  Our technical and professional serviceofferings are less capital intensive than our Medical Equipment Outsourcingsegment, and provide a complementary alternative for customers that wish to owntheir medical equipment, but lack the expertise, funding or scale to performmaintenance, repair and analytical functions. As part of our strategy to grow our Technical and Professional Servicessegment, we acquired the assets of the ICMS division of Intellamed on April 1,2007.

 

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

 

OurMedical Equipment Sales and Remarketing segment accounted for $4.2 million, orapproximately 5.6%, of our revenues for the three months ended March 31,2008 and $4.5 million, or approximately 7.1%, of our revenues for the threemonths ended March 31, 2007.  Thissegment includes three business activities:

 

***Medical Equipment Remarketing and Disposal.*********We are one of the nation’slargest buyers and sellers of pre-owned medical equipment.  We also remarket used medical equipment tohospitals, alternate care 

 

18

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providers,veterinarians and equipment brokers.  Weoffer a wide range of equipment from our standard medical equipment todiagnostic, ultrasound and x-ray equipment.

 

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

 

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

 

**RESULTS OF OPERATIONS**

 

**Thefollowing discussion addresses:**

** **

**·**                  ourfinancial condition as of March 31, 2008;

**·**                  theresults of operations for the three months ended March 31, 2008 and threemonths ended March 31, 2007; and

**·**                  the cashflows for the three months ended March 31, 2008 and three months ended March 31,2007.

** **

**Thisdiscussion should be read in conjunction with the financial statements includedelsewhere in this Quarterly Report on Form 10-Q and the Management’sDiscussion and Analysis of Financial Condition and Results of Operationssection included in our 2007 Annual Report on Form 10-K/A, Amendment No. 1(the “2007 Form 10-K/A”) filed with the Securities and ExchangeCommission.**

** **

Inconnection with the Transaction, the Company incurred significant indebtednessand is highly leveraged.  In addition,the purchase price paid in connection with the Acquisition has been allocatedto state the acquired assets and liabilities at fair value.  The purchase accounting adjustments increasedthe carrying value of our property and equipment and inventory, established intangibleassets for our customer relationships, supply agreement, trade names andtrademarks, technology database and non-compete agreements and revalued ourlong-term benefit plan obligations, among other things.  Subsequent to the Transaction, interest expense,non-cash depreciation and amortization charges have significantlyincreased.  As a result, our successorfinancial statements are not comparable to our predecessor financialstatements.

 

Thefollowing tables provide a summary of selected financial data as a percentageof total revenues for the three months periods ended March 31, 2008 and March 31,2007, respectively:

 

19

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| ** **                                                                                                                      | ** ** | **Percent of Total Revenues** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                      | ** ** | **Three Months**              | ** ** | ** ** | **Three Months** | ** ** |
| ** **                                                                                                                      | ** ** | **Ended**                     | ** ** | ** ** | **Ended** | ** ** |
| ** **                                                                                                                      | ** ** | **March 31,**            | ** ** | ** ** | **March 31,** | ** ** |
| ** **                                                                                                                      | ** ** | **2008**                      | ** ** | ** ** | **2007** | ** ** |
| ** **                                                                                                                      | ** ** | **(Successor)**               | ** ** | ** ** | **(Predecessor)** | ** ** |
| **Revenue**                                                                                                                     |       |                          |       |   |   |   |
| Medical equipment outsourcing                                                                                                   |       | 78.6                          | %          |   | 80.2 | % |
| Technical and professional services                                                                                             |       | 15.8                          |       |   | 12.7 |   |
| Medical equipment sales and remarketing                                                                                         |       | 5.6                           |       |   | 7.1 |   |
| Total revenues                                                                                                                  |       | 100.0                         | %          |   | 100.0 | % |
|                                                                                                                            |       |                          |       |   |   |   |
| **Cost of Revenue**                                                                                                             | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** |
| Cost of medical equipment outsourcing                                                                                           |       | 26.4                          |       |   | 26.0 |   |
| Cost of technical and professional services                                                                                     |       | 11.3                          |       |   | 8.4 |   |
| Cost of medical equipment sales and remarketing                                                                                 |       | 4.6                           |       |   | 5.8 |   |
| Movable medical equipment depreciation                                                                                          |       | 20.1                          |       |   | 16.1 |   |
| Total costs of  medical equipment outsourcing, technical and professional services and  medical equipment sales and remarketing |       | 62.4                          |       |   | 56.3 |   |
| Gross margin                                                                                                                    |       | 37.6                          |       |   | 43.7 |   |
|                                                                                                                            |       |                          |       |   |   |   |
| Selling, general and administrative                                                                                             |       | 29.1                          |       |   | 24.8 |   |
| Transaction and related costs                                                                                                   |       | —                        |       |   | 0.8 |   |
| Operating income                                                                                                                |       | 8.5                           |       |   | 18.1 |   |
|                                                                                                                            |       |                          |       |   |   |   |
| Interest expense                                                                                                                |       | 15.4                          |       |   | 12.7 |   |
| Income (Loss)  before income taxes                                                                                              |       | (6.9                          | )          |   | 5.4 |   |
|                                                                                                                            |       |                          |       |   |   |   |
| Provision (benefit) for income taxes                                                                                            |       | (2.6                          | )          |   | 0.3 |   |
| Net income  (loss)                                                                                                              |       | (4.3                          | )%         |   | 5.1 | % |

 

20

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**Resultsof Operations for the Three Months Ended March 31, 2008 (successor)compared to the Three Months Ended March 31, 2007 (predecessor)**

** **
| **Medical  Equipment Outsourcing Segment — Manage & Utilize** |
|-----------------------------------------------------------------------------|
| *(in  thousands)*                                                           |

 
| ** **                                                                                                              | ** ** | **Three Months**   | ** ** | ** ** | **Three Months**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|--------------------|------------|
| ** **                                                                                                              | ** ** | **Ended**          | ** ** | ** ** | **Ended**          | ** ** |
| ** **                                                                                                              | ** ** | **March 31,** | ** ** | ** ** | **March 31,** | ** ** |
| ** **                                                                                                              | ** ** | **2008**           | ** ** | ** ** | **2007**           | ** ** |
| ** **                                                                                                              | ** ** | **(Successor)**    | ** ** | ** ** | **(Predecessor)**  | ** ** |
| Total revenue                                                                                                           |       | $                  | 59,327     |       |               | $          | 50,989 |   |
| Cost of revenue                                                                                                         |       | 19,916             |       |       | 16,522             |       |
| Medical equipment depreciation                                                                                          |       | 15,178             |       |       | 10,262             |       |
| Gross margin                                                                                                            |       | $                  | 24,233     |       |               | $          | 24,205 |   |
|                                                                                                                    |       |               |       |       |               |       |
| Gross margin %                                                                                                          |       | 40.8               | %          |       | 47.5               | %          |
|                                                                                                                    |       |               |       |       |               |       |
| Gross margin                                                                                                            |       | $                  | 24,233     |       |               | $          | 24,205 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of medical equipment |       | 3,890              |       |       | —             |       |
| Gross margin,  before purchase accounting adjustments                                                                   |       | $                  | 28,123     |       |               | $          | 24,205 |   |
|                                                                                                                    |       |               |       |       |               |       |
| Gross margin %, before purchase accounting  adjustments                                                                 |       | 47.4               | %          |       | 47.5               | %          |

 

Totalrevenue in the Medical Equipment Outsourcing was $59.3 and $51.0 million forthe quarters ended March 31, 2008 and 2007, respectively.  During the quarter ended March 31, 2008,we were successful in adding approximately 125 outsourcing customers throughorganic and competitive takeaway in our acute care and AMPP customer base andalso generated incremental business from new and existing technology in ourfleet.

 

Totalcost of revenue in the segment was $19.9 and $16.5 million for the quartersended March 31, 2008 and 2007, respectively.  Cost of revenue in this segment relatesprimarily to employee related expenses, equipment repair and maintenancecharges related to our medical equipment fleet, occupancy and freightcharges.  Cost of revenue for the quarterended March 31, 2008 includes $0.2 million of charges relating to loss ondisposal of equipment which was revalued in conjunction with theTransaction.  During the quarter ended March 31,2008, we experienced robust rental demand from new and existing customers andincurred additional repair and maintenance and other expenses associated withincreased rental activity.

 

Medicalequipment depreciation was $15.2 and $10.3 million for the quarters ended March 31,2008 and 2007, respectively.  During thequarter ended March 31, 2008, we experienced increased medical equipmentpurchases to meet customer demand.  Medicalequipment depreciation for the quarter ended March 31, 2008 includes $3.6million of charges relating to purchase accounting adjustments.

 

Grossmargin percentage for the Medical Equipment Outsourcing segment was 40.8% and47.5% for the quarters ended March 31, 2008 and 2007, respectively.  Gross margin percentage for the quarter ended

 

21

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March 31,2008 was negatively impacted by purchase accounting adjustments relatingprimarily to our medical equipment fleet.

 

Grossmargin percentage, before purchase accounting adjustments was 47.4% and 47.5%for the quarters ended March 31, 2008 and 2007, respectively.

** **
| **Technical  and Professional Services Segment — Plan & Acquire; Maintain &  Repair** |
|--------------------------------------------------------------------------------------------------------------|
| *(in  thousands)*                                                                                            |

 
| ** **                                                                                           | ** ** | **Three Months**   | ** ** | ** ** | **Three Months**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|--------------------|------------|
| ** **                                                                                           | ** ** | **Ended**          | ** ** | ** ** | **Ended**          | ** ** |
| ** **                                                                                           | ** ** | **March 31,** | ** ** | ** ** | **March 31,** | ** ** |
| ** **                                                                                           | ** ** | **2008**           | ** ** | ** ** | **2007**           | ** ** |
| ** **                                                                                           | ** ** | **(Successor)**    | ** ** | ** ** | **(Predecessor)**  | ** ** |
| Total revenue                                                                                        |       | $                  | 11,876     |       |               | $          | 8,052 |   |
| Cost of revenue                                                                                      |       | 8,511              |       |       | 5,323              |       |
| Gross margin                                                                                         |       | $                  | 3,365      |       |               | $          | 2,729 |   |
|                                                                                                 |       |               |       |       |               |       |
| Gross margin %                                                                                       |       | 28.3               | %          |       | 33.9               | %          |
|                                                                                                 |       |               |       |       |               |       |
| Gross margin                                                                                         |       | $                  | 3,365      |       |               | $          | 2,729 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to favorable lease  commitments |       | 7                  |       |       | —             |       |
| Gross margin,  before purchase accounting adjustments                                                |       | $                  | 3,372      |       |               | $          | 2,729 |   |
|                                                                                                 |       |               |       |       |               |       |
| Gross margin %, before purchase accounting  adjustments                                              |       | 28.4               | %          |       | 33.9               | %          |

 

Totalrevenue in the Technical and Professional Services segment was $11.9 and $8.1million for the quarters ended March 31, 2008 and 2007, respectively.  Revenue for the quarter ended March 31, 2008benefited from our acquisition of the assets of the ICMS division of Intellamedon April 1, 2007, partially offset by continued sales force attention onconverting new customers in our Medical Equipment Outsourcing segment as wellas selected contract terminations.

 

Totalcost of revenue in the segment was $8.5 and $5.3 million for the quarters endedMarch 31, 2008 and 2007, respectively. Cost of revenue consists primarily of employee related expenses, vendorexpenses and occupancy charges.  Cost ofrevenue for the quarter ended March 31, 2008 includes additional employeerelated and vendor expenses related to our acquisition of the assets of theICMS division of Intellamed on April 1, 2007.

 

Grossmargin percentage for the Technical and Professional Services segment was 28.3%and 33.9% for the quarters ended March 31, 2008 and 2007,respectively.  The decline for thequarter ended March 31, 2008 is primarily attributable to lower grossmargin percentage results from the acquisition of the assets of the ICMSdivision of Intellamed.

 

22

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| **Medical  Equipment Sales and Remarketing Segment — Redeploy & Remarket** |
|------------------------------------------------------------------------------------------|
| *(in  thousands)*                                                                        |

 
| ** **                                                                                                              | ** ** | **Three Months**   | ** ** | ** ** | **Three Months**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|--------------------|------------|
| ** **                                                                                                              | ** ** | **Ended**          | ** ** | ** ** | **Ended**          | ** ** |
| ** **                                                                                                              | ** ** | **March 31,** | ** ** | ** ** | **March 31,** | ** ** |
| ** **                                                                                                              | ** ** | **2008**           | ** ** | ** ** | **2007**           | ** ** |
| ** **                                                                                                              | ** ** | **(Successor)**    | ** ** | ** ** | **(Predecessor)**  | ** ** |
| Total revenue                                                                                                           |       | $                  | 4,241      |       |               | $          | 4,508 |   |
| Cost of revenue                                                                                                         |       | 3,444              |       |       | 3,688              |       |
| Gross margin                                                                                                            |       | $                  | 797        |       |               | $          | 820 |   |
|                                                                                                                    |       |               |       |       |               |       |
| Gross margin %                                                                                                          |       | 18.8               | %          |       | 18.2               | %          |
|                                                                                                                    |       |               |       |       |               |       |
| Gross margin                                                                                                            |       | $                  | 797        |       |               | $          | 820 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of medical equipment |       | 292                |       |       | —             |       |
| Gross margin,  before purchase accounting adjustments                                                                   |       | $                  | 1,089      |       |               | $          | 820 |   |
|                                                                                                                    |       |               |       |       |               |       |
| Gross margin %, before purchase accounting  adjustments                                                                 |       | 25.7               | %          |       | 18.2               | %          |

 

Totalrevenue in the Medical Equipment Sales and Remarketing segment was $4.2 and$4.5 million for the quarters ended March 31, 2008 and 2007,respectively.  Robust rental demanddiverted equipment for sale to our Medical Equipment Outsourcing segment duringthe quarter ended March 31, 2008.

 

Totalcost of revenue in the segment was $3.4 and $3.7 million for the quarters endedMarch 31, 2008 and 2007, respectively. Cost of revenue in this segment consists primarily of cost of inventoryand equipment sold and occupancy charges. During the quarter ended March 31, 2008, purchase accountingadjustments of $0.3 million, primarily related to the increased cost of salesresulting from the increased carrying value of medical equipment, impacted costof revenue.

 

Grossmargin percentage for the Medical Equipment Sales and Remarketing segment was18.8% and 18.2% for the quarters ended March 31, 2008 and 2007,respectively.  The impact of purchaseaccounting adjustments impacted gross margin percentage for the quarter ended March 31,2008.  Margins during the quarter ended March 31,2007 were negatively impacted by larger individual sales with lower margins.

 

Grossmargin percentage, before purchase accounting adjustments, for the MedicalEquipment Sales and Remarketing segment was 25.7% and 18.2% for the quartersended March 31, 2008 and 2007, respectively.  Margins and activity in this segment willfluctuate based on the transactional nature of the business.

 

23

----

 

**Selling,General and Administrative, Transaction and Related Costs and Interest Expense**
| *(in thousands)*                    |
|-------------------------------------|
|                                | ** ** | **Three Months** | ** ** | ** ** | **Three Months** | ** ** |
| ** **                          | ** ** | **Ended** | ** ** | ** ** | **Ended** | ** ** |
| ** **                          | ** ** | **March 31,** | ** ** | ** ** | **March 31,** | ** ** |
| ** **                          | ** ** | **2008** | ** ** | ** ** | **2007** | ** ** |
| ** **                          | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| Selling, general and administrative |   | $ | 21,957 |   |   | $ | 15,782 |   |
| Transaction and related costs       |   | — |   |   | 512 |   |
| Interest expense                    |   | 11,620 |   |   | 8,082 |   |
|                                     |  |  |  |  |  |  |  |  |

 

***Selling, General andAdministrative***

** **

Selling,general and administrative expenses were $22.0 and $15.8 million for thequarters ended March 31, 2008 and 2007, respectively.  Selling, general and administrative expensesconsist primarily of employee-related expenses, professional fees, occupancycharges, bad debt expense and depreciation and amortization.  Expenses during the quarter ended March 31,2008 include $4.0 million of charges related to the amortization of ourintangible assets which were recorded at fair value in connection with theTransaction and non-cash stock-based compensation expense related to the 2007Stock Option Plan of Parent of $0.6 million. Expenses during the quarter ended March 31, 2007 include $0.4million of expense related to our 2003 Stock Option Plan.  Selling, general and administrative expensesas a percentage of total revenue were 29.1% and 24.8% for the quarters ended March 31,2008 and 2007, respectively.

 

***Transaction and Related Costs***

** **

Weincurred $0.5 million of expenses in connection with the Transaction during thequarter ended March 31, 2007.

 

***Interest Expense***

** **

Interestexpense was $11.6 and $8.1 million for the quarters ended March 31, 2008and 2007, respectively.  Interest expenseduring the quarter ended March 31, 2008 includes interest charges relatedto the increased debt issued in connection with the Transaction, partiallyoffset by lower average interest rates.

 

**IncomeTaxes**

 

Provision(benefit) for income taxes was $(2.0) and $0.2 million for the quarters ended March 31,2008 and 2007, respectively.  The Companymoved from a net deferred tax asset position prior to the Transaction, wheretax expense related primarily to minimum state taxes due to valuationallowancesestablished fornet operating losses not recognized, to a net deferred tax liability positionafter the Transaction.  Managementbelieves the valuation allowance is no longer necessary as we determined thatit was more likely than not that the benefits of these deferred tax assets willbe realized.

 

24

----

 

**NetIncome (Loss)**

 

Netincome (loss) was $(3.2) and $3.2 million for the quarters ended March 31,2008 and 2007, respectively.  Net lossfor the quarter ended March 31, 2008 was impacted by Transaction-relatedpurchase accounting adjustments and interest associated with our debt,partially offset by robust revenues in our Medical Equipment OutsourcingSegment and income tax benefit.

 

**EBITDA**

** **

EarningsBefore Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $27.7 and$24.0 million for the quarters ended March 31, 2008 and 2007,respectively.  EBITDA for the quarterended March 31, 2008 was negatively impacted by purchase accountingadjustments related to the Transaction and benefited from robust customerdemand in our Medical Equipment Outsourcing segment.

 

EBITDAis not intended to represent an alternative to operating income or cash flowsfrom operating, financing or investing activities (as determined in accordancewith generally accepted accounting principles (“GAAP”)) as a measure ofperformance, and is not representative of funds available for discretionary usedue to our financing obligations. EBITDA, as defined by us, may not be calculated consistently among othercompanies applying similar reporting measures. EBITDA is included because it is a widely accepted financial indicatorused by certain investors and financial analysts to assess and comparecompanies, and a version of EBITDA is an integral part of our debt covenantcalculations.  Management believes thatEBITDA provides an important perspective on our ability to service ourlong-term obligations, our ability to fund continuing growth, and our abilityto continue as a going concern.  Areconciliation of operating cash flows to EBITDA is included below:

 
| **(in thousands)**                          | ** ** | **Three**          | ** ** | ** ** | **Three**          | ** ** |
|---------------------------------------------|------------|--------------------|------------|------------|--------------------|------------|
| ** **                                  | ** ** | **Months**         | ** ** | ** ** | **Months**         | ** ** |
| ** **                                  | ** ** | **Ended**          | ** ** | ** ** | **Ended**          | ** ** |
| ** **                                  | ** ** | **March 31,** | ** ** | ** ** | **March 31,** | ** ** |
| ** **                                  | ** ** | **2008**           | ** ** | ** ** | **2007**           | ** ** |
| ** **                                  | ** ** | **(Successor)**    | ** ** | ** ** | **(Predecessor)**  | ** ** |
| Net cash provided by operating activities   |       | $                  | 18,898     |       |               | $          | 19,286 |   |
| Changes in operating assets and liabilities |       | (1,284             | )          |       | (2,428             | )          |
| Other non-cash expenses                     |       | 454                |       |       | (1,175             | )          |
| Provision (benefit) for income taxes        |       | (1,996             | )          |       | 188                |       |
| Interest expense                            |       | 11,620             |       |       | 8,082              |       |
| EBITDA                                      |       | $                  | 27,692     |       |               | $          | 23,953 |   |

 

25

----

 

**SupplementalInformation:**

*(dollarsin thousands)*

 
|                                                               |       | **Three**          | ** ** | ** ** | **Three**          | ** ** |
|--------------------------------------------------------------------|------------|--------------------|------------|------------|--------------------|------------|
|                                                               |       | **Months**         | ** ** | ** ** | **Months**         | ** ** |
|                                                               |       | **Ended**          | ** ** | ** ** | **Ended**          | ** ** |
|                                                               |       | **March 31,** | ** ** | ** ** | **March 31,** | ** ** |
|                                                               |       | **2008**           | ** ** | ** ** | **2007**           | ** ** |
|                                                               |       | **(Successor)**    | ** ** | ** ** | **(Predecessor)**  | ** ** |
| EBITDA                                                             |       | $                  | 27,692     |       |               | $          | 23,953 |   |
|                                                               |       |               |       |       |               |       |
| **Other Financial Data:**                                          | ** ** | ** **         | ** ** | ** ** | ** **         | ** ** |
| Net cash provided by operating activities                          |       | $                  | 18,898     |       |               | $          | 19,286 |   |
| Net cash used in investing activities                              |       | (29,031            | )          |       | (22,062            | )          |
| Net cash provided by financing activities                          |       | $                  | 10,133     |       |               | $          | 2,776 |   |
|                                                               |       |               |       |       |               |       |
| **Other Operating Data (as of end of period):**                    | ** ** | ** **         | ** ** | ** ** | ** **         | ** ** |
| Medical  equipment (approximate number of owned outsourcing units) |       | 204,000            |       |       | 182,000            |       |
| District Offices                                                   |       | 80                 |       |       | 79                 |       |
| Number of outsourcing hospital customers                           |       | 3,925              |       |       | 3,750              |       |
| Number of total outsourcing customers                              |       | 7,575              |       |       | 7,100              |       |

 

**SEASONALITY**

** **

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

 

**LIQUIDITY AND CAPITAL RESOURCES**

** **

Ourprincipal sources of liquidity are expected to be cash flows from operatingactivities and borrowings under our first lien senior secured asset basedrevolving credit facility providing for loans in an amount of up to $135.0million, pursuant to a credit agreement dated as of May 31, 2007 with agroup of financial institutions (“senior secured credit facility”).  Our senior secured credit facility matures inMay 2013.  It is anticipated thatour principal uses of liquidity will be to fund capital expenditures related topurchases of medical equipment, provide working capital, meet debt servicerequirements and finance our strategic plans.

 

Werequire substantial cash to operate our Medical Equipment Outsourcing programsand service our debt.  Our outsourcingprograms require us to invest a significant amount of cash in medical equipmentpurchases.  To the extent that suchexpenditures cannot be funded from our operating cash flow, borrowing under oursenior secured credit facility or other financing sources, we may not be ableto conduct our business or grow as currently planned.

 

Ifwe are unable to generate sufficient cash flow from operations in order toservice our debt, we will be forced to take actions such as reducing ordelaying capital expenditures, selling assets, restructuring or refinancing ourdebt 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 ourcontrol.  If we are unable to repay ourdebt at maturity, we may have to obtain alternative financing, which may not beavailable to us.

 

26

----

 

Netcash provided by operating activities was $18.9 and $19.3 million for thequarters ended March 31, 2008 and 2007, respectively.

 

Netcash used in investing activities was $29.0 and $22.1 million for the quartersended March 31, 2008 and 2007, respectively.  Net cash used in investing activities wasimpacted during the first quarter of 2008 by heightened capital expendituresfor medical equipment related to robust demand in our Medical EquipmentOutsourcing segment.

 

Netcash provided by financing activities was $10.1 and $2.8 million for thequarters ended March 31, 2008 and 2007, respectively.  During the quarter ended March 31, 2008,net cash provided by financing activities were impacted by net borrowings underour senior secured credit facility.

 

Based on the level of operating performance expected in2008, we believe our cash from operations, together with additional borrowingsunder our senior secured credit facility, will meet our liquidity needs for theforeseeable future, exclusive of any borrowings that we may make to financepotential acquisitions.  However, ifduring that period or thereafter we are not successful in generating sufficientcash flows from operations or in raising additional capital when required insufficient amounts and on terms acceptable to us, our business could beadversely affected.  As of March 31,2008, we had $101.9 million of availability under our senior secured creditfacility based on a borrowing base of $135.0 million less borrowings of $30.8million and after giving effect to $2.3 million used for letters of credit.

 

Our levels of borrowing are further restricted by thefinancial covenants set forth in our senior secured credit facility agreementand the second lien senior indenture governing our PIK Toggle Notes and FloatingRate Notes.  As of March 31, 2008,the Company was in compliance with all covenants under the senior securedcredit facility.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

** **

***Standards Adopted***

 

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Optionfor Financial Assets and Financial Liabilities, which permits entities to electto measure many financial instruments and certain other items at fair valuethat are not currently required to be measured at fair value.  This election is irrevocable.  We adopted the provisions of SFAS No. 159on January 1, 2008.  We did notelect the fair value option for any assets or liabilities.

 

InSeptember 2006, the FASB issued SFAS No. 157, Fair ValueMeasurements, which establishes a consistent framework for measuring fair valueand expands disclosures on fair value measurements. SFAS No. 157 waseffective for the Company starting in fiscal 2008 with respect to financialassets and liabilities. The impact of the initial adoption of SFAS No. 157in 2008 had no impact on our financial statements.

 

Pursuantto the provisions of SFAS No. 157, the Company uses significant otherobservable inputs to value the derivative instrument used to hedge interestrate volatility. The fair market value, which is included as an interest rateswap liability on our balance sheets, follows:

 

27

----

 
| **(in thousands)**    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------|------------|--------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **            | ** ** | **(Successor)**    | ** ** | **(Successor)**       | ** ** |
| Loss on swap contract |       | $                  | 22,676     |                  | $          | 14,681 |   |
|                       |            |                    |            |                       |            |  |  |

 

Withrespect to non-financial assets and liabilities, SFAS No. 157 is effectivefor the Company starting in fiscal 2009. We have not determined the impact, ifany, the adoption of this statement as it pertains to non-financial assets andliabilities will have on our financial statements.

 

***Standards Issued Not Yet Adopted***

 

InMarch 2008, the FASB issued SFAS No. 161, Disclosures aboutDerivative Instruments and Hedging Activities. This statement expandsdisclosures but does not change accounting for derivative instruments andhedging activities.  Pursuant to thetransition provisions of the Statement, the company will adopt SFAS No. 161in fiscal year 2009 and will present the required disclosures in the prescribedformat on a prospective basis. This Statement will not impact the financialstatements as it is disclosure-only in nature.

 

InDecember 2007, the FASB issued SFAS No. 141(R), BusinessCombinations, which establishes principles and requirements for how an acquirerin a business combination recognizes and measures in its financial statementsthe identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest; recognizes and measures the goodwill acquired in thebusiness combination or a gain from a bargain purchase; and determines whatinformation to disclose to enable users of the financial statements to evaluatethe nature and financial effects of the business combination. SFAS No. 141(R) isto be applied prospectively to business combinations for which the acquisitiondate is on or after the beginning of an entity’s fiscal year that begins on orafter Dec. 15, 2008. Beginning January 1, 2009, we will apply theprovisions of SFAS No. 141(R) to our accounting for applicablebusiness combinations.

 

**SAFE HARBOR STATEMENT**

** **

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

 

·                  our history ofnet losses and substantial interest expense;

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

·                  our substantialoutstanding debt and debt service obligations;

·                  restrictionsimposed by the terms of our debt;

·                  a decrease inthe number of patients our customers are serving;

·                  our ability toeffect change in the manner in which healthcare providers traditionally procuremedical equipment;

 

28

----

 

·                  the absence oflong-term commitments with customers;

·                  our ability torenew contracts with GPOs and IDNs;

·                  changes inreimbursement rates and policies by third-party payors;

·                  the impact ofhealth care reform initiatives;

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

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

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

·                  impacts ofequipment product recalls or obsolescence; and

·                  increases invendor costs that cannot be passed through to our customers.

 

Seethe risk factors discussed under Part I, Item 1A of our 2007 Form 10-K/A.

 

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

 

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

 

**InterestRates**

 

Weuse both fixed and variable rate debt as sources of financing.  At March 31, 2008, we had approximately$508.0 million of total debt outstanding. After taking into account the effect of our interest rate swapagreement, we had $30.8 million of debt bearing interest at variable ratesapproximating 5.2%.  Based on variabledebt levels at March 31, 2008, a 1.0 percentage point change in interestrates on variable rate debt would have resulted in annual interest expensefluctuating approximately $0.3 million.

 

InJune 2007, we entered into an interest rate swap agreement for $230.0million, which has the effect of converting our $230.0 of Floating Rate Notesto fixed interest rates.  The effectivedate for the interest rate swap agreement was December 2007; the expirationdate is May 2012.

 

Theinterest rate swap agreement qualifies for cash flow hedge accounting underSFAS No. 133, Accounting for Derivative Instruments and HedgingActivities.  Both at inception and on anon-going basis, we must perform an effectiveness test.  In accordance with SFAS No. 133, thefair value of the interest rate swap agreement at March 31, 2008 isincluded as a cash flow hedge on our balance sheet.  The change in fair value was recorded as acomponent of accumulated other comprehensive loss, net of tax, on our balancesheet since the instrument was determined to be an effective hedge at March 31,2008.  We do not expect any amounts to bereclassified into current earnings in the future due to ineffectiveness.  As a result of our interest rate swapagreement, we expect the effective interest rate on our $230.0 million FloatingRate Notes to be 9.065% from December 2007 through May 2012.

 

**Fuel Costs**

 

Weare also exposed to market risks related to changes in the price of gasolineused to fuel our fleet of delivery and sales vehicles.  A hypothetical 10% increase in the price ofunleaded gasoline from March 

 

29

----

 

2008levels, assuming March 2008 gasoline usage levels, would lead to an annualincrease in fuel costs of approximately $0.4 million.

 

Asof March 31, 2008, we have no other material exposure to market risk.

 

**Item4.  Controls and Procedures**

 

                (a)           *Evaluation of disclosurecontrols and procedures*

 

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

 

                (b)           *Changes in internalcontrol over financial reporting*

 

Therewere no changes in our internal controls over financial reporting during thequarter ended March 31, 2008, that have materially affected, or werereasonably likely to materially affect, our internal controls over financialreporting.

 

**PART II- OTHER INFORMATION**

 

**Item 1.    LegalProceedings**

** **

From time to time, we may become involved in litigationarising out of operations in the normal course of business.  As of March 31, 2008, we were not aparty to any pending legal proceedings the adverse outcome of which couldreasonably be expected to have a material adverse effect on our operatingresults, financial position, or cash flows.

 

**Item1A.  Risk Factors**

 

Ourbusiness faces many risks.  Any of therisks discussed elsewhere in this Quarterly Report on Form 10-Q or ourother filings with the Securities and Exchange Commission, including our riskfactors set forth in our 2007 Form 10-K/A, could have a material impact onour business, financial condition or results of operations.  Additional risks and uncertainties notpresently known to us or that we currently believe to be immaterial may alsoimpair our business operations.

 

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

** **

None.

 

**Item 3.    Defaultsupon Senior Securities**

** **

Notapplicable.

 

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

** **

None.

 

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**Item 5.    OtherInformation**

** **

Notapplicable.

** **

**Item 6.    Exhibits**

 
| ** ** | **Number** | ** ** | **Description**                                                                                                |
|------------|------------|------------|----------------------------------------------------------------------------------------------------------------|
|       | 31.1       |       | Certification of  Principal Executive Officer Pursuant to Section 302 of the Sarbanes  Oxley Act of 2002. |
|       | 31.2       |       | Certification of  Principal Financial Officer Pursuant to Section 302 of the Sarbanes  Oxley Act of 2002. |
|       | 32.1       |       | Certification Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                  |
|       | 32.2       |       | Certification Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                  |

 

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**SIGNATURES**

** **

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

 

Date:May 12, 2008

 
|   |   | 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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