F^$  

** **

**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, 2008**                                                                                                 |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                      |
| **or** |
|   |       |                                                                                                                                                                                                                                                      |
| **o**  | ** ** | **Transition  Report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934 for the transition period from                      to** |

 

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

###  

**UNIVERSAL HOSPITAL SERVICES, INC.**

(Exactname of registrant as specified in its charter)

 

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

 

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

(Addressof principal executive offices, including zip code)

 

**(952) 893-3200**

(Registrant’stelephone number, including area code)

 

**NotApplicable**

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

 

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

 

Yes  o     No  x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer,non-accelerated filer, or a smaller reporting company.  See definition of “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) |                    |   |   |   |

 

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

Yes  o     No  x

 

Numberof shares of common stock outstanding as of August 1, 2008:  1,000.0

 

 

** **

----

 

**PART I - FINANCIALINFORMATION**

** **

**Item 1. FinancialStatements – Unaudited**

** **

**Universal Hospital Services, Inc.**

** **

**Balance Sheets**

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

*(unaudited)*

* *
| ** **                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                        | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                        | ** ** | **(Successor)**   | ** ** | **(Successor)**       | ** ** |
| **Assets**                                                                                                                        | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                   |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                        |       | $                 | 351        |                  | $          | — |   |
| Accounts  receivable, less allowance for doubtful accounts of $1,650 at June 30,  2008 and $1,500 at December 31, 2007  |       | 52,493            |       | 51,379                |       |
| Inventories                                                                                                                       |       | 4,922             |       | 4,230                 |       |
| Deferred income  taxes                                                                                                            |       | 6,360             |       | 5,636                 |       |
| Other current  assets                                                                                                             |       | 3,104             |       | 2,426                 |       |
| Total current  assets                                                                                                             |       | 67,230            |       | 63,671                |       |
|                                                                                                                              |       |              |       |                  |       |
| Property and  equipment, net:                                                                                                     |       |              |       |                  |       |
| Medical  equipment, net                                                                                                           |       | 218,663           |       | 214,336               |       |
| Property and  office equipment, net                                                                                               |       | 18,974            |       | 18,707                |       |
| Total property  and equipment, net                                                                                                |       | 237,637           |       | 233,043               |       |
|                                                                                                                              |       |              |       |                  |       |
| Other long-term  assets:                                                                                                          |       |              |       |                  |       |
| Goodwill                                                                                                                          |       | 282,311           |       | 282,913               |       |
| Other  intangibles, net                                                                                                           |       | 274,499           |       | 282,507               |       |
| Other, primarily  deferred financing costs, net                                                                                   |       | 15,446            |       | 16,618                |       |
| Total assets                                                                                                                      |       | $                 | 877,123    |                  | $          | 878,752 |   |
|                                                                                                                              |       |              |       |                  |       |
| **Liabilities  and Shareholders’ Equity**                                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                             |       |              |       |                  |       |
| Current portion  of long-term debt                                                                                                |       | $                 | 2,959      |                  | $          | 3,120 |   |
| Book overdrafts                                                                                                                   |       | —            |       | 3,420                 |       |
| Accounts payable                                                                                                                  |       | 13,830            |       | 16,518                |       |
| Accrued  compensation                                                                                                             |       | 10,421            |       | 13,527                |       |
| Accrued interest                                                                                                                  |       | 3,886             |       | 3,783                 |       |
| Other accrued  expenses                                                                                                           |       | 8,328             |       | 7,645                 |       |
| Total current  liabilities                                                                                                        |       | 39,424            |       | 48,013                |       |
|                                                                                                                              |       |              |       |                  |       |
| Long-term debt,  less current portion                                                                                             |       | 515,351           |       | 494,215               |       |
| Pension and  other long-term liabilities                                                                                          |       | 1,530             |       | 1,624                 |       |
| Interest rate  swap                                                                                                               |       | 13,411            |       | 14,681                |       |
| Payable to  Parent                                                                                                                |       | 3,715             |       | 2,471                 |       |
| Deferred income  taxes                                                                                                            |       | 88,319            |       | 94,053                |       |
|                                                                                                                              |       |              |       |                  |       |
| Commitments and  contingencies (Note 7)                                                                                           |       |              |       |                  |       |
|                                                                                                                              |       |              |       |                  |       |
| Shareholders’  equity                                                                                                        |       |              |       |                  |       |
| Common stock,  $0.01 par value; 1,000 shares authorized, issued and outstanding at  June 30, 2008 and December 31, 2007 |       | —            |       | —                |       |
| Additional  paid-in capital                                                                                                       |       | 248,794           |       | 248,794               |       |
| Accumulated  deficit                                                                                                              |       | (25,336           | )          | (16,096               | )          |
| Accumulated  other comprehensive loss                                                                                             |       | (8,085            | )          | (9,003                | )          |
| Total shareholders’  equity                                                                                                  |       | 215,373           |       | 223,695               |       |
| Total  liabilities and shareholders’ equity                                                                                  |       | $                 | 877,123    |                  | $          | 878,752 |   |

 

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

** **

**2**

----

 

**UniversalHospital Services, Inc.**

** **

**Statementsof Operations**

*(inthousands)*

*(unaudited)*

 

| ** **                                                                                                                      | ** ** | **Three**         | ** ** | ** **        | ** ** | ** ** | **Two**           | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|------------|-------------------|------------|
| ** **                                                                                                                      | ** ** | **Months**        | ** ** | **Month**         | ** ** | ** ** | **Months**        | ** ** |
| ** **                                                                                                                      | ** ** | **Ended**         | ** ** | **Ended**         | ** ** | ** ** | **Ended**         | ** ** |
| ** **                                                                                                                      | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | ** ** | **May 31,**  | ** ** |
| ** **                                                                                                                      | ** ** | **2008**          | ** ** | **2007**          | ** ** | ** ** | **2007**          | ** ** |
| ** **                                                                                                                      | ** ** | **(Successor)**   | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)** | ** ** |
| **Revenue**                                                                                                                     | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** **        | ** ** |
| Medical  equipment outsourcing                                                                                                  |       | $                 | 55,925     |              | $          | 16,695     |              |       | $ | 33,866 |   |
| Technical and  professional services                                                                                            |       | 11,538            |       | 3,630             |       |       | 6,748             |       |
| Medical  equipment sales and remarketing                                                                                        |       | 4,221             |       | 1,277             |       |       | 3,359             |       |
| Total revenues                                                                                                                  |       | 71,684            |       | 21,602            |       |       | 43,973            |       |
|                                                                                                                            |       |              |       |              |       |       |              |       |
| **Cost of  Sales**                                                                                                              |       |              |       |              |       |       |              |       |
| Cost of medical  equipment outsourcing                                                                                          |       | 20,550            |       | 5,916             |       |       | 11,193            |       |
| Cost of  technical and professional services                                                                                    |       | 8,834             |       | 2,526             |       |       | 4,801             |       |
| Cost of medical  equipment sales and remarketing                                                                                |       | 3,269             |       | 1,212             |       |       | 2,677             |       |
| Medical equipment  depreciation                                                                                                 |       | 15,451            |       | 4,632             |       |       | 8,250             |       |
| Total costs of  medical equipment outsourcing, technical and professional services and  medical equipment sales and remarketing |       | 48,104            |       | 14,286            |       |       | 26,921            |       |
| Gross margin                                                                                                                    |       | 23,580            |       | 7,316             |       |       | 17,052            |       |
|                                                                                                                            |       |              |       |              |       |       |              |       |
| Selling, general  and administrative                                                                                            |       | 21,673            |       | 6,604             |       |       | 12,892            |       |
| Transaction and  related costs                                                                                                  |       | —            |       | —            |       |       | 26,379            |       |
| Operating income  (loss)                                                                                                        |       | 1,907             |       | 712               |       |       | (22,219           | )          |
|                                                                                                                            |       |              |       |              |       |       |              |       |
| Interest expense                                                                                                                |       | 11,877            |       | 3,800             |       |       | 5,747             |       |
| Loss on  extinguishment of debt                                                                                                 |       | —            |       | 1,041             |       |       | 22,396            |       |
| Loss before  income taxes                                                                                                       |       | (9,970            | )          | (4,129            | )          |       | (50,362           | )          |
|                                                                                                                            |       |              |       |              |       |       |              |       |
| Provision  (benefit) for income taxes                                                                                           |       | (3,916            | )          | (1,581            | )          |       | 304               |       |
| Net loss                                                                                                                        |       | $                 | (6,054     | )                 | $          | (2,548     | )                 |       | $ | (50,666 | ) |

 

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

** **

**3**

----

 

**UniversalHospital Services, Inc.**

** **

**Statementsof Operations**

*(inthousands)*

*(unaudited)*

 

| ** **                                                                                                                      | ** ** | **Six**           | ** ** | ** **        | ** ** | ** ** | **Five**          | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|------------|-------------------|------------|
| ** **                                                                                                                      | ** ** | **Months**        | ** ** | **Month**         | ** ** | ** ** | **Months**        | ** ** |
| ** **                                                                                                                      | ** ** | **Ended**         | ** ** | **Ended**         | ** ** | ** ** | **Ended**         | ** ** |
| ** **                                                                                                                      | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | ** ** | **May 31,**  | ** ** |
| ** **                                                                                                                      | ** ** | **2008**          | ** ** | **2007**          | ** ** | ** ** | **2007**          | ** ** |
| ** **                                                                                                                      | ** ** | **(Successor)**   | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)** | ** ** |
| **Revenue**                                                                                                                     | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** **        | ** ** |
| Medical  equipment outsourcing                                                                                                  |       | $                 | 115,252    |              | $          | 16,695     |              |       | $ | 84,855 |   |
| Technical and  professional services                                                                                            |       | 23,414            |       | 3,630             |       |       | 14,800            |       |
| Medical equipment  sales and remarketing                                                                                        |       | 8,462             |       | 1,277             |       |       | 7,867             |       |
| Total revenues                                                                                                                  |       | 147,128           |       | 21,602            |       |       | 107,522           |       |
|                                                                                                                            |       |              |       |              |       |       |              |       |
| **Cost of  Sales**                                                                                                              |       |              |       |              |       |       |              |       |
| Cost of medical  equipment outsourcing                                                                                          |       | 40,466            |       | 5,916             |       |       | 27,694            |       |
| Cost of  technical and professional services                                                                                    |       | 17,345            |       | 2,526             |       |       | 10,124            |       |
| Cost of medical  equipment sales and remarketing                                                                                |       | 6,713             |       | 1,212             |       |       | 6,366             |       |
| Medical  equipment depreciation                                                                                                 |       | 30,629            |       | 4,632             |       |       | 18,512            |       |
| Total costs of  medical equipment outsourcing, technical and professional services and  medical equipment sales and remarketing |       | 95,153            |       | 14,286            |       |       | 62,696            |       |
| Gross margin                                                                                                                    |       | 51,975            |       | 7,316             |       |       | 44,826            |       |
|                                                                                                                            |       |              |       |              |       |       |              |       |
| Selling, general  and administrative                                                                                            |       | 43,630            |       | 6,604             |       |       | 28,692            |       |
| Transaction and  related costs                                                                                                  |       | —            |       | —            |       |       | 26,891            |       |
| Operating income  (loss)                                                                                                        |       | 8,345             |       | 712               |       |       | (10,757           | )          |
|                                                                                                                            |       |              |       |              |       |       |              |       |
| Interest expense                                                                                                                |       | 23,497            |       | 3,800             |       |       | 13,829            |       |
| Loss on  extinguishment of debt                                                                                                 |       | —            |       | 1,041             |       |       | 22,396            |       |
| Loss before  income taxes                                                                                                       |       | (15,152           | )          | (4,129            | )          |       | (46,982           | )          |
|                                                                                                                            |       |              |       |              |       |       |              |       |
| Provision  (benefit) for income taxes                                                                                           |       | (5,912            | )          | (1,581            | )          |       | 492               |       |
| Net loss                                                                                                                        |       | $                 | (9,240     | )                 | $          | (2,548     | )                 |       | $ | (47,474 | ) |

 

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

** **

**4**

----

** **

**UniversalHospital Services, Inc.**

 

**Statementsof Cash Flows**

*(inthousands)*

(unaudited)

 

| ** **                                                                                | ** ** | **Six**           | ** ** | ** **        | ** ** | ** ** | **Five**          | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|------------|-------------------|------------|
| ** **                                                                                | ** ** | **Months**        | ** ** | **Month**         | ** ** | ** ** | **Months**        | ** ** |
| ** **                                                                                | ** ** | **Ended**         | ** ** | **Ended**         | ** ** | ** ** | **Ended**         | ** ** |
| ** **                                                                                | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | ** ** | **May 31,**  | ** ** |
| ** **                                                                                | ** ** | **2008**          | ** ** | **2007**          | ** ** | ** ** | **2007**          | ** ** |
| ** **                                                                                | ** ** | **(Successor)**   | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)** | ** ** |
| Cash flows from  operating activities:                                                    |       |              |       |              |       |       |              |       |
| Net income  (loss)                                                                        |       | $                 | (9,240     | )                 | $          | (2,548     | )                 |       | $ | (47,474 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |              |       |              |       |       |              |       |
| Depreciation                                                                              |       | 34,698            |       | 5,301             |       |       | 21,625            |       |
| Amortization of  intangibles and deferred financing costs                                 |       | 9,212             |       | 1,542             |       |       | 1,913             |       |
| Non-cash  write-off of deferred financing cost                                            |       | —            |       | 290               |       |       | 6,305             |       |
| Tender premium  for purchase of 10.125% senior notes                                      |       | —            |       | 751               |       |       | 16,090            |       |
| Provision for  doubtful accounts                                                          |       | 649               |       | 18                |       |       | 194               |       |
| Provision for  inventory obsolescence                                                     |       | 304               |       | 11                |       |       | 256               |       |
| Non-cash charges  related to step-up in carrying value of inventory                       |       | —            |       | 100               |       |       | —            |       |
| Non-cash  stock-based compensation expense                                                |       | 1,244             |       | 350               |       |       | 7,957             |       |
| Loss (gain) on  sales and disposals of equipment                                          |       | 684               |       | 34                |       |       | (745              | )          |
| Deferred income  taxes                                                                    |       | (6,032            | )          | (1,613            | )          |       | 486               |       |
| Changes in  operating assets and liabilities:                                             |       |              |       |              |       |       |              |       |
| Accounts  receivable                                                                      |       | (1,739            | )          | 592               |       |       | (3,481            | )          |
| Inventories                                                                               |       | (996              | )          | 394               |       |       | (252              | )          |
| Other operating  assets                                                                   |       | (733              | )          | (587              | )          |       | 643               |       |
| Accounts payable                                                                          |       | 2,633             |       | 380               |       |       | 590               |       |
| Other accrued  expenses                                                                   |       | (2,413            | )          | (31,028           | )          |       | 30,211            |       |
| Net cash  provided by (used in) operating activities                                      |       | 28,271            |       | (26,013           | )          |       | 34,318            |       |
| Cash flows from  investing activities:                                                    |       |              |       |              |       |       |              |       |
| Medical  equipment purchases                                                              |       | (41,913           | )          | (2,593            | )          |       | (34,040           | )          |
| Property and  office equipment purchases                                                  |       | (2,300            | )          | (153              | )          |       | (1,720            | )          |
| Proceeds from  disposition of property and equipment                                      |       | 1,310             |       | 126               |       |       | 2,290             |       |
| Acquisition of  the ICMS division of Intellamed, Inc.                                |       | —            |       | —            |       |       | (14,590           | )          |
| Acquisition of  Universal Hospital Services, Inc. by Parent                          |       | —            |       | (335,069          | )          |       | —            |       |
| Net cash used in  investing activities                                                    |       | (42,903           | )          | (337,689          | )          |       | (48,060           | )          |
| Cash flows from  financing activities:                                                    |       |              |       |              |       |       |              |       |
| Proceeds under  amended credit agreement                                                  |       | —            |       | —            |       |       | 73,625            |       |
| Payments under  amended credit agreement                                                  |       | —            |       | (74,550           | )          |       | (42,075           | )          |
| Proceeds under  senior secured credit facility                                            |       | 63,500            |       | 12,550            |       |       | —            |       |
| Payments under  senior secured credit facility                                            |       | (42,975           | )          | (550              | )          |       | —            |       |
| Payments of  principal under capital lease obligations                                    |       | (2,053            | )          | (274              | )          |       | (1,618            | )          |
| Payment of deferred  financing costs                                                      |       | (69               | )          | (17,270           | )          |       | —            |       |
| Proceeds from  issuance of bonds                                                          |       | —            |       | 460,000           |       |       | —            |       |
| Repayment of  10.125% senior notes                                                        |       | —            |       | (250,055          | )          |       | —            |       |
| Tender premium  for purchase of 10.125% senior notes                                      |       | —            |       | (751              | )          |       | (16,090           | )          |
| Cash equity  contributions                                                                |       | —            |       | 239,754           |       |       | —            |       |
| Change in book  overdrafts                                                                |       | (3,420            | )          | (1,669            | )          |       | (119              | )          |
| Proceeds from  issuance of common stock                                                   |       | —            |       | —            |       |       | 19                |       |
| Net cash  provided by financing activities                                                |       | 14,983            |       | 367,185           |       |       | 13,742            |       |
| Net change in  cash and cash equivalents                                                  |       | 351               |       | 3,483             |       |       | —            |       |
| Cash and cash  equivalents at the beginning of period                                     |       | —            |       | —            |       |       | —            |       |
| Cash and cash  equivalents at the end of period                                           |       | $                 | 351        |              | $          | 3,483      |              |       | $ | — |   |
|                                                                                      |       |              |       |              |       |       |              |       |
| Supplemental  cash flow information:                                                      |       |              |       |              |       |       |              |       |
| Interest paid                                                                             |       | $                 | 22,183     |              | $          | 200        |              |       | $ | 17,599 |   |
| Income taxes  paid                                                                        |       | $                 | 397        |              | $          | 34         |              |       | $ | 61 |   |
| Non-cash  activities:                                                                     |       |              |       |              |       |       |              |       |
| Medical  equipment purchases included in accounts payable                                 |       | $                 | 3,522      |              | $          | 4,062      |              |       | $ | 5,103 |   |
| Deferred  financing costs included in accounts payable                                    |       | $                 | —     |              | $          | 300        |              |       | $ | — |   |
| Capital lease  additions                                                                  |       | $                 | 2,503      |              | $          | 345        |              |       | $ | 2,142 |   |
| Equity  contributions from management shareholders                                        |       | $                 | —     |              | $          | 9,039      |              |       | $ | — |   |

 

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

** **

**5**

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**Universal Hospital Services, Inc.**

 

**NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS**

 

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

 

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

 

Althoughthe Company continued as the surviving legal entity after the Acquisition, theaccompanying information presents our results preceding the Acquisition (“predecessor”)and the periods following the Acquisition (“successor”).  All references to the quarter and six monthsended June 30, 2008 and month ended June 30, 2007 refer to oursuccessor results.  All references to thetwo and five months ended May 31, 2007 refer to our predecessor results.

 

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

 

Theinterim financial statements presented herein as of June 30, 2008,reflect, in the opinion of management, all adjustments necessary for a fairpresentation of the financial position and the results of operations and cashflows for the periods presented.  Theseadjustments are all of a normal, recurring nature.  The results of operations for any interimperiod are not necessarily indicative of results for the full year.

 

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

 

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

 

6

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judgmentswhen 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 2007 Form 10-K/A.

 

**2.****                                     ****ComprehensiveLoss**

 

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

 
| ** **                                 | ** ** | **Three Months** | ** ** | **Month**         | ** ** | ** ** | **Two Months** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-------------------|------------|------------|---------------------|------------|
| ** **                                 | ** ** | **Ended**             | ** ** | **Ended**         | ** ** | ** ** | **Ended**           | ** ** |
| ** **                                 | ** ** | **June 30,**     | ** ** | **June 30,** | ** ** | ** ** | **May 31,**    | ** ** |
| **(in thousands)**                    | ** ** | **2008**              | ** ** | **2007**          | ** ** | ** ** | **2007**            | ** ** |
| ** **                                 | ** ** | **(Successor)**       | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)**   | ** ** |
| Net loss                                   |       | $                     | (6,054     | )                 | $          | (2,548     | )                   |       | $ | (50,666 | ) |
| Unrealized gain  (loss) on cash flow hedge |       | 5,578                 |       | (2,459            | )          |       | —              |       |
| Comprehensive  loss                        |       | $                     | (476       | )                 | $          | (5,007     | )                   |       | $ | (50,666 | ) |

 
|                                       |       | **Six  Months**   | ** ** | **Month**         | ** ** | ** ** | **Five  Months**  |   |
|--------------------------------------------|------------|-------------------|------------|-------------------|------------|------------|-------------------|--------|
|                                       |       | **Ended**         | ** ** | **Ended**         | ** ** | ** ** | **Ended**         |   |
|                                       |       | **June 30,** | ** ** | **June 30,** | ** ** | ** ** | **May 31,**  |   |
| **(in thousands)**                    |       | **2008**          | ** ** | **2007**          | ** ** | ** ** | **2007**          |   |
| ** **                                 | ** ** | **(Successor)**   | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)** |   |
| Net loss                                   |       | $                 | (9,240     | )                 | $          | (2,548     | )                 |   | $ | (47,474 | ) |
| Unrealized gain  (loss) on cash flow hedge |       | 918               |       | (2,459            | )          |       | —            |   |
| Comprehensive  loss                        |       | $                 | (8,322     | )                 | $          | (5,007     | )                 |   | $ | (47,474 | ) |

 

**3.****                                     ****RecentAccounting Pronouncements**

 

***Standards Adopted***

 

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

 

InSeptember 2006, the FASB issued SFAS No. 157, Fair ValueMeasurements, which establishes a consistent framework for measuring fair valueand expands disclosures on fair value measurements. SFAS No. 157 waseffective for the Company starting in fiscal 2008 with respect to financialassets and 

 

7

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liabilities.The impact of the initial adoption of SFAS No. 157 in 2008 had no impacton our financial statements.

 

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

 
| ** **              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-------------------|------------|-----------------------|------------|
| **(in thousands)** | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **              | ** ** | **(Successor)**   | ** ** | **(Successor)**       | ** ** |
| Loss on swap  contract  |       | $                 | 13,411     |                  | $          | 14,681 |   |
|                         |            |                   |            |                       |            |  |  |

 

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

 

***Standards Issued Not Yet Adopted***

 

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

 

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

 

**4.****                                     ****The Transaction**

 

TheAcquisition was completed on May 31, 2007 and encompassed:

 

·                  thepurchase by the equity investors of all of the issued and outstanding shares ofcommon stock and option interests of the Company for approximately $335.1million (excluding non-cash consideration of $9.0 million), which is comprisedof the purchase price of approximately $712.0 million less debt, tenderpremium and accrued interest and capitalized leases;

 

8

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·                  equityinvestments from Parent funded by Bear Stearns Merchant Banking (“BSMB”) in theamount of $238.9 million,  managementrollover of $9.0 million and management contributions of $0.9 million;

·                  theentry into by Merger Sub of a new $135.0 million senior secured creditfacility;

·                  theissuance by Merger Sub of $230.0 million of Floating Rate Notes and$230.0 million of PIK Toggle Notes; and

·                  theretirement of $309.6 million of the existing indebtedness of the predecessor,which was approximately $334.6 million as of May 31, 2007 (excludingapproximately $7.7 million of pre-existing capital leases which remainedoutstanding), including the repayment of $235.0 million of our$260.0 million existing 10.125% Senior Notes due 2011 for which wecompleted a tender offer and consent solicitation on May 31, 2007, and therepayment of the outstanding balance ($74.6 million) on our previous $125.0million amended and restated credit agreement (“Amended Credit Agreement”) thatwe had entered into on May 26, 2005, with a bank group led by GeneralElectric Capital Corporation.

 

TheAcquisition occurred simultaneously with:

 

·                  theclosing of the financing and equity investments described above; and

·                  themerger of Merger Sub with and into the Company, with the Company as thesurviving corporation, and the payment of approximately $712.0 million asmerger consideration.

 

***Transaction and Related Costs.*** During the five months ended May 31, 2007, we incurred $26.9million of expenses in connection with the Transaction.  These expenses consisted primarily of:

 

·                  accounting,legal, investment banking advisory and restructuring expenses totaling $13.7million;

·                  BSMBfee expensed of $6.5 million; and

·                  stock-basedcompensation expense related to the accelerated vesting of options under our2003 Stock Option Plan of $6.7 million upon the occurrence of the Transaction.

 

***Loss on Extinguishment of Debt. ***In connection with the Transaction, asdetailed above, predecessor incurred $22.4 million of expense associated withthe purchase of $235.0 million of our 10.125% Senior Notes in May 2007.  The expense consisted of a call premium of$16.1 million and the write-off of $6.3 million of unamortized deferredfinancing costs related to our repurchased 10.125% Senior Notes and AmendedCredit Agreement.

 

**PurchaseAccounting**

 

Wehave accounted for the Acquisition in accordance with the provisions of SFAS No. 141,Business Combinations, whereby the purchase price paid to effect theAcquisition is allocated to state the acquired assets and liabilities at fairvalue.  The Acquisition and theallocation of the purchase price to the opening balance sheet accounts of thesuccessor has been recorded as of the beginning of the first day of our newaccounting period (June 1, 2007). The purchase price was $712.0 million and the total consideration wasapproximately $344.1 million (including non-cash management rollover and directcosts). The sources and uses of funds in connection with the Transaction andthe partial redemption of our 10.125% Senior Notes are summarized below:

 

9

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| **(in millions)**                                         | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|
| **Sources:**                                                   |       |       |       |
| Existing 10.125%  Senior Notes                                 |       | $          | 25.0       |   |
| Floating Rate  Notes                                           |       | 230.0      |       |
| PIK Toggle Notes                                               |       | 230.0      |       |
| Capitalized  leases                                            |       | 7.7        |       |
| Equity  contribution (cash)                                    |       | 239.8      |       |
| Equity  contribution (non-cash)                                |       | 9.0        |       |
| Cash on hand                                                   |       | 1.4        |       |
| **Total  Sources**                                             |       | $          | 742.9      |   |
|                                                           |       |       |       |
| **Uses:**                                                      |       |       |       |
| Consideration  paid (including non-cash consideration of $9.0) |       | $          | 342.9      |   |
| Payment of  existing debt                                      |       | 309.6      |       |
| Tender premium  and accrued interest                           |       | 18.6       |       |
| Capitalized  leases                                            |       | 7.7        |       |
| Existing 10.125%  Senior Notes                                 |       | 25.0       |       |
| Buyer fees (including  direct costs of $1.2)                   |       | 30.9       |       |
| Seller fees                                                    |       | 8.2        |       |
| **Total  Uses**                                                |       | $          | 742.9      |   |

 

Thefollowing tables reconcile the total sources and uses of funds to the purchaseprice and the purchase price to the total consideration:

 
| **Reconciliation  of Sources and Uses to Purchase Price** |
|-----------------------------------------------------------|

 
| **(in millions)**                             | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|------------|------------|
|                                               |       |       |       |
| Total of Sources  and Uses                         |       | $          | 742.9      |   |
| Less: Buyer fees  (including direct costs of $1.2) |       | (30.9      | )          |
| Purchase price  (1)                                |       | $          | 712.0      |   |

 
| **Reconciliation  of Purchase Price to Total Consideration** |
|--------------------------------------------------------------|

 
| **(in millions)** | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|
|                   |       |       |       |
| Purchase Price  (1)    |       | $          | 712.0      |   |
| Direct costs           |       | 1.2        |       |
| Indebtedness (2)       |       | (360.9     | )          |
| Seller fees            |       | (8.2       | )          |
| Total  Consideration   |       | $          | 344.1      |   |

 

----

(1)          PerAgreement and Plan of Merger.

 

(2)          Asdefined in the Agreement and Plan of Merger, “funded indebtedness” includeslong-term debt ($334.6 million for both debt retired and remaining), tenderpremium and accrued interest ($18.6 million) and capitalized leases ($7.7million) as of May 31, 2007.

 

10

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Inconnection with the purchase price allocation, we estimated the fair values ofour long-lived and intangible assets, inventories and liabilities based uponassumptions related to the future cash flows, discount rates and asset livesutilizing currently available information. We have recorded purchase accounting adjustments to increase thecarrying value of our property and equipment and inventory, to establishintangible assets for our customer relationships, supply agreement, trade namesand trademarks, technology database, non-compete agreements, favorable leasecommitments and to revalue our long-term benefit plan obligations, among otherthings.  We revised the preliminarypurchase accounting adjustments during the fourth quarter of 2007 and duringthe second quarter of 2008 as additional information became available that wasprimarily related to the tax impact of our valuation analysis and the taximpact of the Transaction itself.  Thefinal purchase accounting adjustments, as reflected in our June 30, 2008balance sheet, were as follows:

 
| **(in millions)**                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash  Consideration:                                         | ** ** | ** ** | ** ** |       |       |
| Paid to  shareholders and option holders                     | ** ** | ** ** | ** ** | $          | 333.9      |   |
| Direct costs                                                 | ** ** | ** ** | ** ** | 1.2        |       |
|                                                         | ** ** | ** ** | ** ** | 335.1      |       |
| Non-Cash  Consideration                                      | ** ** | ** ** | ** ** | 9.0        |       |
| Total  Consideration                                         | ** ** | ** ** | ** ** | $          | 344.1      |   |
|                                                         | ** ** | ** ** | ** ** |       |       |
| Net assets  acquired at historical cost                      | ** ** | ** ** | ** ** | $          | (132.5     | ) |
|                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Adjustments to  state acquired assets at fair value:         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Increase  carrying value of inventories                      | ** ** | $          | 0.2        |       | ** ** | ** ** |
| Increase  carrying value of medical equipment                | ** ** | 59.7       |       | ** ** | ** ** |
| Increase in  carrying value of property and office equipment | ** ** | 2.3        |       | ** ** | ** ** |
| Write-off of  historical goodwill and other intangibles      | ** ** | (59.8      | )          | ** ** | ** ** |
| Record  intangible assets acquired:                          | ** ** |       |       | ** ** | ** ** |
| Customer  relationships                                      | ** ** | 87.0       |       | ** ** | ** ** |
| Supply agreement                                             | ** ** | 26.0       |       | ** ** | ** ** |
| Trade names and  trademarks                                  | ** ** | 170.0      |       | ** ** | ** ** |
| Technology  database                                         | ** ** | 7.0        |       | ** ** | ** ** |
| Non-compete  agreements                                      | ** ** | 1.8        |       | ** ** | ** ** |
| Record favorable  lease commitments                          | ** ** | 0.1        |       | ** ** | ** ** |
| Write-off of  historical deferred rent credits               | ** ** | 2.4        |       | ** ** | ** ** |
| Decrease in  long-term pension liability                     | ** ** | 0.8        |       | ** ** | ** ** |
| Increase in  other accrued liabilities                       | ** ** | (0.3       | )          | ** ** | ** ** |
| Tax impact of valuation  adjustments                         | ** ** | (102.9     | )          | ** ** | ** ** |
|                                                         | ** ** | ** ** | ** ** | 194.3      | ** ** |
| Net assets  acquired at fair value                           | ** ** | ** ** | ** ** | 61.8       | ** ** |
|                                                         | ** ** | ** ** | ** ** |       | ** ** |
| Excess purchase  price recorded as goodwill                  | ** ** | ** ** | ** ** | $          | 282.3      | ** ** |
|                                                              |            |            |            |            |            |  |  |

 

11

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Our trade names and trademarks have indefinite lives andare not subject to amortization.  Ourtrade names and trademarks and goodwill will be reviewed at least annually forimpairment.  Our goodwill is generallynot deductible for income tax purposes.

 

A condensed balance sheet of the fair value of the acquiredassets and liabilities as of May 31, 2007 is as follows:

 
| **(in millions)**       | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
| Current assets               |       | $          | 90.7       |   |
| Property and  equipment      |       | 231.2      |       |
| Goodwill                     |       | 282.3      |       |
| Other intangible  assets     |       | 291.9      |       |
| Other long-term  assets      |       | 18.3       |       |
| Current  liabilities         |       | (61.7      | )          |
| Long-term debt               |       | (489.4     | )          |
| Other long-term  liabilities |       | (114.5     | )          |
|                         |       | $          | 248.8      |   |

 

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

 

***Successor***

 

The 2007 Stock Option Plan provides for the issuanceof 43.9 million nonqualified stock options of our Parent to any of our andParent’s executives, other key employees and to consultants and certainnon-employee directors.  The optionsallow for the purchase of shares of common stock of our Parent at prices equalto the fair market value of this common stock at the date of grant.

 

Options granted have a ten-year contractual term andvest over approximately six years. Except for options issued to non-employee directors, half of the optionshave fixed vesting schedules and the other half of the options vest uponthe achievement of established performance targets.  Options issued to non-employee directors veston a fixed vesting schedule.  Upon a saleof Parent or the Company, all of the unvested options with fixed vestingschedules will vest and become exercisable, and the unvested options that vestupon the achievement of established performance targets will vest and becomeexercisable upon BSMB’s achievement of a certain internal rate of return on itsinvestment in Parent, subject to certain conditions.  The shares issued to a grantee upon theexercise of such grantee’s options will be subject to certain restrictions ontransferability as provided in the 2007 Stock Option Plan.  Grantees are subject to non-competition,non-solicitation and confidentiality requirements as set forth in their respectivestock option grant agreements.  Forfeitedoptions are available for future issue.

 

Duringthe six months ended June 30, 2008, activity under Parent’s 2007 StockOption Plan was as follows:

 

12

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| **(in thousands except exercise price)** | ** ** | **Number of  Options** | ** ** | **Weighted  average  exercise price** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|
| Outstanding at  December 31, 2007                       |       | 36,490                      |       | $                                          | 1.00       |   |
| Granted                                                      |       | 955                         |       | 1.00                                       |       |
| Exercised                                                    |       | —                      |       |                                       |       |
| Forfeited or  expired                                        |       | (502                        | )          | $                                          | 1.00       |   |
|                                                         |       |                        |       |                                       |       |
| Outstanding at  June 30, 2008                           |       | 36,943                      |       | $                                          | 1.00       |   |
|                                                         |       |                        |       |                                       |       |
| Exercisable at  June 30, 2008                           |       | 5,853                       |       | $                                          | 1.00       |   |
|                                                         |       |                        |       |                                       |       |
| Remaining  authorized options available for issue            |       | 6,962                       |       |                                       |       |

 

Our Parent’s compensation committee determined theexercise price for options issued during fiscal 2008 by reference to the recentper share valuation of the Parent resulting from the Transaction as detailedbelow and by reference to comparable company Earnings Before Interest, Taxes,Depreciation and Amortization (“EBITDA”) multiple valuation.  The exercise price was approved by Parent’sboard of directors.

 
| **(in thousands, except per share amount)**             |   |    |    |
|----------------------------------------------------------------------------------|--------|---------|---------|
|                                                                             |   |    |    |
| Equity  Contribution at May 31, 2007 from BSMB and UHS Management to Parent |   | $       | 248,794 |   |
|                                                                             |   |    |    |
| Parent shares  issued and outstanding at May 31, 2007                       |   | 248,794 |    |
|                                                                             |   |    |    |
| Per share Parent  valuation at May 31, 2007                                 |   | $       | 1.00    |   |

 

Wedetermine the fair value of options using the Black-Scholes option pricingmodel. The estimated fair value of options, including the effect of estimatedforfeitures, is recognized as expense on a straight-line basis over the options’vesting periods. The following assumptions were used in determining the fairvalue of stock options granted during the six months ended June 30, 2008,under the Black-Scholes model:

 
| Risk-free  interest rate      |   | 2.9   | %      |
|-------------------------------|--------|-------|--------|
| Expected  volatility          |   | 30.50 | %      |
| Dividend Yield                |   | None  |   |
| Expected option  term (years) |   | 6.6   |   |

 

Usingthe Black-Scholes option-pricing model, the per-share fair value of optionsissued during the six months ended June 30, 2008 was $0.37.  Expected volatility is based on anindependent valuation of the stock of companies within our peer group.  Given the lack of a true comparable company,the peer group consists of selected public health care companies representingour suppliers, customers and competitors 

 

13

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withincertain product lines.  The riskfree-interest rate is based on the U.S. Treasury yield curve in effect at thegrant date based on the expected option life. The 6.6 year expected option life represents the result of the “simplified”method applied to “plain vanilla” options granted during the period, asprovided within Staff Accounting Bulletin No. 110.  Parent used the simplified method as Parentdoes not have sufficient historical exercise experience to provide a basis uponwhich to estimate the expected term.

 

Although Parent grants stockoptions, the Company recognizes compensation expense related to these optionssince the services are performed for its benefit.  For the three and six months ended June 30,2008 we recognized non-cash stock compensation expense of $0.6 million and $1.2million, respectively.  For the monthended June 30, 2007, we recognized non-cash stock compensation expense of$0.3 million.  Non-cash stockcompensation expense is primarily included in selling, general andadministrative expenses.  At June 30,2008, unearned non-cash stock-based compensation that we expect to recognize asexpense over the next 4.5 years totals approximately $10.7 million, net of ourestimated forfeitures of 3.00%.

 

***Predecessor***

 

We recorded non-cash chargesfor stock-based compensation expense of approximately $8.0 million duringthe first five months of 2007 in relation to our 2003 Stock Option Plan, $6.7million of which resulted from the accelerated vesting of all outstandingpredecessor stock options in connection with the Transaction. In June 2007,we paid $23.9 million to our option holders for their remaining interestsrelated to the 2003 Stock Option Plan.

 

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

 

Long-term debt consists of the following:

 
| ** **                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(in thousands)**                  | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                               | ** ** | **(Successor)**   | ** ** | **(Successor)**       | ** ** |
| PIK Toggle Notes                         |       | $                 | 230,000    |                  | $          | 230,000 |   |
| Floating Rate  Notes                     |       | 230,000           |       | 230,000               |       |
| Senior secured  credit facility          |       | 40,000            |       | 19,475                |       |
| 10.125% Senior  Notes                    |       | 9,945             |       | 9,945                 |       |
| Capital lease  obligations               |       | 8,365             |       | 7,915                 |       |
|                                     |       | 518,310           |       | 497,335               |       |
| Less: Current  portion of long-term debt |       | (2,959            | )          | (3,120                | )          |
| Total long-term  debt                    |       | $                 | 515,351    |                  | $          | 494,215 |   |

 

***PIK Toggle Notes. ***On May 31, 2007, Merger Sub issued $230.0 million aggregateoriginal principal amount of 8.50% / 9.25% PIK Toggle Notes under the SecondLien Senior Indenture dated as of May 31, 2007, between us and Wells FargoBank, National Association, as trustee (“Second Lien Senior Indenture”).  At the closing of the Transaction, as thesurviving corporation in the Acquisition, we assumed all the obligations ofMerger Sub under the Second Lien Senior Indenture.

 

14

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Forany interest payment period through June 1, 2011, the Company may, at itsoption, elect to pay interest on the PIK Toggle Notes entirely in cash (“CashInterest”), entirely by increasing the principal amount of the outstanding PIKToggle Notes, by issuing additional PIK Toggle Notes (“PIK Interest”) or 50%Cash Interest and 50% PIK Interest.  CashInterest on the PIK Toggle Notes accrues at the rate of 8.50% per annum. PIK Interest on the PIK Toggle Notes accrues at the rate of 9.25% perannum.  After June 1, 2011, the Company is required to make allinterest payments on the PIK Toggle Notes entirely as Cash Interest.  AllPIK Toggle Notes mature on June 1, 2015. Interest on the PIK Toggle Notes is payable semiannually in arrears oneach June 1 and December 1, commencing on December 1, 2007.  As of June 30, 2008, we intend to makefuture payments in the form of Cash Interest.

 

Wemay redeem some or all of the PIK Toggle Notes at any time prior to June 1,2011, at a price equal to 100% of the principal amount thereof, plus the applicablepremium (as defined by the Second Lien Senior Indenture), plus accrued andunpaid interest, if any, to the date of redemption.  In addition, on or before June 1, 2010,we may redeem up to 40% of the aggregate principal amount of the PIK ToggleNotes with the net proceeds of certain equity offerings.

 

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

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

 

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

 

***Floating Rate Notes. ***On May 31, 2007, Merger Sub issued $230.0 million aggregateoriginal principal amount of Floating Rate Notes under the Second Lien SeniorIndenture.  Interest on the Floating RateNotes is reset for each semi-annual interest period and is calculated at thecurrent LIBOR rate plus 3.375%.  At June 30,2008, our LIBOR-based rate was 7.584%, which includes the credit spread notedabove.  Interest on the Floating RateNotes is payable semiannually, in arrears, on each June 1 and December 1.  At the closing of the Transaction, as thesurviving corporation in the Acquisition, we assumed all the obligations ofMerger Sub under the Second Lien Senior Indenture.  The Floating RateNotes mature on June 1, 2015.

 

Wemay redeem some or all of the Floating Rate Notes at any time prior to June 1,2009, at a price equal to 100% of the principal amount thereof, plus theapplicable premium (as defined by the Second Lien Senior Indenture), plusaccrued and unpaid interest, if any, to the date of redemption.  In addition, on or before June 1, 2009,we may redeem up to 40% of the aggregate principal amount of the Floating RateNotes with the net proceeds of certain equity offerings.

 

15

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

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

 

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

 

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

 

Theinterest rate swap agreement qualifies for cash flow hedge accounting underSFAS 133, Accounting for Derivative Instruments and Hedging Activities.  Both at inception and on an on-going basis,we must perform an effectiveness test. In accordance with SFAS 133, the fair value of the swap agreement at June 30,2008 is included as an interest rate swap liability on our balance sheet of$13.4 million.  The change in fair valuewas recorded as a component of accumulated other comprehensive loss, net oftax, on our balance sheet since the instrument was determined to be aneffective hedge at June 30, 2008. We do not expect any amounts to be reclassified into current earnings inthe future due to ineffectiveness.

 

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

 

***Second Lien Senior Indenture.***  OurPIK Toggle Notes and Floating Rate Notes (collectively, the “Notes”) areguaranteed, jointly and severally, on a second priority senior secured basis,by certain of our future domestic subsidiaries. We do not currently have any subsidiaries.  The Notes are our second priority seniorsecured obligations and rank:

 

·                 equalin right of payment with all of our existing and future unsecured andunsubordinated indebtedness, and effectively senior to any such unsecuredindebtedness to the extent of the value of collateral;

·                 seniorin right of payment to all of our and our guarantor’s existing and futuresubordinated indebtedness;

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

 

16

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

 

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

 

·                 incuradditional indebtedness;

·                 paycash dividends or distributions on our capital stock or repurchase our capitalstock or subordinated debt;

·                 issueredeemable stock or preferred stock;

·                 issuestock of subsidiaries;

·                 makecertain investments;

·                 transferor sell assets;

·                 createliens on our assets to secure debt;

·                 enterinto transactions with affiliates; and

·                 mergeor consolidate with another company.

 

***Senior Secured Credit Facility. ***In connection with the Transaction, theCompany and Parent entered into a new first lien senior secured asset-basedrevolving credit facility providing for loans in an amount of up to $135.0million pursuant to a credit agreement, dated as of May 31, 2007, with agroup of financial institutions (the “senior secured credit facility”).  The senior secured credit facility isavailable for working capital and general corporate purposes, includingpermitted investments, capital expenditures and debt repayments, on a fullyrevolving basis, subject to the terms and conditions set forth in the creditdocuments in the form of revolving loans, swing line loans and letters ofcredit.

 

Thesenior secured credit facility provides financing of up to $135.0 million,subject to a borrowing base calculated on the basis of certain of our eligibleaccounts receivable, inventory and equipment. As of June 30, 2008, we had $93.9 million of availability under thesenior secured credit facility based on a borrowing base of $135.0 million,less borrowings of $40.0 million, and after giving effect to $1.1 million usedfor letters of credit.

 

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

 

Thesenior secured credit facility provides that we have the right at any time torequest up to $50.0 million of additional commitments, but the lenders areunder no obligation to provide any such additional commitments, and anyincrease in commitments will be subject to customary conditions precedent, suchas an absence of any default or events of default. If we were to request anysuch additional commitments and the existing lenders or new lenders were toagree to provide such commitments, the senior secured credit facility sizecould be increased to up to $185.0 million, but our ability to borrowwould still be limited by the amount of the borrowing base.

 

17

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Borrowingsunder the senior secured credit facility accrue interest:

 

·                 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 payable monthly in arrears.

 

At June 30, 2008, ourprime-based rate was 5.500% and our LIBOR-based rate was 3.959%, each of whichinclude the credit spreads noted above.

 

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

 

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

 

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

 

·                 incur indebtedness;

·                 create or permit liens;

·                 declare or pay dividends and certain otherrestricted payments;

·                 consolidate, merge or recapitalize;

·                 acquire or sell assets;

·                 make certain investments, loans or otheradvances;

·                 enter into transactions with affiliates;

·                 change our line of business; and

·                 enter into hedging transactions.

 

Thesenior secured credit facility also contains a financial covenant that iscalculated if the available borrowing capacity is less than $15.0 million for acertain period.  Such covenant consistsof a minimum ratio of trailing four-quarter Earnings Before Interest, Taxes,Depreciation and Amortization (“EBITDA”) to cash interest expense, as definedin the credit agreement dated May 31, 2007.

 

Thesenior secured credit facility specifies certain events of default, includingamong others, failure to pay principal, interest or fees, violation ofcovenants, inaccuracy of representations or warranties, bankruptcy events,certain ERISA-related events, cross-defaults to other material agreements,change of control events, and invalidity of guarantees or securitydocuments.  Some events of default willbe triggered only after certain cure periods have expired, or will provide formateriality thresholds.  If such adefault occurs, the lenders under the senior secured credit facility would beentitled to take various actions, including all actions permitted to be takenby a secured creditor and the acceleration of amounts due under the seniorsecured credit facility.

 

18

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

 

On May 17, 2007, weentered into a supplemental indenture to our Indenture governing our SeniorNotes, dated as of October 17, 2003, between the Company and Wells FargoBank, National Association, as trustee. The Indenture governs the terms of the Senior Notes.  The supplemental indenture amended ourIndenture.

 

The amendments set forth inthe supplemental indenture (the “Amendments”) became operative after theCompany purchased all of its Senior Notes validly tendered and not withdrawnpursuant to its tender offer and consent solicitation.  As of May 11, 2007, holders of SeniorNotes representing an amount greater than a majority of the principal amount ofoutstanding Senior Notes had validly tendered their Senior Notes and consentedto the execution of the supplemental indenture. The Amendments eliminated from the Indenture:

 

·                 requirements to file reports with the SEC;

·                 requirements to pay taxes;

·                 limitations on the Company to use defensesagainst usury;

·                 the limitation on restricted payments;

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

·                 limitations on incurrence of indebtedness andissuance of preferred stock;

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

·                 limitations on affiliate transactions;

·                 limitations on liens;

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

·                 requirements to preserve corporate existence;

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

·                 limitation on the issuance of guarantees ofindebtedness;

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

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

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

·                 certain events of default.

 

The Company has the right toredeem some or all of the remaining $9.9 million of Senior Notes at theredemption prices (expressed as a percentage of principal amount) set forthbelow, plus accrued and unpaid interest, if any, if redeemed during thetwelve-month period beginning on November 1 of the years indicated below,subject to the rights of the noteholders:

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

 

19

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**7.****                                     ****Commitments and 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 Transaction**

 

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.  On November 29, 2007, we added anew member to our board of directors who is also a director of Ryan. During the first six months of 2008, we made rent payments to a Ryan affiliatetotaling $156,000.

 

OnApril 1, 2008, we added three new independent directors to our Board ofDirectors.  One of our new directors isalso a director of Broadlane, Inc. (“Broadlane”), a health care grouppurchasing organization, that serves many of our customers.  During the second quarter of 2008, we paidBroadlane approximately $158,000 in administrative fees.  On June 30, 2008, accounts payableincludes approximately $44,000 in amounts due to Broadlane.

 

TheCompany believes that the aforementioned services and products were provided inthe ordinary course of business at prices and on terms similar to those thatwould result from arm’s length negotiation between unrelated parties.

 

**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)*

 
| ** **                      | ** ** | **Quarter-to-Date**   | ** ** | **Year-to-Date**  | ** ** |
|---------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                      | ** ** | **Three Months** | ** ** | **Month**         | ** ** | ** ** | **Two Months** | ** ** | **Six Months** | ** ** | **Month** | ** ** | ** ** | **Five Months** | ** ** |
| ** **                      | ** ** | **Ended**             | ** ** | **Ended**         | ** ** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **Ended** | ** ** | ** ** | **Ended** | ** ** |
| ** **                      | ** ** | **June 30,**     | ** ** | **June 30,** | ** ** | ** ** | **May 31,** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | ** ** | **May 31,** | ** ** |
| ** **                      | ** ** | **2008**              | ** ** | **2007**          | ** ** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **(Successor)**       | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)** | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| Revenues                        |       | $                     | 55,925     |              | $          | 16,695 |   |   | $ | 33,866 |   | $ | 115,252 |   | $ | 16,695 |   |   | $ | 84,855 |   |
| Cost of revenue                 |       | 20,550                |       | 5,916             |       |   | 11,193 |   | 40,466 |   | 5,916 |   |   | 27,694 |   |
| Medical  equipment depreciation |       | 15,451                |       | 4,632             |       |   | 8,250 |   | 30,629 |   | 4,632 |   |   | 18,512 |   |
| Gross margin                    |       | $                     | 19,924     |              | $          | 6,147 |   |   | $ | 14,423 |   | $ | 44,157 |   | $ | 6,147 |   |   | $ | 38,649 |   |

 

20

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**Technicaland Professional Services**

*(inthousands)*

 
| ** **      | ** ** | **Quarter-to-Date**   | ** ** | **Year-to-Date**  | ** ** |
|-----------------|------------|-----------------------|------------|-------------------|------------|
| ** **      | ** ** | **Three Months** | ** ** | **Month**         | ** ** | ** ** | **Two Months** | ** ** | **Six Months** | ** ** | **Month** | ** ** | ** ** | **Five Months** | ** ** |
| ** **      | ** ** | **Ended**             | ** ** | **Ended**         | ** ** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **Ended** | ** ** | ** ** | **Ended** | ** ** |
| ** **      | ** ** | **June 30,**     | ** ** | **June 30,** | ** ** | ** ** | **May 31,** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | ** ** | **May 31,** | ** ** |
| ** **      | ** ** | **2008**              | ** ** | **2007**          | ** ** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | ** ** | **2007** | ** ** |
| ** **      | ** ** | **(Successor)**       | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)** | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| Revenues        |       | $                     | 11,538     |              | $          | 3,630 |   |   | $ | 6,748 |   | $ | 23,414 |   | $ | 3,630 |   |   | $ | 14,800 |   |
| Cost of revenue |       | 8,834                 |       | 2,526             |       |   | 4,801 |   | 17,345 |   | 2,526 |   |   | 10,124 |   |
| Gross margin    |       | $                     | 2,704      |              | $          | 1,104 |   |   | $ | 1,947 |   | $ | 6,069 |   | $ | 1,104 |   |   | $ | 4,676 |   |

 

**MedicalEquipment Sales and Remarketing**

*(inthousands)*

 
| ** **      | ** ** | **Quarter-to-Date**   | ** ** | **Year-to-Date**  | ** ** |
|-----------------|------------|-----------------------|------------|-------------------|------------|
| ** **      | ** ** | **Three Months** | ** ** | **Month**         | ** ** | ** ** | **Two Months** | ** ** | **Six Months** | ** ** | **Month** | ** ** | ** ** | **Five Months** | ** ** |
| ** **      | ** ** | **Ended**             | ** ** | **Ended**         | ** ** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **Ended** | ** ** | ** ** | **Ended** | ** ** |
| ** **      | ** ** | **June 30,**     | ** ** | **June 30,** | ** ** | ** ** | **May 31,** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | ** ** | **May 31,** | ** ** |
| ** **      | ** ** | **2008**              | ** ** | **2007**          | ** ** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | ** ** | **2007** | ** ** |
| ** **      | ** ** | **(Successor)**       | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)** | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| Revenues        |       | $                     | 4,221      |              | $          | 1,277 |   |   | $ | 3,359 |   | $ | 8,462 |   | $ | 1,277 |   |   | $ | 7,867 |   |
| Cost of revenue |       | 3,269                 |       | 1,212             |       |   | 2,677 |   | 6,713 |   | 1,212 |   |   | 6,366 |   |
| Gross margin    |       | $                     | 952        |              | $          | 65 |   |   | $ | 682 |   | $ | 1,749 |   | $ | 65 |   |   | $ | 1,501 |   |

 

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

*(inthousands)*

 
| ** **                           | ** ** | **Quarter-to-Date**     | ** ** | **Year-to-Date**        | ** ** |
|--------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **Three Months**   | ** ** | **Month**               | ** ** | ** ** | **Two Months** | ** ** | **Six Months** | ** ** | **Month** | ** ** | ** ** | **Five Months** | ** ** |
| ** **                           | ** ** | **Ended**               | ** ** | **Ended**               | ** ** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **Ended** | ** ** | ** ** | **Ended** | ** ** |
| ** **                           | ** ** | **June 30,  2008** | ** ** | **June 30,  2007** | ** ** | ** ** | **May 31,  2007** | ** ** | **June 30,  2008** | ** ** | **June 30,  2007** | ** ** | ** ** | **May 31,  2007** | ** ** |
| ** **                           | ** ** | **(Successor)**         | ** ** | **(Successor)**         | ** ** | ** ** | **(Predecessor)** | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| Total gross  margin                  |       | $                       | 23,580     |                    | $          | 7,316 |   |   | $ | 17,052 |   | $ | 51,975 |   | $ | 7,316 |   |   | $ | 44,826 |   |
| Selling, general  and administrative |       | 21,673                  |       | 6,604                   |       |   | 12,892 |   | 43,630 |   | 6,604 |   |   | 28,692 |   |
| Transaction and  related costs       |       | —                  |       | —                  |       |   | 26,379 |   | — |   | — |   |   | 26,891 |   |
| Interest expense                     |       | 11,877                  |       | 3,800                   |       |   | 5,747 |   | 23,497 |   | 3,800 |   |   | 13,829 |   |
| Loss on  extinguishment of debt      |       | —                  |       | 1,041                   |       |   | 22,396 |   | — |   | 1,041 |   |   | 22,396 |   |
| Loss before  income tax              |       | $                       | (9,970     | )                       | $          | (4,129 | ) |   | $ | (50,362 | ) | $ | (15,152 | ) | $ | (4,129 | ) |   | $ | (46,982 | ) |

 

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

 

Thecomponents of net periodic pension costs are as follows:

 
| ** **                      | ** ** | **Quarter-to-Date**   | ** ** | **Year-to-Date**  | ** ** |
|---------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                      | ** ** | **Three Months** | ** ** | **Month**         | ** ** | ** ** | **Two Months** | ** ** | **Six Months** | ** ** | **Month** | ** ** | ** ** | **Five Months** | ** ** |
| ** **                      | ** ** | **Ended**             | ** ** | **Ended**         | ** ** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **Ended** | ** ** | ** ** | **Ended** | ** ** |
| ** **                      | ** ** | **June 30,**     | ** ** | **June 30,** | ** ** | ** ** | **May 31,** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | ** ** | **May 31,** | ** ** |
| **(in thousands)**              | ** ** | **2008**              | ** ** | **2007**          | ** ** | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **(Successor)**       | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)** | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| Interest cost                   |       | $                     | 256        |              | $          | 85 |   |   | $ | 168 |   | $ | 516 |   | $ | 85 |   |   | $ | 421 |   |
| Expected return  on plan assets |       | (308                  | )          | (98               | )          |   | (180 | ) | (615 | ) | (98 | ) |   | (452 | ) |
| Recognized net  actuarial loss  |       | —                |       | —            |       |   | 29 |   | — |   | — |   |   | 73 |   |
| Service cost                    |       | —                |       | —            |       |   | — |   | — |   | — |   |   | — |   |
| Net Periodic  cost (benefit)    |       | $                     | (52        | )                 | $          | (13 | ) |   | $ | 17 |   | $ | (99 | ) | $ | (13 | ) |   | $ | 42 |   |

 

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

 

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

 

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

 

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

 

**The followingshould be read in conjunction with the accompanying financial statements andnotes.**

 

**BUSINESS OVERVIEW**

 

**OurCompany**

 

UniversalHospital Services, Inc. (“we”, “our”, the “Company”, or “UHS”) is aleading nationwide provider of medical equipment outsourcing and lifecycleservices to the United States health care industry. Our customers includenational, regional and local acute care hospitals, alternate site providers(such as nursing homes and home care providers) and medical equipmentmanufacturers. Our diverse medical equipment outsourcing customer base includesmore than 4,000 acute care hospitals and approximately 3,825 alternate siteproviders. We also have relationships with more than 200 medical equipmentmanufacturers and many of the nation’s largest group purchasing organizations (“GPOs”)and integrated delivery networks (“IDNs”). All of our services leverage ournationwide network of offices and our more than 65 years of experience managingand servicing all aspects of medical equipment. Our fees are paid directly byour customers rather than from direct reimbursement from third-party payors,such as private insurers or Medicare and Medicaid. We commenced operations in1939, originally incorporated in Minnesota in 1954 and reincorporated in Delawarein 2001.

 

**On May 31,2007, UHS Holdco, Inc. (“Parent”) acquired all of the outstanding capitalstock of the Company for approximately $712.0 million in cash less debt,tender premium and accrued interest and capitalized leases per the terms of theAgreement and Plan of Merger, dated as of April 15, 2007, by and among theCompany, Parent and Parent’s wholly owned subsidiary, Merger Sub, and relateddocuments, which we collectively refer to as the “Transaction” or the “Acquisition.”**

** **

**Althoughthe Company continued as the surviving legal entity after the Acquisition, theaccompanying information presents our results preceding the Acquisition (“predecessor”)and the periods following the Acquisition (“successor”). All references to thequarter and six months ended June 30, 2008 and month ended June 30,2007 refer to our successor results. All references to the two and five monthsended May 31, 2007 refer to our predecessor results.**

 

22

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** **

**As aleading medical equipment lifecycle services company, we design and offercomprehensive solutions for our customers that reduce capital and operatingexpenses and increase equipment and staff productivity and support improvedpatient safety and outcomes.**

** **

 

Ourreporting segments consist of Medical Equipment Outsourcing, Technical andProfessional Services and Medical Equipment Sales and Remarketing. We evaluatethe performance of our reporting segments based on gross margin and grossmargin before purchase accounting adjustments. The accounting policies of theindividual operating segments are the same as those of the entire Company.

 

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

 

**MedicalEquipment Outsourcing Segment - Manage & Utilize**

 

Ourflagship business is our Medical Equipment Outsourcing segment, which accountedfor $55.9 million, or approximately 78.0% of our revenues for the quarter endedJune 30, 2008 and $115.3 million, or approximately 78.3% of our revenuesfor the six months ended June 30, 2008. As of June 30, 2008, we ownedand managed approximately 225,000 pieces of medical equipment, primarily in thecategories of respiratory therapy, newborn care, critical care, patientmonitors, and specialty beds and pressure area management. Historically, wehave purchased and owned directly the equipment used in our medical equipmentoutsourcing programs. Beginning in 2007, the Company entered into revenuesharing agreements with two key manufacturers of equipment where themanufacturers retain ownership of the equipment, but UHS takes possession andmanages the rental of the equipment to customers. The Company may enter intomore of such arrangements in the future. Such arrangements are lesscapital-intensive for the Company.

 

Weperform regular and preventative maintenance on the equipment and retaindetailed records for documentation. We are responsible for all repairs, testingand cleaning of the equipment. Our service 

 

23

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includesprompt replacement of any non-working equipment and the flexibility to upgradetechnology as a customer’s product of choice changes. We have three primaryoutsourcing programs:

 

·                  Supplemental(Peak Needs) Outsourcing;

·                  Long-TermOutsourcing; and

·                  theAsset 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 withnational acute care and alternate site providers. We expect much of our futuregrowth in this segment to be driven by our customers outsourcing more of theirmedical equipment needs and taking full advantage of our expanded offering ofLong-Term Outsourcing agreements and AMPPs.

 

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

 

OurTechnical and Professional Services segment accounted for $11.5 million, orapproximately 16.1% of our revenues for the quarter ended June 30, 2008and $23.4 million, or approximately 15.9% of our revenues for the six monthsended June 30, 2008. We leverage our more than 65 years of experience andour extensive equipment database in repairing and maintaining medicalequipment. We offer a broad range of inspection, preventative maintenance,repair, logistic and consulting services through our team of over 350technicians and professionals located in our nationwide network of districtoffices and service centers. Our technical and professional service offeringsare less capital-intensive than our Medical Equipment Outsourcing segment, andprovide a complementary alternative for customers that wish to own their medicalequipment, but lack the expertise, funding or scale to perform maintenance,repair and analytical functions. As part of our strategy to grow our Technicaland Professional Services segment, we acquired the assets of the ICMS divisionof Intellamed, Inc. (“Intellamed”) on April 1, 2007.

 

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

 

OurMedical Equipment Sales and Remarketing segment accounted for $4.2 million, orapproximately 5.9% of our revenues for the quarter ended June 30, 2008 and$8.5 million, or approximately 5.8% of our revenues for the six months ended June 30,2008. This segment includes three business activities:

 

***Medical Equipment Remarketing and Disposal.*********We are one of the nation’s largest buyers andsellers of pre-owned medical equipment. We also remarket used medical equipmentto hospitals, alternate care providers, veterinarians and equipment brokers. Weoffer a wide range of equipment, from our standard medical equipment todiagnostic, ultrasound and x-ray equipment.

 

***Specialty Medical Equipment Sales and Distribution.*********We use our national infrastructure to providesales and distribution for manufacturers of specialty medical equipment on alimited and exclusive basis. We currently sell equipment in many product linesincluding, but not limited to, continuous passive motion machines, patientmonitors, patient transfer systems and infant security systems.

 

24

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

 

**RESULTS OF OPERATIONS**

 

**Thefollowing discussion addresses:**

** **

**·**                  our financial condition asof June 30, 2008;

**·**                  the results of operationsfor the quarter ended June 30, 2008, month ended June 30, 2007 andtwo months ended May 31, 2007;

**·**                  the results of operationsfor the six months ended June 30, 2008, month ended June 30, 2007 andfive months ended May 31, 2007; and

**·**                  the cash flows for the sixmonths ended June 30, 2008, month ended June 30, 2007 and five monthsended May 31, 2007.

** **

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

** **

Inconnection with the Transaction, the Company incurred significant indebtednessand is highly leveraged. In addition, the purchase price paid in connectionwith the Acquisition has been allocated to state the acquired assets andliabilities at fair value. The purchase accounting adjustments increased thecarrying value of our property and equipment and inventory, establishedintangible assets for our customer relationships, supply agreement, trade namesand trademarks, technology database and non-compete agreements and revalued ourlong-term benefit plan obligations, among other things. Subsequent to theTransaction, interest expense, non-cash depreciation and amortization chargeshave significantly increased. As a result, our successor financial statementsare not comparable to our predecessor financial statements.

 

Thefollowing tables provide a summary of selected financial data as a percentageof total revenues for the quarter-to-date and year-to date periods reportedherein.

 

25

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| ** **                                                                                                                      | ** ** | **Quarter-to-Date**                          | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **Percent of Total Revenues** | ** ** |
| ** **                                                                                                                      | ** ** | **Three Months**                        | ** ** | **Month** | ** ** | ** ** | **Two Months** | ** ** |
| ** **                                                                                                                      | ** ** | **Ended**                                    | ** ** | **Ended** | ** ** | ** ** | **Ended** | ** ** |
| ** **                                                                                                                      | ** ** | **June 30,**                            | ** ** | **June 30,** | ** ** | ** ** | **May 31,** | ** ** |
| ** **                                                                                                                      | ** ** | **2008**                                     | ** ** | **2007** | ** ** | ** ** | **2007** | ** ** |
| ** **                                                                                                                      | ** ** | **(Successor)**                              | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| **Revenue**                                                                                                                     |       |                                         |       |   |   |   |   |   |
| Medical  equipment outsourcing                                                                                                  |       | 78.0                                         | %          | 77.3 | % |   | 77.0 | % |
| Technical and  professional services                                                                                            |       | 16.1                                         |       | 16.8 |   |   | 15.4 |   |
| Medical  equipment sales and remarketing                                                                                        |       | 5.9                                          |       | 5.9 |   |   | 7.6 |   |
| Total revenues                                                                                                                  |       | 100.0                                        | %          | 100.0 | % |   | 100.0 | % |
|                                                                                                                            |       |                                         |       |   |   |   |   |   |
| **Cost of  Revenue**                                                                                                            |       |                                         |       |   |   |   |   |   |
| Cost of medical  equipment outsourcing                                                                                          |       | 28.7                                         |       | 27.4 |   |   | 25.5 |   |
| Cost of  technical and professional services                                                                                    |       | 12.3                                         |       | 11.7 |   |   | 10.9 |   |
| Cost of medical  equipment sales and remarketing                                                                                |       | 4.6                                          |       | 5.6 |   |   | 6.1 |   |
| Movable medical  equipment depreciation                                                                                         |       | 21.5                                         |       | 21.4 |   |   | 18.8 |   |
| Total costs of  medical equipment outsourcing, technical and professional services and  medical equipment sales and remarketing |       | 67.1                                         |       | 66.1 |   |   | 61.3 |   |
| Gross margin                                                                                                                    |       | 32.9                                         |       | 33.9 |   |   | 38.7 |   |
|                                                                                                                            |       |                                         |       |   |   |   |   |   |
| Selling, general  and administrative                                                                                            |       | 30.2                                         |       | 30.6 |   |   | 29.3 |   |
| Transaction and  related costs                                                                                                  |       | —                                       |       | — |   |   | 60.0 |   |
| Operating income  (loss)                                                                                                        |       | 2.7                                          |       | 3.3 |   |   | (50.6 | ) |
|                                                                                                                            |       |                                         |       |   |   |   |   |   |
| Interest expense                                                                                                                |       | 16.6                                         |       | 17.6 |   |   | 13.1 |   |
| Loss on  extinguishment of debt                                                                                                 |       | —                                       |       | 4.8 |   |   | 50.9 |   |
| Loss before  income taxes                                                                                                       |       | (13.9                                        | )          | (19.1 | ) |   | (114.6 | ) |
|                                                                                                                            |       |                                         |       |   |   |   |   |   |
| Provision  (benefit) for income taxes                                                                                           |       | (5.5                                         | )          | (7.3 | ) |   | 0.7 |   |
| Net loss                                                                                                                        |       | (8.4                                         | )%         | (11.8 | )% |   | (115.3 | )% |

 

26

----

 
| ** **                                                                                                                      | ** ** | **Year-to-Date**                             | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **Percent of Total Revenues** | ** ** |
| ** **                                                                                                                      | ** ** | **Six Months**                          | ** ** | **Month** | ** ** | ** ** | **Five Months** | ** ** |
| ** **                                                                                                                      | ** ** | **Ended**                                    | ** ** | **Ended** | ** ** | ** ** | **Ended** | ** ** |
| ** **                                                                                                                      | ** ** | **June 30,**                            | ** ** | **June 30,** | ** ** | ** ** | **May 31,** | ** ** |
| ** **                                                                                                                      | ** ** | **2008**                                     | ** ** | **2007** | ** ** | ** ** | **2007** | ** ** |
| ** **                                                                                                                      | ** ** | **(Successor)**                              | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| **Revenue**                                                                                                                     | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Medical  equipment outsourcing                                                                                                  |       | 78.3                                         | %          | 77.3 | % |   | 78.9 | % |
| Technical and  professional services                                                                                            |       | 15.9                                         |       | 16.8 |   |   | 13.8 |   |
| Medical  equipment sales and remarketing                                                                                        |       | 5.8                                          |       | 5.9 |   |   | 7.3 |   |
| Total revenues                                                                                                                  |       | 100.0                                        | %          | 100.0 | % |   | 100.0 | % |
|                                                                                                                            |       |                                         |       |   |   |   |   |   |
| **Cost of  Revenue**                                                                                                            |       |                                         |       |   |   |   |   |   |
| Cost of medical  equipment outsourcing                                                                                          |       | 27.5                                         |       | 27.4 |   |   | 25.8 |   |
| Cost of  technical and professional services                                                                                    |       | 11.8                                         |       | 11.7 |   |   | 9.4 |   |
| Cost of medical  equipment sales and remarketing                                                                                |       | 4.6                                          |       | 5.6 |   |   | 5.9 |   |
| Movable medical  equipment depreciation                                                                                         |       | 20.8                                         |       | 21.4 |   |   | 17.2 |   |
| Total costs of  medical equipment outsourcing, technical and professional services and  medical equipment sales and remarketing |       | 64.7                                         |       | 66.1 |   |   | 58.3 |   |
| Gross margin                                                                                                                    |       | 35.3                                         |       | 33.9 |   |   | 41.7 |   |
|                                                                                                                            |       |                                         |       |   |   |   |   |   |
| Selling, general  and administrative                                                                                            |       | 29.7                                         |       | 30.6 |   |   | 26.7 |   |
| Transaction and  related costs                                                                                                  |       | —                                       |       | — |   |   | 25.0 |   |
| Operating income  (loss)                                                                                                        |       | 5.7                                          |       | 3.3 |   |   | (10.0 | ) |
|                                                                                                                            |       |                                         |       |   |   |   |   |   |
| Interest expense                                                                                                                |       | 16.0                                         |       | 17.6 |   |   | 12.9 |   |
| Loss on  extinguishment of debt                                                                                                 |       | —                                       |       | 4.8 |   |   | 20.8 |   |
| Loss before  income taxes                                                                                                       |       | (10.3                                        | )          | (19.1 | ) |   | (43.7 | ) |
|                                                                                                                            |       |                                         |       |   |   |   |   |   |
| Provision  (benefit) for income taxes                                                                                           |       | (4.0                                         | )          | (7.3 | ) |   | 0.5 |   |
| Net loss                                                                                                                        |       | (6.3                                         | )%         | (11.8 | )% |   | (44.2 | )% |

 

27

----

 

**Resultsof Operations for the Three Months Ended June 30, 2008 (successor)compared to the Month Ended June 30, 2007 (successor) and Two Months EndedMay 31, 2007 (predecessor)**

** **

**MedicalEquipment Outsourcing Segment – Manage & Utilize**

*(inthousands)*

 

| ** **                                                                                                              | ** ** | **Three Months** | ** ** | **Month**         | ** ** | ** ** | **Two Months** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|------------|---------------------|------------|
| ** **                                                                                                              | ** ** | **Ended**             | ** ** | **Ended**         | ** ** | ** ** | **Ended**           | ** ** |
| ** **                                                                                                              | ** ** | **June 30,**     | ** ** | **June 30,** | ** ** | ** ** | **May 31,**    | ** ** |
| ** **                                                                                                              | ** ** | **2008**              | ** ** | **2007**          | ** ** | ** ** | **2007**            | ** ** |
| ** **                                                                                                              | ** ** | **(Successor)**       | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)**   | ** ** |
| Total revenue                                                                                                           |       | $                     | 55,925     |              | $          | 16,695     |                |       | $ | 33,866 |   |
| Cost of revenue                                                                                                         |       | 20,550                |       | 5,916             |       |       | 11,193              |       |
| Medical  equipment depreciation                                                                                         |       | 15,451                |       | 4,632             |       |       | 8,250               |       |
| Gross margin                                                                                                            |       | $                     | 19,924     |              | $          | 6,147      |                |       | $ | 14,423 |   |
|                                                                                                                    |       |                  |       |              |       |       |                |       |
| Gross margin %                                                                                                          |       | 35.6                  | %          | 36.8              | %          |       | 42.6                | %          |
|                                                                                                                    |       |                  |       |              |       |       |                |       |
| Gross margin                                                                                                            |       | $                     | 19,924     |              | $          | 6,147      |                |       | $ | 14,423 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of medical equipment |       | 3,876                 |       | 1,510             |       |       | —              |       |
| Gross margin,  before purchase accounting adjustments                                                                   |       | $                     | 23,800     |              | $          | 7,657      |                |       | $ | 14,423 |   |
|                                                                                                                    |       |                  |       |              |       |       |                |       |
| Gross margin %,  before purchase accounting adjustments                                                                 |       | 42.6                  | %          | 45.9              | %          |       | 42.6                | %          |

 

Totalrevenue in the Medical Equipment Outsourcing was $55.9, $16.7 and $33.9 millionfor the quarter ended June 30, 2008, month ended June 30, 2007 andtwo months ended May 31, 2007, respectively.  During the quarter ended June 30, 2008,we were successful in adding approximately 250 outsourcing customers throughorganic and competitive takeaway in our acute care and AMPP customer base andalso generated incremental business from new and existing technology in ourfleet.  However, during the latter halfof the quarter ended June 30, 2008, hospital admissions appeared to softenin line with the slowing economic conditions.

 

Totalcost of revenue in the segment was $20.6, $5.9 and $11.2 million for thequarter ended June 30, 2008, month ended June 30, 2007 and two monthsended May 31, 2007, respectively. Cost of revenue in this segment relates primarily to employee relatedexpenses, equipment repair and maintenance charges related to our medicalequipment fleet, occupancy and freight charges. Cost of revenue for thequarter ended June 30, 2008 and month ended June 30, 2007includes $0.3 million and $0.1 million, respectively, of charges relating toloss on disposal of equipment which was revalued in conjunction with theTransaction.  During the quarter ended June 30,2008, we experienced strong rental demand from new and existing customers andincurred additional repair and maintenance and other expenses associated withincreased rental activity.

 

Medicalequipment depreciation was $15.5, $4.6 and $8.3 million for the quarter ended June 30,2008, month ended June 30, 2007 and two months ended May 31, 2007, respectively.  Medical equipment

 

28

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depreciationfor the quarter ended June 30, 2008 and month ended June 30, 2007includes $3.6 million and $1.4 million, respectively, of charges relating topurchase accounting adjustments.

 

Grossmargin percentage for the Medical Equipment Outsourcing segment was 35.6%,36.8% and 42.6% for the quarter ended June 30, 2008, month ended June 30,2007 and two months ended May 31, 2007, respectively.  Gross margin percentage for the quarter endedJune 30, 2008 and month ended June 30, 2007 was negatively impactedby purchase accounting adjustments relating primarily to our medical equipmentfleet.

 

Grossmargin percentage, before purchase accounting adjustments was 42.6%, 45.9% and42.6% for the quarter ended June 30, 2008, month ended June 30, 2007and two months ended May 31, 2007, respectively.

** **

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

*(inthousands)*

 

| ** **                                                                                           | ** ** | **Three Months** | ** ** | **Month**         | ** ** | ** ** | **Two Months** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|------------|---------------------|------------|
| ** **                                                                                           | ** ** | **Ended**             | ** ** | **Ended**         | ** ** | ** ** | **Ended**           | ** ** |
| ** **                                                                                           | ** ** | **June 30,**     | ** ** | **June 30,** | ** ** | ** ** | **May 31,**    | ** ** |
| ** **                                                                                           | ** ** | **2008**              | ** ** | **2007**          | ** ** | ** ** | **2007**            | ** ** |
| ** **                                                                                           | ** ** | **(Successor)**       | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)**   | ** ** |
| Total revenue                                                                                        |       | $                     | 11,538     |              | $          | 3,630      |                |       | $ | 6,748 |   |
| Cost of revenue                                                                                      |       | 8,834                 |       | 2,526             |       |       | 4,801               |       |
| Gross margin                                                                                         |       | $                     | 2,704      |              | $          | 1,104      |                |       | $ | 1,947 |   |
|                                                                                                 |       |                  |       |              |       |       |                |       |
| Gross margin %                                                                                       |       | 23.4                  | %          | 30.4              | %          |       | 28.9                | %          |
|                                                                                                 |       |                  |       |              |       |       |                |       |
| Gross margin                                                                                         |       | $                     | 2,704      |              | $          | 1,104      |                |       | $ | 1,947 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to favorable lease  commitments |       | 7                     |       | 5                 |       |       | —              |       |
| Gross margin,  before purchase accounting adjustments                                                |       | $                     | 2,711      |              | $          | 1,109      |                |       | $ | 1,947 |   |
|                                                                                                 |       |                  |       |              |       |       |                |       |
| Gross margin %,  before purchase accounting adjustments                                              |       | 23.5                  | %          | 30.5              | %          |       | 28.9                | %          |

 

Totalrevenue in the Technical and Professional Services segment was $11.5, $3.6 and$6.7 million for the quarter ended June 30, 2008, month ended June 30,2007 and two months ended May 31, 2007, respectively.  Revenue for the quarter ended June 30,2008 benefited from increased manufacturer services activity.

 

Totalcost of revenue in the segment was $8.8, $2.5 and $4.8 million for the quarterended June 30, 2008, month ended June 30, 2007 and two months ended May 31,2007, respectively.  Cost of revenueconsists primarily of employee-related expenses, vendor expenses and occupancycharges.  Cost of revenue for the quarterended June 30, 2008 includes increased vendor expenses related primarilyto customers acquired through our acquisition of the assets of the ICMSdivision of Intellamed on April 1, 2007.

 

29

----

 

Grossmargin percentage for the Technical and Professional Services segment was23.4%, 30.4% and 28.9% for the quarter ended June 30, 2008, month ended June 30,2007 and two months ended May 31, 2007, respectively.  The decline for the quarter ended June 30,2008 is primarily attributable to lower gross margin percentage results fromthe customers acquired through the acquisition of the assets of the ICMSdivision of Intellamed.

 

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

*(inthousands)*

 

| ** **                                                                                                                              | ** ** | **Three Months** | ** ** | **Month**         | ** ** | ** ** | **Two Months** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|------------|---------------------|------------|
| ** **                                                                                                                              | ** ** | **Ended**             | ** ** | **Ended**         | ** ** | ** ** | **Ended**           | ** ** |
| ** **                                                                                                                              | ** ** | **June 30,**     | ** ** | **June 30,** | ** ** | ** ** | **May 31,**    | ** ** |
| ** **                                                                                                                              | ** ** | **2008**              | ** ** | **2007**          | ** ** | ** ** | **2007**            | ** ** |
| ** **                                                                                                                              | ** ** | **(Successor)**       | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)**   | ** ** |
| Total revenue                                                                                                                           |       | $                     | 4,221      |              | $          | 1,277      |                |       | $ | 3,359 |   |
| Cost of revenue                                                                                                                         |       | 3,269                 |       | 1,212             |       |       | 2,677               |       |
| Gross margin                                                                                                                            |       | $                     | 952        |              | $          | 65         |                |       | $ | 682 |   |
|                                                                                                                                    |       |                  |       |              |       |       |                |       |
| Gross margin %                                                                                                                          |       | 22.6                  | %          | 5.1               | %          |       | 20.3                | %          |
|                                                                                                                                    |       |                  |       |              |       |       |                |       |
| Gross margin                                                                                                                            |       | $                     | 952        |              | $          | 65         |                |       | $ | 682 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of inventories and medical equipment |       | 187                   |       | 143               |       |       | —              |       |
| Gross margin,  before purchase accounting adjustments                                                                                   |       | $                     | 1,139      |              | $          | 208        |                |       | $ | 682 |   |
|                                                                                                                                    |       |                  |       |              |       |       |                |       |
| Gross margin %,  before purchase accounting adjustments                                                                                 |       | 27.0                  | %          | 16.3              | %          |       | 20.3                | %          |

 

Totalrevenue in the Medical Equipment Sales and Remarketing segment was $4.2, $1.3and $3.4 million for the quarter ended June 30, 2008, month ended June 30,2007 and two months ended May 31, 2007, respectively. Strong rental demanddiverted equipment for sale to our Medical Equipment Outsourcing segment duringthe quarter ended June 30, 2008.

 

Totalcost of revenue in the segment was $3.3, $1.2 and $2.7 million for the quarterended June 30, 2008, month ended June 30, 2007 and two months ended May 31,2007, respectively. Cost of revenue in this segment consists primarily of costof inventory and equipment sold and occupancy charges.  During the quarter ended June 30, 2008and month ended June 30, 2007, purchase accounting adjustments related tomedical equipment and inventory impacted cost of revenue by $0.2 million and$0.1 million, respectively.

 

Grossmargin percentage for the Medical Equipment Sales and Remarketing segment was22.6%, 5.1% and 20.3% for the quarter ended June 30, 2008, month ended June 30,2007 and two months ended May 31, 2007, respectively.  Purchase accounting adjustments negativelyimpacted gross margin percentage for the quarter ended June 30, 2008 andmonth ended June 30, 2007.  Marginsand activity in this segment will fluctuate based on the transactional natureof the business.

 

30

----

 

Grossmargin percentage, before purchase accounting adjustments, for the MedicalEquipment Sales and Remarketing segment was 27.0%, 16.3% and 20.3% for thequarter ended June 30, 2008, month ended June 30, 2007 and two monthsended May 31, 2007, respectively.

 

**Selling,General and Administrative, Transaction and Related Costs and Interest Expense**

*(inthousands)*

 

| ** **                           | ** ** | **Three Months** | ** ** | **Month**         | ** ** | ** ** | **Two Months** | ** ** |
|--------------------------------------|------------|-----------------------|------------|-------------------|------------|------------|---------------------|------------|
| ** **                           | ** ** | **Ended**             | ** ** | **Ended**         | ** ** | ** ** | **Ended**           | ** ** |
| ** **                           | ** ** | **June 30,**     | ** ** | **June 30,** | ** ** | ** ** | **May 31,**    | ** ** |
| ** **                           | ** ** | **2008**              | ** ** | **2007**          | ** ** | ** ** | **2007**            | ** ** |
| ** **                           | ** ** | **(Successor)**       | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)**   | ** ** |
| Selling, general  and administrative |       | $                     | 21,673     |              | $          | 6,604      |                |       | $ | 12,892 |   |
| Transaction and  related costs       |       | —                |       | —            |       |       | 26,379              |       |
| Interest expense                     |       | 11,877                |       | 3,800             |       |       | 5,747               |       |
| Loss on  extinguishment of debt      |       | —                |       | 1,041             |       |       | 22,396              |       |
|                                      |            |                       |            |                   |            |            |                     |            |  |  |  |

 

***Selling, General andAdministrative***

** **

Selling,general and administrative expenses were $21.7, $6.6 and $12.9 million for thequarter ended June 30, 2008, month ended June 30, 2007 and two monthsended May 31, 2007, respectively. Selling, general and administrativeexpenses consist primarily of employee-related expenses, professional fees,occupancy charges, bad debt expense and depreciation and amortization.  Expenses during the quarter ended June 30,2008 and month ended June 30, 2007 include $4.0 million and $1.3 million,respectively, of charges related to the amortization of our intangible assetswhich were recorded at fair value in connection with the Transaction andnon-cash stock-based compensation expense related to the 2007 Stock Option Planof Parent of $0.6 million and $0.3 million, respectively.  Purchase accounting adjustments of $0.3 and$0.1 million impacted the quarter ended June 30, 2008 and month ended June 30,2007, respectively.  Expenses during thetwo months ended May 31, 2007 include $0.8 million of expense related toour 2003 Stock Option Plan.  Selling,general and administrative expenses as apercentage of total revenue were 30.2%, 30.6% and 29.3% for the quarterended June 30, 2008, month ended June 30, 2007 and two months ended May 31,2007, respectively.

 

***Transaction and Related Costs***

** **

Weincurred $26.4 million of expenses in connection with the Transaction duringthe two months ended May 31, 2007.

 

***Interest Expense***

** **

Interestexpense was $11.9, $3.8 and $5.7 million for the quarter ended June 30,2008, month ended June 30, 2007 and two months ended May 31, 2007,respectively.  Interest expense duringthe quarter ended June 30, 2008 and month ended June 30, 2007includes interest charges related to the increased debt issued in connectionwith the Transaction, partially offset by lower average interest rates.

 

***Loss on Extinguishment of Debt***

** **

Losson extinguishment of debt charges were $1.0 and $22.4 million during themonth ended June 30, 2007 and two months ended May 31, 2007,respectively.  Loss on extinguishmentduring the month ended June 30, 2007 related to the purchase of a portionof our 10.125% Senior Notes.   Loss on

 

31

----

 

extinguishmentof debt during the two months ended May 31, 2007 included charges relatedto the termination of our amended credit agreement and related to the purchaseof a portion of our 10.125% Senior Notes.

 

**IncomeTaxes**

 

Provision(benefit) for income taxes was $(3.9), $(1.6) and $0.3 million for thequarter ended June 30, 2008, month ended June 30, 2007 and two monthsended May 31, 2007, respectively. The Company moved from a net deferred tax asset position prior to theTransaction, where tax expense related primarily to minimum state taxes due tovaluation allowances established for net operating losses not recognized, to anet deferred tax liability position after the Transaction.  Management believes the valuation allowanceis no longer necessary as we determined that it was more likely than not thatthe benefits of these deferred tax assets will be realized.

 

**NetLoss**

 

Netloss was $6.1, $2.5 and $50.7 million for the quarter ended June 30, 2008,month ended June 30, 2007 and two months ended May 31, 2007,respectively.  Net loss for the quarterended June 30, 2008 and month ended June 30, 2007 was impacted byTransaction-related purchase accounting adjustments and interest associatedwith our debt, partially offset by strong revenues in our Medical EquipmentOutsourcing Segment and income tax benefit.   Net loss for the two months ended May 31, 2007 was impacted byTransaction and related costs and loss on extinguishment of debt charges.

 

32

----

 

**Resultsof Operations for the Six Months Ended June 30, 2008 (successor) comparedto the Month Ended June 30, 2007 (successor) and Five Months Ended May 31,2007 (predecessor)**

 

**MedicalEquipment Outsourcing Segment – Manage & Utilize**

*(inthousands)*

 

| ** **                                                                                                              | ** ** | **Six Months** | ** ** | **Month**         | ** ** | ** ** | **Five Months** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------|------------|------------|----------------------|------------|
| ** **                                                                                                              | ** ** | **Ended**           | ** ** | **Ended**         | ** ** | ** ** | **Ended**            | ** ** |
| ** **                                                                                                              | ** ** | **June 30,**   | ** ** | **June 30,** | ** ** | ** ** | **May 31,**     | ** ** |
| ** **                                                                                                              | ** ** | **2008**            | ** ** | **2007**          | ** ** | ** ** | **2007**             | ** ** |
| ** **                                                                                                              | ** ** | **(Successor)**     | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)**    | ** ** |
| Total revenue                                                                                                           |       | $                   | 115,252    |              | $          | 16,695     |                 |       | $ | 84,855 |   |
| Cost of revenue                                                                                                         |       | 40,466              |       | 5,916             |       |       | 27,694               |       |
| Medical  equipment depreciation                                                                                         |       | 30,629              |       | 4,632             |       |       | 18,512               |       |
| Gross margin                                                                                                            |       | $                   | 44,157     |              | $          | 6,147      |                 |       | $ | 38,649 |   |
|                                                                                                                    |       |                |       |              |       |       |                 |       |
| Gross margin %                                                                                                          |       | 38.3                | %          | 36.8              | %          |       | 45.5                 | %          |
|                                                                                                                    |       |                |       |              |       |       |                 |       |
| Gross margin                                                                                                            |       | $                   | 44,157     |              | $          | 6,147      |                 |       | $ | 38,649 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of medical equipment |       | 7,766               |       | 1,510             |       |       | —               |       |
| Gross margin,  before purchase accounting adjustments                                                                   |       | $                   | 51,923     |              | $          | 7,657      |                 |       | $ | 38,649 |   |
|                                                                                                                    |       |                |       |              |       |       |                 |       |
| Gross margin %,  before purchase accounting adjustments                                                                 |       | 45.1                | %          | 45.9              | %          |       | 45.5                 | %          |

 

Totalrevenue in the Medical Equipment Outsourcing was $115.3, $16.7 and $84.9million for the six months ended June 30, 2008, month ended June 30,2007 and five months ended May 31, 2007, respectively.  During the six months ended June 30,2008, we were successful in adding approximately 375 outsourcing customersthrough organic and competitive takeaway in our acute care and AMPP customerbase and also generated incremental business from new and existing technologyin our fleet.   However, during thelatter half of the quarter ended June 30, 2008, hospital admissionsappeared to soften in line with the slowing economic conditions.

 

Totalcost of revenue in the segment was $40.5, $5.9 and $27.7 million for the sixmonths ended June 30, 2008, month ended June 30, 2007 and five monthsended May 31, 2007, respectively. Cost of revenue in this segment relates primarily to employee-relatedexpenses, equipment repair and maintenance charges related to our medicalequipment fleet, occupancy and freight charges. Cost of revenue for the six months ended June 30, 2008 and monthended June 30, 2007 includes $0.5 million and $0.1 million, respectively,of charges relating to loss on disposal of equipment which was revalued inconjunction with the Transaction.  Duringthe six months ended June 30, 2008, we experienced strong rental demandfrom new and existing customers and incurred additional repair and maintenanceand other expenses associated with increased rental activity.

 

Medicalequipment depreciation was $30.6, $4.6 and $18.5 million for the six monthsended June 30, 2008, month ended June 30, 2007 and five months ended May 31,2007, respectively.  During the sixmonths ended June 30, 2008,we experienced increased medical equipment purchases to meet customerdemand.  Medical equipment depreciationfor the six months ended June 30, 2008 and month ended June 30, 2007includes $7.2 million and $1.4 million, respectively, of charges relating topurchase accounting adjustments.

 

33

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Grossmargin percentage for the Medical Equipment Outsourcing segment was 38.3%,36.8% and 45.5% for the six months ended June 30, 2008, month ended June 30,2007 and five months ended May 31, 2007, respectively.  Gross margin percentage for the six monthsended June 30, 2008 and month ended June 30, 2007 was negativelyimpacted by purchase accounting adjustments relating primarily to our medicalequipment fleet.

 

Grossmargin percentage, before purchase accounting adjustments was 45.1%, 45.9% and45.5% for the six months ended June 30, 2008, month ended June 30,2007 and five months ended May 31, 2007, respectively.

** **

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

*(inthousands)*

 

| ** **                                                                                           | ** ** | **Six Months** | ** ** | **Month**         | ** ** | ** ** | **Five Months** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------|------------|------------|----------------------|------------|
| ** **                                                                                           | ** ** | **Ended**           | ** ** | **Ended**         | ** ** | ** ** | **Ended**            | ** ** |
| ** **                                                                                           | ** ** | **June 30,**   | ** ** | **June 30,** | ** ** | ** ** | **May 31,**     | ** ** |
| ** **                                                                                           | ** ** | **2008**            | ** ** | **2007**          | ** ** | ** ** | **2007**             | ** ** |
| ** **                                                                                           | ** ** | **(Successor)**     | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)**    | ** ** |
| Total revenue                                                                                        |       | $                   | 23,414     |              | $          | 3,630      |                 |       | $ | 14,800 |   |
| Cost of revenue                                                                                      |       | 17,345              |       | 2,526             |       |       | 10,124               |       |
| Gross margin                                                                                         |       | $                   | 6,069      |              | $          | 1,104      |                 |       | $ | 4,676 |   |
|                                                                                                 |       |                |       |              |       |       |                 |       |
| Gross margin %                                                                                       |       | 25.9                | %          | 30.4              | %          |       | 31.6                 | %          |
|                                                                                                 |       |                |       |              |       |       |                 |       |
| Gross margin                                                                                         |       | $                   | 6,069      |              | $          | 1,104      |                 |       | $ | 4,676 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to favorable lease  commitments |       | 15                  |       | 5                 |       |       | —               |       |
| Gross margin,  before purchase accounting adjustments                                                |       | $                   | 6,084      |              | $          | 1,109      |                 |       | $ | 4,676 |   |
|                                                                                                 |       |                |       |              |       |       |                 |       |
| Gross margin %,  before purchase accounting adjustments                                              |       | 26.0                | %          | 30.6              | %          |       | 31.6                 | %          |

 

Totalrevenue in the Technical and Professional Services segment was $23.4, $3.6 and$14.8 million for the six months ended June 30, 2008, month ended June 30,2007 and five months ended May 31, 2007, respectively.  Revenue for the six months ended June 30,2008 benefited from our acquisition of the assets of the ICMS division ofIntellamed on April 1, 2007 and increased manufacturer services activity,partially offset by continued sales force attention on converting new customersin our Medical Equipment Outsourcing segment as well as selected contractterminations.

 

Totalcost of revenue in the segment was $17.3, $2.5 and $10.1 million for the sixmonths ended June 30, 2008, month ended June 30, 2007 and five monthsended May 31, 2007, respectively.  Cost of revenue consists primarily ofemployee-related expenses, vendor expenses and occupancy charges.  Cost of revenue for the six months ended June 30,2008 includes additional employee-related and vendor expenses related primarilyto our acquisition of the assets of the ICMS division of Intellamed on April 1,2007.

 

Grossmargin percentage for the Technical and Professional Services segment was25.9%, 30.4% and 31.6% for the six months ended June 30, 2008, month endedJune 30, 2007 and five months ended May 31, 2007, respectively.  The decline for the six months ended June 30,2008 is primarily

 

34

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attributableto lower gross margin percentage results from the customers acquired throughthe acquisition of the assets of the ICMS division of Intellamed.

 

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

*(inthousands)*

 

| ** **                                                                                                                              | ** ** | **Six Months** | ** ** | **Month**         | ** ** | ** ** | **Five Months** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------|------------|------------|----------------------|------------|
| ** **                                                                                                                              | ** ** | **Ended**           | ** ** | **Ended**         | ** ** | ** ** | **Ended**            | ** ** |
| ** **                                                                                                                              | ** ** | **June 30,**   | ** ** | **June 30,** | ** ** | ** ** | **May 31,**     | ** ** |
| ** **                                                                                                                              | ** ** | **2008**            | ** ** | **2007**          | ** ** | ** ** | **2007**             | ** ** |
| ** **                                                                                                                              | ** ** | **(Successor)**     | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)**    | ** ** |
| Total revenue                                                                                                                           |       | $                   | 8,462      |              | $          | 1,277      |                 |       | $ | 7,867 |   |
| Cost of revenue                                                                                                                         |       | 6,713               |       | 1,212             |       |       | 6,366                |       |
| Gross margin                                                                                                                            |       | $                   | 1,749      |              | $          | 65         |                 |       | $ | 1,501 |   |
|                                                                                                                                    |       |                |       |              |       |       |                 |       |
| Gross margin %                                                                                                                          |       | 20.7                | %          | 5.1               | %          |       | 19.1                 | %          |
|                                                                                                                                    |       |                |       |              |       |       |                 |       |
| Gross margin                                                                                                                            |       | $                   | 1,749      |              | $          | 65         |                 |       | $ | 1,501 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of inventories and medical equipment |       | 479                 |       | 143               |       |       | —               |       |
| Gross margin,  before purchase accounting adjustments                                                                                   |       | $                   | 2,228      |              | $          | 208        |                 |       | $ | 1,501 |   |
|                                                                                                                                    |       |                |       |              |       |       |                 |       |
| Gross margin %,  before purchase accounting adjustments                                                                                 |       | 26.3                | %          | 16.3              | %          |       | 19.1                 | %          |

 

Totalrevenue in the Medical Equipment Sales and Remarketing segment was $8.5, $1.3and $7.9 million for the six months ended June 30, 2008, month ended June 30,2007 and five months ended May 31, 2007, respectively. Strong rentaldemand diverted equipment for sale to our Medical Equipment Outsourcing segmentduring the six months ended June 30, 2008.

 

Totalcost of revenue in the segment was $6.7, $1.2 and $6.4 million for the sixmonths ended June 30, 2008, month ended June 30, 2007 and five monthsended May 31, 2007, respectively. Cost of revenue in this segment consistsprimarily of cost of inventory and equipment sold and occupancy charges.  During the six months ended June 30,2008 and month ended June 30, 2007, purchase accounting adjustmentsrelated to medical equipment andinventory impacted cost of revenue by $0.5 million and $0.1 million,respectively.

 

Grossmargin percentage for the Medical Equipment Sales and Remarketing segment was20.7%, 5.1% and 19.1% for the six months ended June 30, 2008, month ended June 30,2007 and five months ended May 31, 2007, respectively.  Purchase accounting adjustments negativelyimpacted gross margin percentage for the six months ended June 30, 2008and month ended June 30, 2007. Margins and activity in this segment will fluctuate based on thetransactional nature of the business.

 

Grossmargin percentage, before purchase accounting adjustments, for the MedicalEquipment Sales and Remarketing segment was 26.3%, 16.3% and 19.1% for the sixmonths ended June 30, 2008, month ended June 30, 2007 and five monthsended May 31, 2007, respectively.

 

35

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**Selling,General and Administrative, Transaction and Related Costs and Interest Expense**

*(inthousands)*

 

| ** **                           | ** ** | **Six Months** | ** ** | **Month**         | ** ** | ** ** | **Five Months** | ** ** |
|--------------------------------------|------------|---------------------|------------|-------------------|------------|------------|----------------------|------------|
| ** **                           | ** ** | **Ended**           | ** ** | **Ended**         | ** ** | ** ** | **Ended**            | ** ** |
| ** **                           | ** ** | **June 30,**   | ** ** | **June 30,** | ** ** | ** ** | **May 31,**     | ** ** |
| ** **                           | ** ** | **2008**            | ** ** | **2007**          | ** ** | ** ** | **2007**             | ** ** |
| ** **                           | ** ** | **(Successor)**     | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)**    | ** ** |
| Selling, general  and administrative |       | $                   | 43,630     |              | $          | 6,604      |                 |       | $ | 28,692 |   |
| Transaction and  related costs       |       | —              |       | —            |       |       | 26,891               |       |
| Interest expense                     |       | 23,497              |       | 3,800             |       |       | 13,829               |       |
| Loss on  extinguishment of debt      |       | —              |       | 1,041             |       |       | 22,396               |       |
|                                      |            |                     |            |                   |            |            |                      |            |  |  |  |

 

***Selling, General andAdministrative***

** **

Selling,general and administrative expenses were $43.6, $6.6 and $28.7 million for thesix months ended June 30, 2008, month ended June 30, 2007 and fivemonths ended May 31, 2007, respectively. Selling, general andadministrative expenses consist primarily of employee-related expenses,professional fees, occupancy charges, bad debt expense and depreciation andamortization.  Expenses during the sixmonths ended June 30, 2008 and month ended June 30, 2007 include $8.0million and $1.3 million, respectively, of charges related to the amortizationof our intangible assets which were recorded at fair value in connection withthe Transaction and non-cash stock-based compensation expense related to the2007 Stock Option Plan of Parent of $1.2 million and $0.3 million, respectively.  Purchase accounting adjustments of $0.5 and$0.1 million impacted the six months ended June 30, 2008 and month ended June 30,2007, respectively.  Expenses during thefive months ended May 31, 2007 include $1.2 million of expense related toour 2003 Stock Option Plan.  Selling,general and administrative expenses as a percentage of total revenue were29.7%, 30.6% and 26.7% for the six months ended June 30, 2008, month endedJune 30, 2007 and five months ended May 31, 2007, respectively.

 

***Transaction and Related Costs***

** **

Weincurred $26.9 million of expenses in connection with the Transaction duringthe five months ended May 31, 2007.

 

***Interest Expense***

** **

Interestexpense was $23.5, $3.8 and $13.8 million for the six months ended June 30,2008, month ended June 30, 2007 and five months ended May 31, 2007,respectively.  Interest expense duringthe six months ended June 30, 2008 and month ended June 30, 2007includes interest charges related to the increased debt issued in connectionwith the Transaction, partially offset by lower average interest rates.

 

***Loss on Extinguishment of Debt***

** **

Losson extinguishment of debt charges were $1.0 and $22.4 million during themonth ended June 30, 2007 and five months ended May 31, 2007,respectively.  Loss on extinguishment duringthe month ended June 30, 2007 related to the purchase of a portion of our10.125% Senior Notes.   Loss onextinguishment of debt during the five months ended May 31, 2007 includedcharges related to the 

 

36

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terminationof our amended credit agreement and related to the purchase of a portion of our10.125% Senior Notes.

 

**IncomeTaxes**

 

Provision(benefit) for income taxes was $(5.9), $(1.6) and $0.5 million for the sixmonths ended June 30, 2008, month ended June 30, 2007 and five monthsended May 31, 2007, respectively. The Company moved from a net deferred tax asset position prior to theTransaction, where tax expense related primarily to minimum state taxes due tovaluation allowances established for net operating losses not recognized, to anet deferred tax liability position after the Transaction.  Management believes the valuation allowanceis no longer necessary as we determined that it was more likely than not thatthe benefits of these deferred tax assets will be realized.

 

**NetLoss**

 

Netloss was $9.2, $2.5 and $47.5 million for the six months ended June 30,2008, month ended June 30, 2007 and five months ended May 31, 2007,respectively.  Net loss for the sixmonths ended June 30, 2008 and month ended June 30, 2007 was impactedby Transaction-related purchase accounting adjustments and interest associatedwith our debt, partially offset by strong revenues in our Medical EquipmentOutsourcing Segment and income tax benefit.   Net loss for the five months ended May 31, 2007 was impacted byTransaction and related costs and loss on extinguishment of debt charges.

 

**EBITDA**

** **

EarningsBefore Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $51.1,$6.3 and $(10.3) million for the six months ended June 30, 2008, monthended June 30, 2007 and five months ended May 31, 2007,respectively.  EBITDA for the six monthsended June 30, 2008 and month ended June 30, 2007 was negativelyimpacted by purchase accounting adjustments related to the Transaction andbenefited from robust customer demand in our Medical Equipment Outsourcingsegment.  EBITDAfor the five months ended May 31, 2007was negatively impacted by transaction and related costs and loss onextinguishment of debt.

 

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

 

37

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| ** **                                           | ** ** | **Six**           | ** ** | ** **        | ** ** | ** ** | **Five**          | ** ** |
|------------------------------------------------------|------------|-------------------|------------|-------------------|------------|------------|-------------------|------------|
| ** **                                           | ** ** | **Months**        | ** ** | **Month**         | ** ** | ** ** | **Months**        | ** ** |
| ** **                                           | ** ** | **Ended**         | ** ** | **Ended**         | ** ** | ** ** | **Ended**         | ** ** |
| ** **                                           | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | ** ** | **May 31,**  | ** ** |
| ** **                                           | ** ** | **2008**          | ** ** | **2007**          | ** ** | ** ** | **2007**          | ** ** |
| **(in thousands)**                              | ** ** | **(Successor)**   | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)** | ** ** |
| Net cash  provided by (used in) operating activities |       | $                 | 28,271     |              | $          | (26,013    | )                 |       | $ | 34,318 |   |
| Changes in  operating assets and liabilities         |       | 3,248             |       | 30,249            |       |       | (27,711           | )          |
| Other non-cash  expenses                             |       | 1,947             |       | (137              | )          |       | (31,258           | )          |
| Provision  (benefit) for income taxes                |       | (5,912            | )          | (1,581            | )          |       | 492               |       |
| Interest expense                                     |       | 23,497            |       | 3,800             |       |       | 13,829            |       |
| EBITDA                                               |       | $                 | 51,051     |              | $          | 6,318      |              |       | $ | (10,330 | ) |

 

**SupplementalInformation:**

*(dollarsin thousands)*

 
| ** **                                                         | ** ** | **Six**           | ** ** | ** **        | ** ** | ** ** | **Five**          | ** ** |
|--------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|------------|-------------------|------------|
| ** **                                                         | ** ** | **Months**        | ** ** | **Month**         | ** ** | ** ** | **Months**        | ** ** |
| ** **                                                         | ** ** | **Ended**         | ** ** | **Ended**         | ** ** | ** ** | **Ended**         | ** ** |
| ** **                                                         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | ** ** | **May 31,**  | ** ** |
| ** **                                                         | ** ** | **2008**          | ** ** | **2007**          | ** ** | ** ** | **2007**          | ** ** |
| ** **                                                         | ** ** | **(Successor)**   | ** ** | **(Successor)**   | ** ** | ** ** | **(Predecessor)** | ** ** |
| EBITDA                                                             |       | $                 | 51,051     |              | $          | 6,318      |              |       | $ | (10,330 | ) |
|                                                               |       |              |       |              |       |       |              |       |
| **Other  Financial Data:**                                         |       |              |       |              |       |       |              |       |
| Net cash  provided by (used in) operating activities               |       | $                 | 28,271     |              | $          | (26,013    | )                 |       | $ | 34,318 |   |
| Net cash used in  investing activities                             |       | (42,903           | )          | (337,689          | )          |       | (48,060           | )          |
| Net cash provided  by financing activities                         |       | $                 | 14,983     |              | $          | 367,185    |              |       | $ | 13,742 |   |
|                                                               |       |              |       |              |       |       |              |       |
| **Other  Operating Data (as of end of period):**                   |       |              |       |              |       |       |              |       |
| Medical  equipment (approximate number of owned outsourcing units) |       | 205,000           |       | 186,000           |       |       | 185,000           |       |
| District offices                                                   |       | 80                |       | 79                |       |       | 79                |       |
| Number of  outsourcing hospital customers                          |       | 4,000             |       | 3,825             |       |       | 3,800             |       |
| Number of total  outsourcing customers                             |       | 7,825             |       | 7,275             |       |       | 7,200             |       |

 

**SEASONALITY**

** **

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

 

**LIQUIDITY AND CAPITAL RESOURCES**

** **

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

 

38

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

 

Ifwe are unable to generate sufficient cash flow from operations in order toservice our debt, we will be forced to take actions such as reducing ordelaying capital expenditures, selling assets, restructuring or refinancing ourdebt or seeking additional equity capital. This, to a certain extent, is subject to general economic, financial,competitive, legislative, regulatory and other factors that are beyond ourcontrol.  If we are unable to repay ourdebt at maturity, we may have to obtain alternative financing, which may not beavailable to us.

 

Netcash provided by (used in) operating activities was $28.3, $(26.0) and $34.3million for the six months ended June 30, 2008, month ended June 30,2007 and five months ended May 31, 2007, respectively.  Net cash used in operating activities for themonth ended June 30, 2007 was negatively impacted by the payment oftransaction and related costs.

 

Netcash used in investing activities was $42.9, $337.7 and $48.1 million for thesix months ended June 30, 2008, month ended June 30, 2007 and fivemonths ended May 31, 2007, respectively. Net cash used in investing activities was impacted during the first sixmonths of 2008 by an increase in capital expenditures for medical equipmentrelated to robust demand in our Medical Equipment Outsourcing segment.  Net cash used in investing activities wasimpacted during the month ended June 30, 2007 by the acquisition ofUniversal Hospital Services, Inc., by Parent, resulting in a cash outlayof $335.1 million.  Net cash used ininvesting activities was impacted during the five months ended May 31,2007by the acquisitionof the assets of the ICMS division of Intellamed, resulting in a cash outlay of$14.6 million.

 

Netcash provided by financing activities was $15.0, $367.2 and $13.7 million forthe six months ended June 30, 2008, month ended June 30, 2007 andfive months ended May 31, 2007, respectively.  Net cash provided by financing activities forthe month ended June 30, 2007 was impacted by the issuance of $460.0million of Notes and equity contributions of $239.8 million related to theTransaction partially offset by $266.9 million of cash outlays related to thepurchase of a portion of our Senior Notes and the net payoff of our AmendedCredit Agreement of $43.0 million.

 

Based on the level of operating performance expected infiscal 2008, we believe our cash from operations, together with additionalborrowings under our senior secured credit facility, will meet our liquidityneeds for the foreseeable future, exclusive of any borrowings that we may maketo 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, 2008, we had $93.9million of availability under our senior secured credit facility based on aborrowing base of $135.0 million, less borrowings of $40.0 million and aftergiving effect to $1.1 million used for letters of credit.  Our levels of borrowing are further restricted by thefinancial covenants set forth in our senior secured credit facility agreementand the second lien senior indenture governing our PIK Toggle Notes andFloating Rate Notes.  As of June 30,2008, the Company was in compliance with all covenants under the senior securedcredit facility.

 

39

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**RECENT ACCOUNTINGPRONOUNCEMENTS**

** **

***Standards Adopted***

 

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 159, The FairValue Option for Financial Assets and Financial Liabilities, which permitsentities to elect to measure many financial instruments and certain other itemsat fair value that are not currently required to be measured at fairvalue.  This election is irrevocable.  We adopted the provisions of SFAS No. 159on January 1, 2008.  We did notelect the fair value option for any assets or liabilities.

 

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

 

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

 
| ** **              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-------------------|------------|-----------------------|------------|
| **(in thousands)** | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **              | ** ** | **(Successor)**   | ** ** | **(Successor)**       | ** ** |
| Loss on swap  contract  |       | $                 | 13,411     |                  | $          | 14,681 |   |
|                         |            |                   |            |                       |            |  |  |

 

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

 

***Standards Issued Not Yet Adopted***

 

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

 

InDecember 2007, the FASB issued SFAS No. 141(R), BusinessCombinations, which establishes principles and requirements for how an acquirerin a business combination recognizes and measures in its financial statementsthe identifiable assets acquired, the liabilities assumed, and any noncontrollinginterest; recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase; and determines what informationto disclose to enable users of the financial statements to evaluate the natureand financial effects of the business combination. SFAS No. 141(R) is

 

40

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tobe 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. Beginning January 1, 2009, we will apply theprovisions of SFAS No. 141(R) to our accounting for applicablebusiness combinations.

 

**SAFE HARBOR STATEMENT**

** **

**SafeHarbor Statement under the Private Securities Litigation Reform Act of 1995:** We believe statements in this QuarterlyReport on Form 10-Q looking forward in time involve risks anduncertainties.  The following factors,among others, could adversely affect our business, operations and financialcondition, causing our actual results to differ materially from those expressedin any forward-looking statements:

 

·                  ourhistory of net losses and substantial interest expense;

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

·                  oursubstantial outstanding debt and debt service obligations;

·                  restrictionsimposed by the terms of our debt;

·                  adecrease in the number of patients our customers are serving;

·                  ourability to effect change in the manner in which healthcare providerstraditionally procure medical equipment;

·                  theabsence of long-term commitments with customers;

·                  ourability to renew contracts with GPOs and IDNs;

·                  changesin reimbursement rates and policies by third-party payors;

·                  theimpact of health care reform initiatives;

·                  theimpact of significant regulation of the health care industry and the need tocomply with those regulations;

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

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

·                  impactsof equipment product recalls or obsolescence; and

·                  increasesin vendor costs that cannot be passed through to our customers.

 

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

 

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

 

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

 

**InterestRates**

 

Weuse both fixed and variable rate debt as sources of financing.  At June 30, 2008, we had approximately$518.3 million of total debt outstanding. After taking into account the effect of our interest rate swapagreement, we had $40.0 million of debt bearing interest at variable ratesapproximating 4.3%.  Based on variabledebt levels at June 30, 2008, a 1.0 percentage point change in

 

41

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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 our $230.0 of Floating Rate Notesto fixed interest rates.  The effectivedate for the interest rate swap agreement was December 2007; theexpiration 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 basis, we must perform an effectiveness test.  In accordance with SFAS No. 133, thefair value of the interest rate swap agreement at June 30, 2008 is includedas a cash flow hedge on our balance sheet. The change in fair value was recorded as a component of accumulatedother comprehensive loss, net of tax, on our balance sheet since the instrumentwas determined to be an effective hedge at June 30, 2008.  We do not expect any amounts to bereclassified into current earnings in the future due to ineffectiveness.  As a result of our interest rate swapagreement, we expect the effective interest rate on our $230.0 million FloatingRate Notes to be 9.065% from December 2007 through May 2012.

 

**Fuel Costs**

 

Weare also exposed to market risks related to changes in the price of gasolineused to fuel our fleet of delivery and sales vehicles.  A hypothetical 10% increase in the price ofunleaded gasoline, assuming June 2008 gasoline usage levels, would lead toan annual increase in fuel costs of approximately $0.5 million.

 

Asof June 30, 2008, we have no other material exposure to market risk.

 

**Item4.  Controls and Procedures**

 

(a)           *Evaluationof disclosure controls and procedures*

 

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

 

(b)           *Changes in internalcontrol over financial reporting*

 

Therewere no changes in our internal controls over financial reporting during thequarter ended June 30, 2008, that have materially affected, or werereasonably likely to materially affect, our internal controls over financialreporting.

 

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**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, 2008, 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.

 

**Item1A.  Risk Factors**

 

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

 

**Item 2.    Unregistered Sales of Equity Securities andUse of Proceeds**

** **

None.

 

**Item 3.    Defaults upon Senior Securities**

** **

Notapplicable.

 

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

** **

None.

 

**Item 5.    Other Information**

** **

Notapplicable.

 

**Item 6.    Exhibits**

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

 

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**SIGNATURES**

** **

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

 

Date:August 13, 2008

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

 

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