**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 June 30, 2009**                                                                                                 |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                |
| **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)

 

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

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T  (§ 232.405 of this chapter) during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o   Noo

 

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

 

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

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o   Nox

 

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

 

 

 

----

 

**PART I - FINANCIALINFORMATION**

** **

**Item 1. FinancialStatements – Unaudited**

** **

**UniversalHospital Services, Inc.**

** **

**BalanceSheets**

*(inthousands, except share and per share information)*

*(unaudited)*

 
| ** **                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                        | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                        | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  assets:                                                                                                                  |       |              |       |                  |       |
| Cash  and cash equivalents                                                                                                        |       | $                 | 3,500      |                  | $          | 12,006 |   |
| Short-term  investments                                                                                                           |       | 1,500             |       | 1,500                 |       |
| Accounts  receivable, less allowance for doubtful accounts of $2,450 at June 30,  2009 and December 31, 2008            |       | 56,400            |       | 54,113                |       |
| Inventories                                                                                                                       |       | 5,080             |       | 5,627                 |       |
| Deferred  income taxes                                                                                                            |       | 6,452             |       | 6,025                 |       |
| Other  current assets                                                                                                             |       | 3,293             |       | 2,815                 |       |
| Total  current assets                                                                                                             |       | 76,225            |       | 82,086                |       |
|                                                                                                                              |       |              |       |                  |       |
| Property  and equipment, net:                                                                                                     |       |              |       |                  |       |
| Medical  equipment, net                                                                                                           |       | 196,133           |       | 215,643               |       |
| Property  and office equipment, net                                                                                               |       | 21,164            |       | 22,728                |       |
| Total  property and equipment, net                                                                                                |       | 217,297           |       | 238,371               |       |
|                                                                                                                              |       |              |       |                  |       |
| Other  long-term assets:                                                                                                          |       |              |       |                  |       |
| Goodwill                                                                                                                          |       | 280,211           |       | 280,211               |       |
| Other  intangibles, net                                                                                                           |       | 255,343           |       | 262,848               |       |
| Other,  primarily deferred financing costs, net                                                                                   |       | 13,022            |       | 14,209                |       |
| Total  assets                                                                                                                     |       | $                 | 842,098    |                  | $          | 877,725 |   |
|                                                                                                                              |       |              |       |                  |       |
| **Liabilities and Shareholders’ Equity**                                                                                     | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                             |       |              |       |                  |       |
| Current  portion of long-term debt                                                                                                |       | $                 | 3,988      |                  | $          | 3,555 |   |
| Book  overdrafts                                                                                                                  |       | 1,159             |       | 7,170                 |       |
| Accounts  payable                                                                                                                 |       | 13,685            |       | 17,976                |       |
| Accrued  compensation                                                                                                             |       | 10,971            |       | 12,154                |       |
| Accrued  interest                                                                                                                 |       | 3,679             |       | 3,880                 |       |
| Other  accrued expenses                                                                                                           |       | 7,238             |       | 6,146                 |       |
| Total  current liabilities                                                                                                        |       | 40,720            |       | 50,881                |       |
|                                                                                                                              |       |              |       |                  |       |
| Long-term  debt, less current portion                                                                                             |       | 516,908           |       | 527,788               |       |
| Pension  and other long-term liabilities                                                                                          |       | 8,110             |       | 8,248                 |       |
| Interest  rate swap                                                                                                               |       | 22,346            |       | 27,167                |       |
| Payable  to Parent                                                                                                                |       | 5,920             |       | 5,012                 |       |
| Deferred  income taxes                                                                                                            |       | 66,334            |       | 70,178                |       |
|                                                                                                                              |       |              |       |                  |       |
| Commitments  and contingencies (Note 7)                                                                                           |       |              |       |                  |       |
|                                                                                                                              |       |              |       |                  |       |
| Shareholders’  equity                                                                                                        |       |              |       |                  |       |
| Common  stock, $0.01 par value; 1,000 shares authorized, issued and outstanding at  June 30, 2009 and December 31, 2008 |       | —            |       | —                |       |
|                                                                                                                              |       |              |       |                  |       |
| Additional  paid-in capital                                                                                                       |       | 248,794           |       | 248,794               |       |
| Accumulated  deficit                                                                                                              |       | (49,185           | )          | (39,592               | )          |
| Accumulated  other comprehensive loss                                                                                             |       | (17,849           | )          | (20,751               | )          |
| Total  shareholders’ equity                                                                                                  |       | 181,760           |       | 188,451               |       |
| Total  liabilities and shareholders’ equity                                                                                  |       | $                 | 842,098    |                  | $          | 877,725 |   |

 

The accompanying notes are anintegral part of the unaudited financial statements.

 

2

----

 

**UniversalHospital Services, Inc.**

** **

**Statementsof Operations**

*(inthousands)*

*(unaudited)*

 
| ** **                                                                                                                      | ** ** | **Three  Months Ended  June 30,** | ** ** | **Six  Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **2009**                               | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Revenue**                                                                                                                     | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Medical equipment  outsourcing                                                                                                  |       | $                                      | 56,524     |                                 | $          | 55,925 |   | $ | 114,806 |   | $ | 115,252 |   |
| Technical and  professional services                                                                                            |       | 10,696                                 |       | 11,538                               |       | 21,108 |   | 23,414 |   |
| Medical equipment sales  and remarketing                                                                                        |       | 5,616                                  |       | 4,221                                |       | 10,852 |   | 8,462 |   |
| Total revenues                                                                                                                  |       | 72,836                                 |       | 71,684                               |       | 146,766 |   | 147,128 |   |
|                                                                                                                            |       |                                   |       |                                 |       |   |   |   |   |
| **Cost  of Sales**                                                                                                              |       |                                   |       |                                 |       |   |   |   |   |
| Cost of medical  equipment outsourcing                                                                                          |       | 19,760                                 |       | 20,550                               |       | 40,229 |   | 40,466 |   |
| Cost of technical and  professional services                                                                                    |       | 7,568                                  |       | 8,834                                |       | 14,938 |   | 17,345 |   |
| Cost of medical  equipment sales and remarketing                                                                                |       | 4,440                                  |       | 3,269                                |       | 8,826 |   | 6,713 |   |
| Medical equipment  depreciation                                                                                                 |       | 15,904                                 |       | 15,451                               |       | 31,766 |   | 30,629 |   |
| Total costs of medical  equipment outsourcing, technical and professional services and medical  equipment sales and remarketing |       | 47,672                                 |       | 48,104                               |       | 95,759 |   | 95,153 |   |
| Gross margin                                                                                                                    |       | 25,164                                 |       | 23,580                               |       | 51,007 |   | 51,975 |   |
|                                                                                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Selling, general and  administrative                                                                                            |       | 21,158                                 |       | 21,673                               |       | 43,173 |   | 43,630 |   |
| Operating income                                                                                                                |       | 4,006                                  |       | 1,907                                |       | 7,834 |   | 8,345 |   |
|                                                                                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Interest expense                                                                                                                |       | 11,845                                 |       | 11,877                               |       | 23,562 |   | 23,497 |   |
| Loss before income  taxes                                                                                                       |       | (7,839                                 | )          | (9,970                               | )          | (15,728 | ) | (15,152 | ) |
|                                                                                                                            |       |                                   |       |                                 |       |   |   |   |   |
| Benefit for income  taxes                                                                                                       |       | (3,036                                 | )          | (3,916                               | )          | (6,135 | ) | (5,912 | ) |
| Net loss                                                                                                                        |       | $                                      | (4,803     | )                                    | $          | (6,054 | ) | $ | (9,593 | ) | $ | (9,240 | ) |

 

The accompanying notesare an integral part of the unaudited financial statements.

 

3

----

 

**Universal Hospital Services, Inc.**

 

**Statements of Cash Flows**

*(in thousands)*

*(unaudited)*

 
| ** **                                                                       | ** ** | **Six  Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                       | ** ** | **June 30,**     | ** ** |
| ** **                                                                       | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Cash flows from  operating activities:                                           |       |                  |       |   |   |
| Net loss                                                                         |       | $                     | (9,593     | ) | $ | (9,240 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                  |       |   |   |
| Depreciation                                                                     |       | 35,971                |       | 34,698 |   |
| Amortization of  intangibles and deferred financing costs                        |       | 8,709                 |       | 9,212 |   |
| Provision for doubtful  accounts                                                 |       | 720                   |       | 649 |   |
| Provision for inventory  obsolescence                                            |       | (113                  | )          | 304 |   |
| Non-cash stock-based  compensation expense                                       |       | 908                   |       | 1,244 |   |
| Loss on sales and  disposals of equipment                                        |       | 50                    |       | 684 |   |
| Deferred income taxes                                                            |       | (4,271                | )          | (6,032 | ) |
| Changes in operating  assets and liabilities:                                    |       |                  |       |   |   |
| Accounts receivable                                                              |       | (3,007                | )          | (1,739 | ) |
| Inventories                                                                      |       | 660                   |       | (996 | ) |
| Other operating assets                                                           |       | (495                  | )          | (733 | ) |
| Accounts payable                                                                 |       | (1,841                | )          | 2,633 |   |
| Other operating  liabilities                                                     |       | (2,351                | )          | (2,413 | ) |
| Net cash provided by  operating activities                                       |       | 25,347                |       | 28,271 |   |
| Cash flows from  investing activities:                                           |       |                  |       |   |   |
| Medical equipment  purchases                                                     |       | (15,539               | )          | (41,913 | ) |
| Property and office  equipment purchases                                         |       | (1,953                | )          | (2,300 | ) |
| Proceeds from  disposition of property and equipment                             |       | 1,828                 |       | 1,310 |   |
| Net cash used in  investing activities                                           |       | (15,664               | )          | (42,903 | ) |
| Cash flows from  financing activities:                                           |       |                  |       |   |   |
| Proceeds under senior  secured credit facility                                   |       | 42,000                |       | 63,500 |   |
| Payments under senior  secured credit facility                                   |       | (52,000               | )          | (42,975 | ) |
| Payments of principal  under capital lease obligations                           |       | (2,178                | )          | (2,053 | ) |
| Payment of deferred  financing costs                                             |       | —                |       | (69 | ) |
| Change in book  overdrafts                                                       |       | (6,011                | )          | (3,420 | ) |
| Net cash provided by  (used in) financing activities                             |       | (18,189               | )          | 14,983 |   |
| Net change in cash and  cash equivalents                                         |       | (8,506                | )          | 351 |   |
|                                                                             |       |                  |       |   |   |
| Cash and cash  equivalents at the beginning of period                            |       | 12,006                |       | — |   |
| Cash and cash  equivalents at the end of period                                  |       | $                     | 3,500      |   | $ | 351 |   |
|                                                                             |       |                  |       |   |   |
| Supplemental cash flow  information:                                             |       |                  |       |   |   |
| Interest paid                                                                    |       | $                     | 22,563     |   | $ | 22,183 |   |
| Income taxes paid                                                                |       | $                     | 192        |   | $ | 397 |   |
| Non-cash activities:                                                             |       |                  |       |   |   |
| Medical equipment  purchases included in accounts payable                        |       | $                     | 3,244      |   | $ | 3,522 |   |
| Capital lease additions                                                          |       | $                     | 1,731      |   | $ | 2,503 |   |

 

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

 

4

----

 

**Universal Hospital Services, Inc.**

 

**NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS**

 

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

 

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

 

Theinterim financial statements presented herein as of June 30, 2009,reflect, in the opinion of management, all adjustments necessary for a fairpresentation of the financial position and the results of operations and cashflows for the periods presented.  Theseadjustments are all of a normal, recurring nature.  The results of operations for any interimperiod are not necessarily indicative of results for the full year.

 

TheDecember 31, 2008 balance sheet amounts were derived from auditedfinancial statements, but do not include all disclosures required by GAAP.

 

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

 

Adescription of our critical accounting policies is included in our 2008 Form 10-K.

 

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

 

Comprehensiveloss is comprised of net loss and other comprehensive income.  Other comprehensive income includesunrealized gains from derivatives designated as cash flow hedges.  Accumulated other comprehensive loss isdisplayed separately on the balance sheets. A reconciliation of net loss to comprehensive loss is provided below:

 

5

----

 
| *** ***                        | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| **(in thousands)**                  | ** ** | **2009**                | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net loss                            |       | $                       | (4,803     | )                     | $          | (6,054 | ) | $ | (9,593 | ) | $ | (9,240 | ) |
| Unrealized gain on cash  flow hedge |       | 2,280                   |       | 5,578                 |       | 2,902 |   | 918 |   |
| Comprehensive loss                  |       | $                       | (2,523     | )                     | $          | (476 | ) | $ | (6,691 | ) | $ | (8,322 | ) |

 

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

 

***Standards Adopted***

 

InMay 2009, the Financial Accounting Standards Board (“FASB”) issued, and weadopted, SFAS No. 165, *Subsequent Events*.SFAS 165 stipulates: the period after the balance sheet date during whichmanagement of a reporting entity should evaluate events or transactions thatmay occur for potential recognition or disclosure in the financial statements,the circumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements and thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date. SFAS 165 also includes a requirement to disclose the date through whichthe company has evaluated subsequent events and whether the date correspondswith the release of their financial statements. SFAS 165 is effective forinterim and annual periods ending after June 15, 2009. The adoption of FAS165 did not have a material impact on our financial position or results ofoperations.  We have evaluated subsequentevents through August 12, 2009, the date on which our financial statementswere issued.

 

InApril 2009, the FASB issued two FASB Staff Positions (“FSPs”), to addressconcerns about (1) measuring the fair value of financial instruments whenthe markets become inactive and quoted prices may reflect distressedtransactions and (2) recording impairment charges on investments in debtsecurities. The FASB also issued a third FSP to require disclosures of fairvalues of certain financial instruments in interim financial statements.

 

FSPNo. SFAS 157-4, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly*,provides additional guidance to highlight and expand on the factors that shouldbe considered in estimating fair value when there has been a significantdecrease in market activity for a financial asset. FSP No. SFAS 157-4 alsorequires new disclosures relating to fair value measurement inputs andvaluation techniques (including changes in inputs and valuation techniques).

 

FSPNo. SFAS 115-2 and SFAS 124-2, *Recognitionand Presentation of Other-Than-Temporary Impairments*, will change (1) thetrigger for determining whether an other-than-temporary impairment exists and (2) theamount of an impairment charge to be recorded in earnings. To determine whetheran other-than-temporary impairment exists, an entity will be required to assessthe likelihood of selling a security prior to recovering its cost basis. Thisis a change from the current requirement for an entity to assess whether it hasthe intent and ability to hold a security to recovery or maturity. FSP No. SFAS115-2 and SFAS 124-2 also expands and increases the frequency of existingdisclosure about other-than-

 

6

----

 

temporaryimpairments and requires new disclosures of the significant inputs used indetermining a credit loss, as well as a roll forward of that amount eachperiod.

 

FSPNo. SFAS 107-1 and APB 28-1, *InterimDisclosures about Fair Value of Financial Instruments*, increases thefrequency of fair value disclosures from annual to quarterly to providefinancial statement users with more timely information about the effects ofcurrent market conditions on their financial instruments.

 

Weadopted these three FSPs during the second quarter of 2009.  The adoption of the three FSPs did not have amaterial effect on the Company’s financial condition, results of operations orcashflows.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities*.SFAS No.161 requires companies to provide enhanced disclosures aboutderivative instruments and hedging activities to provide a better understandingof their effects on a company’s financial position, financial performance, andcash flows. We adopted the disclosure provisions of SFAS No. 161 on January 1,2009.

 

Weenter into derivative instruments for risk management purposes only, includingderivatives designated as hedging instruments under SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities – anamendment of FASB Statement No.133*. We have an interest rate swapthat is designated as a fair value hedge for a portion of our long-term debt.By using this instrument, we are exposed, from time to time, to credit risk andmarket risk. Credit risk is the risk that the counterparty will fail to performunder the terms of the derivative contract. When the fair value of a derivativecontract is positive, the counterparty owes us, which creates credit risk forus. We minimize this credit risk by entering into transactions with highquality counterparties. Market risk is the risk that a change in interest rateswill result in an adverse effect on the value of a financial instrument.

 

InDecember 2007, the FASB issued SFAS No. 141(R), *BusinessCombinations*, which establishes principles and requirements for howan acquirer in a business combination recognizes and measures in its financialstatements the 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 December 15, 2008. We adopted SFAS No. 141(R) on January 1,2009 and will apply the provisions to applicable business combinations on aprospective basis.

 

***Standards Issued Not Yet Adopted***

 

InJune 2009, the FASB issued SFAS No. 168, *The FASBAccounting Standards Codification*TM *and the Hierarchy of Generally Accepted Accounting Principles – areplacement of FASB Statement No. 162*.  In addition in June 2009, the FASBissued Accounting Standards Update No. 2009-01, *Topic 205 –Generally Accepted Accounting Principles - amendments based on Statement ofFinancial Accounting Standards No. 168 – The FASB Accounting StandardsCodificationTM and the Hierarchy of Generally Accepted Accounting Principles*(“ASU 2009-1”). Both FAS 168 and ASU 2009-1 recognize the FASB

 

7

----

 

AccountingStandards CodificationTM as the source of authoritative U.S. generallyaccepted accounting principles to be utilized by nongovernmental entities.  SFAS 168 and ASU 2009-1 are effective forinterim and annual periods ending after September 15, 2009.

 

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

 

InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements*, which establishes a consistent framework for measuringfair value and expands disclosures on fair value measurements. SFAS No. 157was effective for the Company starting in fiscal 2008 with respect to financialassets and liabilities. In addition the Company adopted the non-financial assetand liability provisions SFAS No. 157 on January 1, 2009.  The adoption of the non-financial asset andliability provisions of SFAS No. 157 had no impact on our financialstatements as of January 1, 2009 and will be applied on a prospectivebasis.

 

Financialassets and liabilities measured at fair value on a recurring basis as of June 30,2009 and December 31, 2008, in accordance with SFAS No. 157, aresummarized in the following table by type of inputs applicable to the fairvalue measurements:

 
| ** **             | ** ** | **Quoted  Prices** | ** ** | ** **      | ** ** | ** **       | ** ** | ** **        | ** ** |
|------------------------|------------|--------------------|------------|-----------------|------------|------------------|------------|-------------------|------------|
| ** **             | ** ** | **in  Active**     | ** ** | **Significant** | ** ** | ** **       | ** ** | ** **        | ** ** |
| ** **             | ** ** | **Markets  for**   | ** ** | **Other**       | ** ** | **Significant**  | ** ** | **Total**         | ** ** |
| ** **             | ** ** | **Indentical**     | ** ** | **Observable**  | ** ** | **Unobservable** | ** ** | **as of**         | ** ** |
| **(in thousands)**     | ** ** | **Assets**         | ** ** | **Inputs**      | ** ** | **Inputs**       | ** ** | **June 30,** | ** ** |
| **Description**        | ** ** | **(Level  1)**     | ** ** | **(Level  2)**  | ** ** | **(Level  3)**   | ** ** | **2009**          | ** ** |
| Short term investments |       | $                  | —     |            | $          | 1,500            |       | $                 | —     |   | $ | 1,500 |   |
| Loss on swap contract  |       | —             |       | 22,346          |       | —           |       | 22,346            |       |
|                   |       | $                  | —     |            | $          | 23,846           |       | $                 | —     |   | $ | 23,846 |   |

 
| ** **             | ** ** | **Quoted  Prices** | ** ** | ** **      | ** ** | ** **       | ** ** | ** **            | ** ** |
|------------------------|------------|--------------------|------------|-----------------|------------|------------------|------------|-----------------------|------------|
| ** **             | ** ** | **in  Active**     | ** ** | **Significant** | ** ** | ** **       | ** ** | ** **            | ** ** |
| ** **             | ** ** | **Markets  for**   | ** ** | **Other**       | ** ** | **Significant**  | ** ** | **Total**             | ** ** |
| ** **             | ** ** | **Indentical**     | ** ** | **Observable**  | ** ** | **Unobservable** | ** ** | **as of**             | ** ** |
| **(in thousands)**     | ** ** | **Assets**         | ** ** | **Inputs**      | ** ** | **Inputs**       | ** ** | **December 31,** | ** ** |
| **Description**        | ** ** | **(Level  1)**     | ** ** | **(Level  2)**  | ** ** | **(Level  3)**   | ** ** | **2008**              | ** ** |
| Short term investments |       | $                  | —     |            | $          | 1,500            |       | $                     | —     |   | $ | 1,500 |   |
| Loss on swap contract  |       | —             |       | 27,167          |       | —           |       | 27,167                |       |
|                   |       | $                  | —     |            | $          | 28,667           |       | $                     | —     |   | $ | 28,667 |   |

 

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

 

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

 

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

 

8

----

 

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

 

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

 

**Fair Value of Other FinancialInstruments**

 

TheCompany considers that the carrying amount of financial instruments, includingaccounts receivable, accounts payable and accrued liabilities, approximate fairvalue due to their short maturities.  Thefair value of our outstanding PIK Toggle Notes, Floating Rate Notes and 10.125%Senior Notes, based on the quoted market price for the same or similar issuesof debt, is approximately:

 
| ** **           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------|------------|-------------------|------------|-----------------------|------------|
| **(in millions)**    | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| PIK Toggle Notes     |       | $                 | 218.5      |                  | $          | 162.4 |   |
| Floating Rate Notes  |       | 185.2             |       | 139.4                 |       |
| 10.125% Senior Notes |       | 9.8               |       | 9.8                   |       |
|                      |            |                   |            |                       |            |  |  |

 

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

 

Underits 2007 Stock Option Plan, our parent corporation, UHS Holdco Inc. (“Parent”),may grant to any of our and Parent’s executives, other key employees and toconsultants and certain non-employee directors, nonqualified options topurchase common stock of Parent at a price equal to the fair market value ofthe common stock at the date of grant. Approximately 43.9 million shares ofParent’s common stock are reserved for issuance under the 2007 Stock OptionPlan.

 

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

 

9

----

 

requirementsas set forth in their respective stock option grant agreements.  Forfeitedoptions are available for future issue.

 

Duringthe six months ended June 30, 2009, activity under Parent’s 2007 StockOption Plan was as follows

** **
| **(in thousands except exercise price)**          | ** ** | **Number  of  Options** | ** ** | **Weighted  average  exercise price** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|---------------------------------------|------------|
| Outstanding at  December 31, 2008            |       | 36,740                  |       | $                                     | 1.00       |   |
| Granted                                           |       | 1,569                   |       | $                                     | 1.00       |   |
| Exercised                                         |       | —                  |       |                                  |       |
| Forfeited or expired                              |       | (498                    | )          | $                                     | 1.00       |   |
|                                              |       |                    |       |                                  |       |
| Outstanding at  June 30, 2009                |       | 37,811                  |       | $                                     | 1.00       |   |
|                                              |       |                    |       |                                  |       |
| Exercisable at  June 30, 2009                |       | 11,881                  |       | $                                     | 1.00       |   |
|                                              |       |                    |       |                                  |       |
| Remaining authorized  options available for issue |       | 6,094                   |       |                                  |       |

 

Our Parent’s compensation committee determined theexercise price for options issued during the six months ended June 30,2009 by reference to both a comparable company Earnings Before Interest, Taxes,Depreciation and Amortization (“EBITDA”) multiple valuation and by reference toa discounted cash flow analysis performed by management.  The exerciseprice was approved by Parent’s board of directors.

 

We determine the fair value of options using theBlack-Scholes option pricing model. The estimated fair value of options,including the effect of estimated forfeitures, is recognized as expense on astraight-line basis over the options’ expected vesting periods. The followingassumptions were used in determining the fair value of stock options grantedduring the six months ended June 30, 2009, under the Black-Scholes model:

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

 

Although Parent grants stockoptions, the Company recognizes compensation expense related to these optionssince the services are performed for its benefit.  For the six-monthperiods ended June 30, 2009 and 2008, we recognized non-cash stockcompensation expense of $0.9 and $1.2 million, respectively, which is primarilyincluded in selling, general and administrative expenses.  At June 30,2009, unearned non-cash stock-based compensation related to our fixed vestingoptions, that we expect to recognize as expense over the next 4.3 years, totalsapproximately $4.5 million, net of our estimated forfeiture rate of 2.0% andunearned non-cash stock-based compensation related to the performance vestingoptions totaling approximately $4.9 million, net of our estimated forfeiture rateof 2.0%, would be recognized

 

10

----

 

over the next 4.3 years onlyif the performance targets are met.  The expense could be accelerated uponthe sale of Parent or the Company.

 

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

 

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

 

Long-term debt consists of the following:

 
| ** **                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(in thousands)**                       | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| PIK Toggle Notes                         |       | $                 | 230,000    |                  | $          | 230,000 |   |
| Floating Rate Notes                      |       | 230,000           |       | 230,000               |       |
| Senior secured credit  facility          |       | 39,000            |       | 49,000                |       |
| 10.125% Senior Notes                     |       | 9,945             |       | 9,945                 |       |
| Capital lease  obligations               |       | 11,951            |       | 12,398                |       |
|                                     |       | 520,896           |       | 531,343               |       |
| Less:  Current portion of long-term debt |       | (3,988            | )          | (3,555                | )          |
| Total  long-term debt                    |       | $                 | 516,908    |                  | $          | 527,788 |   |

 

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

 

***Floating Rate Notes. ***Our~~~~Floating Rate Notes (the “Floating Rate Notes”)were issued on May 31, 2007 in the aggregate principal amount of $230.0million under the Second Lien Senior Indenture. The Floating Rate Notes mature on June 1, 2015.  Interest on the FloatingRate Notes is payable semiannually in arrears on each June 1 and December 1.Interest on the Floating Rate Notes is reset for

 

11

----

 

eachsemi-annual interest period and is calculated at the current LIBOR rate plus3.375%.  At June 30, 2009, ourLIBOR-based rate was 4.635%, which includes the credit spread.  The Floating Rate Notes are redeemable, atthe Company’s option, in whole or in part of, at specified redemption prices(as defined in the Second Lien Senior Indenture) plus accrued interest to thedate of redemption. In addition, the Floating Rate Notes have a change ofcontrol provision, which gives each holder the right to require the Company topurchase all or a portion of such holders’ Floating Rate Notes upon a change incontrol, as defined in the Second Lien Senior Indenture, at a purchase priceequal to 101% of the principal amount plus accrued interest to the date ofpurchase. The Floating Rate Notes, subject to certain definitions andexceptions, have covenants that restrict, among other things, the incurrence ofadditional debt, the payment of dividends and the issuance of preferred stock.The Floating Rate Notes are uncollateralized.

 

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

 

Theinterest rate swap agreement qualifies for cash flow hedge accounting underSFAS 133, *Accounting for Derivative Instruments and HedgingActivities*.  Both at inceptionand on an on-going basis, we must perform an effectiveness test.  In accordance with SFAS 133, the fair valueof the interest rate swap agreement at June 30, 2009 is included as a cashflow hedge on our balance sheet.  Thechange in fair value was recorded as a component of accumulated othercomprehensive loss on our balance sheet, net of tax, since the instrument wasdetermined to be an effective hedge at June 30, 2009.  We do not expect any amounts to bereclassified into current earnings in the future due to ineffectiveness.

 

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

 

***Senior Secured CreditFacility.***Our senior secured credit facility is a first liensenior secured asset-based revolving credit facility that allows for borrowingsup to $135.0 million, as defined in the credit agreement dated May 31,2007 between the Company and a group of financial institutions.  The senior secured credit facility terminateson May 31, 2013.  As of June 30,2009, we had $93.6 million of availability under the senior secured creditfacility based on a borrowing base of $135.0 million, less borrowings of $39.0million, and after giving effect to $2.4 million used for letters ofcredit.  Our obligations under the seniorsecured credit facility are secured by a first priority security interest insubstantially all of our assets, excluding a pledge of our and Parent’s capitalstock, any joint ventures and certain other exceptions. Our obligations underthe senior secured credit facility are unconditionally guaranteed by Parent.

 

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

 

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

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

 

12

----

 

AtJune 30, 2009, our LIBOR-based rate was 1.820%, which includes the creditspread noted above.  As of June 30,2009, we had no outstanding balances under our prime rate based agreement.

 

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

 

**7.****                                     ****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.

 

**8.             Related Party Transactions**

 

**ManagementAgreement**

 

On May 31, 2007, we and Irving Place Capitalentered into a professional services agreement pursuant to which Irving PlaceCapital provides general advisory and management services to us with respect tofinancial and operating matters.  IrvingPlace Capital is a principal owner of Parent, and the following members of ourboard of directors are associated with Irving Place Capital:  John Howard, Robert Juneja and BretBowerman.  In addition, David Crane, a director,provides consulting services to Irving Place Capital.  We paid Irving Place Capital professionalservices fees of $0.4 million for each of the six-month periods ended June 30,2009 and 2008, respectively.

 

**BusinessRelationship**

 

Inthe ordinary course of business, we entered into an operating lease for ourMinneapolis, Minnesota district office with Ryan Companies US, Inc. (“Ryan”),which began on May 1, 2007.  One of our board of directors is also adirector of Ryan.  We made payments to Ryan totaling $167,000 and $156,000during the six months ended June 30, 2009 and 2008, respectively.

 

OnApril 1, 2008, we added three directors to our Board of Directors.  One of these directors also is a director ofBroadlane, Inc. (“Broadlane”), a health care group purchasing organizationthat serves many of our customers. During the six months ended June 30, 2009, we paid Broadlaneapproximately $257,000 in administrative fees. On June 30, 2009, accounts payable includes approximately $40,000in amounts due to Broadlane.

 

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

 

13

----

 

**9.             Segment Information**

 

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

 

**Medical Equipment Outsourcing**

*(in thousands)*

 
| ** **                      | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                      | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                        |       | $                                     | 56,524     |                                | $          | 55,925 |   | $ | 114,806 |   | $ | 115,252 |   |
| Cost of revenue                 |       | 19,760                                |       | 20,550                              |       | 40,229 |   | 40,466 |   |
| Medical equipment  depreciation |       | 15,904                                |       | 15,451                              |       | 31,766 |   | 30,629 |   |
| Gross margin                    |       | $                                     | 20,860     |                                | $          | 19,924 |   | $ | 42,811 |   | $ | 44,157 |   |

 

**Technical and Professional Services**

*(in thousands)*

 
| ** **      | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|-----------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **      | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues        |       | $                                     | 10,696     |                                | $          | 11,538 |   | $ | 21,108 |   | $ | 23,414 |   |
| Cost of revenue |       | 7,568                                 |       | 8,834                               |       | 14,938 |   | 17,345 |   |
| Gross margin    |       | $                                     | 3,128      |                                | $          | 2,704 |   | $ | 6,170 |   | $ | 6,069 |   |

 

**Medical Equipment Sales andRemarketing**

*(in thousands)*

 
| ** **      | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|-----------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **      | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues        |       | $                                     | 5,616      |                                | $          | 4,221 |   | $ | 10,852 |   | $ | 8,462 |   |
| Cost of revenue |       | 4,440                                 |       | 3,269                               |       | 8,826 |   | 6,713 |   |
| Gross margin    |       | $                                     | 1,176      |                                | $          | 952 |   | $ | 2,026 |   | $ | 1,749 |   |

 

**Total Gross Margin and Reconciliationto Loss Before Income Tax**

*(in thousands)*

 
| ** **                           | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                           | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Total gross margin                   |       | $                                     | 25,164     |                                | $          | 23,580 |   | $ | 51,007 |   | $ | 51,975 |   |
| Selling, general and  administrative |       | 21,158                                |       | 21,673                              |       | 43,173 |   | 43,630 |   |
| Interest expense                     |       | 11,845                                |       | 11,877                              |       | 23,562 |   | 23,497 |   |
| Loss before income tax               |       | $                                     | (7,839     | )                                   | $          | (9,970 | ) | $ | (15,728 | ) | $ | (15,152 | ) |

 

**10.          Pension Plan**

 

Thecomponents of net periodic pension costs are as follows:

 

14

----

 
| ** **                      | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(in thousands)**              | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest  cost                  |       | $                                     | 267        |                                | $          | 256 |   | $ | 533 |   | $ | 516 |   |
| Expected  return on plan assets |       | (304                                  | )          | (308                                | )          | (607 | ) | (615 | ) |
| Recognized  net actuarial loss  |       | 4                                     |       | —                              |       | 6 |   | — |   |
| Net  periodic cost (benefit)    |       | $                                     | (33        | )                                   | $          | (52 | ) | $ | (68 | ) | $ | (99 | ) |

 

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

 

15

----

 

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

** **

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

** **

**BUSINESS OVERVIEW**

 

**OurCompany**

 

UniversalHospital Services, Inc. (“we”, “our”, “us”, the “Company”, or “UHS”) is aleading nationwide provider of medical equipment outsourcing and lifecyclesolutions to the United States health care industry. Our customers includenational, regional and local acute and long-term acute care hospitals,alternate site providers (such as skilled nursing facilities, specialtyhospitals, large physician clinics, and home care providers) and medicalequipment manufacturers.  We provide ourcustomers solutions across the spectrum of the equipment life cycle as a resultof our position as one of the industry’s largest purchasers and outsourcers ofmedical equipment.  We currently own ormanage over 520,000 pieces of medical equipment in our Medical EquipmentOutsourcing and Technical and Professional Services segments. Our diversemedical equipment outsourcing customer base includes more than 4,150 acute carehospitals and approximately 4,150 alternate site providers.  We also have relationships with more than 200medical equipment manufacturers and all of the nation’s largest grouppurchasing organizations (“GPOs”) and many of the integrated delivery networks(“IDNs”).  All of our solutions leverageour nationwide network of 84 offices and our 70 years of experience managingand servicing all aspects of medical equipment. Our fees are paid directly by our customers rather than from directreimbursement from third-party payors, such as private insurers, Medicare, orMedicaid.  We commenced operations in1939, originally incorporated in Minnesota in 1954 and reincorporated inDelaware in 2001.

 

***As one of thenation’s leading medical equipment lifecycle solutions companies, we design andoffer comprehensive solutions for our customers that help reduce capital andoperating expenses while increasing equipment and staff productivity andsupporting improved patient safety and outcomes.***

 

 

16

----

 

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

 

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

 

**MedicalEquipment Outsourcing Segment - Manage & Utilize**

 

Ourflagship business is our Medical Equipment Outsourcing segment, which accountedfor $56.5 million, or approximately 77.6% of our revenues, for the quarterended June 30, 2009 and $114.8 million, or approximately 78.2%, of ourrevenues for the six months ended June 30, 2009.  As of June 30, 2009, we owned or managedover 325,000 pieces of medical equipment in our Medical Equipment Outsourcingsegment, primarily in the categories of respiratory therapy, newborn care,critical care, patient monitors, patient handling (such as beds, stretchers andwheelchairs), pressure area management (such as therapy surfaces) and woundtherapy.  Historically, we have purchasedand directly owned the equipment used in our medical equipment outsourcingprograms.  Beginning in 2007, we enteredinto revenue sharing agreements with two key manufacturers of equipment wherethe manufacturers retain ownership of the equipment, but we take possession andmanage the rental of the equipment to customers.  We may enter into more of such arrangementsin the future.  Such arrangements areless capital-intensive for the Company.

 

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

 

·                  Supplemental and Peak Needs Usage;

·                  Customized Outsourcing Agreements; and

·                  Asset Management Partnership Program (“AMPP”).

 

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

 

17

----

 

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

 

OurTechnical and Professional Services segment accounted for $10.7 million, orapproximately 14.7% of our revenues for the quarter ended June 30, 2009and $21.1 million, or approximately 14.4% of our revenues for the six monthsended June 30, 2009.  We leverageour 70 years of experience and our extensive equipment database in repairingand maintaining medical equipment.  Weoffer a broad range of inspection, preventative maintenance, repair, logisticand consulting services through our team of approximately 325 technicians and professionalslocated throughout the United States in our nationwide network of offices.  We managed over 195,000 units of customerowned equipment and serviced over 325,000 units that we own or directly managein our Medical Equipment Outsourcing segment. Our technical and professionalservice offerings are less capital-intensive than our Medical EquipmentOutsourcing segment, and provide a complementary alternative for customers thatwish to own their medical equipment, but lack the infrastructure, expertise orscale to perform maintenance, repair, and lifecycle analysis and planningfunctions.

 

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

 

OurMedical Equipment Sales and Remarketing segment accounted for $5.6 million, orapproximately 7.7%, of our revenues for the quarter ended June 30, 2009and $10.9 million, or approximately 7.4%, of our revenues for the six monthsended June 30, 2009.  This segmentincludes three distinct business activities:

 

***Medical Equipment Remarketing and Disposal.*********We are one of the nation’slargest buyers and sellers of pre-owned medical equipment.  We remarket pre-owned medical equipment tohospitals, alternate site providers, veterinarians and equipment brokers.  We offer a wide range of equipment from ourstandard medical equipment to diagnostic, ultrasound and x-ray equipment.

 

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

 

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

 

**RESULTS OF OPERATIONS**

 

**Thefollowing discussion addresses:**

 

18

----

 

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

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

** **

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

** **

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

 
| ** **                                                                                                                      | ** ** | **Three  Months Ended June 30** | ** ** | **Six  Months Ended June 30** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                      | ** ** | ** **                           | ** ** | ** **                         | ** ** | **Percent** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                                                                                                                      | ** ** | **Percent  of Total Revenues**       | ** ** | **Increase**                       | ** ** | **Percent  of Total Revenues** | ** ** | **Increase** | ** ** |
| ** **                                                                                                                      | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **(Decrease)** | ** ** | **2009** | ** ** | **2008** | ** ** | **(Decrease)** | ** ** |
| **Revenue**                                                                                                                     |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Medical equipment  outsourcing                                                                                                  |       | 77.6                                 | %          | 78.0                               | %          | 1.1 | % | 78.2 | % | 78.3 | % | (0.4 | )% |
| Technical and  professional services                                                                                            |       | 14.7                                 |       | 16.1                               |       | (7.3 | ) | 14.4 |   | 15.9 |   | (9.8 | ) |
| Medical equipment sales  and remarketing                                                                                        |       | 7.7                                  |       | 5.9                                |       | 33.0 |   | 7.4 |   | 5.8 |   | 28.2 |   |
| Total revenues                                                                                                                  |       | 100.0                                | %          | 100.0                              | %          | 1.6 |   | 100.0 | % | 100.0 | % | (0.2 | ) |
|                                                                                                                            |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| **Cost  of Sales**                                                                                                              |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Cost of medical  equipment outsourcing                                                                                          |       | 27.1                                 |       | 28.7                               |       | (3.8 | ) | 27.4 |   | 27.5 |   | (0.6 | ) |
| Cost of technical and  professional services                                                                                    |       | 10.4                                 |       | 12.3                               |       | (14.3 | ) | 10.2 |   | 11.8 |   | (13.9 | ) |
| Cost of medical  equipment sales and remarketing                                                                                |       | 6.1                                  |       | 4.6                                |       | 35.8 |   | 6.0 |   | 4.6 |   | 31.5 |   |
| Medical equipment  depreciation                                                                                                 |       | 21.9                                 |       | 21.5                               |       | 2.9 |   | 21.6 |   | 20.8 |   | 3.7 |   |
| Total costs of medical  equipment outsourcing, technical and professional services and medical  equipment sales and remarketing |       | 65.5                                 |       | 67.1                               |       | (0.9 | ) | 65.2 |   | 64.7 |   | 0.6 |   |
| Gross margin                                                                                                                    |       | 34.5                                 |       | 32.9                               |       | 6.7 |   | 34.8 |   | 35.3 |   | (1.9 | ) |
|                                                                                                                            |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Selling, general and  administrative                                                                                            |       | 29.0                                 |       | 30.2                               |       | (2.4 | ) | 29.4 |   | 29.7 |   | (1.0 | ) |
| Operating income                                                                                                                |       | 5.5                                  |       | 2.7                                |       | 110.1 |   | 5.4 |   | 5.7 |   | (6.1 | ) |
|                                                                                                                            |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Interest expense                                                                                                                |       | 16.3                                 |       | 16.6                               |       | (0.3 | ) | 16.1 |   | 16.0 |   | 0.3 |   |
| Loss before income  taxes                                                                                                       |       | (10.8                                | )          | (13.9                              | )          | (21.4 | ) | (10.7 | ) | (10.3 | ) | 3.8 |   |
|                                                                                                                            |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Benefit for income  taxes                                                                                                       |       | (4.2                                 | )          | (5.5                               | )          | (22.5 | ) | (4.2 | ) | (4.0 | ) | 3.8 |   |
| Net loss                                                                                                                        |       | (6.6                                 | )%         | (8.4                               | )%         | (20.7 | ) | (6.5 | )% | (6.3 | )% | 3.8 |   |

 

19

----

 

**Resultsof Operations for the Three Months Ended June 30, 2009 compared to theThree Months Ended June 30, 2008**

** **

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

*(inthousands)*

 
| ** **                                                                                                              | ** ** | **Three  Months Ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                              | ** ** | **2009**                               | ** ** | **2008**   | ** ** | **Change** | ** ** | **%  Change** | ** ** |
| Total revenue                                                                                                           |       | $                                      | 56,524     |       | $          | 55,925     |       | $ | 599 |   | 1.1 | % |
| Cost of revenue                                                                                                         |       | 19,760                                 |       | 20,550     |       | (790       | )          | (3.8 | ) |
| Medical equipment  depreciation                                                                                         |       | 15,904                                 |       | 15,451     |       | 453        |       | 2.9 |   |
| Gross margin                                                                                                            |       | $                                      | 20,860     |       | $          | 19,924     |       | $ | 936 |   | 4.7 |   |
|                                                                                                                    |       |                                   |       |       |       |       |       |   |   |
| Gross margin %                                                                                                          |       | 36.9                                   | %          | 35.6       | %          |       |       |   |   |
|                                                                                                                    |       |                                   |       |       |       |       |       |   |   |
| Gross margin                                                                                                            |       | $                                      | 20,860     |       | $          | 19,924     |       | $ | 936 |   | 4.7 |   |
| Purchase accounting  adjustments, primarily non-cash charges related to step-up in carrying value  of medical equipment |       | 3,544                                  |       | 3,876      |       | (332       | )          | (8.6 | ) |
| Gross margin, before  purchase accounting adjustments                                                                   |       | $                                      | 24,404     |       | $          | 23,800     |       | $ | 604 |   | 2.5 | % |
| Gross margin %, before  purchase accounting adjustments                                                                 |       | 43.2                                   | %          | 42.6       | %          |       |       |   |   |

 

Totalrevenue in the Medical Equipment Outsourcing segment increased $0.6 million, or1.1%, to $56.5 million in the second quarter of 2009 as compared to the sameperiod of 2008.  This increase wasprimarily driven by increased activity in our AMPP, patient handling and woundtherapy solutions, partially offset by what we believe has been an increasedcustomer effort to control outsourcing expenses.

 

Totalcost of revenue in the segment decreased $0.8 million, or 3.8%, to $19.8 millionin the second quarter of 2009 as compared to the same period of 2008.  This decrease is primarily attributable tolower expenses related to medical equipment fleet repairs, vehicles andemployee-related expenses of $0.4, $0.2 and $0.2 million, respectively.

 

Medicalequipment depreciation increased $0.5 million, or 2.9%, to $15.9 million in thesecond quarter of 2009 as compared to the same period of 2008.  The increase in medical equipmentdepreciation primarily relates to the increase in medical equipment purchasesin fiscal year 2008 to meet customer demand. Medical equipment depreciation for the quarters ended June 30, 2009and 2008 include $3.4 and $3.6 million, respectively, of purchase accountingadjustments related to the step-up in carrying value of our medical equipment.

 

Grossmargin percentage for the Medical Equipment Outsourcing segment increased from35.6% in the second quarter of 2008 to 36.9% for the second quarter of 2009.Gross margin percentage, before purchase accounting adjustments, increased from42.6% in the second quarter of 2008 to 43.2% in the second quarter of2009.  The increase is primarily due tocontinuous improvement efforts coupled with cost controls implemented duringthe quarter that resulted in repair, vehicle and employee related cost savings.

 

20

----

 

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

*(inthousands)*

 
| ** **                                                                                           | ** ** | **Three  Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                           | ** ** | **June 30,**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                           | ** ** | **2009**                | ** ** | **2008**   | ** ** | **Change** | ** ** | **%  Change** | ** ** |
| Total revenue                                                                                        |       | $                       | 10,696     |       | $          | 11,538     |       | $ | (842 | ) | (7.3 | )% |
| Cost of revenue                                                                                      |       | 7,568                   |       | 8,834      |       | (1,266     | )          | (14.3 | ) |
| Gross margin                                                                                         |       | $                       | 3,128      |       | $          | 2,704      |       | $ | 424 |   | 15.7 |   |
| Gross margin %                                                                                       |       | 29.2                    | %          | 23.4       | %          |       |       |   |   |
|                                                                                                 |       |                    |       |       |       |       |       |   |   |
| Gross margin                                                                                         |       | $                       | 3,128      |       | $          | 2,704      |       | $ | 424 |   | 15.7 |   |
| Purchase accounting  adjustments, primarily non-cash charges related to favorable lease  commitments |       | 5                       |       | 7          |       | (2         | )          | (33.0 | ) |
| Gross margin, before  purchase accounting adjustments                                                |       | $                       | 3,133      |       | $          | 2,711      |       | $ | 422 |   | 15.6 | % |
| Gross margin %, before  purchase accounting adjustments                                              |       | 29.3                    | %          | 23.5       | %          |       |       |   |   |

 

Totalrevenue in the Technical and Professional Services segment declined $0.8million, or 7.3%, to $10.7 million in the second quarter of 2009 as compared tothe same period of 2008. This decrease was primarily attributable to a decreasein episodic business flows in our manufacturer services unit.

 

Totalcost of revenue in the segment declined $1.3 million, or 14.3%, to $7.6 millionin the second quarter of 2009 as compared to the same period of 2008.   This decrease was primarily attributable toa decrease in expenses associated with our manufacturer services unit and lowerthird party vendor expenses of $0.8 and $0.5 million, respectively.

 

Grossmargin percentage for the Technical and Professional Services segment increasedfrom 23.4% for the second quarter of 2008 to 29.2% for the same period of2009.  We expect gross margin percentageto fluctuate based on the variability of third party vendor expenses in ourCustomized Healthcare Asset Management Programs (“CHAMP®”) and supplementalservice programs.

 

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

*(inthousands)*

 
| ** **                                                                                                                      | ** ** | **Three  Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                      | ** ** | **June 30,**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                      | ** ** | **2009**                | ** ** | **2008**   | ** ** | **Change** | ** ** | **%  Change** | ** ** |
| Total revenue                                                                                                                   |       | $                       | 5,616      |       | $          | 4,221      |       | $ | 1,395 |   | 33.0 | % |
| Cost of revenue                                                                                                                 |       | 4,440                   |       | 3,269      |       | 1,171      |       | 35.8 |   |
| Gross margin                                                                                                                    |       | $                       | 1,176      |       | $          | 952        |       | $ | 224 |   | 23.5 |   |
| Gross margin %                                                                                                                  |       | 20.9                    | %          | 22.6       | %          |       |       |   |   |
|                                                                                                                            |       |                    |       |       |       |       |       |   |   |
| Gross margin                                                                                                                    |       | $                       | 1,176      |       | $          | 952        |       | $ | 224 |   | 23.5 |   |
| Purchase accounting  adjustments, primarily non-cash charges related to the step-up in carrying  value of our medical equipment |       | 278                     |       | 187        |       | 91         |       | 48.7 |   |
| Gross margin, before  purchase accounting adjustments                                                                           |       | $                       | 1,454      |       | $          | 1,139      |       | $ | 315 |   | 27.7 | % |
| Gross margin %, before  purchase accounting adjustments                                                                         |       | 25.9                    | %          | 27.0       | %          |       |       |   |   |

 

21

----

 

Totalrevenue in the Medical Equipment Sales and Remarketing segment increased $1.4million, or 33.0%, to $5.6 million in the second quarter of 2009 as compared tothe same period of 2008.  The increasewas primarily driven by an increase in equipment and disposable sales of $1.1and $0.4 million, respectively, partially offset by a decrease in pre-ownedequipment sales of $0.1 million.

 

Totalcost of revenue in the segment increased $1.2 million, or 35.8%, to $4.4million in the second quarter of 2009 as compared to the same period of2008.  The increase was primarily due toan increase in the cost of new equipment, disposables and pre-owned equipmentof $0.8, $0.3 and $0.1 million, respectively. During the quarters ended June 30, 2009 and 2008, purchase accountingadjustments related to medical equipment sold increased cost of revenue by $0.3and $0.2 million, respectively.

 

Grossmargin percentage for the Medical Equipment Sales and Remarketing segmentdecreased from 22.6% in the second quarter of 2008 to 20.9% for the same periodof 2009.  Gross margin percentage, beforepurchase accounting adjustments, decreased from 27.0% in the second quarter of2008 to 25.9% for the same period of 2009. We expect margins and activity in this segment to fluctuate based on thetransactional nature of the business.

 

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

*(inthousands)*

 
| ** **                           | ** ** | **Three  Months Ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **2009**                               | ** ** | **2008**   | ** ** | **Change** | ** ** | **%  Change** | ** ** |
| Selling, general and  administrative |       | $                                      | 21,158     |       | $          | 21,673     |       | $ | (515 | ) | (2.4 | )% |
| Interest expense                     |       | 11,845                                 |       | 11,877     |       | (32        | )          | (0.3 | )% |
|                                      |            |                                        |            |            |            |            |            |  |  |  |  |  |

 

***Selling, General andAdministrative***

** **

Selling,general and administrative expense decreased $0.5 million, or 2.4%, to $21.2million for the second quarter of 2009 as compared to the same period of 2008.  Selling, general and administrative expenseconsists primarily of employee-related expenses, professional fees, occupancycharges, bad debt expense and depreciation and amortization.  Expenses during the three months ended June 30,2009 and 2008 include $3.7 and $4.0 million, respectively, of charges relatedto the amortization of our intangible assets and non-cash stock-basedcompensation expense related to the 2007 Stock Option Plan of $0.3 and $0.6million, respectively.  Bad debt expensefor the three-month periods ended June 30, 2009 and 2008 was $0.1 and $0.5million, respectively.  Cost savingsinitiatives implemented in the second quarter of 2009 resulted in $0.6 millionof severance charges, which related to the realignment of our support and operationsorganizations.  These costs savings areexpected to be realized through the remainder of 2009.  Selling, general and administrative expenseas a percentage of total revenue was 29.0% and 30.2% for each of the quartersended June 30, 2009 and 2008, respectively.

 

***Interest Expense***

** **

Interestexpense remained flat at $11.8 million for the quarter ended June 30, 2009as compared to the same period of 2008. Increased levels of outstanding debt on our senior secured creditfacility were offset by a lower average interest rate on our variable ratedebt.

 

22

----

 

**IncomeTaxes**

 

Benefitfor income taxes decreased $0.9 million to $3.0 million during the secondquarter of 2009 as compared to the same period of 2008.  The decrease is attributable to the change inloss before income taxes.

 

**NetLoss**

 

Netloss decreased $1.2 million to $4.8 million in the second quarter of 2009 ascompared to the same period of 2008. This decrease was primarily driven by increased activity in our AMPP,patient handling and wound therapy solutions, partially offset by what webelieve to be an increased customer effort to control outsourcing expenses anda decrease in episodic business flows in our Technical and ProfessionalServices segment.

 

**Resultsof Operations for the Six Months Ended June 30, 2009 compared to the SixMonths Ended June 30, 2008**

** **

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

*(inthousands)*

 
| ** **                                                                                                              | ** ** | **Six  Months Ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                              | ** ** | **2009**                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **%  Change** | ** ** |
| Total revenue                                                                                                           |       | $                                    | 114,806    |       | $          | 115,252    |       | $ | (446 | ) | (0.4 | )% |
| Cost of revenue                                                                                                         |       | 40,229                               |       | 40,466     |       | (237       | )          | (0.6 | ) |
| Medical equipment  depreciation                                                                                         |       | 31,766                               |       | 30,629     |       | 1,137      |       | 3.7 |   |
| Gross margin                                                                                                            |       | $                                    | 42,811     |       | $          | 44,157     |       | $ | (1,346 | ) | (3.0 | ) |
| Gross margin %                                                                                                          |       | 37.3                                 | %          | 38.3       | %          |       |       |   |   |
|                                                                                                                    |       |                                 |       |       |       |       |       |   |   |
| Gross margin                                                                                                            |       | $                                    | 42,811     |       | $          | 44,157     |       | $ | (1,346 | ) | (3.0 | ) |
| Purchase accounting  adjustments, primarily non-cash charges related to step-up in carrying value  of medical equipment |       | 7,125                                |       | 7,766      |       | (641       | )          | (8.3 | ) |
| Gross margin, before  purchase accounting adjustments                                                                   |       | $                                    | 49,936     |       | $          | 51,923     |       | $ | (1,987 | ) | (3.8 | )% |
| Gross margin %, before  purchase accounting adjustments                                                                 |       | 43.5                                 | %          | 45.1       | %          |       |       |   |   |

 

Totalrevenue in the Medical Equipment Outsourcing segment decreased $0.4 million, or0.4%, to $114.8 million in the first six months of 2009 as compared to the sameperiod of 2008.  This decrease resultedprimarily from an overall decrease in patient census and what we believe hasbeen an increased customer effort to control outsourcing expenses, partiallyoffset by increased activity in our AMPP, patient handling and wound therapysolutions.

 

Totalcost of revenue in the segment decreased $0.2 million, or 0.6%, to $40.2million in the first six months of 2009 as compared to the same period of 2008.

 

Medicalequipment depreciation increased $1.1 million, or 3.7%, to $31.8 million in thefirst six months of 2009 as compared to the same period of 2008.  The increase in medical equipmentdepreciation primarily relates to the increase in medical equipment purchasesin fiscal year 2008 to meet customer

 

23

----

 

demand.  Medical equipment depreciation for the sixmonths ended June 30, 2009 and 2008 include $6.8 and $7.2 million,respectively, of purchase accounting adjustments related to the step-up incarrying value of our medical equipment.

 

Grossmargin percentage for the Medical Equipment Outsourcing segment decreased from38.3% in the first six months of 2008 to 37.3% for the same period of 2009.Gross margin percentage, before purchase accounting adjustments, decreased from45.1% in the first six months of 2008 to 43.5% in the first six months of2009.  This decrease resulted primarilyfrom an overall decrease in patient census and an increased customer effort tocontrol outsourcing expenses, partially offset by increased activity in ourAMPP, patient handling and wound therapy solutions.

 

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

*(inthousands)*

 
| ** **                                                                                           | ** ** | **Six  Months Ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                           | ** ** | **2009**                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **%  Change** | ** ** |
| Total revenue                                                                                        |       | $                                    | 21,108     |       | $          | 23,414     |       | $ | (2,306 | ) | (9.8 | )% |
| Cost of revenue                                                                                      |       | 14,938                               |       | 17,345     |       | (2,407     | )          | (13.9 | ) |
| Gross margin                                                                                         |       | $                                    | 6,170      |       | $          | 6,069      |       | $ | 101 |   | 1.7 |   |
| Gross margin %                                                                                       |       | 29.2                                 | %          | 25.9       | %          |       |       |   |   |
|                                                                                                 |       |                                 |       |       |       |       |       |   |   |
| Gross margin                                                                                         |       | $                                    | 6,170      |       | $          | 6,069      |       | $ | 101 |   | 1.7 |   |
| Purchase accounting  adjustments, primarily non-cash charges related to favorable lease  commitments |       | 9                                    |       | 15         |       | (6         | )          | (36.9 | ) |
| Gross margin, before  purchase accounting adjustments                                                |       | $                                    | 6,179      |       | $          | 6,084      |       | $ | 95 |   | 1.6 | % |
| Gross margin %, before  purchase accounting adjustments                                              |       | 29.3                                 | %          | 26.0       | %          |       |       |   |   |

 

Totalrevenue in the Technical and Professional Services segment declined $2.3million, or 9.8%, to $21.1 million in the first six months of 2009 as comparedto the same period of 2008. This decrease was primarily attributable to adecrease in episodic business flows in our manufacturer services unit.

 

Totalcost of revenue in the segment declined $2.4 million, or 13.9%, to $14.9million in the first six months of 2009 as compared to the same period of2008.   This decrease was primarilyattributable to a decrease in expenses associated with our manufacturerservices unit and lower third party vendor expenses of $1.8 and $1.2 million,respectively, partially offset by an increase in employee-related charges of$0.6 million.

 

Grossmargin percentage for the Technical and Professional Services segment increasedfrom 25.9% for the first six months of 2008 to 29.2% for the same period of2009.  Gross margin percentage willfluctuate based on the variability of third party vendor expenses in our CHAMP®and supplemental service programs.

 

24

----

 

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

*(inthousands)*

 
| ** **                                                                                                                | ** ** | **Six  Months Ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                | ** ** | **2009**                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **%  Change** | ** ** |
| Total revenue                                                                                                             |       | $                                    | 10,852     |       | $          | 8,462      |       | $ | 2,390 |   | 28.2 | % |
| Cost of revenue                                                                                                           |       | 8,826                                |       | 6,713      |       | 2,113      |       | 31.5 |   |
| Gross margin                                                                                                              |       | $                                    | 2,026      |       | $          | 1,749      |       | $ | 277 |   | 15.8 |   |
| Gross margin %                                                                                                            |       | 18.7                                 | %          | 20.7       | %          |       |       |   |   |
|                                                                                                                      |       |                                 |       |       |       |       |       |   |   |
| Gross margin                                                                                                              |       | $                                    | 2,026      |       | $          | 1,749      |       | $ | 277 |   | 15.8 |   |
| Purchase accounting  adjustments, primarily non-cash charges related to a step-up in carrying  value of medical equipment |       | 602                                  |       | 479        |       | 123        |       | 25.7 |   |
| Gross margin, before  purchase accounting adjustments                                                                     |       | $                                    | 2,628      |       | $          | 2,228      |       | $ | 400 |   | 18.0 | % |
| Gross margin %, before  purchase accounting adjustments                                                                   |       | 24.2                                 | %          | 26.3       | %          |       |       |   |   |

 

Totalrevenue in the Medical Equipment Sales and Remarketing segment increased $2.4 million,or 28.2%, to $10.9 million in the first six months of 2009 as compared to thesame period of 2008.  The increase wasprimarily driven by an increase in new equipment and disposable sales of $2.1and $0.8 million, respectively, partially offset by a decrease in pre-ownedequipment sales of $0.5 million.

 

Totalcost of revenue in the segment increased $2.1 million, or 31.5%, to $8.8million in the first six months of 2009 as compared to the same period of2008.  The increase was primarily due toan increase in the cost of new equipment and disposables of $1.5 and $0.7million, respectively, partially offset by a decrease in the cost of pre-ownedequipment sales of $0.1 million.  Duringthe six months ended June 30, 2009 and 2008, purchase accounting adjustmentsrelated to medical equipment sold increased cost of revenue by $0.6 and $0.5million, respectively.

 

Grossmargin percentage for the Medical Equipment Sales and Remarketing segmentdecreased from 20.7% in the first six months of 2008 to 18.7% for the sameperiod of 2009.  Gross margin percentage,before purchase accounting adjustments, decreased from 26.3% in the first sixmonths of 2008 to 24.2% for the same period of 2009.  We expect margins and activity in thissegment to fluctuate based on the transactional nature of the business.

 

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

*(inthousands)*

 
| ** **                           | ** ** | **Six  Months Ended  June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **2009**                             | ** ** | **2008**   | ** ** | **Change** | ** ** | **%  Change** | ** ** |
| Selling, general and  administrative |       | $                                    | 43,173     |       | $          | 43,630     |       | $ | (457 | ) | (1.0 | )% |
| Interest expense                     |       | 23,562                               |       | 23,497     |       | 65         |       | 0.3 | % |
|                                      |            |                                      |            |            |            |            |            |  |  |  |  |  |

 

***Selling, General andAdministrative***

** **

Selling,general and administrative expense decreased $0.5 million, or 1.0%, to $43.2million for the first six months of 2009 as compared to the same period of2008.  Selling, general andadministrative

 

25

----

 

expenseconsists primarily of employee-related expenses, professional fees, occupancycharges, bad debt expense and depreciation and amortization.  Expenses during the six months ended June 30,2009 and 2008 include $7.5 and $8.0 million, respectively, of charges relatedto the amortization of our intangible assets and non-cash stock-basedcompensation expense related to the 2007 Stock Option Plan of $0.9 and $1.2million, respectively.  Bad debt expensefor the six months ended June 30, 2009 and 2008 was $0.7 and $0.6 million,respectively.  Cost savings initiativesimplemented in the second quarter of 2009 resulted in $0.6 million of severancecharges, which related to the realignment of our support and operationsorganizations.  These costs savings areexpected to be realized through the remainder of 2009.  Selling, general and administrative expenseas a percentage of total revenue was 29.4% and 29.7% for each of the six monthperiods ended June 30, 2009 and 2008, respectively.

 

***Interest Expense***

** **

Interestexpense increased $0.1 million, or 0.3%, to $23.6 million during the first sixmonths of 2009 as compared to the same period of 2008.  The increase was primarily driven by increasedlevels of outstanding debt on our senior secured credit facility, partiallyoffset by a lower average interest rate on our variable rate debt.

 

**IncomeTaxes**

 

Benefitfor income taxes increased $0.2 million to $6.1 million during the first sixmonths of 2009 as compared to the same period of 2008.  The increase is attributable to the change inloss before income taxes.

 

**NetLoss**

 

Netloss increased $0.4 million to $9.6 million in the first six months of 2009 ascompared to the same period of 2008.  This increase was primarily driven by anoverall decrease in patient census, an increased customer effort to controloutsourcing expenses and a decrease in episodic business flows in our Technicaland Professional Services segment, partially offset by increased activity inour AMPP, patient handling and wound therapy solutions.

 

**EBITDA**

** **

EarningsBefore Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $51.3 and$51.1 million for the six months ended June 30, 2009 and 2008,respectively.  EBITDA for the six monthsended June 30, 2009 was primarily driven by increased activity in ourAMPP, patient handling and wound therapy solutions, partially offset by anoverall decrease in patient census, an increased customer effort to controloutsourcing expenses and a decrease in episodic business flows in our Technicaland Professional Services segment.

 

EBITDAis not intended to represent an alternative to operating income or cash flowsfrom operating, financing or investing activities (as determined in accordancewith GAAP) as a measure of performance, and is not representative of fundsavailable for discretionary use due to our financing obligations.  EBITDA, as defined by us, may not becalculated consistently among other companies applying similar reportingmeasures.  EBITDA is included because itis a widely accepted financial indicator pre-owned by certain investors andfinancial analysts to assess and compare companies, and a version of EBITDA

 

26

----

 

isan integral part of our debt covenant calculations.  Management believes that EBITDA provides animportant perspective on our ability to service our long-term obligations, ourability to fund continuing growth, and our ability to continue as a goingconcern.  A reconciliation of operatingcash flows to EBITDA is included below:

 
| ** **                                   | ** ** | **Six  Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                           | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| Net cash provided by  operating activities   |       | $                                    | 25,347     |   | $ | 28,271 |   |
| Changes in operating  assets and liabilities |       | 7,034                                |       | 3,248 |   |
| Other non-cash expenses                      |       | 1,502                                |       | 1,947 |   |
| Benefit for income  taxes                    |       | (6,135                               | )          | (5,912 | ) |
| Interest expense                             |       | 23,562                               |       | 23,497 |   |
| EBITDA                                       |       | $                                    | 51,310     |   | $ | 51,051 |   |

 
| ** **                                                         | ** ** | **Six  Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(dollars in thousands)**                                         | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| EBITDA                                                             |       | $                                    | 51,310     |   | $ | 51,051 |   |
|                                                               |       |                                 |       |   |   |
| **Other  Financial Data:**                                         |       |                                 |       |   |   |
| Net cash provided by  operating activities                         |       | $                                    | 25,347     |   | $ | 28,271 |   |
| Net cash used in  investing activities                             |       | (15,664                              | )          | (42,903 | ) |
| Net cash provided by  (used in) financing activities               |       | $                                    | (18,189    | ) | $ | 14,983 |   |
|                                                               |       |                                 |       |   |   |
| **Other  Operating Data (as of end of period):**                   |       |                                 |       |   |   |
| Medical equipment  (approximate number of owned outsourcing units) |       | 217,000                              |       | 205,000 |   |
| District offices                                                   |       | 84                                   |       | 80 |   |
| Number of outsourcing  hospital customers                          |       | 4,150                                |       | 4,000 |   |
| Number of total  outsourcing customers                             |       | 8,300                                |       | 7,825 |   |

 

**SEASONALITY**

** **

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

 

**LIQUIDITY AND CAPITAL RESOURCES**

** **

Ourprincipal sources of liquidity are expected to be cash and cash equivalents of$3.5 million, cash flows from operating activities, and borrowings under ourfirst lien senior secured asset-based revolving credit facility providing forloans in an amount of up to $135.0 million, pursuant to a credit agreementdated as of May 31, 2007 with a group of financial institutions (the “seniorsecured credit facility”).  Our seniorsecured credit facility matures in May 2013.  It is anticipated that our principal uses ofliquidity will be to fund capital expenditures related to purchases of medicalequipment, provide working capital, meet debt service requirements and financeour strategic plans.

 

Werequire substantial cash to operate our Medical Equipment Outsourcing programsand service our debt.  Our outsourcingprograms require us to invest a significant amount of cash in medical equipmentpurchases.  To the extent that such expenditurescannot be funded from cash and cash equivalents, our

 

27

----

 

operatingcash flow, borrowing under our senior secured credit facility or otherfinancing sources, we may not be able to conduct our business or grow ascurrently planned.

 

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

 

Netcash provided by operating activities was $25.3 and $28.3 million for the sixmonths ended June 30, 2009 and 2008, respectively.

 

Netcash used in investing activities was $15.7 and $42.9 million for the sixmonths ended June 30, 2009 and 2008, respectively.  Net cash used in investing activitiesdeclined during the 2009 period as a result of a decrease in capitalexpenditures for medical equipment and property and office equipment.

 

Netcash provided by (used in) financing activities was ($18.2) and $15.0 millionfor the six months ended June 30, 2009 and 2008, respectively.  During the six months ended June 30,2009, net cash used in financing activities was impacted by a net pay down ofour senior secured credit facility of $10.0 million compared to a net draw fromour senior secured credit facility of $20.5 million for the same period of2008.

 

Cashon-hand was $3.5 million as of June 30, 2009 compared to $0.4 million asof June 30, 2008.

 

Based on the level of operating performance expected in2009, we believe our cash and cash equivalents, cash from operations, andadditional borrowings under our senior secured credit facility, will meet ourliquidity needs for the foreseeable future, exclusive of any borrowings that wemay make to finance potential acquisitions. However, if during that period or thereafter we are not successful ingenerating sufficient cash flows from operations or in raising additionalcapital when required in sufficient amounts and on terms acceptable to us, ourbusiness could be adversely affected.  As of June 30,2009, we had $93.6 million of availability under our senior secured creditfacility, based on a borrowing base of $135.0 million, less borrowings of $39.0million and after giving effect to $2.4 million used for letters of credit.

 

Our levels of borrowing are further restricted by thefinancial covenants set forth in our senior secured credit facility agreementand the second lien senior indenture governing our PIK Toggle Notes andFloating Rate Notes.  As of June 30,2009, the Company was in compliance with all covenants under the senior securedcredit facility.

 

28

----

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

***Standards Adopted***

 

InMay 2009, the Financial Accounting Standards Board (“FASB”) issued, and weadopted, SFAS No. 165, *Subsequent Events*.SFAS 165 stipulates: the period after the balance sheet date during whichmanagement of a reporting entity should evaluate events or transactions thatmay occur for potential recognition or disclosure in the financial statements,the circumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements and thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date. SFAS 165 also includes a requirement to disclose the date through whichthe company has evaluated subsequent events and whether the date correspondswith the release of their financial statements. SFAS 165 is effective forinterim and annual periods ending after June 15, 2009. The adoption of FAS165 did not have a material impact on our financial position or results ofoperations.  We have evaluated subsequentevents through August 12, 2009, the date on which our financial statementswere issued.

 

InApril 2009, the FASB issued two FASB Staff Positions (“FSPs”), to addressconcerns about (1) measuring the fair value of financial instruments whenthe markets become inactive and quoted prices may reflect distressedtransactions and (2) recording impairment charges on investments in debtsecurities. The FASB also issued a third FSP to require disclosures of fairvalues of certain financial instruments in interim financial statements.

 

FSPNo. SFAS 157-4, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly*,provides additional guidance to highlight and expand on the factors that shouldbe considered in estimating fair value when there has been a significantdecrease in market activity for a financial asset. FSP No. SFAS 157-4 alsorequires new disclosures relating to fair value measurement inputs andvaluation techniques (including changes in inputs and valuation techniques).

 

FSPNo. SFAS 115-2 and SFAS 124-2, *Recognitionand Presentation of Other-Than-Temporary Impairments*, will change (1) thetrigger for determining whether an other-than-temporary impairment exists and (2) theamount of an impairment charge to be recorded in earnings. To determine whetheran other-than-temporary impairment exists, an entity will be required to assessthe likelihood of selling a security prior to recovering its cost basis. Thisis a change from the current requirement for an entity to assess whether it hasthe intent and ability to hold a security to recovery or maturity. FSP No. SFAS115-2 and SFAS 124-2 also expands and increases the frequency of existingdisclosure about other-than-temporary impairments and requires new disclosuresof the significant inputs used in determining a credit loss, as well as a rollforward of that amount each period.

 

FSPNo. SFAS 107-1 and APB 28-1, *InterimDisclosures about Fair Value of Financial Instruments*, increases thefrequency of fair value disclosures from annual to quarterly to providefinancial statement users with more timely information about the effects ofcurrent market conditions on their financial instruments.

 

Weadopted these three FSPs during the second quarter of 2009.  The adoption of the three FSPs did not have amaterial effect on the Company’s financial condition, results of operations orcashflows.

 

29

----

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities*.SFAS No.161 requires companies to provide enhanced disclosures aboutderivative instruments and hedging activities to provide a better understandingof their effects on a company’s financial position, financial performance, andcash flows. We adopted the disclosure provisions of SFAS No. 161 on January 1,2009.

 

Weenter into derivative instruments for risk management purposes only, includingderivatives designated as hedging instruments under SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities – anamendment of FASB Statement No.133*. We have an interest rate swapthat is designated as a fair value hedge for a portion of our long-term debt.By using this instrument, we are exposed, from time to time, to credit risk andmarket risk. Credit risk is the risk that the counterparty will fail to performunder the terms of the derivative contract. When the fair value of a derivativecontract is positive, the counterparty owes us, which creates credit risk forus. We minimize this credit risk by entering into transactions with highquality counterparties. Market risk is the risk that a change in interest rateswill result in an adverse effect on the value of a financial instrument.

 

InDecember 2007, the FASB issued SFAS No. 141(R), *BusinessCombinations*, which establishes principles and requirements for howan acquirer in a business combination recognizes and measures in its financialstatements the 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 December 15, 2008. We adopted SFAS No. 141(R) on January 1,2009 and will apply the provisions to applicable business combinations on aprospective basis.

 

***Standards Issued Not Yet Adopted***

 

InJune 2009, the FASB issued SFAS No. 168, *The FASBAccounting Standards Codification*TM *and the Hierarchy of Generally Accepted Accounting Principles – areplacement of FASB Statement No. 162*.  In addition in June 2009, the FASB issuedAccounting Standards Update No. 2009-01, *Topic 205 –Generally Accepted Accounting Principles - amendments based on Statement ofFinancial Accounting Standards No. 168 – The FASB Accounting StandardsCodificationTM and the Hierarchy of Generally Accepted Accounting Principles*(“ASU 2009-1”). Both FAS 168 and ASU 2009-1 recognize the FASB AccountingStandards CodificationTM as the source of authoritative U.S. generallyaccepted accounting principles to be utilized by nongovernmental entities.  SFAS 168 and ASU 2009-1 are effective forinterim and annual periods ending after September 15, 2009.

 

**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

 

30

----

 

financialcondition, causing our actual results to differ materially from those expressedin any forward-looking statements:

 

·                  our history of net losses and substantialinterest expense;

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

·                  our substantial outstanding debt and debtservice obligations;

·                  restrictions imposed by the terms of ourdebt;

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

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

·                  the absence of long-term commitments withcustomers;

·                  our ability to renew contracts with GPOs andIDNs;

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

·                  the impact of health care reform initiatives;

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

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

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

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

·                  impacts of equipment product recalls orobsolescence; and

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

 

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

 

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

 

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 June 30, 2009, we had approximately$520.9 million of total debt outstanding. After taking into account the effect of our interest rate swapagreement, we had $39.0 million of debt bearing interest at variable ratesapproximating 1.8%.  Based on variabledebt levels at June 30, 2009, a 1.0 percentage point change in interestrates on variable rate debt would have resulted in annual interest expensefluctuating approximately $0.4 million.

 

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

 

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

 

31

----

 

basis,we must perform an effectiveness test. In accordance with SFAS No. 133, the fair value of the interestrate swap agreement at June 30, 2009 is included as an interest rate swapliability on our balance sheet.  Thechange in fair value was recorded as a component of accumulated othercomprehensive loss, net of tax, on our balance sheet since the instrument wasdetermined to be an effective hedge at June 30, 2009.  We do not expect any amounts to bereclassified into current earnings in the future due to ineffectiveness.  As a result of our interest rate swapagreement, we expect the effective interest rate on our $230.0 million ofFloating Rate Notes to be 9.065% from December 2007 through May 2012.

 

**Fuel Costs**

 

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

 

**Other Market Risk**

 

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

 

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

 

**Item4(T).  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(e) and Rule 15d-15(e) promulgatedunder the Securities Exchange Act of 1934 as amended (the “Exchange Act”)).  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of the end ofthe period covered by this report, our disclosure controls and procedures wereeffective.

 

(b)           *Changes in internalcontrol over financial reporting*

 

Therewere no changes in our internal control over financial reporting during thequarter ended June 30, 2009, that have materially affected, or arereasonably likely to materially affect, our internal control 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 June 30, 2009, we were not a partyto any pending legal proceedings the adverse outcome of which could reasonablybe expected to have a material adverse effect on our operating results,financial position or cash flows.

 

32

----

 

**Item 1A.****             ****RiskFactors**

 

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

 

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

** **

None.

 

**Item 3.**                       Defaults uponSenior Securities

** **

Notapplicable.

 

**Item 4.**                       Submission ofMatters to a Vote of Security Holders

** **

None.

 

**Item 5.**                       OtherInformation

** **

Notapplicable.

 

**Item 6.**                       Exhibits

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

 

33

----

 

**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:  August 12, 2009 |                                                       |
|-----------------------------|------------------------------------------------------------|
|                        | Universal  Hospital Services, Inc.                    |
|                        |                                                       |
|                        | By                                                         | /s/  Gary D. Blackford |
|                        | Gary  D. Blackford,                                        |
|                        | Chairman  of the Board and Chief Executive Officer         |
|                        | (Principal  Executive Officer and Duly Authorized Officer) |
|                        |                                                       |
|                        | By                                                         | /s/  Rex T. Clevenger |
|                        | Rex  T. Clevenger,                                         |
|                        | Executive  Vice President and Chief Financial Officer      |
|                        | (Principal  Financial Officer)                             |

 

34

----