** **

**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 March 31, 2009**

 

**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)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes   o      No x

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T  (§ 232.405 of this chapter) during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).

 

Yes   o      No o

 

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.

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yes   o       No x

 

Number of shares ofcommon stock outstanding as of May 1, 2009:  1,000

** **

** **

** **

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** **

**PART I - FINANCIALINFORMATION**

** **

**Item 1. FinancialStatements – Unaudited**

** **

**UniversalHospital Services, Inc.**

** **

**BalanceSheets**

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

*(unaudited)*

 
| ** **                                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                         | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                         | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                    |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                         |       | $                  | 33,400     |                  | $          | 12,006 |   |
| Short-term  investments                                                                                                            |       | 1,500              |       | 1,500                 |       |
| Accounts  receivable, less allowance for doubtful accounts of $2,450 at March 31,  2009 and December 31, 2008            |       | 54,307             |       | 54,113                |       |
| Inventories                                                                                                                        |       | 5,428              |       | 5,627                 |       |
| Deferred income  taxes                                                                                                             |       | 6,011              |       | 6,025                 |       |
| Other current  assets                                                                                                              |       | 3,478              |       | 2,815                 |       |
| Total current  assets                                                                                                              |       | 104,124            |       | 82,086                |       |
|                                                                                                                               |       |               |       |                  |       |
| Property and  equipment, net:                                                                                                      |       |               |       |                  |       |
| Medical  equipment, net                                                                                                            |       | 205,781            |       | 215,643               |       |
| Property and  office equipment, net                                                                                                |       | 21,894             |       | 22,728                |       |
| Total property  and equipment, net                                                                                                 |       | 227,675            |       | 238,371               |       |
|                                                                                                                               |       |               |       |                  |       |
| Other long-term  assets:                                                                                                           |       |               |       |                  |       |
| Goodwill                                                                                                                           |       | 280,211            |       | 280,211               |       |
| Other intangibles,  net                                                                                                            |       | 259,022            |       | 262,848               |       |
| Other, primarily  deferred financing costs, net                                                                                    |       | 13,669             |       | 14,209                |       |
| Total assets                                                                                                                       |       | $                  | 884,701    |                  | $          | 877,725 |   |
|                                                                                                                               |       |               |       |                  |       |
| **Liabilities  and Shareholders’ Equity**                                                                                     | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                              |       |               |       |                  |       |
| Current portion  of long-term debt                                                                                                 |       | $                  | 3,572      |                  | $          | 3,555 |   |
| Book overdrafts                                                                                                                    |       | 71                 |       | 7,170                 |       |
| Accounts payable                                                                                                                   |       | 11,744             |       | 17,976                |       |
| Accrued  compensation                                                                                                              |       | 8,281              |       | 12,154                |       |
| Accrued interest                                                                                                                   |       | 14,221             |       | 3,880                 |       |
| Other accrued  expenses                                                                                                            |       | 6,540              |       | 6,146                 |       |
| Total current  liabilities                                                                                                         |       | 44,429             |       | 50,881                |       |
|                                                                                                                               |       |               |       |                  |       |
| Long-term debt,  less current portion                                                                                              |       | 548,585            |       | 527,788               |       |
| Pension and  other long-term liabilities                                                                                           |       | 8,176              |       | 8,248                 |       |
| Interest rate  swap                                                                                                                |       | 26,134             |       | 27,167                |       |
| Payable to  Parent                                                                                                                 |       | 5,635              |       | 5,012                 |       |
| Deferred income  taxes                                                                                                             |       | 67,459             |       | 70,178                |       |
|                                                                                                                               |       |               |       |                  |       |
| Commitments and  contingencies (Note 7)                                                                                            |       |               |       |                  |       |
|                                                                                                                               |       |               |       |                  |       |
| Shareholders’  equity                                                                                                         |       |               |       |                  |       |
| Common stock,  $0.01 par value; 1,000 shares authorized, issued and outstanding at  March 31, 2009 and December 31, 2008 |       | —             |       | —                |       |
|                                                                                                                               |       |               |       |                  |       |
| Additional  paid-in capital                                                                                                        |       | 248,794            |       | 248,794               |       |
| Accumulated  deficit                                                                                                               |       | (44,382            | )          | (39,592               | )          |
| Accumulated  other comprehensive loss                                                                                              |       | (20,129            | )          | (20,751               | )          |
| Total  shareholders’ equity                                                                                                   |       | 184,283            |       | 188,451               |       |
| Total  liabilities and shareholders’ equity                                                                                   |       | $                  | 884,701    |                  | $          | 877,725 |   |

 

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

 

2

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**Universal Hospital Services, Inc.**

** **

**Statements of Operations**

*(in thousands)*

*(unaudited)*

 
| ** **                                                                                                                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                      | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                                      | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| **Revenue**                                                                                                                     | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Medical  equipment outsourcing                                                                                                  |       | $                                | 58,282     |   | $ | 59,327 |   |
| Technical and  professional services                                                                                            |       | 10,412                           |       | 11,876 |   |
| Medical  equipment sales and remarketing                                                                                        |       | 5,236                            |       | 4,241 |   |
| Total revenues                                                                                                                  |       | 73,930                           |       | 75,444 |   |
|                                                                                                                            |       |                             |       |   |   |
| **Cost of  Sales**                                                                                                              |       |                             |       |   |   |
| Cost of medical  equipment outsourcing                                                                                          |       | 20,469                           |       | 19,916 |   |
| Cost of  technical and professional services                                                                                    |       | 7,370                            |       | 8,511 |   |
| Cost of medical  equipment sales and remarketing                                                                                |       | 4,386                            |       | 3,444 |   |
| Medical  equipment depreciation                                                                                                 |       | 15,862                           |       | 15,178 |   |
| Total costs of  medical equipment outsourcing, technical and professional services and  medical equipment sales and remarketing |       | 48,087                           |       | 47,049 |   |
| Gross margin                                                                                                                    |       | 25,843                           |       | 28,395 |   |
|                                                                                                                            |       |                             |       |   |   |
| Selling, general  and administrative                                                                                            |       | 22,015                           |       | 21,957 |   |
| Operating income                                                                                                                |       | 3,828                            |       | 6,438 |   |
|                                                                                                                            |       |                             |       |   |   |
| Interest expense                                                                                                                |       | 11,717                           |       | 11,620 |   |
| Loss before  income taxes                                                                                                       |       | (7,889                           | )          | (5,182 | ) |
|                                                                                                                            |       |                             |       |   |   |
| Benefit for  income taxes                                                                                                       |       | (3,099                           | )          | (1,996 | ) |
| Net loss                                                                                                                        |       | $                                | (4,790     | ) | $ | (3,186 | ) |

 

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

** **

**3**

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** **

**Universal Hospital Services, Inc.**

 

**Statements of Cash Flows**

*(in thousands)*

*(unaudited)*

 
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                       | ** ** | **March 31,**               | ** ** |
| ** **                                                                       | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Cash flows from  operating activities:                                           |       |                             |       |   |   |
| Net loss                                                                         |       | $                                | (4,790     | ) | $ | (3,186 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                             |       |   |   |
| Depreciation                                                                     |       | 17,995                           |       | 17,214 |   |
| Amortization of  intangibles and deferred financing costs                        |       | 4,428                            |       | 4,642 |   |
| Provision for  doubtful accounts                                                 |       | 587                              |       | 167 |   |
| Provision for  inventory obsolescence                                            |       | (22                              | )          | 112 |   |
| Non-cash  stock-based compensation expense                                       |       | 623                              |       | 612 |   |
| Loss on sales  and disposals of equipment                                        |       | 137                              |       | 184 |   |
| Deferred income  taxes                                                           |       | (2,705                           | )          | (2,131 | ) |
| Changes in  operating assets and liabilities:                                    |       |                             |       |   |   |
| Accounts  receivable                                                             |       | (781                             | )          | (6,969 | ) |
| Inventories                                                                      |       | 222                              |       | (593 | ) |
| Other operating  assets                                                          |       | (725                             | )          | (52 | ) |
| Accounts payable                                                                 |       | (2,795                           | )          | 2,784 |   |
| Other operating  liabilities                                                     |       | 6,377                            |       | 6,114 |   |
| Net cash  provided by operating activities                                       |       | 18,551                           |       | 18,898 |   |
| Cash flows from investing  activities:                                           |       |                             |       |   |   |
| Medical  equipment purchases                                                     |       | (10,164                          | )          | (28,844 | ) |
| Property and  office equipment purchases                                         |       | (674                             | )          | (1,057 | ) |
| Proceeds from  disposition of property and equipment                             |       | 951                              |       | 870 |   |
| Net cash used in  investing activities                                           |       | (9,887                           | )          | (29,031 | ) |
| Cash flows from  financing activities:                                           |       |                             |       |   |   |
| Proceeds under  senior secured credit facility                                   |       | 42,000                           |       | 30,050 |   |
| Payments under  senior secured credit facility                                   |       | (21,000                          | )          | (18,725 | ) |
| Payments of  principal under capital lease obligations                           |       | (1,171                           | )          | (915 | ) |
| Payment of  deferred financing costs                                             |       | —                           |       | (61 | ) |
| Change in book  overdrafts                                                       |       | (7,099                           | )          | (216 | ) |
| Net cash  provided by financing activities                                       |       | 12,730                           |       | 10,133 |   |
| Net change in  cash and cash equivalents                                         |       | 21,394                           |       | — |   |
|                                                                             |       |                             |       |   |   |
| Cash and cash  equivalents at the beginning of period                            |       | 12,006                           |       | — |   |
| Cash and cash  equivalents at the end of period                                  |       | $                                | 33,400     |   | $ | — |   |
|                                                                             |       |                             |       |   |   |
| Supplemental  cash flow information:                                             |       |                             |       |   |   |
| Interest paid                                                                    |       | $                                | 774        |   | $ | 661 |   |
| Income taxes  paid                                                               |       | $                                | 30         |   | $ | 23 |   |
| Non-cash  activities:                                                            |       |                             |       |   |   |
| Medical equipment  purchases included in accounts payable                        |       | $                                | 2,256      |   | $ | 6,886 |   |
| Deferred  financing costs included in accounts payable                           |       | $                                | —     |   | $ | 8 |   |
| Capital lease  additions                                                         |       | $                                | 985        |   | $ | 239 |   |

 

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

** **

**4**

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**Universal Hospital Services, Inc.**

 

**NOTES TO UNAUDITED QUARTERLY FINANCIAL STATEMENTS**

 

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

 

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

 

Theinterim financial statements presented herein as of March 31, 2009,reflect, in the opinion of management, all adjustments necessary for a fairpresentation of the financial position and the results of operations and cashflows for the periods presented.  Theseadjustments are all of a normal, recurring nature.  The results of operations for any interimperiod are not necessarily indicative of results for the full year.

 

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

 

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

 

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

 

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

 

Comprehensiveloss is comprised of net loss and other comprehensive income (loss).  Other comprehensive income (loss) includesunrealized gains and losses from derivatives designated as cash flow hedges.  Accumulated other comprehensive loss is displayedseparately on the balance sheets.  Areconciliation of net loss to comprehensive loss is provided below:

 

5

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| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **March 31,**               | ** ** |
| **(in thousands)**                    | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Net loss                                   |       | $                                | (4,790     | ) | $ | (3,186 | ) |
| Unrealized gain  (loss) on cash flow hedge |       | 622                              |       | (4,660 | ) |
| Comprehensive  loss                        |       | $                                | (4,168     | ) | $ | (7,846 | ) |

 

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

 

***Standards Adopted***

 

InMarch 2008, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standard (“SFAS”) No. 161, *Disclosures about Derivative Instruments and Hedging Activities*.SFAS No.161 requires companies to provide enhanced disclosures aboutderivative instruments and hedging activities to provide a better understandingof their effects on a company’s financial position, financial performance, andcash flows. We adopted the disclosure provisions of SFAS No. 161 on January 1,2009.

 

Weenter into derivative instruments for risk management purposes only, includingderivatives designated as hedging instruments under SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*.The Company has an interest rate swap that is designated as a fair value hedgefor a portion of our long-term debt. By using this instrument, we are exposed,from time to time, to credit risk and market risk. Credit risk is the risk thatthe counterparty will fail to perform under the terms of the derivativecontract. When the fair value of a derivative contract is positive, the counterpartyowes us, which creates credit risk for us. We minimize this credit risk byentering into transactions with high quality counterparties. Market risk is therisk that a change in interest rates will result in an adverse effect on thevalue of a financial instrument.

 

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

 

***Standards Issued Not Yet Adopted***

 

InApril 2009, the FASB issued two FASB Staff Positions (“FSPs”), to addressconcerns about (1) measuring the fair value of financial instruments whenthe markets become inactive and quoted prices may reflect distressedtransactions and (2) recording impairment charges on investments in debt

 

6

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securities.The FASB also issued a third FSP to require disclosures of fair values ofcertain financial instruments in interim financial statements.

 

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

 

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

 

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

 

Wecurrently are evaluating the provisions of these three FSPs to determine whateffect, in any, they will have on our financial statements.  The FASB has required that companies adoptthese FSPs effective for the quarter ending June 30, 2009.

 

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

 

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

 

Financialassets and liabilities measured at fair value on a recurring basis as of March 31,2009, in accordance with SFAS No. 157, are summarized in the followingtable by type of inputs applicable to the fair value measurements:

 

7

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*(inthousands)*

 
| ** **              | ** ** | **Quoted  Prices**   | ** ** | ** **         | ** ** | ** **         | ** ** | ** **         | ** ** |
|-------------------------|------------|----------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **              | ** ** | **in Active**   | ** ** | **Significant**    | ** ** | ** **         | ** ** | ** **         | ** ** |
| ** **              | ** ** | **Markets for** | ** ** | **Other**          | ** ** | **Significant**    | ** ** | **Total**          | ** ** |
| ** **              | ** ** | **Indentical**       | ** ** | **Observable**     | ** ** | **Unobservable**   | ** ** | **as of**     | ** ** |
| ** **              | ** ** | **Assets**           | ** ** | **Inputs**         | ** ** | **Inputs**         | ** ** | **March 31,** | ** ** |
| **Description**         | ** ** | **(Level 1)**   | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** | **2009**           | ** ** |
| Short term  investments |       | $                    | —     |               | $          | 1,500              |       | $                  | —     |   | $ | 1,500 |   |
| Loss on swap  contract  |       | —               |       | 26,134             |       | —             |       | 26,134             |       |
|                    |       | $                    | —     |               | $          | 27,634             |       | $                  | —     |   | $ | 27,634 |   |

 

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

 

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

 

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

 

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

 

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

 

During the three months ended March 31, 2009,activity under the 2007 Stock Option Plan of our parent corporation, UHS Holdco, Inc.(“Parent”) was as follows:

 

8

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| **(in thousands except exercise price)** | ** ** | **Number of  Options** | ** ** | **Weighted  average  exercise price** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|
| Outstanding at  December 31, 2008                       |       | 36,740                      |       | $                                          | 1.00       |   |
| Granted                                                      |       | —                      |       |                                       |       |
| Exercised                                                    |       | —                      |       |                                       |       |
| Forfeited or  expired                                        |       | (88                         | )          | $                                          | 1.00       |   |
|                                                         |       |                        |       |                                       |       |
| Outstanding at  March 31, 2009                          |       | 36,652                      |       | $                                          | 1.00       |   |
|                                                         |       |                        |       |                                       |       |
| Exercisable at  March 31, 2009                          |       | 11,921                      |       | $                                          | 1.00       |   |
|                                                         |       |                        |       |                                       |       |
| Remaining  authorized options available for issue            |       | 7,162                       |       |                                       |       |

 

Although Parent grants stock options, the Companyrecognizes compensation expense related to these options since the services areperformed for its benefit.  For each of the three month periods ended March 31,2009 and 2008 we recognized non-cash stock compensation expense of $0.6 millionwhich is primarily included in selling, general and administrative expenses. At March 31, 2009, unearned non-cash stock-based compensation that weexpect to recognize as expense over the next 3.8 years totals approximately$9.1 million, net of our estimated forfeiture rate of 2.0%.

 

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

 

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

 

Long-term debt consists of the following:

 
| ** **                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(in thousands)**                  | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| PIK Toggle Notes                         |       | $                  | 230,000    |                  | $          | 230,000 |   |
| Floating Rate  Notes                     |       | 230,000            |       | 230,000               |       |
| Senior secured  credit facility          |       | 70,000             |       | 49,000                |       |
| 10.125% Senior  Notes                    |       | 9,945              |       | 9,945                 |       |
| Capital lease  obligations               |       | 12,212             |       | 12,398                |       |
|                                     |       | 552,157            |       | 531,343               |       |
| Less: Current  portion of long-term debt |       | (3,572             | )          | (3,555                | )          |
| Total long-term  debt                    |       | $                  | 548,585    |                  | $          | 527,788 |   |

 

***PIK Toggle Notes. ***The PIK Toggle Notes mature on June 1,2015.  Interest on the PIK ToggleNotes is payable semiannually in arrears on each June 1 and December 1.  For any interest payment period through June 1,2011, the Company may, at its option, elect to pay interest on the PIK ToggleNotes entirely in cash (“Cash Interest”), entirely by increasing the principalamount of the outstanding PIK Toggle Notes, by issuing additional PIK ToggleNotes (“PIK Interest”) or 50% Cash Interest and 50% PIK Interest.  Cash Interest on the PIK Toggle Notes accruesat the rate of 8.50% per annum.  PIK

 

9

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Intereston the PIK Toggle Notes accrues at the rate of 9.25% per annum.  After June 1,2011, the Company is required to make all interest payments on the PIK ToggleNotes entirely as Cash Interest.  The PIK Toggle Notes are redeemable, atthe Company’s option, in whole or in part, at specified redemption prices (asdefined) plus accrued interest to the date of redemption. In addition, the PIKToggle Notes have a change of control provision, which gives each holder theright to require the Company to purchase all or a portion of such holders’ PIKToggle Notes upon a change in control, as defined in the Second Lien SeniorIndenture, at a purchase price equal to 101% of the principal amount plusaccrued interest to the date of purchase. The PIK Toggle Notes, subject tocertain definitions and exceptions, have covenants that restrict, among otherthings, the incurrence of additional debt, the payment of dividends and theissuance of preferred stock. The PIK Toggle Notes are uncollateralized.

 

***Floating Rate Notes. ***The Floating Rate Notes mature on June 1,2015.  Interest on the FloatingRate Notes is payable semiannually in arrears on each June 1 and December 1.Interest on the Floating Rate Notes is reset for each semi-annual interestperiod and is calculated at the current LIBOR rate plus 3.375%.  At March 31, 2009, our LIBOR-based ratewas 5.943%, which includes the credit spread. The Floating Rate Notes are redeemable, at the Company’s option, inwhole or in part of, at specified redemption prices (as defined) plus accruedinterest to the date of redemption. In addition, the Floating Rate Notes have achange of control provision, which gives each holder the right to require theCompany to purchase all or a portion of such holders’ Floating Rate Notes upona change in control, as defined in the Second Lien Senior Indenture, at apurchase price equal to 101% of the principal amount plus accrued interest tothe date of purchase. The Floating Rate Notes, subject to certain definitionsand exceptions, have covenants that restrict, among other things, theincurrence of additional debt, the payment of dividends and the issuance ofpreferred stock. The Floating Rate Notes are uncollateralized.

 

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

 

Theinterest rate swap agreement qualifies for cash flow hedge accounting underSFAS 133, *Accounting for Derivative Instruments and HedgingActivities*.  Both at inceptionand on an on-going basis, we must perform an effectiveness test.  In accordance with SFAS 133, the fair valueof the interest rate swap agreement at March 31, 2009 is included as acash flow hedge on our balance sheet. The change in fair value was recorded as a component of accumulatedother comprehensive loss on our balance sheet, net of tax, since the instrumentwas determined to be an effective hedge at March 31, 2009.  We do not expect any amounts to bereclassified into current earnings in the future due to ineffectiveness.

 

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

 

***Senior Secured CreditFacility.***The senior secured credit facility allows forborrowings up to $135.0 million, as defined in the agreement dated May 31,2007, and terminates on May 31, 2013. As of March 31, 2009, we had $63.6 million of availability underthe senior secured credit facility based on a borrowing base of $135.0 million,less borrowings of $70.0 million, and after giving effect to $1.4 million usedfor letters of credit.  Our obligationsunder the senior secured credit facility are secured by a first prioritysecurity interest in substantially all of our assets, excluding a pledge of ourand Parent’s

 

10

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capital stock, any jointventures and certain other exceptions. Our obligations under the senior securedcredit facility are unconditionally guaranteed by Parent.

 

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

 

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

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

 

AtMarch 31, 2009, we had LIBOR-Based rates ranging from 2.023% to 4.765%,each of which includes the credit spread noted above.  As of March 31, 2009, we had nooutstanding balances under our prime rate based agreement.

 

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

 

**7.****                                     ****Commitmentsand Contingencies**

 

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

 

**8.****                                     ****RelatedParty Transactions**

 

**ManagementAgreement**

On May 31, 2007, we and Irving Place Capitalentered into a professional services agreement pursuant to which generaladvisory and management services are to be provided to us with respect tofinancial and operating matters.  IrvingPlace Capital is a principal owner of Parent, and the following members of ourboard of directors are associated with Irving Place Capital:  John Howard, Robert Juneja and BretBowerman.  In addition, David Crane, adirector, provides consulting services to Irving Place Capital.  The total professional services fees paid toIrving Place Capital was $0.2 for each of the quarters ended March 31,2009 and 2008, respectively.

 

**BusinessRelationship**

Inthe ordinary course of business, we entered into an operating lease for ourMinneapolis, Minnesota district office with Ryan Companies US, Inc. (“Ryan”),which began on May 1, 2007.  One of our board

 

11

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ofdirectors is also a director of Ryan.  During each of the quarters ended March 31,2009 and 2008, we made rent payments to a Ryan affiliate of $78,000.

 

OnApril 1, 2008, we added three new 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 quarter ended March 31, 2009,we paid Broadlane approximately $130,000 in administrative fees.  On March 31, 2009, accounts payableincludes approximately $44,000 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.****                                     ****SegmentInformation**

 

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

 

**Medical Equipment Outsourcing**

*(in thousands)*

 
| ** **                      | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Revenues                        |       | $                                                    | 58,282     |   | $ | 59,327 |   |
| Cost of revenue                 |       | 20,469                                               |       | 19,916 |   |
| Medical  equipment depreciation |       | 15,862                                               |       | 15,178 |   |
| Gross margin                    |       | $                                                    | 21,951     |   | $ | 24,233 |   |

 

**Technicaland Professional Services**

*(inthousands)*

* *
| ** **      | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------|------------|------------------------------------------------------|------------|
| ** **      | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Revenues        |       | $                                                    | 10,412     |   | $ | 11,876 |   |
| Cost of revenue |       | 7,370                                                |       | 8,511 |   |
| Gross margin    |       | $                                                    | 3,042      |   | $ | 3,365 |   |

 

**MedicalEquipment Sales and Remarketing**

*(inthousands)*

* *
| ** **      | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------|------------|------------------------------------------------------|------------|
| ** **      | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Revenues        |       | $                                                    | 5,236      |   | $ | 4,241 |   |
| Cost of revenue |       | 4,386                                                |       | 3,444 |   |
| Gross margin    |       | $                                                    | 850        |   | $ | 797 |   |

 

12

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

*(in thousands)*

* *
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Total gross  margin                  |       | $                                                    | 25,843     |   | $ | 28,395 |   |
| Selling, general  and administrative |       | 22,015                                               |       | 21,957 |   |
| Interest expense                     |       | 11,717                                               |       | 11,620 |   |
| Loss before  income tax              |       | $                                                    | (7,889     | ) | $ | (5,182 | ) |

 

**10.****                              ****PensionPlan**

 

Thecomponents of net periodic pension costs are as follows:

 
| ** **                      | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| **(in thousands)**         | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Interest cost                   |       | $                                                    | 266        |   | $ | 260 |   |
| Expected return  on plan assets |       | (303                                                 | )          | (308 | ) |
| Recognized net  actuarial loss  |       | 2                                                    |       | — |   |
| Net periodic  cost (benefit)    |       | $                                                    | (35        | ) | $ | (48 | ) |

 

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

 

13

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

** **

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

** **

**BUSINESS OVERVIEW**

 

**OurCompany**

 

UniversalHospital Services, Inc. (“we”, “our”, “us”, the “Company”, or “UHS”) is aleading nationwide provider of medical equipment outsourcing and lifecyclesolutions to the United States health care industry. Our customers includenational, regional and local acute and long-term acute care hospitals,alternate site providers (such as skilled nursing facilities, specialtyhospitals, large physician clinics, and home care providers) and medicalequipment manufacturers.  We provide ourcustomers solutions across the spectrum of the equipment life cycle as a resultof our position as one of the industry’s largest purchasers and outsourcers ofmedical equipment.  We currently own ormanage over 535,000 pieces of medical equipment. Our diverse medical equipmentoutsourcing customer base includes more than 4,150 acute care hospitals andapproximately 4,100 alternate site providers. We also have relationships with more than 200 medical equipmentmanufacturers and all of the nation’s largest group purchasing organizations (“GPOs”)and many of the integrated delivery networks (“IDNs”).  All of our solutions leverage our nationwidenetwork of 84 offices and our 70 years of experience managing and servicing allaspects of medical equipment.  Our feesare paid directly by our customers rather than from direct reimbursement fromthird-party payors, such as private insurers, Medicare, or Medicaid.  We commenced operations in 1939, originallyincorporated in Minnesota in 1954 and reincorporated in Delaware in 2001.

 

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

 

 

14

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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 $58.3 million, or approximately 78.8% of our revenues for the quarter endedMarch 31, 2009 and $59.3 million, or approximately 78.6% of our revenuesfor the quarter ended March 31, 2008. As of March 31, 2009, we owned or managed over 325,000 pieces ofmedical equipment, primarily in the categories of respiratory therapy, newborncare, critical care, patient monitors, patient handling (such as beds, stretchersand wheelchairs), pressure area management (such as therapy surfaces) and woundtherapy.  Historically, we have purchasedand owned directly the equipment used in our medical equipment outsourcingprograms.  Beginning in 2007, the Companyentered into revenue sharing agreements with two key manufacturers of equipmentwhere the manufacturers retain ownership of the equipment, but UHS takespossession and manages 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 and Peak Needs Usage;

·                  Customized Outsourcing Agreements; and

·                  Asset Management Partnership Program (“AMPP”).

 

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

 

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

 

OurTechnical and Professional Services segment accounted for $10.4 million, orapproximately 14.1% of our revenues for the quarter ended March 31, 2009and $11.9 million, or approximately 15.8% of our

 

15

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revenuesfor the quarter ended March 31, 2008. We leverage our 70 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 throughout theUnited States in our nationwide network of offices.  We managed over 210,000 units of customerowned equipment and serviced over 325,000 units that we own or directly manage.Our technical and professional service offerings are less capital-intensivethan our Medical Equipment Outsourcing segment, and provide a complementaryalternative for customers that wish to own their medical equipment, but lackthe infrastructure, expertise or scale to perform maintenance, repair, andlifecycle analysis and planning functions.

 

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

 

OurMedical Equipment Sales and Remarketing segment accounted for $5.2 million, orapproximately 7.1% of our revenues for the quarter ended March 31, 2009and $4.2 million, or approximately 5.6% of our revenues for the quarter ended March 31,2008.  This segment includes threedistinct business activities:

 

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

 

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

 

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

 

**RESULTS OF OPERATIONS**

 

**Thefollowing discussion addresses:**

 

**·**                  ourfinancial condition as of March 31, 2009 and

**·**                  theresults of operations for the quarters ended March 31, 2009 and 2008.

** **

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

 

Thefollowing table provides information on the percentages of certain items ofselected financial data compared to total revenues for the three month periodsended March 31, 2009 and 2008.  Thetable below also indicates the percentage increase or decrease over the priorcomparable period.

 

16

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| ** **                                                                                                                      | ** ** | **Percent of Total Revenues** | ** ** | ** **   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------|------------|
| ** **                                                                                                                      | ** ** | **Three Months Ended**             | ** ** | **Percent**  | ** ** |
| ** **                                                                                                                      | ** ** | **March 31,**                           | ** ** | **Increase** | ** ** |
| ** **                                                                                                                      | ** ** | **2009**                                     | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** |
| **Revenue**                                                                                                                     |       |                                         |       |         |       |   |   |
| Medical  equipment outsourcing                                                                                                  |       | 78.8                                         | %          | 78.6         | %          | (1.8 | )% |
| Technical and  professional services                                                                                            |       | 14.1                                         |       | 15.8         |       | (12.3 | ) |
| Medical  equipment sales and remarketing                                                                                        |       | 7.1                                          |       | 5.6          |       | 23.5 |   |
| Total revenues                                                                                                                  |       | 100.0                                        | %          | 100.0        | %          | (2.0 | ) |
|                                                                                                                            |       |                                         |       |         |       |   |   |
| **Cost of  Sales**                                                                                                              |       |                                         |       |         |       |   |   |
| Cost of medical  equipment outsourcing                                                                                          |       | 27.7                                         |       | 26.4         |       | 2.8 |   |
| Cost of  technical and professional services                                                                                    |       | 10.0                                         |       | 11.3         |       | (13.4 | ) |
| Cost of medical  equipment sales and remarketing                                                                                |       | 5.9                                          |       | 4.6          |       | 27.4 |   |
| Medical  equipment depreciation                                                                                                 |       | 21.5                                         |       | 20.1         |       | 4.5 |   |
| Total costs of  medical equipment outsourcing, technical and professional services and medical  equipment sales and remarketing |       | 65.1                                         |       | 62.4         |       | 2.2 |   |
| Gross margin                                                                                                                    |       | 34.9                                         |       | 37.6         |       | (9.0 | ) |
|                                                                                                                            |       |                                         |       |         |       |   |   |
| Selling, general  and administrative                                                                                            |       | 29.8                                         |       | 29.1         |       | 0.3 |   |
| Operating income                                                                                                                |       | 5.1                                          |       | 8.5          |       | (40.5 | ) |
|                                                                                                                            |       |                                         |       |         |       |   |   |
| Interest expense                                                                                                                |       | 15.8                                         |       | 15.4         |       | 0.8 |   |
| Loss before  income taxes                                                                                                       |       | (10.7                                        | )          | (6.9         | )          | 52.2 |   |
|                                                                                                                            |       |                                         |       |         |       |   |   |
| Benefit for  income taxes                                                                                                       |       | (4.2                                         | )          | (2.6         | )          | 55.3 |   |
| Net loss                                                                                                                        |       | (6.5                                         | )%         | (4.3         | )%         | 50.3 |   |

 

17

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**Resultsof Operations for the Three Months Ended March 31, 2009 compared to theThree Months Ended March 31, 2008**

** **

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

*(inthousands)*

 
| ** **                                                                                                              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                              | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                              | ** ** | **2009**                         | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                                           |       | $                                | 58,282     |       | $          | 59,327     |       | $ | (1,045 | ) | (1.8 | )% |
| Cost of revenue                                                                                                         |       | 20,469                           |       | 19,916     |       | 553        |       | 2.8 |   |
| Medical  equipment depreciation                                                                                         |       | 15,862                           |       | 15,178     |       | 684        |       | 4.5 |   |
| Gross margin                                                                                                            |       | $                                | 21,951     |       | $          | 24,233     |       | $ | (2,282 | ) | (9.4 | ) |
|                                                                                                                    |       |                             |       |       |       |       |       |   |   |
| Gross margin %                                                                                                          |       | 37.7                             | %          | 40.8       | %          |       |       |   |   |
|                                                                                                                    |       |                             |       |       |       |       |       |   |   |
| Gross margin                                                                                                            |       | $                                | 21,951     |       | $          | 24,233     |       | $ | (2,282 | ) | (9.4 | ) |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of medical equipment |       | 3,581                            |       | 3,890      |       | (309       | )          | (7.9 | ) |
| Gross margin,  before purchase accounting adjustments                                                                   |       | $                                | 25,532     |       | $          | 28,123     |       | $ | (2,591 | ) | (9.2 | )% |
|                                                                                                                    |       |                             |       |       |       |       |       |   |   |
| Gross margin %,  before purchase accounting adjustments                                                                 |       | 43.8                             | %          | 47.4       | %          |       |       |   |   |

 

Totalrevenue in the Medical Equipment Outsourcing segment decreased $1.0 million, or1.8%, to $58.3 million in the first quarter of 2009 as compared to the sameperiod of 2008.  This decrease wasprimarily driven by an overall decrease in patient census in customerfacilities resulting from comparably lower influenza rates, the effect of whichmanagement estimates to be in excess of $2.0 million of revenue, partiallyoffset by an increase in our AMPP customer base and new and existing technologyin our medical equipment fleet, both owned and managed.

 

Totalcost of revenue in the segment increased $0.6 million, or 2.8%, to $20.5million in the first quarter of 2009 as compared to the same period of2008.  This increase is primarilyattributable to higher repair and maintenance expense related to our medicalequipment fleet and increased employee and related expenses resulting from ourexpanded equipment offerings.

 

Medicalequipment depreciation increased $0.7 million, or 4.5%, to $15.9 million in thefirst quarter of 2009 as compared to the same period of 2008.  The increase in medical equipmentdepreciation primarily relates to the increase in medical equipment purchasesin fiscal year 2008 to meet customer demand. Medical equipment depreciation for the quarters ended March 31,2009 and 2008 include $3.4 and $3.6 million, respectively, of purchaseaccounting adjustments related to the step-up in carrying value of our medicalequipment.

 

Grossmargin percentage for the Medical Equipment Outsourcing segment decreased from40.8% in the first quarter of 2008 to 37.7% for the first quarter of 2009.Gross margin percentage, before purchase accounting adjustments, decreased from47.4% in the first quarter of 2008 to 43.8% in the first quarter of 2009.  The decrease is primarily attributable to adecrease in revenues due to the comparably low influenza rate in the quarterended March 31, 2009 as compared to the same period of 2008, and anincrease in repair and maintenance expenses related to our medical equipmentfleet.

 

18

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

*(inthousands)*

 
| ** **                                                                                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                           | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                           | ** ** | **2009**                         | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                        |       | $                                | 10,412     |       | $          | 11,876     |       | $ | (1,464 | ) | (12.3 | )% |
| Cost of revenue                                                                                      |       | 7,370                            |       | 8,511      |       | (1,141     | )          | (13.4 | ) |
| Gross margin                                                                                         |       | $                                | 3,042      |       | $          | 3,365      |       | $ | (323 | ) | (9.6 | ) |
|                                                                                                 |       |                             |       |       |       |       |       |   |   |
| Gross margin %                                                                                       |       | 29.2                             | %          | 28.3       | %          |       |       |   |   |
|                                                                                                 |       |                             |       |       |       |       |       |   |   |
| Gross margin                                                                                         |       | $                                | 3,042      |       | $          | 3,365      |       | $ | (323 | ) | (9.6 | ) |
| Purchase  accounting adjustments, primarily non-cash charges related to favorable lease  commitments |       | 5                                |       | 7          |       | (3         | )          | (35.7 | ) |
| Gross margin,  before purchase accounting adjustments                                                |       | $                                | 3,047      |       | $          | 3,372      |       | $ | (326 | ) | (9.7 | )% |
|                                                                                                 |       |                             |       |       |       |       |       |   |   |
| Gross margin %,  before purchase accounting adjustments                                              |       | 29.3                             | %          | 28.3       | %          |       |       |   |   |

 

Totalrevenue in the Technical and Professional Services segment declined $1.5million, or 12.3%, to $10.4 million in the first quarter of 2009 as compared tothe same period of 2008. This decrease was primarily attributable to a decreasein episodic business flows in our manufacturer services unit.

 

Totalcost of revenue in the segment declined $1.1 million, or 13.4%, to $7.4 millionin the first quarter of 2009 as compared to the same period of 2008.   This decrease was primarily attributable toa $1.0 million decrease in expenses associated with our manufacturer servicesunit.

 

Grossmargin percentage for the Technical and Professional Services segment increasedfrom 28.3% for the first quarter of 2008 to 29.2% for the first quarter of2009.  Gross margin percentage willfluctuate based on the variability of third party vendor expenses in ourCustomized Healthcare Asset Management Programs (“CHAMP®”) and supplementalservice programs.

 

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

*(inthousands)*

 
| ** **                                                                                                                              | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                              | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                              | ** ** | **2009**                         | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Total revenue                                                                                                                           |       | $                                | 5,236      |       | $          | 4,241      |       | $ | 995 |   | 23.5 | % |
| Cost of revenue                                                                                                                         |       | 4,386                            |       | 3,444      |       | 942        |       | 27.4 |   |
| Gross margin                                                                                                                            |       | $                                | 850        |       | $          | 797        |       | $ | 53 |   | 6.6 |   |
|                                                                                                                                    |       |                             |       |       |       |       |       |   |   |
| Gross margin %                                                                                                                          |       | 16.2                             | %          | 18.8       | %          |       |       |   |   |
|                                                                                                                                    |       |                             |       |       |       |       |       |   |   |
| Gross margin                                                                                                                            |       | $                                | 850        |       | $          | 797        |       | $ | 53 |   | 6.6 |   |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of inventories and medical equipment |       | 324                              |       | 292        |       | 32         |       | 10.9 |   |
| Gross margin,  before purchase accounting adjustments                                                                                   |       | $                                | 1,174      |       | $          | 1,089      |       | $ | 85 |   | 7.8 | % |
|                                                                                                                                    |       |                             |       |       |       |       |       |   |   |
| Gross margin %,  before purchase accounting adjustments                                                                                 |       | 22.4                             | %          | 25.7       | %          |       |       |   |   |

 

19

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Totalrevenue in the Medical Equipment Sales and Remarketing segment increased $1.0million, or 23.5%, to $5.2 million in the first quarter of 2009 as compared tothe same period of 2008.  The increasewas primarily driven by an increase in new equipment and disposable sales of$1.0 and $0.4 million, respectively, partially offset by a decrease in usedequipment sales of $0.5 million.

 

Totalcost of revenue in the segment increased $0.9 million, or 27.4%, to $4.4million in the first quarter of 2009 as compared to the same period of2008.  The increase was primarily due toan increase in the cost of new equipment and disposables of $0.7 and $0.3million, respectively, partially offset by a decrease in the cost of usedequipment sales of $0.3 million.  Duringeach of the quarters ended March 31, 2009 and 2008, purchase accountingadjustments related to medical equipment sold increased cost of revenue by $0.3million.

 

Grossmargin percentage for the Medical Equipment Sales and Remarketing segmentdecreased from 18.8% in the first quarter of 2008 to 16.2% for the same periodof 2009.  Gross margin percentage, beforepurchase accounting adjustments, decreased from 25.7% in the first quarter of2008 to 22.4% for the same period of 2009. Margins and activity in this segment will fluctuate based on thetransactional nature of the business.

 

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

*(in thousands)*

* *
| ** **                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **March 31,**               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **2009**                         | ** ** | **2008**   | ** ** | **Change** | ** ** | **% Change** | ** ** |
| Selling, general  and administrative |       | $                                | 22,015     |       | $          | 21,957     |       | $ | 58 |   | 0.3 | % |
| Interest expense                     |       | 11,717                           |       | 11,620     |       | 97         |       | 0.8 | % |
|                                      |            |                                  |            |            |            |            |            |  |  |  |  |  |

 

***Selling, General andAdministrative***

 

Selling,general and administrative expense increased $0.1 million, or 0.3%, to $22.0million for the first quarter of 2009 as compared to the same period of2008.  Selling, general andadministrative expense consists primarily of employee-related expenses,professional fees, occupancy charges, bad debt expense and depreciation andamortization.  Expenses during the threemonths ended March 31, 2009 and 2008 include $3.8 and $4.0 million,respectively, of charges related to the amortization of our intangible assetsand non-cash stock-based compensation expense related to the 2007 Stock OptionPlan of $0.6 million in each of the periods. Bad debt expense for the three month periods ended March 31, 2009and 2008 was $0.6 and $0.2 million, respectively.  Selling, general and administrative expenseas a percentage of total revenue was 29.8% and 29.1% for each of the quartersended March 31, 2009 and 2008, respectively.

 

***Interest Expense***

 

Interestexpense increased $0.1 million, or 0.8%, to $11.7 million during the firstquarter of 2009 as compared to the same period of 2008.  The increase was primarily driven byincreased levels of outstanding debt on our senior secured credit facility,partially offset by a lower average interest rate on our revolving creditagreement.  The increased level of debton our senior secured credit facility results from our $31.0 million draw on March 11,2009, to, among other things, pre-borrow for our upcoming interest payments dueJune 1, 2009 on our Floating Rate Notes and PIK Toggle Notes.

 

20

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**IncomeTaxes**

 

Benefitfor income taxes increased $1.1 million to $3.1 million during the firstquarter of 2009 as compared to the same period of 2008.  The increase is attributable to the change inloss before income taxes.

 

**NetLoss**

 

Netloss increased $1.6 million to $4.8 million in the first quarter of 2009 ascompared to the same period of 2008.  Theincrease is primarily attributable to comparably lower influenza rates, whichimpacted our Medical Equipment Outsourcing segment, and a decrease in episodicbusiness flows in our Technical and Professional Services segment.

 

**EBITDA**

 

EarningsBefore Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $25.6 and$27.7 million for the quarters ended March 31, 2009 and 2008,respectively.  EBITDA for the quarterended March 31, 2009 was negatively impacted by a decrease in outsourcingrevenues due to comparably lower influenza rates and a decrease in episodicbusiness flows in our Technical and Professional Services segment, as comparedto the same period of 2008.

 

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:

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,**               | ** ** |
| **(in thousands)**                      | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Net cash  provided by operating activities   |       | $                                | 18,551     |   | $ | 18,898 |   |
| Changes in  operating assets and liabilities |       | (2,298                           | )          | (1,284 | ) |
| Other non-cash  expenses                     |       | 778                              |       | 454 |   |
| Benefit for  income taxes                    |       | (3,099                           | )          | (1,996 | ) |
| Interest expense                             |       | 11,717                           |       | 11,620 |   |
| EBITDA                                       |       | $                                | 25,649     |   | $ | 27,692 |   |

 

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| ** **                                                         | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **March 31,**               | ** ** |
| **(dollars in thousands)**                               | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| EBITDA                                                             |       | $                                | 25,649     |   | $ | 27,692 |   |
|                                                               |       |                             |       |   |   |
| **Other  Financial Data:**                                         |       |                             |       |   |   |
| Net cash  provided by operating activities                         |       | $                                | 18,551     |   | $ | 18,898 |   |
| Net cash used in  investing activities                             |       | (9,887                           | )          | (29,031 | ) |
| Net cash  provided by financing activities                         |       | $                                | 12,730     |   | $ | 10,133 |   |
|                                                               |       |                             |       |   |   |
| **Other  Operating Data (as of end of period):**                   |       |                             |       |   |   |
| Medical  equipment (approximate number of owned outsourcing units) |       | 217,000                          |       | 204,000 |   |
| District offices                                                   |       | 84                               |       | 80 |   |
| Number of  outsourcing hospital customers                          |       | 4,150                            |       | 3,925 |   |
| Number of total  outsourcing customers                             |       | 8,250                            |       | 7,575 |   |

 

**SEASONALITY**

 

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

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Ourprincipal sources of liquidity are expected to be cash and cash equivalents of$33.4 million, cash flows from operating activities, and borrowings under ourfirst lien senior secured asset-based revolving credit facility providing forloans in an amount of up to $135.0 million, pursuant to a credit agreementdated as of May 31, 2007 with a group of financial institutions (“seniorsecured credit facility”).  Our seniorsecured credit facility matures in May 2013.  It is anticipated that our principal uses ofliquidity will be to fund capital expenditures related to purchases of medicalequipment, provide working capital, meet debt service requirements and financeour strategic plans.

 

Werequire substantial cash to operate our Medical Equipment Outsourcing programsand service our debt.  Our outsourcingprograms require us to invest a significant amount of cash in medical equipmentpurchases.  To the extent that suchexpenditures cannot be funded from cash and cash equivalents, our operatingcash flow, borrowing under our senior secured credit facility or otherfinancing sources, we may not be able to conduct our business or grow ascurrently planned.

 

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

 

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Netcash provided by operating activities was $18.6 and $18.9 million for thequarters ended March 31, 2009 and 2008, respectively.

 

Netcash used in investing activities was $9.9 and $29.0 million for the quartersended March 31, 2009 and 2008, respectively.  Net cash used in investing activitiesdeclined during the first quarter of 2009 as a result of a decrease in capitalexpenditures for medical equipment and property and office equipment.

 

Netcash provided by financing activities was $12.7 and $10.1 million for thequarters ended March 31, 2009 and 2008, respectively.  During the quarter ended March 31, 2009,net cash provided by financing activities was impacted by increased netborrowings under our senior secured credit facility.

 

Cashon-hand was $33.4 million for the quarter ended March 31, 2009.  On March 11, 2009, we drew $31.0 millionfrom our senior secured credit facility to, among other things, pre-borrow forthe upcoming interest payments due June 1, 2009 on our Floating Rate Notesand PIK Toggle Notes.

 

Based on the level of operating performance expected in2009, we believe our cash and cash equivalents, cash from operations, andadditional borrowings under our senior secured credit facility, will meet ourliquidity needs for the foreseeable future, exclusive of any borrowings that wemay make to finance potential acquisitions. However, if during that period or thereafter we are not successful ingenerating sufficient cash flows from operations or in raising additionalcapital when required in sufficient amounts and on terms acceptable to us, ourbusiness could be adversely affected.  As of March 31,2009, we had $63.6 million of availability under our senior secured creditfacility, based on a borrowing base of $135.0 million, less borrowings of $70.0million and after giving effect to $1.4 million used for letters of credit.

 

Our levels of borrowing are further restricted by thefinancial covenants set forth in our senior secured credit facility agreementand the second lien senior indenture governing our PIK Toggle Notes andFloating Rate Notes.  As of March 31,2009, the Company was in compliance with all covenants under the senior securedcredit facility.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

***Standards Adopted***

 

InMarch 2008, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standard (“SFAS”) No. 161, *Disclosures about Derivative Instruments and Hedging Activities*.SFAS No.161 requires companies to provide enhanced disclosures aboutderivative instruments and hedging activities to provide a better understandingof their effects on a company’s financial position, financial performance, andcash flows. We adopted the disclosure provisions of SFAS No. 161 on January 1,2009.

 

Weenter into derivative instruments for risk management purposes only, includingderivatives designated as hedging instruments under SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*.The Company has an interest rate swap that is designated as a fair value hedgefor a portion of our long-term debt. By using this instrument, we are exposed,from time to time, to credit risk and market risk. Credit risk is the risk thatthe counterparty will fail to perform under the terms of the derivativecontract. When the fair value of a derivative contract is positive, thecounterparty owes us,

 

23

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whichcreates credit risk for us. We minimize this credit risk by entering intotransactions with high quality counterparties. Market risk is the risk that achange in interest rates will result in an adverse effect on the value of afinancial instrument.

 

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

 

***Standards Issued Not Yet Adopted***

 

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

 

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

 

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

 

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

 

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Wecurrently are evaluating the provisions of these three FSPs to determine whateffect, in any, they will have on our financial statements.  The FASB has required that companies adoptthese FSPs effective for the quarter ending June 30, 2009.

 

**SAFE HARBOR STATEMENT**

 

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

 

·                  our history of net losses and substantialinterest expense;

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

·                  our substantial outstanding debt and debtservice obligations;

·                  restrictions imposed by the terms of ourdebt;

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

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

·                  the absence of long-term commitments withcustomers;

·                  our ability to renew contracts with GPOs andIDNs;

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

·                  the impact of health care reform initiatives;

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

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

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

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

·                  impacts of equipment product recalls orobsolescence; and

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

 

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

 

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

 

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

 

**InterestRates**

 

Weuse both fixed and variable rate debt as sources of financing.  At March 31, 2009, we had approximately$552.2 million of total debt outstanding. After taking into account the effect of our interest rate swapagreement, we had $70.0 million of debt bearing interest at variable ratesapproximating 2.9%.  Based on variabledebt levels at March 31, 2009, a 1.0 percentage point change in

 

25

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interestrates on variable rate debt would have resulted in annual interest expensefluctuating approximately $0.7 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 March 31, 2009 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 March 31,2009.  We do not expect any amounts to bereclassified into current earnings in the future due to ineffectiveness.  As a result of our interest rate swapagreement, we expect the effective interest rate on our $230.0 million 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 current gasoline usage and price levels, would leadto an annual change in fuel costs of approximately $0.2 million.

 

**Other Market Risk**

 

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

 

Asof March 31, 2009, we have no other material exposure to market risk.

 

 

**Item4(T).  Controls and Procedures**

 

(a)       *Evaluation of disclosure controls and procedures*

 

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

 

26

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

 

Therewere no changes in our internal control over financial reporting during thequarter ended March 31, 2009, that have materially affected, or arereasonably likely to materially affect, our internal control 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 March 31, 2009, 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 2008 Form 10-K, could have a material impact onour business, financial condition or results of operations.  Additional risks and uncertainties notpresently known to us or that we currently believe to be immaterial may also impairour business operations.

** **

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

 

None.

 

**Item 3.   Defaults upon Senior Securities**

 

Notapplicable.

 

**Item 4.    Submissionof Matters to a Vote of Security Holders**

 

None.

 

**Item 5.   Other Information**

 

Notapplicable.

** **

**Item 6.   Exhibits**

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

** **

**27**

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** **

**SIGNATURES**

 

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

 

Date:May 13, 2009

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

 

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