**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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

#### ** **

**(MarkOne)**

**x****                                                                             ****Quarterly Report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934 for the quarterly periodended September 30, 2008**

 

**or**

 

**o****                                                                                ****Transition Report pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934 for the transition periodfrom                  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, anon-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

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

 

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 November 1, 2008:  1,000.0

 

 

 

----

 

**PART I- FINANCIAL INFORMATION**

** **

**Item1. Financial Statements – Unaudited**

 

**UniversalHospital Services, Inc.**

** **

**BalanceSheets**

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

*(unaudited)*

 
| ** **                                                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                             | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                                                                             | ** ** | **(Successor)**        | ** ** | **(Successor)**       | ** ** |
| **Assets**                                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                        |       |                   |       |                  |       |
| Accounts  receivable, less allowance for doubtful accounts of $1,850 at  September 30, 2008 and $1,500 at December 31, 2007  |       | $                      | 53,587     |                  | $          | 51,379 |   |
| Inventories                                                                                                                            |       | 5,375                  |       | 4,230                 |       |
| Deferred income  taxes                                                                                                                 |       | 5,738                  |       | 5,636                 |       |
| Other current  assets                                                                                                                  |       | 2,958                  |       | 2,426                 |       |
| Total current  assets                                                                                                                  |       | 67,658                 |       | 63,671                |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Property and  equipment, net:                                                                                                          |       |                   |       |                  |       |
| Medical  equipment, net                                                                                                                |       | 213,786                |       | 214,336               |       |
| Property and  office equipment, net                                                                                                    |       | 19,866                 |       | 18,707                |       |
| Total property  and equipment, net                                                                                                     |       | 233,652                |       | 233,043               |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Other long-term  assets:                                                                                                               |       |                   |       |                  |       |
| Goodwill                                                                                                                               |       | 282,311                |       | 282,913               |       |
| Other  intangibles, net                                                                                                                |       | 270,673                |       | 282,507               |       |
| Other, primarily  deferred financing costs, net                                                                                        |       | 14,819                 |       | 16,618                |       |
| Total assets                                                                                                                           |       | $                      | 869,113    |                  | $          | 878,752 |   |
|                                                                                                                                   |       |                   |       |                  |       |
| **Liabilities  and Shareholders’ Equity**                                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                                  |       |                   |       |                  |       |
| Current portion  of long-term debt                                                                                                     |       | $                      | 3,059      |                  | $          | 3,120 |   |
| Book overdrafts                                                                                                                        |       | 2,429                  |       | 3,420                 |       |
| Accounts payable                                                                                                                       |       | 18,155                 |       | 16,518                |       |
| Accrued  compensation                                                                                                                  |       | 10,019                 |       | 13,527                |       |
| Accrued interest                                                                                                                       |       | 14,090                 |       | 3,783                 |       |
| Other accrued  expenses                                                                                                                |       | 9,220                  |       | 7,645                 |       |
| Total current  liabilities                                                                                                             |       | 56,972                 |       | 48,013                |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Long-term debt,  less current portion                                                                                                  |       | 500,854                |       | 494,215               |       |
| Pension and  other long-term liabilities                                                                                               |       | 1,506                  |       | 1,624                 |       |
| Interest rate  swap                                                                                                                    |       | 14,132                 |       | 14,681                |       |
| Payable to  Parent                                                                                                                     |       | 4,347                  |       | 2,471                 |       |
| Deferred income  taxes                                                                                                                 |       | 83,473                 |       | 94,053                |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Commitments and  contingencies (Note 7)                                                                                                |       |                   |       |                  |       |
|                                                                                                                                   |       |                   |       |                  |       |
| Shareholders’  equity                                                                                                             |       |                   |       |                  |       |
| Common stock,  $0.01 par value; 1,000 shares authorized, issued and outstanding at  September 30, 2008 and December 31, 2007 |       | —                 |       | —                |       |
| Additional  paid-in capital                                                                                                            |       | 248,794                |       | 248,794               |       |
| Accumulated  deficit                                                                                                                   |       | (32,446                | )          | (16,096               | )          |
| Accumulated  other comprehensive loss                                                                                                  |       | (8,519                 | )          | (9,003                | )          |
| Total  shareholders’ equity                                                                                                       |       | 207,829                |       | 223,695               |       |
| Total  liabilities and shareholders’ equity                                                                                       |       | $                      | 869,113    |                  | $          | 878,752 |   |

 

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

 

2

----

 

**Universal Hospital Services, Inc.**

** **

**Statements of Operations**

*(in thousands)*

*(unaudited)*

 
| ** **                                                                                                                      | ** ** | **Three**              | ** ** | **Three**              | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                                      | ** ** | **Months**             | ** ** | **Months**             | ** ** |
| ** **                                                                                                                      | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                                                                                                                      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                      | ** ** | **2008**               | ** ** | **2007**               | ** ** |
| ** **                                                                                                                      | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** |
| **Revenue**                                                                                                                     | ** ** | ** **             | ** ** | ** **             | ** ** |
| Medical  equipment outsourcing                                                                                                  |       | $                      | 53,469     |                   | $          | 49,988 |   |
| Technical and  professional services                                                                                            |       | 11,174                 |       | 11,098                 |       |
| Medical  equipment sales and remarketing                                                                                        |       | 6,336                  |       | 4,097                  |       |
| Total revenues                                                                                                                  |       | 70,979                 |       | 65,183                 |       |
|                                                                                                                            |       |                   |       |                   |       |
| **Cost of  Sales**                                                                                                              |       |                   |       |                   |       |
| Cost of medical  equipment outsourcing                                                                                          |       | 20,605                 |       | 18,314                 |       |
| Cost of  technical and professional services                                                                                    |       | 8,066                  |       | 8,158                  |       |
| Cost of medical  equipment sales and remarketing                                                                                |       | 4,587                  |       | 3,610                  |       |
| Medical  equipment depreciation                                                                                                 |       | 15,809                 |       | 14,116                 |       |
| Total costs of  medical equipment outsourcing, technical and professional services and  medical equipment sales and remarketing |       | 49,067                 |       | 44,198                 |       |
| Gross margin                                                                                                                    |       | 21,912                 |       | 20,985                 |       |
|                                                                                                                            |       |                   |       |                   |       |
| Selling, general  and administrative                                                                                            |       | 21,276                 |       | 20,741                 |       |
| Transaction and  related costs                                                                                                  |       | —                 |       | 237                    |       |
| Operating income                                                                                                                |       | 636                    |       | 7                      |       |
|                                                                                                                            |       |                   |       |                   |       |
| Interest expense                                                                                                                |       | 11,526                 |       | 11,231                 |       |
| Loss before  income taxes                                                                                                       |       | (10,890                | )          | (11,224                | )          |
|                                                                                                                            |       |                   |       |                   |       |
| Benefit for  income taxes                                                                                                       |       | (3,780                 | )          | (4,317                 | )          |
| Net loss                                                                                                                        |       | $                      | (7,110     | )                      | $          | (6,907 | ) |

 

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

 

3

----

 

**Universal Hospital Services, Inc.**

 

**Statements of Operations**

*(in thousands)*

*(unaudited)*

 
| ** **                                                                                                                      | ** ** | **Nine**               | ** ** | **Four**               | ** ** | ** ** | **Five**          | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------|-------------------|------------|
| ** **                                                                                                                      | ** ** | **Months**             | ** ** | **Months**             | ** ** | ** ** | **Months**        | ** ** |
| ** **                                                                                                                      | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | ** ** | **Ended**         | ** ** |
| ** **                                                                                                                      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | **May 31,**  | ** ** |
| ** **                                                                                                                      | ** ** | **2008**               | ** ** | **2007**               | ** ** | ** ** | **2007**          | ** ** |
| ** **                                                                                                                      | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** | ** ** | **(Predecessor)** | ** ** |
| **Revenue**                                                                                                                     | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** **        | ** ** |
| Medical  equipment outsourcing                                                                                                  |       | $                      | 168,721    |                   | $          | 66,683     |              |       | $ | 84,855 |   |
| Technical and  professional services                                                                                            |       | 34,588                 |       | 14,728                 |       |       | 14,800            |       |
| Medical  equipment sales and remarketing                                                                                        |       | 14,798                 |       | 5,374                  |       |       | 7,867             |       |
| Total revenues                                                                                                                  |       | 218,107                |       | 86,785                 |       |       | 107,522           |       |
|                                                                                                                            |       |                   |       |                   |       |       |              |       |
| **Cost of  Sales**                                                                                                              |       |                   |       |                   |       |       |              |       |
| Cost of medical  equipment outsourcing                                                                                          |       | 61,071                 |       | 24,230                 |       |       | 27,694            |       |
| Cost of  technical and professional services                                                                                    |       | 25,411                 |       | 10,684                 |       |       | 10,124            |       |
| Cost of medical  equipment sales and remarketing                                                                                |       | 11,300                 |       | 4,822                  |       |       | 6,366             |       |
| Medical  equipment depreciation                                                                                                 |       | 46,438                 |       | 18,748                 |       |       | 18,512            |       |
| Total costs of  medical equipment outsourcing, technical and professional services and  medical equipment sales and remarketing |       | 144,220                |       | 58,484                 |       |       | 62,696            |       |
| Gross margin                                                                                                                    |       | 73,887                 |       | 28,301                 |       |       | 44,826            |       |
|                                                                                                                            |       |                   |       |                   |       |       |              |       |
| Selling, general  and administrative                                                                                            |       | 64,906                 |       | 27,345                 |       |       | 28,692            |       |
| Transaction and  related costs                                                                                                  |       | —                 |       | 237                    |       |       | 26,891            |       |
| Operating income  (loss)                                                                                                        |       | 8,981                  |       | 719                    |       |       | (10,757           | )          |
|                                                                                                                            |       |                   |       |                   |       |       |              |       |
| Interest expense                                                                                                                |       | 35,023                 |       | 15,031                 |       |       | 13,829            |       |
| Loss on  extinguishment of debt                                                                                                 |       | —                 |       | 1,041                  |       |       | 22,396            |       |
| Loss before  income taxes                                                                                                       |       | (26,042                | )          | (15,353                | )          |       | (46,982           | )          |
|                                                                                                                            |       |                   |       |                   |       |       |              |       |
| Provision  (benefit) for income taxes                                                                                           |       | (9,692                 | )          | (5,898                 | )          |       | 492               |       |
| Net loss                                                                                                                        |       | $                      | (16,350    | )                      | $          | (9,455     | )                 |       | $ | (47,474 | ) |

 

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

 

4

----

 

**UniversalHospital Services, Inc.**

 

**Statementsof Cash Flows**

*(inthousands)*

*(unaudited)*

 
| ** **                                                                                 | ** ** | **Nine Months**   | ** ** | **Four Months**   | ** ** | ** ** | **Five Months** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------|----------------------|------------|
| ** **                                                                                 | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | ** ** | **Ended**            | ** ** |
| ** **                                                                                 | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | **May 31,**     | ** ** |
| ** **                                                                                 | ** ** | **2008**               | ** ** | **2007**               | ** ** | ** ** | **2007**             | ** ** |
| ** **                                                                                 | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** | ** ** | **(Predecessor)**    | ** ** |
| Cash flows from  operating activities:                                                     |       |                   |       |                   |       |       |                 |       |
| Net loss                                                                                   |       | $                      | (16,350    | )                      | $          | (9,455     | )                    |       | $ | (47,474 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                   |       |                   |       |       |                 |       |
| Depreciation                                                                               |       | 52,629                 |       | 21,465                 |       |       | 21,625               |       |
| Amortization of  intangibles and deferred financing costs                                  |       | 13,639                 |       | 6,185                  |       |       | 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                                                           |       | 1,136                  |       | 499                    |       |       | 194                  |       |
| Provision for  inventory obsolescence                                                      |       | 313                    |       | 107                    |       |       | 256                  |       |
| Non-cash charges  related to step-up in carrying value of inventory                        |       | —                 |       | 200                    |       |       | —               |       |
| Non-cash  stock-based compensation expense                                                 |       | 1,876                  |       | 1,399                  |       |       | 7,957                |       |
| Loss (gain) on  sales and disposals of equipment                                           |       | 1,224                  |       | 540                    |       |       | (745                 | )          |
| Deferred income  taxes                                                                     |       | (9,968                 | )          | (5,993                 | )          |       | 392                  |       |
| Changes in  operating assets and liabilities:                                              |       |                   |       |                   |       |       |                 |       |
| Accounts  receivable                                                                       |       | (3,316                 | )          | (876                   | )          |       | (3,481               | )          |
| Inventories                                                                                |       | (1,458                 | )          | 147                    |       |       | (252                 | )          |
| Other operating  assets                                                                    |       | (567                   | )          | (395                   | )          |       | 643                  |       |
| Accounts payable                                                                           |       | 3,580                  |       | 1,047                  |       |       | 590                  |       |
| Other accrued  expenses                                                                    |       | 8,257                  |       | (21,047                | )          |       | 30,305               |       |
| Net cash  provided by (used in) operating activities                                       |       | 50,995                 |       | (5,136                 | )          |       | 34,318               |       |
| Cash flows from  investing activities:                                                     |       |                   |       |                   |       |       |                 |       |
| Medical  equipment purchases                                                               |       | (50,329                | )          | (13,069                | )          |       | (34,040              | )          |
| Property and  office equipment purchases                                                   |       | (3,197                 | )          | (1,565                 | )          |       | (1,720               | )          |
| Proceeds from  disposition of property and equipment                                       |       | 1,875                  |       | 818                    |       |       | 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                                                     |       | (51,651                | )          | (348,885               | )          |       | (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                                             |       | 73,850                 |       | 22,475                 |       |       | —               |       |
| Payments under  senior secured credit facility                                             |       | (69,025                | )          | (22,475                | )          |       | —               |       |
| Payments of  principal under capital lease obligations                                     |       | (3,109                 | )          | (1,600                 | )          |       | (1,618               | )          |
| Payment of  deferred financing costs                                                       |       | (69                    | )          | (17,350                | )          |       | —               |       |
| 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                                                                 |       | (991                   | )          | (1,427                 | )          |       | (119                 | )          |
| Proceeds from  issuance of common stock                                                    |       | —                 |       | —                 |       |       | 19                   |       |
| Net cash  provided by financing activities                                                 |       | 656                    |       | 354,021                |       |       | 13,742               |       |
| Net change in  cash and cash equivalents                                                   |       | —                 |       | —                 |       |       | —               |       |
| Cash and cash  equivalents at the beginning of period                                      |       | —                 |       | —                 |       |       | —               |       |
| Cash and cash  equivalents at the end of period                                            |       | $                      | —     |                   | $          | —     |                 |       | $ | — |   |
|                                                                                       |       |                   |       |                   |       |       |                 |       |
| Supplemental  cash flow information:                                                       |       |                   |       |                   |       |       |                 |       |
| Interest paid                                                                              |       | $                      | 22,904     |                   | $          | 630        |                 |       | $ | 17,599 |   |
| Income taxes  paid                                                                         |       | $                      | 404        |                   | $          | 48         |                 |       | $ | 61 |   |
| Non-cash  activities:                                                                      |       |                   |       |                   |       |       |                 |       |
| Medical  equipment purchases included in accounts payable                                  |       | $                      | 6,900      |                   | $          | 9,080      |                 |       | $ | 5,103 |   |
| Deferred  financing costs included in accounts payable                                     |       | $                      | —     |                   | $          | 270        |                 |       | $ | — |   |
| Capital lease  additions                                                                   |       | $                      | 4,862      |                   | $          | 1,417      |                 |       | $ | 2,142 |   |
| Equity  contributions from management shareholders                                         |       | $                      | —     |                   | $          | 9,039      |                 |       | $ | — |   |

 

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

 

5

----

 

**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 nine monthsended September 30, 2008, quarter and four months ended September 30,2007 refer to our successor results.  Allreferences to the five months ended May 31, 2007 refer to our predecessorresults.

 

Theinterim financial statements included in this Quarterly Report on Form 10-Qhave been prepared by the Company without audit, pursuant to the rules andregulations of the Securities and Exchange Commission (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 September 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 aremade.  We evaluate our estimates andjudgments on an ongoing basis and predicate those estimates and judgments onhistorical experience and on various other factors that we believe to bereasonable under the circumstances.  Wemake adjustments to our assumptions and

 

6

----

 

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**  | ** ** | **Three Months**  | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                          | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| **(in thousands)**             | ** ** | **2008**               | ** ** | **2007**               | ** ** |
| ** **                          | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** |
| Net loss                            |       | $                      | (7,110     | )                      | $          | (6,907 | ) |
| Unrealized loss  on cash flow hedge |       | (433                   | )          | (6,049                 | )          |
| Comprehensive  loss                 |       | $                      | (7,543     | )                      | $          | (12,956 | ) |

 
| ** **                                 | ** ** | **Nine Months**   | ** ** | **Four Months**   | ** ** | ** ** | **Five Months** | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------|------------|------------|----------------------|------------|
| ** **                                 | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | ** ** | **Ended**            | ** ** |
| ** **                                 | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | **May 31,**     | ** ** |
| **(in thousands)**                    | ** ** | **2008**               | ** ** | **2007**               | ** ** | ** ** | **2007**             | ** ** |
| ** **                                 | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** | ** ** | **(Predecessor)**    | ** ** |
| Net loss                                   |       | $                      | (16,350    | )                      | $          | (9,455     | )                    |       | $ | (47,474 | ) |
| Unrealized gain  (loss) on cash flow hedge |       | 484                    |       | (8,508                 | )          |       | —               |       |
| Comprehensive  loss                        |       | $                      | (15,866    | )                      | $          | (17,963    | )                    |       | $ | (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 Value Measurements,which establishes a consistent framework for measuring fair value and expandsdisclosures on fair value measurements. SFAS No. 157 was effective for theCompany starting in fiscal 2008 with respect to financial assets and

 

7

----

 

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, is as follows:

 
| ** **              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in thousands)** | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **              | ** ** | **(Successor)**        | ** ** | **(Successor)**       | ** ** |
| Loss on swap  contract  |       | $                      | 14,132     |                  | $          | 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 SFAS No. 157, if any, as it pertains to non-financialassets and 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. SFAS No. 161 expandsdisclosures but does not change accounting for derivative instruments andhedging activities.  Pursuant to thetransition provisions of SFAS No. 161, the Company will adopt SFAS No. 161in fiscal year 2009 and will present the required disclosures in the prescribedformat on a prospective basis. SFAS No. 161 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 applicable businesscombinations.

 

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

 

TheAcquisition was completed on May 31, 2007 and encompassed:

 

·                  the purchase by the equity investors of allof the issued and outstanding shares of common stock and option interests ofthe Company for approximately $335.1 million (excluding non-cash considerationof $9.0 million), which is comprised of the purchase price of approximately$712.0 million less debt, tender premium and accrued interest andcapitalized leases;

 

8

----

 

·                  equity investments from Parent funded by BSMB/UHSL.P. and BSMB/UHS Co-Investment Partners (collectively, “Irving Place Capital”)in the amount of $238.9 million, management rollover of $9.0 million andmanagement contributions of $0.9 million (on November 1, 2008, Bear StearnsMerchant Banking, commonly known as “BSMB”, which was affiliated with  Bear Stearns & Co. Inc., spun out into anindependent firm and changed its name to “Irving Place Capital”);

·                  the entry into by Merger Sub of a new$135.0 million senior secured credit facility;

·                  the issuance by Merger Sub of$230.0 million of Floating Rate Notes and $230.0 million of PIKToggle Notes; and

·                  the retirement of $309.6 million of theexisting indebtedness of the predecessor, which was approximately $334.6million as of May 31, 2007 (excluding approximately $7.7 million ofpre-existing capital leases which remained outstanding), including therepayment of $235.0 million of our $260.0 million existing 10.125%Senior Notes due 2011 for which we completed a tender offer and consentsolicitation on May 31, 2007, and the repayment of the outstanding balance($74.6 million) on our previous $125.0 million amended and restated creditagreement (“Amended Credit Agreement”) that we had entered into on May 26,2005, with a bank group led by General Electric Capital Corporation.

 

TheAcquisition occurred simultaneously with:

 

·                  the closing of the financing and equityinvestments described above; and

·                  the merger of Merger Sub with and into theCompany, with the Company as the surviving corporation, and the payment ofapproximately $712.0 million as merger consideration.

 

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

 

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

·                  Irving PlaceCapital fee expensed of $6.5 million;and

·                  stock-based compensation expense related tothe accelerated vesting of options under our 2003 Stock Option Plan of $6.7million 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

----

 
| **(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

----

 

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 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      |   |
|                                                              |            |            |            |            |            |  |  |

 

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.

 

11

----

 

A condensed balance sheet of the fair value of theacquired assets 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 Irving Place Capital’s achievement of a certain internal rateof return on its investment 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 theirrespective stock option grant agreements. Forfeited options are available for future issue.

 

Duringthe nine months ended September 30, 2008, activity under Parent’s 2007Stock Option Plan was as follows:

 

12

----

 
| **(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                                         |       | (614                        | )          | $                                          | 1.00       |   |
|                                                         |       |                        |       |                                       |       |
| Outstanding at  September 30, 2008                      |       | 36,831                      |       | $                                          | 1.00       |   |
|                                                         |       |                        |       |                                       |       |
| Exercisable at  September 30, 2008                      |       | 5,829                       |       | $                                          | 1.00       |   |
|                                                         |       |                        |       |                                       |       |
| Remaining  authorized options available for issue            |       | 7,074                       |       |                                       |       |

 

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 a peer group of companies’ 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 Irving Place Capital 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 nine months ended September 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 nine months ended September 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

 

13

----

 

competitorswithin certain product lines.  The riskfree-interest rate is based on the U.S. Treasury yield curve in effect at thegrant date based on the expected option life. The 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 nine months ended September 30,2008, we recognized non-cash stock compensation expense of $0.6 million and$1.9 million, respectively.  For thethree and four months ended September 30, 2007, we recognized non-cashstock compensation expense of $1.0 million and $1.4 million, respectively.  Non-cash stock compensation expense isprimarily included in selling, general and administrative expenses.  At September 30, 2008, unearned non-cashstock-based compensation that we expect to recognize as expense over the next4.3 years totals approximately $10.1 million, net of our estimated forfeituresof 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:

 
| ** **                               | ** ** | **September 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          |       | 24,300                 |       | 19,475                |       |
| 10.125% Senior  Notes                    |       | 9,945                  |       | 9,945                 |       |
| Capital lease  obligations               |       | 9,668                  |       | 7,915                 |       |
|                                     |       | 503,913                |       | 497,335               |       |
| Less: Current  portion of long-term debt |       | (3,059                 | )          | (3,120                | )          |
| Total long-term  debt                    |       | $                      | 500,854    |                  | $          | 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.

 

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

 

14

----

 

amountof the outstanding PIK Toggle Notes, by issuing additional PIK Toggle Notes (“PIKInterest”) or 50% Cash Interest and 50% PIK Interest.  Cash Interest on the PIK Toggle Notes accruesat the rate of 8.50% per annum.  PIK Interest on the PIK Toggle Notesaccrues at the rate of 9.25% per annum.  After June 1, 2011, theCompany is required to make all interest payments on the PIK Toggle Notesentirely as Cash Interest.  All PIK Toggle Notes mature on June 1,2015.  Interest on the PIK Toggle Notesis payable semiannually in arrears on each June 1 and December 1,commencing on December 1, 2007.  Asof September 30, 2008, we intend to make future payments in the form ofCash Interest.

 

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

 

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

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

 

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

 

***Floating Rate Notes. ***On May 31, 2007, 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 September 30,2008, our LIBOR-based rate was 6.303%, 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.

 

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

 

15

----

 

principalamount) set forth below plus accrued and unpaid interest, if any, on theFloating Rate Notes redeemed, to the applicable redemption date, if redeemedduring the twelve-month period beginning on June 1 of the years indicatedbelow, 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 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 September 30, 2008 isincluded as an interest rate swap liability on our balance sheet.  The change in fair value was recorded as acomponent of accumulated other comprehensive loss, net of tax, on our balancesheet since the instrument was determined to be an effective hedge at September 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.

 

***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 unsecured indebtednessto 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 are securedby first priority liens on the collateral securing the Notes or that aresecured by a lien on assets that are not part of the collateral securing theNotes, in each case, to the extent of the value of such collateral or assets;and

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

 

16

----

 

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 creditagreement and related documentation in the form of revolving loans, swing lineloans and letters of credit.

 

Thesenior secured credit facility provides financing of up to $135.0 million,subject to a borrowing base calculated on the basis of certain of our eligibleaccounts receivable, inventory and equipment. As of September 30, 2008, we had $109.3 million of availabilityunder the senior secured credit facility based on a borrowing base of $135.0million, less borrowings of $24.3 million, and after giving effect to $1.4million used for 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 in substantiallyall of our assets, excluding a pledge of our and Parent’s capital stock, anyjoint ventures and certain other exceptions. Our obligations under the senior secured credit facility areunconditionally 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 size couldbe increased to up to $185.0 million, but our ability to borrow wouldstill be limited by the amount of the borrowing base.

 

Borrowingsunder the senior secured credit facility accrue interest on a predeterminedgrid, which at September 30, 2008 was:

 

17

----

 

·                  ata per annum rate equal to 0.75% above the rate announced from time to time bythe agent as the “prime rate” payable quarterly in arrears; and

·                  ata per annum rate equal to 1.75% above the adjusted LIBOR rate used by the agentpayable monthly in arrears.

 

At September 30, 2008, our prime-basedrate was 5.750% and our LIBOR-based rate was 4.236%, each of which include thecredit spreads noted above.

 

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

 

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

 

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

 

·                  incurindebtedness;

·                  createor permit liens;

·                  declareor pay dividends and certain other restricted payments;

·                  consolidate,merge or recapitalize;

·                  acquireor sell assets;

·                  makecertain investments, loans or other advances;

·                  enterinto transactions with affiliates;

·                  changeour line of business; and

·                  enterinto hedging transactions.

 

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

 

The senior secured creditfacility specifies certain events of default, including among others, failureto pay principal, interest or fees, violation of covenants, inaccuracy ofrepresentations or warranties, bankruptcy events, certain ERISA-related events,cross-defaults to other material agreements, change of control events, andinvalidity of guarantees or security documents. Some events of default will be triggered only after certain cure periodshave expired, or will provide for materiality thresholds.  If such a default occurs, the lenders underthe senior secured credit facility would be entitled to take various actions,including all actions permitted to be taken by a secured creditor and theacceleration of amounts due under the senior secured credit facility.

 

18

----

 

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

 

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

 

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

 

·                  requirementsto file reports with the SEC;

·                  requirementsto pay taxes;

·                  limitationson the Company to use defenses against usury;

·                  thelimitation on restricted payments;

·                  thelimitation on payment of dividends and other payment restrictions affectingsubsidiaries;

·                  limitationson incurrence of indebtedness and issuance of preferred stock;

·                  limitationson asset sales and requirements to repurchase the Senior Notes with excessproceeds thereof;

·                  limitationson affiliate transactions;

·                  limitationson liens;

·                  limitationson the businesses in which the Company and its subsidiaries may engage;

·                  requirementsto preserve corporate existence;

·                  requirementsto purchase the Senior Notes upon a change of control;

·                  limitationon the issuance of guarantees of indebtedness;

·                  limitationson the payments for consent from holders of the Senior Notes;

·                  limitationson merger, consolidation and sale of assets with respect to the Company;

·                  limitationson merger or consolidation of, or transfer of assets of, guarantors; and

·                  certainevents of default.

 

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

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

 

19

----

 

**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 not predictablewith assurance.  While the ultimateresolution of these actions may have an impact on the Company’s financialresults for a particular reporting period, management believes that any suchresolution would not have a material adverse effect on the financial position,results of operations or cash flows of the Company.

 

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

 

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 nine months of 2008, we made rent payments to a Ryan affiliatetotaling $231,000.

 

OnApril 1, 2008, we added three new independent directors to our Board ofDirectors.  One of our new directors alsois a director of Broadlane, Inc. (“Broadlane”), a health care grouppurchasing organization that serves many of our customers.  During the six months ended September 30,2008, we paid Broadlane approximately $291,000 in administrative fees.  On September 30, 2008, accounts payableincludes approximately $46,000 in amounts due to Broadlane.

 

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

 

**9.****                                     ****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:

 

**MedicalEquipment Outsourcing**

*(inthousands)*

 
| ** **                      | ** ** | **Quarter-to-Date**    | ** ** | **Year-to-Date**       | ** ** |
|---------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** | **Four Months** | ** ** | ** ** | **Five Months** | ** ** |
| ** **                      | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | **Ended** | ** ** | ** ** | **Ended** | ** ** |
| ** **                      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | **May 31,** | ** ** |
| ** **                      | ** ** | **2008**               | ** ** | **2007**               | ** ** | **2008** | ** ** | **2007** | ** ** | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| Revenues                        |       | $                      | 53,469     |                   | $          | 49,988 |   | $ | 168,721 |   | $ | 66,683 |   |   | $ | 84,855 |   |
| Cost of revenue                 |       | 20,605                 |       | 18,314                 |       | 61,071 |   | 24,230 |   |   | 27,694 |   |
| Medical  equipment depreciation |       | 15,809                 |       | 14,116                 |       | 46,438 |   | 18,748 |   |   | 18,512 |   |
| Gross margin                    |       | $                      | 17,055     |                   | $          | 17,558 |   | $ | 61,212 |   | $ | 23,705 |   |   | $ | 38,649 |   |

 

20

----

 

**Technicaland Professional Services**

*(inthousands)*

 
| ** **      | ** ** | **Quarter-to-Date**    | ** ** | **Year-to-Date**       | ** ** |
|-----------------|------------|------------------------|------------|------------------------|------------|
| ** **      | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** | **Four Months** | ** ** | ** ** | **Five Months** | ** ** |
| ** **      | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | **Ended** | ** ** | ** ** | **Ended** | ** ** |
| ** **      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | **May 31,** | ** ** |
| ** **      | ** ** | **2008**               | ** ** | **2007**               | ** ** | **2008** | ** ** | **2007** | ** ** | ** ** | **2007** | ** ** |
| ** **      | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| Revenues        |       | $                      | 11,174     |                   | $          | 11,098 |   | $ | 34,588 |   | $ | 14,728 |   |   | $ | 14,800 |   |
| Cost of revenue |       | 8,066                  |       | 8,158                  |       | 25,411 |   | 10,684 |   |   | 10,124 |   |
| Gross margin    |       | $                      | 3,108      |                   | $          | 2,940 |   | $ | 9,177 |   | $ | 4,044 |   |   | $ | 4,676 |   |

 

**MedicalEquipment Sales and Remarketing**

*(inthousands)*

 
| ** **      | ** ** | **Quarter-to-Date**    | ** ** | **Year-to-Date**       | ** ** |
|-----------------|------------|------------------------|------------|------------------------|------------|
| ** **      | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** | **Four Months** | ** ** | ** ** | **Five Months** | ** ** |
| ** **      | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | **Ended** | ** ** | ** ** | **Ended** | ** ** |
| ** **      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | **May 31,** | ** ** |
| ** **      | ** ** | **2008**               | ** ** | **2007**               | ** ** | **2008** | ** ** | **2007** | ** ** | ** ** | **2007** | ** ** |
| ** **      | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| Revenues        |       | $                      | 6,336      |                   | $          | 4,097 |   | $ | 14,798 |   | $ | 5,374 |   |   | $ | 7,867 |   |
| Cost of revenue |       | 4,587                  |       | 3,610                  |       | 11,300 |   | 4,822 |   |   | 6,366 |   |
| Gross margin    |       | $                      | 1,749      |                   | $          | 487 |   | $ | 3,498 |   | $ | 552 |   |   | $ | 1,501 |   |

 

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

*(inthousands)*

 
| ** **                           | ** ** | **Quarter-to-Date**    | ** ** | **Year-to-Date**       | ** ** |
|--------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** | **Four Months** | ** ** | ** ** | **Five Months** | ** ** |
| ** **                           | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | **Ended** | ** ** | ** ** | **Ended** | ** ** |
| ** **                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | **May 31,** | ** ** |
| ** **                           | ** ** | **2008**               | ** ** | **2007**               | ** ** | **2008** | ** ** | **2007** | ** ** | ** ** | **2007** | ** ** |
| ** **                           | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| Total gross  margin                  |       | $                      | 21,912     |                   | $          | 20,985 |   | $ | 73,887 |   | $ | 28,301 |   |   | $ | 44,826 |   |
| Selling, general  and administrative |       | 21,276                 |       | 20,741                 |       | 64,906 |   | 27,345 |   |   | 28,692 |   |
| Transaction and  related costs       |       | —                 |       | 237                    |       | — |   | 237 |   |   | 26,891 |   |
| Interest expense                     |       | 11,526                 |       | 11,231                 |       | 35,023 |   | 15,031 |   |   | 13,829 |   |
| Loss on  extinguishment of debt      |       | —                 |       | —                 |       | — |   | 1,041 |   |   | 22,396 |   |
| Loss before  income tax              |       | $                      | (10,890    | )                      | $          | (11,224 | ) | $ | (26,042 | ) | $ | (15,353 | ) |   | $ | (46,982 | ) |

 

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

 

Thecomponents of net periodic pension costs are as follows:

 

21

----

 
| ** **                      | ** ** | **Quarter-to-Date**    | ** ** | **Year-to-Date**       | ** ** |
|---------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **Three Months**  | ** ** | **Three Months**  | ** ** | **Nine Months** | ** ** | **Four Months** | ** ** | ** ** | **Five Months** | ** ** |
| ** **                      | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | **Ended** | ** ** | **Ended** | ** ** | ** ** | **Ended** | ** ** |
| ** **                      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | **May 31,** | ** ** |
| **(in thousands)**         | ** ** | **2008**               | ** ** | **2007**               | ** ** | **2008** | ** ** | **2007** | ** ** | ** ** | **2007** | ** ** |
| ** **                      | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| Interest cost                   |       | $                      | 258        |                   | $          | 255 |   | $ | 774 |   | $ | 340 |   |   | $ | 421 |   |
| Expected return  on plan assets |       | (308                   | )          | (295                   | )          | (923 | ) | (393 | ) |   | (452 | ) |
| Recognized net  actuarial loss  |       | —                 |       | —                 |       | — |   | — |   |   | 73 |   |
| Service cost                    |       | —                 |       | —                 |       | — |   | — |   |   | — |   |
| Net periodic  cost (benefit)    |       | $                      | (50        | )                      | $          | (40 | ) | $ | (149 | ) | $ | (53 | ) |   | $ | 42 |   |

 

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 the valuation allowanceis no longer necessary as we determined that it was more likely than not thatthe benefits of these deferred tax assets will be realized.

 

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

 

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

 

**BUSINESS OVERVIEW**

 

**OurCompany**

 

UniversalHospital Services, Inc. (the “Company,” “UHS,” “we,” “our,” or “us”) 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 medicalequipment outsourcing customer base includes more than 4,050 acute carehospitals and approximately 3,925 alternate site providers.  We also have relationships with more than 200medical equipment manufacturers and many of the nation’s largest grouppurchasing organizations (“GPOs”) and integrated delivery networks (“IDNs”).  All of our services leverage our nationwidenetwork of offices and our more than 65 years of experience managing andservicing all aspects of medical equipment. Our fees are paid directly by our customers rather than from directreimbursement from third-party payors, such as private insurers or Medicare andMedicaid.  We commenced operations in1939, originally incorporated in Minnesota in 1954 and reincorporated inDelaware in 2001.

 

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

 

22

----

 

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

 

**Althoughthe Company continued as the surviving legal entity after the Acquisition, theaccompanying information presents our results preceding the Acquisition (“predecessor”)and the periods following the Acquisition (“successor”).  All references to the three and nine monthsended September 30, 2008 and three and four months ended September 30,2007 refer to our successor results.  Allreferences to the five months ended May 31, 2007 refer to our predecessorresults.**

 

**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 andRemarketing.  We evaluate the performance of our reporting segmentsbased on gross margin and gross margin before purchase accounting adjustments.The accounting policies of the individual operating segments are the same asthose of the entire Company.

 

Wepresent the non-Generally Accepted Accounting Principals (“GAAP”) financialmeasure gross margin, before purchase accounting adjustments, because we usethis measure to monitor and evaluate the performance of our business andbelieve that the presentation of this measure will enhance users’ ability toanalyze trends in our business and evaluate our performance relative to othercompanies in our industry.  A reconciliation of the non-GAAPfinancial measure to its equivalent GAAP measure is included in the respectivetables.

 

**MedicalEquipment Outsourcing Segment - Manage & Utilize**

 

Ourflagship business is our Medical Equipment Outsourcing segment, which accountedfor $53.5 million, or approximately 75.3% of our revenues for the quarter endedSeptember 30, 2008 and $168.7 million, or approximately 77.3% of ourrevenues for the nine months ended September 30, 2008.  As of September 30, 2008, we owned andmanaged approximately 229,000 pieces of medical equipment,

 

23

----

 

primarilyin the categories of respiratory therapy, newborn care, critical care, patientmonitors, specialty beds, pressure area management and wound therapy.  Historically, we have purchased and owneddirectly the equipment used in our medical equipment outsourcing programs.  Beginning in 2007, the Company entered intorevenue sharing 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 into more of sucharrangements in the future.  Sucharrangements are less capital-intensive for the Company.

 

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

 

·                  Supplemental(Peak Needs) Outsourcing;

·                  Long-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 with national acute care and alternatesite providers. We expect much of our future growth in this segment to bedriven by our customers outsourcing more of their medical equipment needs andtaking full advantage of our expanded offering of Long-Term Outsourcingagreements and AMPPs.

 

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

 

OurTechnical and Professional Services segment accounted for $11.2 million, orapproximately 15.8% of our revenues for the quarter ended September 30,2008 and $34.6 million, or approximately 15.9% of our revenues for the ninemonths ended September 30, 2008.  Weleverage our more than 65 years of experience and our extensive equipmentdatabase in repairing and maintaining medical equipment.  We offer a broad range of inspection,preventative maintenance, repair, logistic and consulting services through ourteam of approximately 350 technicians and professionals located in ournationwide network of district offices and service centers.  Our technical and professional serviceofferings are less capital-intensive than our Medical Equipment Outsourcingsegment, and provide a complementary alternative for customers that wish to owntheir medical equipment, but lack the expertise, funding or scale to performmaintenance, repair and analytical functions. As part of our strategy to grow our Technical and Professional Servicessegment, we acquired the assets of the ICMS division of Intellamed, Inc. (“Intellamed”)on April 1, 2007.

 

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

 

OurMedical Equipment Sales and Remarketing segment accounted for $6.3 million, orapproximately 8.9% of our revenues for the quarter ended September 30,2008 and $14.8 million, or approximately 6.8% of our revenues for the ninemonths ended September 30, 2008. This segment includes three business activities:

 

24

----

 

***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 equipment to hospitals, alternate careproviders, veterinarians and equipment brokers. We offer a wide range of equipment, from our standard medical equipmentto diagnostic, 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.  Wecurrently sell equipment in many product lines including, but not limited to,continuous passive motion machines, patient monitors, patient transfer systemsand infant security systems.

 

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

 

**RESULTS OF OPERATIONS**

 

**Thefollowing discussion addresses:**

 

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

**·**                  the results of operationsfor the quarters ended September 30, 2008 and 2007;

**·**                  the results of operationsfor the nine months ended September 30, 2008, four months ended September 30,2007 and five months ended May 31, 2007; and

**·**                  the cash flows for thenine months ended September 30, 2008, four months ended September 30,2007 and five months ended 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 connection with the Acquisition has been allocatedto state the acquired assets and liabilities at fair value.  The purchase accounting adjustments increasedthe carrying value of our property and equipment and inventory, 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 the Transaction, interestexpense, non-cash depreciation and amortization charges have significantlyincreased.  As a result, our successorfinancial statements are not comparable to our predecessor financialstatements.

 

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

 

25

----

 
| ** **                                                                                                                      | ** ** | **Quarter-to-Date**                          | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **Percent of Total Revenues** | ** ** | ** ** | ** ** |
| ** **                                                                                                                      | ** ** | **Three Months**                        | ** ** | **Three Months** | ** ** | ** ** | ** ** |
| ** **                                                                                                                      | ** ** | **Ended**                                    | ** ** | **Ended** | ** ** | ** ** | ** ** |
| ** **                                                                                                                      | ** ** | **September 30,**                       | ** ** | **September 30,** | ** ** | **Percent** | ** ** |
| ** **                                                                                                                      | ** ** | **2008**                                     | ** ** | **2007** | ** ** | **Increase** | ** ** |
| ** **                                                                                                                      | ** ** | **(Successor)**                              | ** ** | **(Successor)** | ** ** | **(Decrease)** | ** ** |
| **Revenue**                                                                                                                     |       |                                         |       |   |   |   |   |
| Medical  equipment outsourcing                                                                                                  |       | 75.3                                         | %          | 76.7 | % | 7.0 | % |
| Technical and  professional services                                                                                            |       | 15.8                                         |       | 17.0 |   | 0.7 |   |
| Medical  equipment sales and remarketing                                                                                        |       | 8.9                                          |       | 6.3 |   | 54.6 |   |
| Total revenues                                                                                                                  |       | 100.0                                        | %          | 100.0 | % | 8.9 |   |
|                                                                                                                            |       |                                         |       |   |   |   |   |
| **Cost of  Revenue**                                                                                                            |       |                                         |       |   |   |   |   |
| Cost of medical  equipment outsourcing                                                                                          |       | 29.0                                         |       | 28.1 |   | 12.5 |   |
| Cost of  technical and professional services                                                                                    |       | 11.4                                         |       | 12.5 |   | (1.1 | ) |
| Cost of medical  equipment sales and remarketing                                                                                |       | 6.5                                          |       | 5.5 |   | 27.1 |   |
| Movable medical  equipment depreciation                                                                                         |       | 22.2                                         |       | 21.7 |   | 12.0 |   |
| Total costs of  medical equipment outsourcing, technical and professional services and  medical equipment sales and remarketing |       | 69.1                                         |       | 67.8 |   | 11.0 |   |
| Gross margin                                                                                                                    |       | 30.9                                         |       | 32.2 |   | 4.4 |   |
|                                                                                                                            |       |                                         |       |   |   |   |   |
| Selling, general  and administrative                                                                                            |       | 30.0                                         |       | 31.8 |   | 2.6 |   |
| Transaction and  related costs                                                                                                  |       | —                                       |       | 0.4 |   |   | * |
| Operating income                                                                                                                |       | 0.9                                          |       | — |   |   | * |
|                                                                                                                            |       |                                         |       |   |   |   |   |
| Interest expense                                                                                                                |       | 16.2                                         |       | 17.2 |   | 2.6 |   |
| Loss before  income taxes                                                                                                       |       | (15.3                                        | )          | (17.2 | ) | (3.0 | ) |
|                                                                                                                            |       |                                         |       |   |   |   |   |
| Benefit for  income taxes                                                                                                       |       | (5.3                                         | )          | (6.6 | ) | (12.4 | ) |
| Net loss                                                                                                                        |       | (10.0                                        | )%         | (10.6 | )% | 2.9 | % |

 

----

* Not Meaningful

 

26

----

 
| ** **                                                                                                                      | ** ** | **Year-to-Date**                             | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                                      | ** ** | **Percent of Total Revenues** | ** ** |
| ** **                                                                                                                      | ** ** | **Nine Months**                         | ** ** | **Four Months** | ** ** | ** ** | **Five Months** | ** ** |
| ** **                                                                                                                      | ** ** | **Ended**                                    | ** ** | **Ended** | ** ** | ** ** | **Ended** | ** ** |
| ** **                                                                                                                      | ** ** | **September 30,**                       | ** ** | **September 30,** | ** ** | ** ** | **May 31,** | ** ** |
| ** **                                                                                                                      | ** ** | **2008**                                     | ** ** | **2007** | ** ** | ** ** | **2007** | ** ** |
| ** **                                                                                                                      | ** ** | **(Successor)**                              | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| **Revenue**                                                                                                                     |       |                                         |       |   |   |   |   |   |
| Medical  equipment outsourcing                                                                                                  |       | 77.3                                         | %          | 76.8 | % |   | 78.9 | % |
| Technical and  professional services                                                                                            |       | 15.9                                         |       | 17.0 |   |   | 13.8 |   |
| Medical  equipment sales and remarketing                                                                                        |       | 6.8                                          |       | 6.2 |   |   | 7.3 |   |
| Total revenues                                                                                                                  |       | 100.0                                        | %          | 100.0 | % |   | 100.0 | % |
|                                                                                                                            |       |                                         |       |   |   |   |   |   |
| **Cost of  Revenue**                                                                                                            |       |                                         |       |   |   |   |   |   |
| Cost of medical  equipment outsourcing                                                                                          |       | 28.0                                         |       | 27.9 |   |   | 25.8 |   |
| Cost of  technical and professional services                                                                                    |       | 11.6                                         |       | 12.3 |   |   | 9.4 |   |
| Cost of medical  equipment sales and remarketing                                                                                |       | 5.2                                          |       | 5.6 |   |   | 5.9 |   |
| Movable medical  equipment depreciation                                                                                         |       | 21.3                                         |       | 21.6 |   |   | 17.2 |   |
| Total costs of  medical equipment outsourcing, technical and professional services and  medical equipment sales and remarketing |       | 66.1                                         |       | 67.4 |   |   | 58.3 |   |
| Gross margin                                                                                                                    |       | 33.9                                         |       | 32.6 |   |   | 41.7 |   |
|                                                                                                                            |       |                                         |       |   |   |   |   |   |
| Selling, general  and administrative                                                                                            |       | 29.8                                         |       | 31.5 |   |   | 26.7 |   |
| Transaction and  related costs                                                                                                  |       | —                                       |       | 0.3 |   |   | 25.0 |   |
| Operating income  (loss)                                                                                                        |       | 4.1                                          |       | 0.8 |   |   | (10.0 | ) |
|                                                                                                                            |       |                                         |       |   |   |   |   |   |
| Interest expense                                                                                                                |       | 16.1                                         |       | 17.3 |   |   | 12.9 |   |
| Loss on  extinguishment of debt                                                                                                 |       | —                                       |       | 1.2 |   |   | 20.8 |   |
| Loss before  income taxes                                                                                                       |       | (11.9                                        | )          | (17.7 | ) |   | (43.7 | ) |
|                                                                                                                            |       |                                         |       |   |   |   |   |   |
| Provision  (benefit) for income taxes                                                                                           |       | (4.4                                         | )          | (6.8 | ) |   | 0.5 |   |
| Net loss                                                                                                                        |       | (7.5                                         | )%         | (10.9 | )% |   | (44.2 | )% |

 

27

----

 

**Resultsof Operations for the Three Months Ended September 30, 2008 (successor)compared to the Three Months Ended September 30, 2007 (successor)**

 

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

*(in thousands)*

 
| ** **                                                                                                              | ** ** | **Three Months Ended** | ** ** | ** **      | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                              | ** ** | **September 30,**           | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **                                                                                                              | ** ** | **2008**                         | ** ** | **2007**        | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                                                                                                              | ** ** | **(Successor)**                  | ** ** | **(Successor)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenue                                                                                                           |       | $                                | 53,469     |            | $          | 49,988     |       | $ | 3,481 |   | 7.0 | % |
| Cost of revenue                                                                                                         |       | 20,605                           |       | 18,314          |       | 2,291      |       | 12.5 |   |
| Medical  equipment depreciation                                                                                         |       | 15,809                           |       | 14,116          |       | 1,693      |       | 12.0 |   |
| Gross margin                                                                                                            |       | $                                | 17,055     |            | $          | 17,558     |       | $ | (503 | ) | (2.9 | ) |
|                                                                                                                    |       |                             |       |            |       |       |       |   |   |
| Gross margin %                                                                                                          |       | 31.9                             | %          | 35.1            | %          |       |       |   |   |
|                                                                                                                    |       |                             |       |            |       |       |       |   |   |
| Gross margin                                                                                                            |       | $                                | 17,055     |            | $          | 17,558     |       | $ | (503 | ) | (2.9 | ) |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of medical equipment |       | 4,937                            |       | 4,211           |       | 726        |       | 17.2 |   |
| Gross margin,  before purchase accounting adjustments                                                                   |       | $                                | 21,992     |            | $          | 21,769     |       | $ | 223 |   | 1.0 | % |
|                                                                                                                    |       |                             |       |            |       |       |       |   |   |
| Gross margin %,  before purchase accounting adjustments                                                                 |       | 41.1                             | %          | 43.5            | %          |       |       |   |   |

 

Totalrevenue in the Medical Equipment Outsourcing segment increased $3.5 million, or7.0%, to $53.5 million in the third quarter of 2008 as compared to the sameperiod of 2007.  This increase was drivenby organic and competitive takeaway in our acute care and AMPP customer baseand incremental business from new and existing technology, either owned ormanaged.

 

Totalcost of revenue in the segment increased $2.3 million, or 12.5%, to $20.6million in the third quarter of 2008 as compared to the same period of2007.  This increase is primarilyattributable to increased employee, freight and auto related expenses, aportion of which relates to building our infrastructure for new businessopportunities.

 

Medicalequipment depreciation increased $1.7 million, or 12.0%, to $15.8 million inthe third quarter of 2008 as compared to the same period of 2007.  Medical equipment depreciation for thequarters ended September 30, 2008 and 2007 includes $3.8 million and $2.8million, respectively, of purchase accounting adjustments.

 

Grossmargin percentage for the Medical Equipment Outsourcing segment decreased from35.1% in the third quarter of 2007 to 31.9% for the third quarter of 2008.  The decrease is primarily attributable toincreased costs due to the higher level of revenues and increased depreciationexpense.

 

Grossmargin percentage, before purchase accounting adjustments, decreased from 43.5%in the third quarter of 2007 to 41.1% in the third quarter of 2008.

 

28

----

 

**Technical and Professional ServicesSegment – Plan & Acquire; Maintain & Repair**

*(in thousands)*

 
| ** **                                                                                           | ** ** | **Three Months Ended** | ** ** | ** **      | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                           | ** ** | **September 30,**           | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **                                                                                           | ** ** | **2008**                         | ** ** | **2007**        | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                                                                                           | ** ** | **(Successor)**                  | ** ** | **(Successor)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenue                                                                                        |       | $                                | 11,174     |            | $          | 11,098     |       | $ | 76 |   | 0.7 | % |
| Cost of revenue                                                                                      |       | 8,066                            |       | 8,158           |       | (92        | )          | (1.1 | ) |
| Gross margin                                                                                         |       | $                                | 3,108      |            | $          | 2,940      |       | $ | 168 |   | 5.7 |   |
|                                                                                                 |       |                             |       |            |       |       |       |   |   |
| Gross margin %                                                                                       |       | 27.8                             | %          | 26.5            | %          |       |       |   |   |
|                                                                                                 |       |                             |       |            |       |       |       |   |   |
| Gross margin                                                                                         |       | $                                | 3,108      |            | $          | 2,940      |       | $ | 168 |   | 5.7 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to favorable lease  commitments |       | 6                                |       | 7               |       | (1         | )          | (8.4 | ) |
| Gross margin,  before purchase accounting adjustments                                                |       | $                                | 3,114      |            | $          | 2,947      |       | $ | 167 |   | 5.7 | % |
|                                                                                                 |       |                             |       |            |       |       |       |   |   |
| Gross margin %,  before purchase accounting adjustments                                              |       | 27.9                             | %          | 26.5            | %          |       |       |   |   |

 

Totalrevenue in the Technical and Professional Services segment increased $0.1million, or 0.7%, to $11.2 million in the third quarter of 2008 as compared tothe same period of 2007.

 

Totalcost of revenue in the segment declined $0.1 million, or 1.1%, to $8.1 millionfor third quarter of 2008 as compared to the same period of 2007.

 

Grossmargin percentage for the Technical and Professional Services segment increasedfrom 26.5% for the third quarter of 2007 to 27.8% for the third quarter of2008.  Gross margin percentage willfluctuate based on the variability of third party vendor expenses in ourCustomized Healthcare Asset Management Programs and supplemental serviceprograms.

 

**Medical Equipment Sales andRemarketing Segment – Redeploy & Remarket**

*(in thousands)*

 
| ** **                                                                                                                              | ** ** | **Three Months Ended** | ** ** | ** **      | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                                              | ** ** | **September 30,**           | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **                                                                                                                              | ** ** | **2008**                         | ** ** | **2007**        | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                                                                                                                              | ** ** | **(Successor)**                  | ** ** | **(Successor)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenue                                                                                                                           |       | $                                | 6,336      |            | $          | 4,097      |       | $ | 2,239 |   | 54.6 | % |
| Cost of revenue                                                                                                                         |       | 4,587                            |       | 3,610           |       | 977        |       | 27.1 |   |
| Gross margin                                                                                                                            |       | $                                | 1,749      |            | $          | 487        |       | $ | 1,262 |   | 259.1 |   |
|                                                                                                                                    |       |                             |       |            |       |       |       |   |   |
| Gross margin %                                                                                                                          |       | 27.6                             | %          | 11.9            | %          |       |       |   |   |
|                                                                                                                                    |       |                             |       |            |       |       |       |   |   |
| Gross margin                                                                                                                            |       | $                                | 1,749      |            | $          | 487        |       | $ | 1,262 |   | 259.1 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of inventories and medical equipment |       | 191                              |       | 380             |       | (189       | )          | (49.8 | ) |
| Gross margin,  before purchase accounting adjustments                                                                                   |       | $                                | 1,940      |            | $          | 867        |       | $ | 1,073 |   | 123.7 | % |
|                                                                                                                                    |       |                             |       |            |       |       |       |   |   |
| Gross margin %,  before purchase accounting adjustments                                                                                 |       | 30.6                             | %          | 21.2            | %          |       |       |   |   |

 

Totalrevenue in the Medical Equipment Sales and Remarketing segment increased $2.2million, or 54.6%, to $6.3 million in the third quarter of 2008 as compared tothe same period of 2007.  The increasewas primarily driven by new equipment sales of $1.5 million during the thirdquarter of 2008.

 

29

----

 

Totalcost of revenue in the segment increased $1.0 million, or 27.1%, to $4.6million in the third quarter of 2008 as compared to the same period of2007.  The increase was primarily due toan increase in the cost of new equipment sold of $0.8 million.  During the quarters ended September 30,2008 and 2007, purchase accounting adjustments related to medical equipment andinventory impacted cost of revenue by $0.2 million and $0.4 million,respectively.

 

Grossmargin percentage for the Medical Equipment Sales and Remarketing segmentincreased from 11.9% in the third quarter of 2007 to 27.6% for the same periodof 2008.  Purchase accounting adjustmentsnegatively impacted gross margin percentage for the quarters ended September 30,2008 and 2007.  Margins and activity inthis segment will fluctuate based on the transactional nature of the business.

 

Grossmargin percentage, before purchase accounting adjustments, for the MedicalEquipment Sales and Remarketing segment increased from 21.2% in the thirdquarter of 2007 to 30.6% for the same period of 2008.

 

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

*(in thousands)*

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | ** **      | ** ** | ** ** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|-----------------|------------|------------|------------|
| ** **                           | ** ** | **September 30,**           | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **2008**                         | ** ** | **2007**        | ** ** | **Change** | ** ** | **% Change** | ** ** |
| ** **                           | ** ** | **(Successor)**                  | ** ** | **(Successor)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling, general  and administrative |       | $                                | 21,276     |            | $          | 20,741     |       | $ | 535 |   | 2.6 | % |
| Transaction and  related costs       |       | —                           |       | 237             |       | (237       | )          |   | * |
| Interest expense                     |       | 11,526                           |       | 11,231          |       | 295        |       | 2.6 | % |
|                                      |            |                                  |            |                 |            |            |            |  |  |  |  |  |

 

----

* Not Meaningful

 

***Selling, General andAdministrative***

 

Selling,general and administrative expenses increased $0.5 million, or 2.6%, to $21.3million for the third quarter of 2008 as compared to the same period of2007.  Selling, general andadministrative expenses consist primarily of employee-related expenses,professional fees, occupancy charges, bad debt expense and depreciation andamortization.  Expenses during the threemonths ended September 30, 2008 and 2007 include $4.0 million and $3.8million, respectively, of charges related to the amortization of our intangibleassets which 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 $1.0 million, respectively.  Purchase accounting adjustments of $0.3million impacted each of the three month periods ended September 30, 2008and 2007, respectively.  Selling, generaland administrative expenses as a percentage of total revenue were 30.0% and31.8% for the quarters ended September 30, 2008 and 2007, respectively.

 

***Transaction and Related Costs***

 

Weincurred $0.2 million of expenses in connection with the Transaction during thequarter ended September 30, 2007.

 

30

----

 

***Interest Expense***

 

Interestexpense increased $0.3 million, or 2.6%, to $11.5 million during the thirdquarter of 2008 as compared to the same period of 2007.  The increase was primarily driven byincreased levels of outstanding debt on our senior secured credit facility.

 

**IncomeTaxes**

 

Benefitfor income taxes was $3.8 and $4.3 million for the quarters ended September 30,2008 and 2007, respectively.  The Companymoved from a net deferred tax asset position prior to the Transaction, wheretax expense related primarily to minimum state taxes due to valuationallowances established for net operating losses not recognized, to a netdeferred tax liability position after the Transaction.  Management believes the valuation allowanceis no longer necessary as we determined that it was more likely than not thatthe benefits of these deferred tax assets will be realized.

 

**NetLoss**

 

Netloss increased $0.2 million, or 2.9%, to $7.1 million in the third quarter of2008 as compared to the same period of 2007. The increase primarily resulted from higher selling, general andadministrative expenses and interest expense of $0.5 and $0.3 million,respectively; reduced income tax benefit of $0.5 million; partially offset byan increased gross margin of $0.9 million and a reduction in transaction andrelated expenses of $0.2 million.

 

**Resultsof Operations for the Nine Months Ended September 30, 2008 (successor)compared to the Four Months Ended September 30, 2007 (successor) and FiveMonths Ended May 31, 2007 (predecessor)**

 

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

*(in thousands)*

 
| ** **                                                                                                              | ** ** | **Nine Months**   | ** ** | **Four Months**   | ** ** | ** ** | **Five Months** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------|----------------------|------------|
| ** **                                                                                                              | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | ** ** | **Ended**            | ** ** |
| ** **                                                                                                              | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | **May 31,**     | ** ** |
| ** **                                                                                                              | ** ** | **2008**               | ** ** | **2007**               | ** ** | ** ** | **2007**             | ** ** |
| ** **                                                                                                              | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** | ** ** | **(Predecessor)**    | ** ** |
| Total revenue                                                                                                           |       | $                      | 168,721    |                   | $          | 66,683     |                 |       | $ | 84,855 |   |
| Cost of revenue                                                                                                         |       | 61,071                 |       | 24,230                 |       |       | 27,694               |       |
| Medical  equipment depreciation                                                                                         |       | 46,438                 |       | 18,748                 |       |       | 18,512               |       |
| Gross margin                                                                                                            |       | $                      | 61,212     |                   | $          | 23,705     |                 |       | $ | 38,649 |   |
|                                                                                                                    |       |                   |       |                   |       |       |                 |       |
| Gross margin %                                                                                                          |       | 36.3                   | %          | 35.5                   | %          |       | 45.5                 | %          |
|                                                                                                                    |       |                   |       |                   |       |       |                 |       |
| Gross margin                                                                                                            |       | $                      | 61,212     |                   | $          | 23,705     |                 |       | $ | 38,649 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of medical equipment |       | 12,703                 |       | 5,721                  |       |       | —               |       |
| Gross margin,  before purchase accounting adjustments                                                                   |       | $                      | 73,915     |                   | $          | 29,426     |                 |       | $ | 38,649 |   |
|                                                                                                                    |       |                   |       |                   |       |       |                 |       |
| Gross margin %,  before purchase accounting adjustments                                                                 |       | 43.8                   | %          | 44.1                   | %          |       | 45.5                 | %          |

 

31

----

 

Totalrevenue in the Medical Equipment Outsourcing segment was $168.7, $66.7 and$84.9 million for the nine months ended September 30, 2008, four monthsended September 30, 2007 and five months ended May 31, 2007,respectively.  During the nine monthsended September 30, 2008, we were successful in adding approximately 525outsourcing customers through organic and competitive takeaway in our acutecare and AMPP customer base and also generated incremental business from newand existing technology in our fleet.

 

Totalcost of revenue in the segment was $61.1, $24.2 and $27.7 million for the ninemonths ended September 30, 2008, four months ended September 30, 2007and five months ended May 31, 2007, respectively.  Cost of revenue in this segment relatesprimarily to employee-related expenses, equipment repair and maintenancecharges related to our medical equipment fleet, occupancy and freightcharges.  Cost of revenue for the ninemonths ended September 30, 2008 and four months ended September 30,2007 includes $0.8 million and $0.6 million, respectively, of charges relatingto loss on disposal of equipment which was revalued in conjunction with theTransaction.  During the nine monthsended September 30, 2008, we experienced strong rental demand from new andexisting customers and incurred additional repair and maintenance and otherexpenses associated with increased rental activity, as well as incrementalcosts related to building infrastructure for new business opportunities.

 

Medicalequipment depreciation was $46.4, $18.7 and $18.5 million for the nine monthsended September 30, 2008, four months ended September 30, 2007 andfive months ended May 31, 2007, respectively.  During the nine months ended September 30,2008, we experienced increased medical equipment purchases to meet customerdemand.  Medical equipment depreciationfor the nine months ended September 30, 2008 and four months ended September 30,2007 includes $11.7 million and $5.0 million, respectively, of charges relatingto purchase accounting adjustments.

 

Grossmargin percentage for the Medical Equipment Outsourcing segment was 36.3%,35.5% and 45.5% for the nine months ended September 30, 2008, four monthsended September 30, 2007 and five months ended May 31, 2007,respectively.  Gross margin percentagefor the nine months ended September 30, 2008 and four months ended September 30,2007 was negatively impacted by purchase accounting adjustments relatingprimarily to our medical equipment fleet.

 

Grossmargin percentage, before purchase accounting adjustments was 43.8%, 44.1% and45.5% for the nine months ended September 30, 2008, four months ended September 30,2007 and five months ended May 31, 2007, respectively.

 

32

----

 

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

*(in thousands)*

 
| ** **                                                                                           | ** ** | **Nine Months**   | ** ** | **Four Months**   | ** ** | ** ** | **Five Months** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------|----------------------|------------|
| ** **                                                                                           | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | ** ** | **Ended**            | ** ** |
| ** **                                                                                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | **May 31,**     | ** ** |
| ** **                                                                                           | ** ** | **2008**               | ** ** | **2007**               | ** ** | ** ** | **2007**             | ** ** |
| ** **                                                                                           | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** | ** ** | **(Predecessor)**    | ** ** |
| Total  revenue                                                                                       |       | $                      | 34,588     |                   | $          | 14,728     |                 |       | $ | 14,800 |   |
| Cost  of revenue                                                                                     |       | 25,411                 |       | 10,684                 |       |       | 10,124               |       |
| Gross  margin                                                                                        |       | $                      | 9,177      |                   | $          | 4,044      |                 |       | $ | 4,676 |   |
|                                                                                                 |       |                   |       |                   |       |       |                 |       |
| Gross  margin%                                                                                       |       | 26.5                   | %          | 27.5                   | %          |       | 31.6                 | %          |
|                                                                                                 |       |                   |       |                   |       |       |                 |       |
| Gross  margin                                                                                        |       | $                      | 9,177      |                   | $          | 4,044      |                 |       | $ | 4,676 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to favorable lease  commitments |       | 21                     |       | 12                     |       |       | —               |       |
| Gross  margin, before purchase accounting adjustments                                                |       | $                      | 9,198      |                   | $          | 4,056      |                 |       | $ | 4,676 |   |
|                                                                                                 |       |                   |       |                   |       |       |                 |       |
| Gross  margin%, before purchase accounting adjustments                                               |       | 26.6                   | %          | 27.5                   | %          |       | 31.6                 | %          |

 

Totalrevenue in the Technical and Professional Services segment was $34.6, $14.7 and$14.8 million for the nine months ended September 30, 2008, four monthsended September 30, 2007 and five months ended May 31, 2007,respectively.  Revenue for the ninemonths ended September 30, 2008 benefited from our acquisition of theassets of the ICMS division of Intellamed on April 1, 2007 and increasedmanufacturer service activity, partially offset by continued sales forceattention on converting new customers in our Medical Equipment Outsourcingsegment as well as selected contract terminations.

 

Totalcost of revenue in the segment was $25.4, $10.7 and $10.1 million for the ninemonths ended September 30, 2008, four months ended September 30, 2007and five months ended May 31, 2007, respectively.  Cost of revenue consists primarily ofemployee-related expenses, vendor expenses and occupancy charges.  Cost of revenue for the nine months ended September 30,2008 and four months ended September 30, 2007 include additionalemployee-related and vendor expenses related primarily to our acquisition ofthe assets of the ICMS division of Intellamed on April 1, 2007.

 

Grossmargin percentage for the Technical and Professional Services segment was26.5%, 27.5% and 31.6% for the nine months ended September 30, 2008, fourmonths ended September 30, 2007 and five months ended May 31, 2007,respectively.  The decline for the ninemonths ended September 30, 2008 is primarily attributable to lower grossmargin percentage results from the customers acquired through the acquisitionof the assets of the ICMS division of Intellamed.

 

33

----

 

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

*(in thousands)*

 
| ** **                                                                                                                              | ** ** | **Nine Months**   | ** ** | **Four Months**   | ** ** | ** ** | **Five Months** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------|----------------------|------------|
| ** **                                                                                                                              | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | ** ** | **Ended**            | ** ** |
| ** **                                                                                                                              | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | **May 31,**     | ** ** |
| ** **                                                                                                                              | ** ** | **2008**               | ** ** | **2007**               | ** ** | ** ** | **2007**             | ** ** |
| ** **                                                                                                                              | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** | ** ** | **(Predecessor)**    | ** ** |
| Total  revenue                                                                                                                          |       | $                      | 14,798     |                   | $          | 5,374      |                 |       | $ | 7,867 |   |
| Cost  of revenue                                                                                                                        |       | 11,300                 |       | 4,822                  |       |       | 6,366                |       |
| Gross  margin                                                                                                                           |       | $                      | 3,498      |                   | $          | 552        |                 |       | $ | 1,501 |   |
|                                                                                                                                    |       |                   |       |                   |       |       |                 |       |
| Gross  margin%                                                                                                                          |       | 23.6                   | %          | 10.3                   | %          |       | 19.1                 | %          |
|                                                                                                                                    |       |                   |       |                   |       |       |                 |       |
| Gross  margin                                                                                                                           |       | $                      | 3,498      |                   | $          | 552        |                 |       | $ | 1,501 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of inventories and medical equipment |       | 669                    |       | 523                    |       |       | —               |       |
| Gross  margin, before purchase accounting adjustments                                                                                   |       | $                      | 4,167      |                   | $          | 1,075      |                 |       | $ | 1,501 |   |
|                                                                                                                                    |       |                   |       |                   |       |       |                 |       |
| Gross  margin%, before purchase accounting adjustments                                                                                  |       | 28.2                   | %          | 20.0                   | %          |       | 19.1                 | %          |

 

Totalrevenue in the Medical Equipment Sales and Remarketing segment was $14.8, $5.4and $7.9 million for the nine months ended September 30, 2008, four monthsended September 30, 2007 and five months ended May 31, 2007,respectively.

 

Totalcost of revenue in the segment was $11.3, $4.8 and $6.4 million for the ninemonths ended September 30, 2008, four months ended September 30, 2007and five months ended May 31, 2007, respectively. Cost of revenue in thissegment consists primarily of cost of inventory and equipment sold andoccupancy charges.  During the ninemonths ended September 30, 2008 and four months ended September 30,2007, purchase accounting adjustments related to medical equipment andinventory impacted cost of revenue by $0.7 million and $0.5 million,respectively.

 

Grossmargin percentage for the Medical Equipment Sales and Remarketing segment was23.6%, 10.3% and 19.1% for the nine months ended September 30, 2008, fourmonths ended September 30, 2007 and five months ended May 31, 2007,respectively.  Purchase accountingadjustments negatively impacted gross margin percentage for the nine monthsended September 30, 2008 and four months ended September 30,2007.  Margins and activity in thissegment will fluctuate based on the transactional nature of the business.

 

Grossmargin percentage, before purchase accounting adjustments, for the MedicalEquipment Sales and Remarketing segment was 28.2%, 20.0% and 19.1% for the ninemonths ended September 30, 2008, four months ended September 30, 2007and five months ended May 31, 2007, respectively.

 

34

----

 

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

*(in thousands)*

 
| ** **                           | ** ** | **Nine Months**   | ** ** | **Four Months**   | ** ** | ** ** | **Five Months** | ** ** |
|--------------------------------------|------------|------------------------|------------|------------------------|------------|------------|----------------------|------------|
| ** **                           | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | ** ** | **Ended**            | ** ** |
| ** **                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | **May 31,**     | ** ** |
| ** **                           | ** ** | **2008**               | ** ** | **2007**               | ** ** | ** ** | **2007**             | ** ** |
| ** **                           | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** | ** ** | **(Predecessor)**    | ** ** |
| Selling, general  and administrative |       | $                      | 64,906     |                   | $          | 27,345     |                 |       | $ | 28,692 |   |
| Transaction and  related costs       |       | —                 |       | 237                    |       |       | 26,891               |       |
| Interest expense                     |       | 35,023                 |       | 15,031                 |       |       | 13,829               |       |
| Loss on  extinguishment of debt      |       | —                 |       | 1,041                  |       |       | 22,396               |       |
|                                      |            |                        |            |                        |            |            |                      |            |  |  |  |

 

***Selling, General andAdministrative***

*** ***

Selling,general and administrative expenses were $64.9, $27.3 and $28.7 million for thenine months ended September 30, 2008, four months ended September 30,2007 and five months ended May 31, 2007, respectively. Selling, generaland administrative expenses consist primarily of employee-related expenses,professional fees, occupancy charges, bad debt expense and depreciation andamortization.  Expenses during the ninemonths ended September 30, 2008 and four months ended September 30,2007 include $11.8 million and $5.4 million, respectively, of charges relatedto the amortization of our intangible assets which were recorded at fair valuein connection with the Transaction and non-cash stock-based compensationexpense related to the 2007 Stock Option Plan of Parent of $1.9 million and$1.4 million, respectively.  Purchaseaccounting adjustments of $0.8 and $0.3 million impacted the nine months ended September 30,2008 and four months ended September 30, 2007, respectively.  Expenses during the five months ended May 31,2007 include $1.2 million of expense related to our 2003 Stock OptionPlan.  Selling, general andadministrative expenses as a percentage of total revenue were 29.8%, 31.5% and26.7% for the nine months ended September 30, 2008, four months ended September 30,2007 and five months ended May 31, 2007, respectively.

 

***Transaction and Related Costs***

*** ***

Weincurred $0.2 and $26.9 million of expenses in connection with the Transactionduring the four months ended September 30, 2007 and five months ended May 31,2007, respectively.

 

***Interest Expense***

*** ***

Interestexpense was $35.0, $15.0 and $13.8 million for the nine months ended September 30,2008, four months ended September 30, 2007 and five months ended May 31,2007, respectively.  Interest expenseduring the nine months ended September 30, 2008 and four months ended September 30,2007 includes interest charges related to the increased debt issued inconnection with the Transaction, partially offset by lower average interestrates.

*** ***

***Loss on Extinguishment ofDebt***

 

Loss on extinguishment of debt charges were$1.0 and $22.4 million during the four months ended September 30,2007 and five months ended May 31, 2007, respectively.  Loss on extinguishment during the four monthsended September 30, 2007 related to the purchase of a portion of our10.125% Senior

 

35

----

 

Notes.   Loss on extinguishment of debt during thefive months ended May 31, 2007 included charges related to the 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 $(9.7), $(5.9) and $0.5 million for the ninemonths ended September 30, 2008, four months ended September 30, 2007and five months ended May 31, 2007, respectively.  The Company moved from a net deferred taxasset position prior to the Transaction, where tax expense related primarily tominimum state taxes due to valuation allowances established for net operatinglosses not recognized, to a net deferred tax liability position after theTransaction.  Management believes the valuationallowance is no longer necessary as we determined that it was more likely thannot that the benefits of these deferred tax assets will be realized.

 

**NetLoss**

** **

Netloss was $16.4, $9.5 and $47.5 million for the nine months ended September 30,2008, four months ended September 30, 2007 and five months ended May 31,2007, respectively.  Net loss for thenine months ended September 30, 2008 and four months ended September 30,2007 was impacted by Transaction-related purchase accounting adjustments and interestassociated with our debt, partially offset by strong revenues in our MedicalEquipment Outsourcing Segment and income tax benefit.  Net loss for the five months ended May 31,2007 was impacted by Transaction and related costs and loss on extinguishmentof debt charges.

 

**EBITDA**

** **

EarningsBefore Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $73.4,$26.5 and $(10.3) million for the nine months ended September 30, 2008,four months ended September 30, 2007 and five months ended May 31, 2007,respectively.  EBITDA for the nine monthsended September 30, 2008 and four months ended September 30, 2007 wasnegatively impacted by purchase accounting adjustments related to theTransaction and benefited from strong customer demand in our Medical EquipmentOutsourcing segment.  EBITDA for the fivemonths ended May 31, 2007 was negatively impacted by transaction andrelated costs and loss on extinguishment of debt.

 

EBITDAis not intended to represent an alternative to operating income or cash flowsfrom operating, financing or investing activities (as determined in accordancewith GAAP) as a measure of performance, and is not representative of fundsavailable for discretionary use due to our financing obligations.  EBITDA, as defined by us, may not becalculated consistently among other companies applying similar reportingmeasures.  EBITDA is included because itis a widely accepted financial indicator used by certain investors andfinancial analysts to assess and compare companies, and a version of EBITDA isan integral part of our debt covenant calculations.  Management believes that EBITDA provides animportant perspective on our ability to service our long-term obligations, ourability to fund continuing growth, and our ability to continue as a goingconcern.  A reconciliation of operatingcash flows to EBITDA is included below:

 

36

----

 
| ** **                                           | ** ** | **Nine**               | ** ** | **Four**               | ** ** | ** ** | **Five**          | ** ** |
|------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------|-------------------|------------|
| ** **                                           | ** ** | **Months**             | ** ** | **Months**             | ** ** | ** ** | **Months**        | ** ** |
| ** **                                           | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | ** ** | **Ended**         | ** ** |
| ** **                                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | **May 31,**  | ** ** |
| **(in thousands)**                              | ** ** | **2008**               | ** ** | **2007**               | ** ** | ** ** | **2007**          | ** ** |
| ** **                                           | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** | ** ** | **(Predecessor)** | ** ** |
| Net cash  provided by (used in) operating activities |       | $                      | 50,995     |                   | $          | (5,136     | )                 |       | $ | 34,318 |   |
| Changes in  operating assets and liabilities         |       | (6,496                 | )          | 21,124                 |       |       | (27,711           | )          |
| Other non-cash  expenses                             |       | 3,614                  |       | 1,401                  |       |       | (31,258           | )          |
| Provision  (benefit) for income taxes                |       | (9,692                 | )          | (5,898                 | )          |       | 492               |       |
| Interest expense                                     |       | 35,023                 |       | 15,031                 |       |       | 13,829            |       |
| EBITDA                                               |       | $                      | 73,444     |                   | $          | 26,522     |              |       | $ | (10,330 | ) |

 

**SupplementalInformation:**

*(dollars in thousands)*

 
| ** **                                                         | ** ** | **Nine**               | ** ** | **Four**               | ** ** | ** ** | **Five**          | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------|-------------------|------------|
| ** **                                                         | ** ** | **Months**             | ** ** | **Months**             | ** ** | ** ** | **Months**        | ** ** |
| ** **                                                         | ** ** | **Ended**              | ** ** | **Ended**              | ** ** | ** ** | **Ended**         | ** ** |
| ** **                                                         | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | ** ** | **May 31,**  | ** ** |
| ** **                                                         | ** ** | **2008**               | ** ** | **2007**               | ** ** | ** ** | **2007**          | ** ** |
| ** **                                                         | ** ** | **(Successor)**        | ** ** | **(Successor)**        | ** ** | ** ** | **(Predecessor)** | ** ** |
| EBITDA                                                             |       | $                      | 73,444     |                   | $          | 26,522     |              |       | $ | (10,330 | ) |
|                                                               |       |                   |       |                   |       |       |              |       |
| **Other  Financial Data:**                                         |       |                   |       |                   |       |       |              |       |
| Net cash  provided by (used in) operating activities               |       | $                      | 50,995     |                   | $          | (5,136     | )                 |       | $ | 34,318 |   |
| Net cash used in  investing activities                             |       | (51,651                | )          | (348,885               | )          |       | (48,060           | )          |
| Net cash  provided by financing activities                         |       | $                      | 656        |                   | $          | 354,021    |              |       | $ | 13,742 |   |
|                                                               |       |                   |       |                   |       |       |              |       |
| **Other  Operating Data (as of end of period):**                   |       |                   |       |                   |       |       |              |       |
| Medical  equipment (approximate number of owned outsourcing units) |       | 206,000                |       | 191,000                |       |       | 185,000           |       |
| District offices                                                   |       | 83                     |       | 80                     |       |       | 79                |       |
| Number of  outsourcing hospital customers                          |       | 4,050                  |       | 3,850                  |       |       | 3,800             |       |
| Number of total  outsourcing customers                             |       | 7,975                  |       | 7,400                  |       |       | 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 CAPITALRESOURCES**

** **

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.

 

37

----

 

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.  The domestic economy, like theglobal economy, has recently deteriorated significantly.  The current decrease and any future decreasein domestic economic activity could significantly and adversely affect ourresults of operations and financial condition. If we are unable to repay our debt at maturity, we may have to obtainalternative financing, which may not be available to us.

 

Netcash provided by (used in) operating activities was $51.0, $(5.1) and $34.3million for the nine months ended September 30, 2008, four months ended September 30,2007 and five months ended May 31, 2007, respectively.  Net cash used in operating activities for thefour months ended September 30, 2007 was negatively impacted by cashoutlays for transaction and related costs.

 

Netcash used in investing activities was $51.7, $348.9 and $48.1 million for thenine months ended September 30, 2008, four months ended September 30,2007 and five months ended May 31, 2007, respectively.  Net cash used in investing activities wasimpacted during the first nine months of 2008 by an increase in capitalexpenditures for medical equipment related to strong demand in our MedicalEquipment Outsourcing segment.  Net cashused in investing activities was impacted during the four months ended September 30,2007 by the acquisition of Universal Hospital Services, Inc., by Parent,resulting in a cash outlay of $335.1 million. Net cash used in investing activities was impacted during the fivemonths ended May 31, 2007 by the acquisition of the assets of the ICMSdivision of Intellamed, resulting in a cash outlay of $14.6 million.

 

Netcash provided by financing activities was $0.7, $354.0 and $13.7 million forthe nine months ended September 30, 2008, four months ended September 30,2007 and five months ended May 31, 2007, respectively.  Net cash provided by financing activities forthe four months ended September 30, 2007 was impacted by the issuance of$460.0 million of Notes and equity contributions of $239.8 million related tothe Transaction partially offset by $266.9 million of cash outlays related tothe purchase 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 September 30, 2008, we had $109.3million of availability under our senior secured credit facility, based on aborrowing base of $135.0 million, less borrowings of $24.3 million and aftergiving effect to $1.4 million used for letters of credit.  On October 17, 2008, we drew anadditional $28.0 million from our senior secured credit facility

 

38

----

 

to,among other things, pre-borrow for the upcoming interest payments on ourFloating Rate Notes and PIK Toggle Notes due on December 1, 2008.

 

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 September 30,2008, the Company was in compliance with all covenants under the senior securedcredit facility.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

** **

***Standards Adopted***

 

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) 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 isirrevocable.  We adopted the provisionsof SFAS No. 159 on January 1, 2008. We did not elect 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:

 
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in thousands)**              | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                           | ** ** | **(Successor)**        | ** ** | **(Successor)**       | ** ** |
| Loss on swap contract |       | $                      | 14,132     |                  | $          | 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, of the adoption of SFAS No. 157 as it pertains to non-financialassets and liabilities 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. SFAS No. 161 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. SFAS No. 161 will not impact the financialstatements as it is disclosure-only in nature.

 

39

----

 

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.

 

**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:

 
| · |   | our  history of net losses and substantial interest expense;                                                                                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | our  need for substantial cash to operate and expand our business as planned;                                                                                 |
| · |   | our  substantial outstanding debt and debt service obligations;                                                                                               |
| · |   | restrictions  imposed by the terms of our debt;                                                                                                               |
| · |   | a  decrease in the number of patients our customers are serving;                                                                                              |
| · |   | our  ability to effect change in the manner in which healthcare providers  traditionally procure medical equipment;                                           |
| · |   | the  absence of long-term commitments with customers;                                                                                                         |
| · |   | our  ability to renew contracts with GPOs and IDNs;                                                                                                           |
| · |   | changes  in reimbursement rates and policies by third-party payors;                                                                                           |
| · |   | the  impact of health care reform initiatives;                                                                                                                |
| · |   | the  impact of significant regulation of the health care industry and the need to  comply with those regulations;                                             |
| · |   | prolonged  negative changes in domestic and global economic conditions;                                                                                       |
| · |   | difficulties  or delays in our continued expansion into certain of our  businesses/geographic markets and developments of new businesses/geographic  markets; |
| · |   | additional  credit risks in increasing business with home care providers and nursing  homes;                                                                  |
| · |   | impacts  of equipment product recalls or obsolescence; and                                                                                                    |
| · |   | increases  in 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.

 

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

 

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

 

40

----

 

**InterestRates**

 

Weuse both fixed and variable rate debt as sources of financing.  At September 30, 2008, we hadapproximately $503.9 million of total debt outstanding.  After taking into account the effect of ourinterest rate swap agreement, we had $24.3 million of debt bearing interest atvariable rates approximating 4.3%.  Basedon variable debt levels at September 30, 2008, a 1.0 percentage pointchange in interest rates on variable rate debt would have resulted in annualinterest expense fluctuating approximately $0.2 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 September 30, 2008 isincluded as an interest rate swap liability on our balance sheet.  The change in fair value was recorded as acomponent of accumulated other comprehensive loss, net of tax, on our balancesheet since the instrument was determined to be an effective hedge at September 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 September 2008 gasoline usage and pricelevels, would lead to an annual increase in fuel costs of approximately $0.4million.

 

**Other Market Risk**

 

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

 

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

 

**Item 4.  Controls and Procedures**

 

(a)           *Evaluation of disclosurecontrols and procedures*

 

Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgatedunder 

 

41

----

 

theSecurities 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 September 30, 2008, that have materially affected, or werereasonably likely to materially affect, our internal controls over financialreporting.

 

**PART II - OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

** **

From time to time, we may become involved in litigationarising out of operations in the normal course of business.  As of September 30, 2008, we were not aparty to any pending legal proceedings the adverse outcome of which couldreasonably be expected to have a material adverse effect on our operatingresults, financial position, or cash flows.

 

**Item 1A. 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.  In addition to the risk factors as discussedin our 2007 Form 10K/A, prolonged negative changes in domestic and globaleconomic conditions may affect our customers and suppliers, which could harmour results of operations and financial position. Additional risks anduncertainties not presently known to us or that we currently believe to beimmaterial may also impair our business operations.

 

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

** **

None.

 

**Item 3. Defaults upon SeniorSecurities**

** **

Notapplicable.

 

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

** **

None.

 

**Item 5. Other Information**

** **

Notapplicable.

 

42

----

 

**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.                                 |

 

43

----

 

**SIGNATURES**

** **

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

 
| Date:  November 12, 2008 |                                                                               |
|-------------------------------|------------------------------------------------------------------------------------|
|                          |                                                                               |
|                          | Universal  Hospital Services, Inc.                                            |
|                          |                                                                               |
|                          | By                                                                                 | /s/  Gary D. Blackford |
|                          | Gary  D. Blackford,                                                                |
|                          | Chairman  of the Board and Chief Executive Officer                                 |
|                          | (Principal  Executive Officer and Duly Authorized Officer)                         |
|                          |                                                                               |
|                          | By                                                                                 | /s/  Rex T. Clevenger |
|                          | Rex  T. Clevenger,                                                                 |
|                          | Executive  Vice President and Chief Financial Officer(Principal Financial Officer) |

 

44

----