Agiliti Health, Inc. - FORM 10-Q

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EX-31.1 - EX-31.1 - Agiliti Health, Inc.	uhs-20140930ex311e8865e.htm
EX-10.2 - EX-10.2 - Agiliti Health, Inc.	uhs-20140930ex102408159.htm
EX-32.2 - EX-32.2 - Agiliti Health, Inc.	uhs-20140930ex322f25fa0.htm
EX-10.1 - EX-10.1 - Agiliti Health, Inc.	uhs-20140930ex1012c42f1.htm
EX-10.3 - EX-10.3 - Agiliti Health, Inc.	uhs-20140930ex10303f977.htm
EX-32.1 - EX-32.1 - Agiliti Health, Inc.	uhs-20140930ex321d9f3d7.htm
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EX-31.2 - EX-31.2 - Agiliti Health, Inc.	uhs-20140930ex312771871.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2014


☐	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to

Commission File Number: 000-20086

UNIVERSAL HOSPITAL SERVICES, INC.

(Exact name of registrant as specified in its charter)


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

6625 West 78th Street, Suite 300

Minneapolis, Minnesota 55439-2604

(Address of principal executive offices, including zip code)

(952) 893-3200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of common stock outstanding as of November 6, 2014: 1,000

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Universal Hospital Services, Inc.

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		Page
PART I - FINANCIAL INFORMATION

ITEM 1.	Consolidated Financial Statements (unaudited)

	Consolidated Balance Sheets — September 30, 2014 and December 31, 2013	2

	Consolidated Statements of Operations—Three and nine months ended September 30, 2014 and 2013	3

	Consolidated Statements of Comprehensive Loss —Three and nine months ended September 30, 2014 and 2013	3

	Consolidated Statements of Cash Flows — Three and nine months ended September 30, 2014 and 2013	4

	Notes to Consolidated Financial Statements	5

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	40

ITEM 4.	Controls and Procedures	40

PART II - OTHER INFORMATION

ITEM 1.	Legal Proceedings	41

ITEM 1A.	Risk Factors	41

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

ITEM 3.	Defaults Upon Senior Securities	41

ITEM 4.	Mine Safety Disclosures	41

ITEM 5.	Other Information	41

ITEM 6.	Exhibits	42

Signatures		43

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PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements — Unaudited

Universal Hospital Services, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share information)

(unaudited)


	September 30,		December 31,
	2014		2013
Assets
Current assets:
Accounts receivable, less allowance for doubtful accounts of $1,985 at September 30, 2014 and $2,185 at December 31, 2013	$	67,342	$	69,667
Inventories		9,761		9,481
Deferred income taxes, net		1,494		1,841
Other current assets		6,546		4,438
Total current assets		85,143		85,427

Property and equipment:
Medical equipment		585,933		584,078
Property and office equipment		83,294		80,696
Accumulated depreciation		(434,717)		(405,443)
Total property and equipment, net		234,510		259,331

Other long-term assets:
Goodwill		335,577		335,577
Other intangibles, net		176,016		220,631
Other, primarily deferred financing costs, net		12,852		14,649
Total assets	$	844,098	$	915,615

Liabilities and (Deficit) Equity
Current liabilities:
Current portion of long-term debt	$	5,777	$	6,487
Book overdrafts		4,923		9,469
Accounts payable		30,041		32,502
Accrued compensation		15,457		11,714
Accrued interest		6,562		18,884
Dividend payable		50		73
Other accrued expenses		11,226		11,031
Total current liabilities		74,036		90,160

Long-term debt, less current portion		715,851		704,284
Pension and other long-term liabilities		6,535		7,425
Payable to Parent		23,420		22,669
Deferred income taxes, net		54,165		68,057

Commitments and contingencies (Note 9)

(Deficit) Equity
Common stock, $0.01 par value; 1,000 shares authorized, issued and outstanding at September 30, 2014 and December 31, 2013		—		—
Additional paid-in capital		214,494		214,505
Accumulated deficit		(240,712)		(187,901)
Accumulated other comprehensive loss		(3,884)		(3,884)
Total Universal Hospital Services, Inc. (deficit) equity		(30,102)		22,720
Noncontrolling interest		193		300
Total (deficit) equity		(29,909)		23,020
Total liabilities and (deficit) equity	$	844,098	$	915,615

The accompanying notes are an integral part of the unaudited consolidated financial statements.

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Universal Hospital Services, Inc.

Consolidated Statements of Operations

(in thousands)

(unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Revenue
Medical equipment solutions	$	67,861	$	68,355	$	216,771	$	215,141
Clinical engineering solutions		23,717		21,839		68,505		65,000
Surgical services		14,887		14,084		43,890		41,486
Total revenues		106,465		104,278		329,166		321,627

Cost of Revenue
Cost of medical equipment solutions		32,204		31,107		97,919		94,918
Cost of clinical engineering solutions		18,670		16,310		54,454		50,120
Cost of surgical services		7,982		7,921		24,418		23,175
Medical equipment depreciation		17,766		18,314		55,996		54,670
Total costs of revenues		76,622		73,652		232,787		222,883
Gross margin		29,843		30,626		96,379		98,744

Selling, general and administrative		26,539		27,070		85,416		87,246
Restructuring, acquisition and integration expenses		—		—		1,820		236
Intangible asset impairment charge		—		—		34,900		—
Operating income (loss)		3,304		3,556		(25,757)		11,262

Loss on extinguishment of debt		—		—		—		1,853
Interest expense		13,264		13,834		39,922		41,657
Loss before income taxes and noncontrolling interest		(9,960)		(10,278)		(65,679)		(32,248)

Provision (benefit) for income taxes		225		(1,313)		(13,232)		(398)
Consolidated net loss		(10,185)		(8,965)		(52,447)		(31,850)
Net income attributable to noncontrolling interest		103		216		364		532
Net loss attributable to Universal Hospital Services, Inc.	$	(10,288)	$	(9,181)	$	(52,811)	$	(32,382)

The accompanying notes are an integral part of the unaudited consolidated financial statements.

Universal Hospital Services, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013

Consolidated net loss	$	(10,185)	$	(8,965)	$	(52,447)	$	(31,850)
Total other comprehensive income		—		—		—		—
Comprehensive loss		(10,185)		(8,965)		(52,447)		(31,850)
Comprehensive income attributable to noncontrolling interest		103		216		364		532
Comprehensive loss attributable to Universal Hospital Services, Inc.	$	(10,288)	$	(9,181)	$	(52,811)	$	(32,382)

The accompanying notes are an integral part of the unaudited consolidated financial statements.

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Universal Hospital Services, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Nine Months Ended
	September 30,
	2014		2013
Cash flows from operating activities:
Consolidated net loss	$	(52,447)	$	(31,850)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		64,120		63,157
Assets impairment charges		2,025		—
Intangible asset impairment charge		34,900		—
Amortization of intangibles, deferred financing costs and bond premium		10,359		12,017
Non-cash write off of deferred financing cost		—		1,853
Provision for doubtful accounts		658		1,216
Provision for inventory obsolescence		(27)		22
Non-cash share-based compensation expense - net		801		609
Gain on sales and disposals of equipment		(1,791)		(1,070)
Deferred income taxes		(13,545)		733
Changes in operating assets and liabilities:
Accounts receivable		1,667		75
Inventories		(253)		(989)
Other operating assets		(2,137)		(199)
Accounts payable		221		(755)
Other operating liabilities		(9,274)		(9,341)
Net cash provided by operating activities		35,277		35,478
Cash flows from investing activities:
Medical equipment purchases		(44,563)		(39,799)
Property and office equipment purchases		(3,610)		(6,327)
Proceeds from disposition of property and equipment		6,996		2,632
Purchases of noncontrolling interests		(46)		—
Holdback payment related to acquisition		—		(1,655)
Net cash used in investing activities		(41,223)		(45,149)
Cash flows from financing activities:
Proceeds under senior secured credit facility		123,400		82,900
Payments under senior secured credit facility		(107,200)		(66,700)
Payments of principal under capital lease obligations		(5,199)		(5,679)
Payments of floating rate notes		—		(230,000)
Proceeds from issuance of bonds		—		234,025
Accrued interest received from bondholders		—		8,620
Accrued interest paid to bondholders		—		(8,620)
Distributions to noncontrolling interests		(436)		(528)
Dividend and equity distribution payments		(73)		—
Payment of deferred financing costs		—		(4,116)
Change in book overdrafts		(4,546)		(231)
Net cash provided by financing activities		5,946		9,671
Net change in cash and cash equivalents		—		—

Cash and cash equivalents at the beginning of period		—		—
Cash and cash equivalents at the end of period	$	—	$	—

Supplemental cash flow information:
Interest paid	$	51,528	$	47,296
Income taxes paid		318		320
Non-cash activities:
Medical equipment purchases included in accounts payable (at end of period)	$	10,973	$	6,894
Capital lease additions		1,038		9,174

The accompanying notes are an integral part of the unaudited consolidated financial statements.

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Universal Hospital Services, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.Basis of Presentation

The interim consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Universal Hospital Services, Inc. (“we”, “our”, “us”, the “Company”, or “UHS”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company’s 2013 Annual Report on Form 10-K filed with the SEC.

The interim consolidated financial statements presented herein as of September 30, 2014, reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations and cash flows for the periods presented. These adjustments are all of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full year.

We are required to make estimates and assumptions about future events in preparing consolidated financial statements in conformity with GAAP. These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses at the date of the unaudited consolidated financial statements. While we believe that our past estimates and assumptions have been materially accurate, our current estimates are subject to change if different assumptions as to the outcome of future events are made. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. We make adjustments to our assumptions and judgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in preparing the accompanying unaudited consolidated financial statements.

A description of our significant accounting policies is included in our 2013 Annual Report on Form 10-K. There have been no material changes to these policies for the quarter ended September 30, 2014.

Principles of Consolidation

The consolidated financial statements include the accounts of UHS and its 100%-owned subsidiary, UHS Surgical Services, Inc. (“Surgical Services”). In addition, in accordance with guidance issued by the Financial Accounting Standards Board (“FASB”), we have accounted for our equity investments in entities in which we are the primary beneficiary under the full consolidation method. All significant intercompany transactions and balances have been eliminated through consolidation. As the primary beneficiary, we consolidate the limited liability companies (“LLCs”) referred to in Note 11, Limited Liability Companies, as we effectively receive the majority of the benefits from such entities and we provide equipment lease guarantees for such entities.

Reclassifications

Certain amounts in the 2013 Consolidated Statements of Operations have been reclassified to conform with the 2014 presentation.

2.Recent Accounting Pronouncements

Standard Adopted

In July 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-11 Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist (“ASU 2013-11”). ASU 2013-11 requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (“NOL”) carryforward, or similar tax loss or tax credit

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carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The ASU does not require new recurring disclosures. ASU 2013-11 is effective prospectively for fiscal years beginning after December 15, 2013 and interim periods within those years. The adoption of ASU 2013-11 did not have a material effect on our consolidated financial statements.

Standards Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in the U.S. GAAP when it becomes effective. The new standard is effective beginning after December 15, 2016 and interim periods within those years. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

In August 2014, the FASB issued ASU No. 2014-15 Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which requires management to evaluate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and whether or not it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued. The new standard is effective beginning after December 15, 2016 and interim periods within those years. Early adoption is permitted. We are evaluating the effect that ASU 2014-15 will have on our consolidated financial statements and related disclosures.

3.Fair Value Measurements

Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 are summarized in the following table by type of inputs applicable to the fair value measurements:


	Fair Value at September 30, 2014								Fair Value at December 31, 2013
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total

Contingent Consideration	$	—	$	—	$	158	$	158	$	—	$	—	$	215	$	215

A description of the inputs used in the valuation of assets and liabilities is summarized as follows:

Level 1 — Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets.

Level 2 — Inputs include directly or indirectly observable inputs other than Level 1 inputs such as quoted prices for similar assets or liabilities exchanged in active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that are considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves that are observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 — Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities or related observable inputs that can be corroborated at the measurement date. Measurements of non-exchange traded derivative contract assets and liabilities are primarily based on valuation models, discounted cash flow models or other valuation techniques that are believed to be used by market participants. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in pricing assets or liabilities.

During 2012, we recorded a contingent consideration liability, in the form of an earn-out payment, related to our acquisitions. The contingent consideration payments are based on achieving certain revenue results. The fair value of the

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liability was estimated using a discounted cash flow approach with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement. The significant inputs in the Level 3 measurement not supported by market activity included our assessments of expected future cash flows during the earn-out period, related to the assets acquired, appropriately discounted considering the uncertainties associated with the obligation, and calculated based on estimated revenues in accordance with the terms of the agreement. During the three months ended September 30, 2014 and 2013, we paid $0.02 and $0.02 million, respectively, in earn-outs. During the nine months ended September 30, 2014 and 2013, we paid $0.06 and $0.07 million, respectively, in earn-outs.

The assumptions used in preparing the discounted cash flow analysis included estimates of interest rates and the timing and amount of incremental cash flows.

A reconciliation of the beginning and ending balance for the Level 3 measurement are as follows:


(in thousands)
Balance at December 31, 2013	$	215
Payments		(57)
Balance at September 30, 2014	$	158

During the three and nine months ended September 30, 2014, we recorded $0 and $2.0 million, respectively, of impairment charge on certain long-lived assets for which the carrying value of those assets may not be recoverable based upon our estimated cash flows. The fair value of the assets was estimated using a discounted cash flow approach with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement. There were no assets impairments for the three and nine months ended September 30, 2013. The fair value of those assets measured on a nonrecurring basis was $0 million as of September 30, 2014.

During the three and nine months ended September 30, 2014, we recorded $0 and $34.9 million of intangible asset impairment charge. The fair value of the intangible asset was estimated using an income approach with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement. There were no intangible asset impairment charges for the three and nine months ended September 30, 2013. Intangible asset impairment charge recorded during the second quarter of 2014 is discussed in Note 4, Goodwill and Other Intangible Assets.

Fair Value of Other Financial Instruments

The Company considers that the carrying amount of financial instruments, including accounts receivable, accounts payable, accrued liabilities and senior secured credit facility, approximates fair value due to their short maturities. The fair value of our outstanding Original Notes and Add-on Notes (each as defined in Note 8, Long-Term Debt) as of September 30, 2014 and December 31, 2013, based on the quoted market price for the same or similar issues of debt, which represents a Level 2 fair value measurement, is approximately:


	September 30, 2014				December 31, 2013
	Carrying		Fair		Carrying		Fair
(in millions)	Value		Value		Value		Value

Original notes - 7.625%	$	425.0	$	399.5	$	425.0	$	450.5
Add-on notes - 7.625% (1)		231.5		206.8		232.7		233.2

(1) The carrying value of the Add-on notes - 7.625% includes unamortized bond premium of $11.5 and $12.7 million as of September 30, 2014 and December 31, 2013, respectively.

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4.Goodwill and Other Intangible Assets

Our goodwill as of September 30, 2014 and December 31, 2013, by reporting segment, consists of the following:


	Medical		Clinical
	Equipment		Engineering		Surgical
(in thousands)	Solutions		Solutions		Services		Total

Balance at December 31, 2013	$	227,486	$	55,655	$	52,436	$	335,577
Acquisitions		—		—		—		—
Balance at September 30, 2014	$	227,486	$	55,655	$	52,436	$	335,577

Our other intangible assets as of September 30, 2014 and December 31, 2013 consist of the following:


	September 30, 2014								December 31, 2013
			Accumulated								Accumulated
(in thousands)	Cost		Amortization		Impairment		Net		Cost		Amortization		Impairment		Net

Finite-life intangibles
Customer relationship	$	115,731	$	(78,358)	$	—	$	37,373	$	115,731	$	(70,964)	$	—	$	44,767
Supply agreement		26,000		(18,738)		—		7,262		26,000		(16,560)		—		9,440
Technology databases		7,217		(7,217)		—		—		7,217		(7,199)		—		18
Non-compete agreements		780		(499)		—		281		780		(374)		—		406
Favorable lease agreements		134		(134)		—		—		134		(134)		—		—
Total finite-life intangibles		149,862		(104,946)		—		44,916		149,862		(95,231)		—		54,631
Indefinite-life intangibles
Trade names		166,000		—		(34,900)		131,100		166,000		—		—		166,000
Total intangible assets	$	315,862	$	(104,946)	$	(34,900)	$	176,016	$	315,862	$	(95,231)	$	—	$	220,631

During the second quarter of 2014, the Company became aware of certain events that will have a negative impact on the future financial results of the Company. The Company applies a fair value based impairment test to the net book value of goodwill and intangible assets with indefinite lives on an annual basis and on an interim basis if events or circumstances indicate that an impairment loss may have occurred. The review of indefinite-life intangibles for impairment during the second quarter of 2014 indicated that the carrying value of trade names in the MES segment exceeded its estimated fair values. The Company performed an interim impairment test and recorded a non-cash impairment charge of $34.9 million in the second quarter of 2014. As a result of the trade names impairment, the Company’s equity went to a deficit causing the Company to undertake a step 2 goodwill impairment analysis. The preliminary step 2 analysis of the MES goodwill reflects no impairment, and therefore none has been recorded in the second quarter of 2014. The calculation of the preliminary step 2 goodwill analysis contained significant judgments and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities. The finalization of the step 2 analysis and the result of the third quarter impairment review resulted in no changes to or additional impairment charges. There were no impairment charges during the three and nine months ended September 30, 2013 with respect to trade names.

Total amortization expense related to intangible assets were $3.1 and $3.4 million for the three months ended September 30, 2014 and 2013, respectively and $9.7 and $10.4 million for the nine months ended September 30, 2014 and 2013, respectively.

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The estimated future amortization expense for identifiable intangible assets during the remainder of 2014 and the next five years is as follows:


(in thousands)

Remainder of 2014	$	3,110
2015		11,931
2016		10,807
2017		7,514
2018		5,931
2019		3,364

5.Equity (Deficit)

The following tables represent changes in equity (deficit) that are attributable to our shareholders and noncontrolling interests for the nine month periods ended September 30, 2014 and 2013.


					Accumulated
	Additional				Other				Total
	Paid-in		Accumulated		Comprehensive		Noncontrolling		Equity
(in thousands)	Capital		Deficit		Loss		Interests		(Deficit)

Balance at December 31, 2013	$	214,505	$	(187,901)	$	(3,884)	$	300	$	23,020
Net (loss) income		—		(52,811)		—		364		(52,447)
Cash distributions to noncontrolling interests		—		—		—		(436)		(436)
Purchases of noncontrolling interests		(11)		—		—		(35)		(46)
Balance at September 30, 2014	$	214,494	$	(240,712)	$	(3,884)	$	193	$	(29,909)


					Accumulated
	Additional				Other
	Paid-in		Accumulated		Comprehensive		Noncontrolling		Total
(in thousands)	Capital		Deficit		Loss		Interests		Equity

Balance at December 31, 2012	$	214,481	$	(144,864)	$	(9,086)	$	344	$	60,875
Net (loss) income		—		(32,382)		—		532		(31,850)
Cash distributions to noncontrolling interests		—		—		—		(528)		(528)
Balance at September 30, 2013	$	214,481	$	(177,246)	$	(9,086)	$	348	$	28,497

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6.Share-Based Compensation

During the nine months ended September 30, 2014, activity under the 2007 Stock Option Plan (the “2007 Stock Option Plan”), of UHS Holdco, Inc., our parent company (“Parent”), was as follows:


						Weighted
						average
		Weighted				remaining
		average		Aggregate		contractual
(in thousands except exercise price and years)	Number of Options	exercise price		intrinsic value		term (years)

Outstanding at December 31, 2013	38,116	$	1.17	$	9,611	5.5
Granted	—		—
Exercised	—		—
Forfeited or expired	(3,749)		1.38

Outstanding at September 30, 2014	34,367	$	1.15	$	9,478	4.4

Exercisable at September 30, 2014	26,764	$	1.07	$	9,444	3.3

Remaining authorized options available for issue	9,319

The exercise price of the stock option award is equal to the market value of Parent’s common stock on the grant date as determined reasonably and in good faith by Parent’s Board of Directors and compensation committee and based on an analysis of a variety of factors including peer group multiples, merger and acquisition multiples, and discounted cash flow analyses.

The intrinsic value of a stock award is the amount by which the market value of the underlying stock exceeds the exercise price of the award.

We determine the fair value of stock options using the Black-Scholes option pricing model. The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on a straight-line basis over the options’ expected vesting periods. There were no stock options granted during the nine months ended September 30, 2014.

Although Parent grants stock options, the Company recognizes compensation expense related to these options since the services are performed for its benefit. Along with this expense, which is primarily included in Selling, General and Administrative expense, the Company records an offsetting Payable to Parent liability which is not expected to be settled within the next twelve months.

At September 30, 2014, unearned non-cash share-based compensation that we expect to recognize as expense over a weighted average period of 1.9 years totals approximately $3.2 million, net of our estimated forfeiture rate of 2.0%. The expense could be accelerated upon the sale of Parent or the Company.

7.Dividend and Equity Distribution

On June 8, 2011, the Board of Directors declared an equity distribution of $0.12 per option to holders of outstanding options on the Parent’s stock on June 10, 2011 that vested on December 31, 2011, 2012 and 2013 and are scheduled to vest on December 31, 2014 and 2015.

Our consolidated balance sheets as of September 30, 2014 and December 31, 2013 reflect the related current dividend payable and long-term dividend payable included in Payable to Parent for estimated amounts to be paid to holders of options expected to vest on December 31, 2014 through 2015 based on an estimated option forfeiture rate of 2% annually.

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8.Long-Term Debt

Long-term debt consists of the following:


	September 30,		December 31,
(in thousands)	2014		2013
Original notes - 7.625%	$	425,000	$	425,000
Add-on notes - 7.625%		220,000		220,000
Unamortized bond premium		11,520		12,702
Senior secured credit facility		49,200		33,000
Capital lease obligations		15,908		20,069
		721,628		710,771
Less: Current portion of long-term debt		(5,777)		(6,487)
Total long-term debt	$	715,851	$	704,284

Original Notes and Add-on Notes — 7.625%. On August 7, 2012, we issued $425.0 million in aggregate principal amount of 7.625% Second Lien Senior Secured Notes due 2020 (the “Original Notes”) under an indenture dated as of August 7, 2012 (the “2012 Indenture”). On February 12, 2013, we issued $220.0 million in aggregate principal amount of 7.625% Second Lien Senior Secured Notes due 2020 (the “Add-on Notes”, and along with the Original Notes, the “2012 Notes”) as “additional notes” pursuant to the 2012 Indenture. The 2012 Notes mature on August 15, 2020.

The 2012 Indenture provides that the 2012 Notes are our second lien senior secured obligations and are fully and unconditionally guaranteed on a second lien senior secured basis by our existing and certain of our future 100%-owned domestic subsidiaries.

Interest on the 2012 Notes is payable, entirely in cash, semiannually, in arrears, on February 15 and August 15 of each year, beginning on February 15, 2013. We may redeem some or all of the 2012 Notes at the redemption prices set forth in the 2012 Indenture. If we sell certain assets or undergo certain kinds of changes of control, we must offer to repurchase the 2012 Notes.

Our 2012 Notes are subject to certain debt covenants which are described below under the heading “2012 Indenture”.

In connection with the issuance of the 2012 Notes, we entered into a registration rights agreement with the initial purchasers of the 2012 Notes. Pursuant to those agreements, we filed Registration Statements on Form S-4 to register the exchanges of the 2012 Notes for fully registered 2012 Notes. Following declaration of effectiveness by the SEC, we completed offers to exchange all of the then outstanding 2012 Notes for an equivalent amount of the 2012 Notes which have been registered under the Securities Act of 1933, as amended. We did not receive any additional proceeds from the exchange offers.

Senior Secured Credit Facility. On July 31, 2012, we entered into a Second Amended and Restated Credit Agreement with Bank of America, N.A., as agent for the lenders, and the lenders party thereto (the “Second Amended Credit Agreement”), which amended our then-existing senior secured credit facility originally dated as of May 31, 2007 and amended and restated as of May 6, 2010. We refer to the second amended and restated senior secured credit facility as the “senior secured credit facility.” The senior secured credit facility is a first lien senior secured asset based revolving credit facility that is available for working capital and general corporate purposes, including permitted investments, capital expenditures and debt repayments, on a fully revolving basis, subject to the terms and conditions set forth in the credit documents in the form of revolving loans, swing line loans and letters of credit. The Second Amended Credit Agreement increased the aggregate amount we may obtain under revolving loans from $195.0 million to $235.0 million and extended the maturity date to July 31, 2017. Our obligations under the Second Amended Credit Agreement are secured by a first priority security interest in substantially all of our assets, excluding a pledge of our and Parent’s stock, any joint ventures and certain other exceptions. Our obligations under the Second Amended Credit Agreement are unconditionally guaranteed by Parent and our restricted subsidiaries.

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As of September 30, 2014, we had $129.4 million of availability under the senior secured credit facility based on a borrowing base of $182.2 million less borrowings of $49.2 million and after giving effect to $3.6 million used for letters of credit.

The senior secured credit facility requires our compliance with various affirmative and negative covenants. Pursuant to the affirmative covenants, we and Parent agreed to, among other things, deliver financial and other information to the administrative agent, provide notice of certain events (including events of default), pay our obligations, maintain our properties, maintain the security interest in the collateral for the benefit of the administrative agent and the lenders and maintain insurance.

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

incur indebtedness;

create or permit liens;

declare or pay dividends and certain other restricted payments;

consolidate, merge or recapitalize;

acquire or sell assets;

make certain investments, loans or other advances;

enter into transactions with affiliates;

change our line of business; and

enter into hedging transactions.

The senior secured credit facility also contains a financial covenant that is triggered if our available borrowing capacity is less than $20.0 million for a certain period, which consists of a minimum ratio of trailing four-quarter Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) to cash interest expense, as such terms are defined in the senior secured credit facility.

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

Borrowings under the senior secured credit facility accrue interest (including a credit spread varying with facility usage):

at a per annum rate equal to 1.00% - 1.50% above the rate equal to the greater of (i) the “federal funds rate” plus one-half of one percent (0.50%) per annum, (ii) the “prime rate” announced from time to time by the administrative agent for such day and (iii) the “Eurodollar rate” for a one month interest period as determined on such day, plus one percent (1.0%) payable quarterly in arrears; and

at a per annum rate equal to 2.00% - 2.50% above the adjusted British Bankers Association Interest Settlement Rate for deposits in Dollars rate used by the administrative agent with a term equivalent to the selected interest rate period, for the respective interest rate period determined at our option, payable in arrears upon cessation of the interest rate period elected, provided that for an interest rate period longer than three months, payable in arrears on the respective dates that fall every three months from the beginning of such interest rate period.

At September 30, 2014, we had $49.2 million of borrowings outstanding of which $44.0 million was accruing interest at a rate of 2.6536%, $3.0 million was accruing interest at a rate of 2.6535% and $2.2 million was accruing interest at a rate of 4.75%.

We were in compliance with all financial debt covenants for all periods presented.

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2012 Indenture. Our 2012 Notes are guaranteed, jointly and severally, on a second priority senior secured basis, by Surgical Services, and are also similarly guaranteed by certain of our future 100%-owned domestic subsidiaries. The 2012 Notes are our second priority senior secured obligations and rank (i) equal in right of payment with all of our existing and future unsubordinated indebtedness, and effectively senior to any such unsecured indebtedness to the extent of the value of collateral; (ii) senior in right of payment to all of our and our guarantors’ existing and future subordinated indebtedness; (iii) effectively junior to our senior secured credit facility; and (iv) structurally subordinated to any indebtedness and other liabilities (including trade payables) of any of our future subsidiaries that are not guarantors.

The 2012 Indenture governing the 2012 Notes contains covenants that limit our and our guarantors’ ability, subject to certain definitions and exceptions, and certain of our future subsidiaries’ ability to:

incur additional indebtedness;

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

issue redeemable stock or preferred stock;

issue stock of subsidiaries;

make certain investments;

transfer or sell assets;

create liens on our assets to secure debt;

enter into transactions with affiliates; and

merge or consolidate with another company.

The 2012 Indenture specifies certain events of default, including among others, failure to pay principal, interest or premium, violation of covenants and agreements, cross-defaults to other material agreements, bankruptcy events, invalidity of guarantees, and a default in the performance by us of the security documents relating to the 2012 Indenture. Some events of default will be triggered only after certain grace or cure periods have expired, or provide for materiality thresholds. In the event certain bankruptcy-related defaults occur, the 2012 Notes will become due and payable immediately. If any other default occurs, the Trustee (and in some cases the noteholders) would be entitled to take various actions, including acceleration of amounts due under the 2012 Indenture.

We were in compliance with all financial debt covenants for all periods presented.

9.Commitments and Contingencies

The Company, in the ordinary course of business, could be subject to liability claims related to employees and the equipment that it rents and services. Asserted claims are subject to many uncertainties and the outcome of individual matters is not predictable. While the ultimate resolution of these actions may have an impact on the Company’s financial results for a particular reporting period, management believes that any such resolution would not have a material adverse effect on the financial position, results of operations or cash flows of the Company and the chance of a negative outcome on outstanding litigation is considered remote.

10.Related Party Transactions

Management Agreement

On May 31, 2007, we and Irving Place Capital Merchant Manager III, L.P. (“IPC”) entered into a professional services agreement pursuant to which IPC provides general advisory and management services to us with respect to financial and operating matters. IPC is a principal owner of Parent, and the following members of our board of directors are associated with IPC: Michael Feiner, Robert Juneja, and Bret Bowerman. In addition, David Crane, a director, provides certain services to IPC. The professional services agreement requires us to pay an annual fee for ongoing advisory and management services equal to the greater of $0.5 million or 0.75% of our Adjusted EBITDA (as defined in the professional services agreement) for the immediately preceding fiscal year, payable in quarterly installments. The professional services agreement provides that IPC will be reimbursed for its reasonable out-of-pocket expenses in connection with certain activities undertaken pursuant to the professional services agreement and will be indemnified for liabilities incurred in connection with its role under the professional services agreement, other than for liabilities resulting from its gross negligence or willful misconduct. The term of the professional services agreement commenced on May 31, 2007 and will remain in effect unless and until either party notifies the other of its desire to terminate, we are

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sold to a third-party purchaser or we consummate a qualified initial public offering, as defined in the professional services agreement. Total professional services fees incurred to IPC were $0.3 and $0.3 million for the three month periods ended September 30, 2014 and 2013, respectively, and $0.7 and $0.8 million for the nine month periods ended September 30, 2014 and 2013, respectively.

Business Relationship

In the ordinary course of business, we entered into an operating lease for our Minneapolis, Minnesota district service center with Ryan Fund V, LLC (“Ryan”), which began on May 1, 2007. One member of our board of directors is also a limited partner in Ryan which has ownership interest in an LLC that owns the property. Total rent expense to Ryan were $0.1 and $0.1 million during the three month periods ended September 30, 2014 and 2013, respectively, and $0.3 and $0.3 million during the nine month periods ended September 30, 2014 and 2013, respectively.

In the ordinary course of business, we entered into engagement letters with CTPartners, LLC (“CTPartners”) during 2012 through 2014 to conduct searches for certain executive positions. One member of our board of directors is also a director of CTPartners. Total fees incurred to CTPartners was $0.1 and $0 million for the three month periods ended September 30, 2014 and 2013, respectively, and $0.3 and $0.2 million during the nine month periods ended September 30, 2014 and 2013, respectively.

The Company believes that the aforementioned arrangements and relationships were provided in the ordinary course of business.

11.Limited Liability Companies

We participate with others in the formation of LLCs in which Surgical Services becomes a partner and shares the financial interest with the other investors. Surgical Services is the primary beneficiary of these LLCs. These LLCs acquire certain medical equipment for use in their respective business activities, which generally focus on surgical procedures. The LLCs will acquire medical equipment for rental purposes under equipment financing leases. At September 30, 2014, the LLCs had approximately $0.4 million of total assets. The third party investors in each respective LLC generally provide the lease financing company with individual proportionate lease guarantees based on their respective ownership percentages in the LLCs. In addition, Surgical Services will provide such financing companies with its corporate guarantee based on its respective ownership interest in each LLC. In certain instances, Surgical Services has provided such financing companies with an overall corporate guarantee in connection with equipment financing transactions. In such instances, the individual investors in each respective LLC will generally indemnify us against losses, if any, incurred in connection with its corporate guarantee. Additionally, we provide operational and administrative support to the LLCs in which it is a partner. As of September 30, 2014, we held interests in six active LLCs.

In accordance with guidance issued by the FASB, we account for equity investments in LLCs (in which we are the primary beneficiary) under the full consolidation method whereby transactions between Surgical Services and the LLCs have been eliminated through consolidation.

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12.Segment Information

Our reporting segments consist of Medical Equipment Solutions (“MES”), Clinical Engineering Solutions (“CES”) and Surgical Services (“SS”). Certain operating information for our segments as well as a reconciliation of total Company gross margin to loss before income taxes and noncontrolling interest was as follows:

Medical Equipment Solutions

(in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Revenues	$	67,861	$	68,355	$	216,771	$	215,141
Cost of revenue		32,204		31,107		97,919		94,918
Medical equipment depreciation		16,340		17,189		51,843		50,620
Gross margin	$	19,317	$	20,059	$	67,009	$	69,603

Clinical Engineering Solutions

(in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Revenues	$	23,717	$	21,839	$	68,505	$	65,000
Cost of revenue		18,670		16,310		54,454		50,120
Gross margin	$	5,047	$	5,529	$	14,051	$	14,880

Surgical Services

(in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Revenues	$	14,887	$	14,084	$	43,890	$	41,486
Cost of revenue		7,982		7,921		24,418		23,175
Medical equipment depreciation		1,426		1,125		4,153		4,050
Gross margin	$	5,479	$	5,038	$	15,319	$	14,261

Total Gross Margin and Reconciliation to Loss Before Income Taxes and Noncontrolling Interest

(in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Total gross margin	$	29,843	$	30,626	$	96,379	$	98,744
Selling, general and administrative		26,539		27,070		85,416		87,246
Restructuring, acquisition and integration expenses		—		—		1,820		236
Intangible asset impairment charge		—		—		34,900		—
Loss on extinguishment of debt		—		—		—		1,853
Interest expense		13,264		13,834		39,922		41,657
Loss before income taxes and noncontrolling interest	$	(9,960)	$	(10,278)	$	(65,679)	$	(32,248)

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Total Assets By Reporting Segment

(in thousands)


	September 30,		December 31,
	2014		2013
Medical Equipment Solutions	$	633,461	$	701,507
Clinical Engineering Solutions		111,021		112,746
Surgical Services		99,616		101,362
Total Company Assets	$	844,098	$	915,615

The following table provides additional detail on percentage of revenue for each group of similar products sold or services provided in the MES, CES and SS segments:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013

MES
Equipment usage solutions	59.8	%	59.8	%	61.1	%	60.7	%
Equipment/disposable sales	3.9		5.8		4.8		6.2
	63.7		65.6		65.9		66.9
CES
Service solutions	22.3		20.9		20.8		20.2
SS
Equipment usage solutions	13.8		13.4		13.1		12.8
Equipment/disposable sales	0.2		0.1		0.2		0.1
	14.0		13.5		13.3		12.9
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%

13.Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We evaluate the recoverability of our deferred tax assets by scheduling the expected reversals of deferred tax assets and liabilities in order to determine whether net operating loss carry forwards are recoverable prior to expiration and have established a valuation allowance in accordance with ASC Topic 740, “Income Taxes”. The tax expense for the three months ended September 30, 2014 primarily relates to state minimum fees. The tax benefit for the nine months ended September 30, 2014 primarily relates to intangible asset impairment charge, partially offset by state minimum fees. The expected tax benefit from operating loss during the three and nine months ended September 30, 2014 was offset by the recording of additional valuation allowance. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.

At September 30, 2014, the Company had available unused federal net operating loss carryforwards of approximately $207.3 million. The net operating loss carryforwards will expire at various dates from 2020 through 2035.

14.Consolidating Financial Statements

In accordance with the provisions of the 2012 Indenture, as a 100%-owned subsidiary of UHS, Surgical Services has jointly and severally guaranteed all the Company’s Obligations (as defined in the 2012 Indenture) on a full and unconditional basis. Consolidating financial information of UHS and the guarantor is presented on the following pages.

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Universal Hospital Services, Inc.

Consolidating Balance Sheets

(in thousands, except share and per share information)

(unaudited)


	September 30, 2014
	Parent		Subsidiary
	Issuer		Guarantor		Consolidating
	UHS		Surgical Services		Adjustments		Consolidated
Assets
Current assets:
Accounts receivable, less allowance for doubtful accounts	$	59,260	$	8,082	$	—	$	67,342
Due from affiliates		31,003		—		(31,003)		—
Inventories		5,310		4,451		—		9,761
Deferred income taxes, net		394		1,100		—		1,494
Other current assets		6,201		345		—		6,546
Total current assets		102,168		13,978		(31,003)		85,143

Property and equipment:
Medical equipment		547,501		38,432		—		585,933
Property and office equipment		76,548		6,746		—		83,294
Accumulated depreciation		(406,019)		(28,698)		—		(434,717)
Total property and equipment, net		218,030		16,480		—		234,510

Other long-term assets:
Goodwill		283,141		52,436		—		335,577
Investment in subsidiary		53,287		—		(53,287)		—
Other intangibles, net		159,463		16,553		—		176,016
Other, primarily deferred financing costs, net		12,683		169		—		12,852
Total assets	$	828,772	$	99,616	$	(84,290)	$	844,098

Liabilities and (Deficit) Equity
Current liabilities:
Current portion of long-term debt	$	5,083	$	694	$	—	$	5,777
Book overdrafts		4,332		591		—		4,923
Due to affiliates		—		31,003		(31,003)		—
Accounts payable		27,160		2,881		—		30,041
Accrued compensation		12,643		2,814		—		15,457
Accrued interest		6,562		—		—		6,562
Dividend payable		50		—		—		50
Other accrued expenses		11,095		131		—		11,226
Total current liabilities		66,925		38,114		(31,003)		74,036

Long-term debt, less current portion		714,031		1,820		—		715,851
Pension and other long-term liabilities		6,535		—		—		6,535
Payable to Parent		23,420		—		—		23,420
Deferred income taxes, net		47,952		6,213		—		54,165

Commitments and contingencies

(Deficit) Equity
Common stock		—		—		—		—
Additional paid-in capital		214,505		60,008		(60,019)		214,494
Accumulated deficit		(233,980)		(6,732)		—		(240,712)
Accumulated loss in subsidiary		(6,732)		—		6,732		—
Accumulated other comprehensive loss		(3,884)		—		—		(3,884)
Total Universal Hospital Services, Inc. (deficit) equity		(30,091)		53,276		(53,287)		(30,102)
Noncontrolling interest		—		193		—		193
Total (deficit) equity		(30,091)		53,469		(53,287)		(29,909)
Total liabilities and (deficit) equity	$	828,772	$	99,616	$	(84,290)	$	844,098

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Universal Hospital Services, Inc.

Consolidating Balance Sheets

(in thousands, except share and per share information)


	December 31, 2013
	Parent		Subsidiary
	Issuer		Guarantor		Consolidating
	UHS		Surgical Services		Adjustments		Consolidated
Assets
Current assets:
Accounts receivable, less allowance for doubtful accounts	$	61,709	$	7,958	$	—	$	69,667
Due from affiliates		28,299		—		(28,299)		—
Inventories		5,887		3,594		—		9,481
Deferred income taxes, net		1,045		796		—		1,841
Other current assets		4,211		227		—		4,438
Total current assets		101,151		12,575		(28,299)		85,427

Property and equipment:
Medical equipment		549,306		34,772		—		584,078
Property and office equipment		74,336		6,360		—		80,696
Accumulated depreciation		(381,387)		(24,056)		—		(405,443)
Total property and equipment, net		242,255		17,076		—		259,331

Other long-term assets:
Goodwill		283,141		52,436		—		335,577
Investment in subsidiary		53,963		—		(53,963)		—
Other intangibles, net		201,596		19,035		—		220,631
Other, primarily deferred financing costs, net		14,409		240		—		14,649
Total assets	$	896,515	$	101,362	$	(82,262)	$	915,615

Liabilities and Equity
Current liabilities:
Current portion of long-term debt	$	5,248	$	1,239	$	—	$	6,487
Book overdrafts		7,949		1,520		—		9,469
Due to affiliates		—		28,299		(28,299)		—
Accounts payable		28,935		3,567		—		32,502
Accrued compensation		9,333		2,381		—		11,714
Accrued interest		18,884		—		—		18,884
Dividend payable		73		—		—		73
Other accrued expenses		10,950		81		—		11,031
Total current liabilities		81,372		37,087		(28,299)		90,160

Long-term debt, less current portion		702,381		1,903		—		704,284
Pension and other long-term liabilities		7,425		—		—		7,425
Payable to Parent		22,669		—		—		22,669
Deferred income taxes, net		59,948		8,109		—		68,057

Commitments and contingencies

Equity
Common stock		—		—		—		—
Additional paid-in capital		214,505		60,019		(60,019)		214,505
Accumulated deficit		(181,845)		(6,056)		—		(187,901)
Accumulated loss in subsidiary		(6,056)		—		6,056		—
Accumulated other comprehensive loss		(3,884)		—		—		(3,884)
Total Universal Hospital Services, Inc. equity		22,720		53,963		(53,963)		22,720
Noncontrolling interest		—		300		—		300
Total equity		22,720		54,263		(53,963)		23,020
Total liabilities and equity	$	896,515	$	101,362	$	(82,262)	$	915,615

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Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)


	Three Months Ended September 30, 2014
	Parent		Subsidiary
	Issuer		Guarantor		Consolidating
	UHS		Surgical Services		Adjustments		Consolidated
Revenue
Medical equipment solutions	$	67,861	$	—	$	—	$	67,861
Clinical engineering solutions		23,717		—		—		23,717
Surgical services		—		14,887		—		14,887
Total revenues		91,578		14,887		—		106,465

Cost of Revenue
Cost of medical equipment solutions	$	32,204		—		—		32,204
Cost of clinical engineering solutions		18,670		—		—		18,670
Cost of surgical services		—		7,982		—		7,982
Medical equipment depreciation		16,340		1,426		—		17,766
Total costs of revenues		67,214		9,408		—		76,622
Gross margin		24,364		5,479		—		29,843

Selling, general and administrative		21,467		5,072		—		26,539
Operating income		2,897		407		—		3,304

Equity in loss of subsidiary		111		—		(111)		—
Interest expense		12,726		538		—		13,264
Loss before income taxes and noncontrolling interest		(9,940)		(131)		111		(9,960)

Provision (benefit) for income taxes		245		(20)		—		225
Consolidated net loss		(10,185)		(111)		111		(10,185)
Net income attributable to noncontrolling interest		—		103		—		103
Net loss attributable to Universal Hospital Services, Inc.	$	(10,185)	$	(214)	$	111	$	(10,288)

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Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)


	Three Months Ended September 30, 2013
	Parent		Subsidiary
	Issuer		Guarantor		Consolidating
	UHS		Surgical Services		Adjustments		Consolidated
Revenue
Medical equipment solutions	$	68,355	$	—	$	—	$	68,355
Clinical engineering solutions		21,839		—		—		21,839
Surgical services		—		14,084		—		14,084
Total revenues		90,194		14,084		—		104,278

Cost of Revenue
Cost of medical equipment solutions	$	31,107		—		—		31,107
Cost of clinical engineering solutions		16,310		—		—		16,310
Cost of surgical services		—		7,921		—		7,921
Medical equipment depreciation		17,189		1,125		—		18,314
Total costs of revenues		64,606		9,046		—		73,652
Gross margin		25,588		5,038		—		30,626

Selling, general and administrative		22,393		4,677		—		27,070
Operating income		3,195		361		—		3,556

Equity in income of subsidiary		(1,104)		—		1,104		—
Interest expense		13,314		520		—		13,834
Loss before income taxes and noncontrolling interest		(9,015)		(159)		(1,104)		(10,278)

Benefit for income taxes		(50)		(1,263)		—		(1,313)
Consolidated net (loss) income		(8,965)		1,104		(1,104)		(8,965)
Net income attributable to noncontrolling interest		—		216		—		216
Net (loss) income attributable to Universal Hospital Services, Inc.	$	(8,965)	$	888	$	(1,104)	$	(9,181)

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Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)


	Nine Months Ended September 30, 2014
	Parent		Subsidiary
	Issuer		Guarantor		Consolidating
	UHS		Surgical Services		Adjustments		Consolidated
Revenue
Medical equipment solutions	$	216,771	$	—	$	—	$	216,771
Clinical engineering solutions		68,505		—		—		68,505
Surgical services		—		43,890		—		43,890
Total revenues		285,276		43,890		—		329,166

Cost of Revenue
Cost of medical equipment solutions	$	97,919		—		—		97,919
Cost of clinical engineering solutions		54,454		—		—		54,454
Cost of surgical services		—		24,418		—		24,418
Medical equipment depreciation		51,843		4,153		—		55,996
Total costs of revenues		204,216		28,571		—		232,787
Gross margin		81,060		15,319		—		96,379

Selling, general and administrative		70,732		14,684		—		85,416
Restructuring, acquisition and integration expenses		1,820		—		—		1,820
Intangible asset impairment charge		34,900		—		—		34,900
Operating (loss) income		(26,392)		635		—		(25,757)

Equity in loss of subsidiary		312		—		(312)		—
Interest expense		38,322		1,600		—		39,922
Loss before income taxes and noncontrolling interest		(65,026)		(965)		312		(65,679)

Benefit for income taxes		(12,579)		(653)		—		(13,232)
Consolidated net loss		(52,447)		(312)		312		(52,447)
Net income attributable to noncontrolling interest		—		364		—		364
Net loss attributable to Universal Hospital Services, Inc.	$	(52,447)	$	(676)	$	312	$	(52,811)

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Universal Hospital Services, Inc.

Consolidating Statements of Operations

(in thousands)

(unaudited)


	Nine Months Ended September 30, 2013
	Parent		Subsidiary
	Issuer		Guarantor		Consolidating
	UHS		Surgical Services		Adjustments		Consolidated
Revenue
Medical equipment solutions	$	215,141	$	—	$	—	$	215,141
Clinical engineering solutions		65,000		—		—		65,000
Surgical services		—		41,486		—		41,486
Total revenues		280,141		41,486		—		321,627

Cost of Revenue
Cost of medical equipment solutions	$	94,918		—		—		94,918
Cost of clinical engineering solutions		50,120		—		—		50,120
Cost of surgical services		—		23,175		—		23,175
Medical equipment depreciation		50,620		4,050		—		54,670
Total costs of revenues		195,658		27,225		—		222,883
Gross margin		84,483		14,261		—		98,744

Selling, general and administrative		73,076		14,170		—		87,246
Restructuring, acquisition and integration expenses		(129)		365		—		236
Operating income (loss)		11,536		(274)		—		11,262

Equity in loss of subsidiary		44		—		(44)		—
Loss on extinguishment of debt		1,853		—		—		1,853
Interest expense		40,064		1,593		—		41,657
Loss before income taxes and noncontrolling interest		(30,425)		(1,867)		44		(32,248)

Provision (benefit) for income taxes		1,425		(1,823)		—		(398)
Consolidated net loss		(31,850)		(44)		44		(31,850)
Net income attributable to noncontrolling interest		—		532		—		532
Net loss attributable to Universal Hospital Services, Inc.	$	(31,850)	$	(576)	$	44	$	(32,382)

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Universal Hospital Services, Inc.

Consolidating Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)


	Three Months Ended September 30, 2014								Nine Months Ended September 30, 2014
	Parent		Subsidiary						Parent		Subsidiary
	Issuer		Guarantor		Consolidating				Issuer		Guarantor		Consolidating
	UHS		Surgical Services		Adjustments		Consolidated		UHS		Surgical Services		Adjustments		Consolidated

Consolidated net loss	$	(10,185)	$	(111)	$	111	$	(10,185)	$	(52,447)	$	(312)	$	312	$	(52,447)
Total other comprehensive income		—		—		—		—		—		—		—		—
Comprehensive loss		(10,185)		(111)		111		(10,185)		(52,447)		(312)		312		(52,447)
Comprehensive income attributable to noncontrolling interest		—		103		—		103		—		364		—		364
Comprehensive loss attributable to Universal Hospital Services, Inc.	$	(10,185)	$	(214)	$	111	$	(10,288)	$	(52,447)	$	(676)	$	312	$	(52,811)


	Three Months Ended September 30, 2013								Nine Months Ended September 30, 2013
	Parent		Subsidiary						Parent		Subsidiary
	Issuer		Guarantor		Consolidating				Issuer		Guarantor		Consolidating
	UHS		Surgical Services		Adjustments		Consolidated		UHS		Surgical Services		Adjustments		Consolidated
Consolidated net (loss) income	$	(8,965)	$	1,104	$	(1,104)	$	(8,965)	$	(31,850)	$	(44)	$	44	$	(31,850)
Total other comprehensive income		—		—		—		—		—		—		—		—
Comprehensive (loss) income		(8,965)		1,104		(1,104)		(8,965)		(31,850)		(44)		44		(31,850)
Comprehensive income attributable to noncontrolling interest		—		216		—		216		—		532		—		532
Comprehensive (loss) income attributable to Universal Hospital Services, Inc.	$	(8,965)	$	888	$	(1,104)	$	(9,181)	$	(31,850)	$	(576)	$	44	$	(32,382)

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Universal Hospital Services, Inc.

Consolidating Statements of Cash Flows

(in thousands)

(unaudited)


	Nine Months Ended September 30, 2014
	Parent		Subsidiary
	Issuer		Guarantor		Consolidating
	UHS		Surgical Services		Adjustments		Consolidated
Cash flows from operating activities:
Consolidated net loss	$	(52,447)	$	(312)	$	312	$	(52,447)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		59,139		4,981		—		64,120
Assets impairment charges		2,025		—		—		2,025
Intangible assets impairment charge		34,900		—		—		34,900
Amortization of intangibles, deferred financing costs and bond premium		7,877		2,482		—		10,359
Equity in loss of subsidiary		312		—		(312)		—
Provision for doubtful accounts		661		(3)		—		658
Provision for inventory obsolescence		(16)		(11)		—		(27)
Non-cash share-based compensation expense - net		626		175		—		801
Gain on sales and disposals of equipment		(1,776)		(15)		—		(1,791)
Deferred income taxes		(11,345)		(2,200)		—		(13,545)
Changes in operating assets and liabilities:
Accounts receivable		1,788		(121)		—		1,667
Due from (to) affiliates		(2,529)		2,529		—		—
Inventories		593		(846)		—		(253)
Other operating assets		(2,090)		(47)		—		(2,137)
Accounts payable		498		(277)		—		221
Other operating liabilities		(9,757)		483		—		(9,274)
Net cash provided by operating activities		28,459		6,818		—		35,277
Cash flows from investing activities:
Medical equipment purchases		(40,270)		(4,293)		—		(44,563)
Property and office equipment purchases		(3,420)		(190)		—		(3,610)
Proceeds from disposition of property and equipment		6,919		77		—		6,996
Purchases of noncontrolling interests		—		(46)		—		(46)
Net cash used in investing activities		(36,771)		(4,452)		—		(41,223)
Cash flows from financing activities:
Proceeds under senior secured credit facility		123,400		—		—		123,400
Payments under senior secured credit facility		(107,200)		—		—		(107,200)
Payments of principal under capital lease obligations		(4,198)		(1,001)		—		(5,199)
Distributions to noncontrolling interests		—		(436)		—		(436)
Dividend and equity distribution payments		(73)		—		—		(73)
Change in book overdrafts		(3,617)		(929)		—		(4,546)
Net cash provided by (used in) financing activities		8,312		(2,366)		—		5,946
Net change in cash and cash equivalents		—		—		—		—
Cash and cash equivalents at the beginning of period		—		—		—		—
Cash and cash equivalents at the end of period	$	—	$	—	$	—	$	—

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Universal Hospital Services, Inc.

Consolidating Statements of Cash Flows

(in thousands)

(unaudited)


	Nine Months Ended September 30, 2013
	Parent		Subsidiary
	Issuer		Guarantor		Consolidating
	UHS		Surgical Services		Adjustments		Consolidated
Cash flows from operating activities:
Consolidated net loss	$	(31,850)	$	(44)	$	44	$	(31,850)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		58,531		4,626		—		63,157
Amortization of intangibles, deferred financing costs and bond premium		9,499		2,518		—		12,017
Non-cash write off of deferred financing cost		1,853		—		—		1,853
Equity in loss of subsidiary		44		—		(44)		—
Provision for doubtful accounts		1,377		(161)		—		1,216
Provision for inventory obsolescence		64		(42)		—		22
Non-cash share-based compensation expense - net		452		157		—		609
Gain on sales and disposals of equipment		(1,055)		(15)		—		(1,070)
Deferred income taxes		1,595		(862)		—		733
Changes in operating assets and liabilities:
Accounts receivable		(299)		374		—		75
Due from (to) affiliates		(2,490)		2,490		—		—
Inventories		100		(1,089)		—		(989)
Other operating assets		(283)		84		—		(199)
Accounts payable		(419)		(336)		—		(755)
Other operating liabilities		(8,039)		(1,302)		—		(9,341)
Net cash provided by operating activities		29,080		6,398		—		35,478
Cash flows from investing activities:
Medical equipment purchases		(36,895)		(2,904)		—		(39,799)
Property and office equipment purchases		(6,008)		(319)		—		(6,327)
Proceeds from disposition of property and equipment		2,612		20		—		2,632
Holdback payment related to acquisition		—		(1,655)		—		(1,655)
Net cash used in investing activities		(40,291)		(4,858)		—		(45,149)
Cash flows from financing activities:
Proceeds under senior secured credit facility		82,900		—		—		82,900
Payments under senior secured credit facility		(66,700)		—		—		(66,700)
Payments of principal under capital lease obligations		(4,659)		(1,020)		—		(5,679)
Payments of floating rate notes		(230,000)		—		—		(230,000)
Proceeds from issuance of bonds		234,025		—		—		234,025
Accrued interest received from bondholders		8,620		—		—		8,620
Accrued interest paid to bondholders		(8,620)		—		—		(8,620)
Distributions to noncontrolling interests		—		(528)		—		(528)
Payment of deferred financing costs		(4,116)		—		—		(4,116)
Change in book overdrafts		(239)		8		—		(231)
Net cash provided by (used in) financing activities		11,211		(1,540)		—		9,671
Net change in cash and cash equivalents		—		—		—		—
Cash and cash equivalents at the beginning of period		—		—		—		—
Cash and cash equivalents at the end of period	$	—	$	—	$	—	$	—

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15.Restructuring

We incurred restructuring expense of $1.8 and $0.2 million during the nine months ended September 30, 2014 and 2013, respectively, the majority of which related to severances and other related expenses. We incurred no restructuring expense during the three months ended September 30, 2014 and 2013. In addition, we recorded $0.4 million during the nine months ended September 30, 2013 for cancellation of outstanding stock options for certain terminated employees, which was recorded as reduction to Payable to Parent in the Consolidated Balance Sheets. The restructuring expense impact was recorded under the Corporate and Unallocated segment. As of December 31, 2013, we had $0.3 million of restructuring liability. For the nine months ended September 30, 2014, $1.5 million in restructuring charges was paid. An additional provision of $1.8 million was recorded in the first three quarters of 2014 for new severance arrangements and the remaining liability of $0.6 million as of September 30, 2014 is expected to be paid out by the end of the third quarter of 2015 and is included in the Other accrued expenses in the Consolidated Balance Sheets. As of December 31, 2012, we had $4.8 million of restructuring liability. For the nine months ended September 30, 2013, we incurred restructuring expense of $0.2 million and $4.2 million in restructuring charges was paid and the remaining $0.8 was a liability as of September 30, 2013.

16.Concentration

One customer accounted for approximately 14% of total revenue for the nine months ended September 30, 2014 and 2013.

17. Subsequent Events

On October 24, 2014, Timothy W. Kuck resigned from his position as Executive Vice President, Strategy and Business Development of the Company effective November 1, 2014. In connection with his resignation, Mr. Kuck has entered into a mutual termination agreement (“MTA”) with the Company effective November 1, 2014. This MTA includes customary non-competition and release provisions in exchange for separation payments totaling approximately $346,245 along with other benefits. In addition, Mr. Kuck will receive a payment totaling approximately $232,291, which represents a pro-rated portion of the incentive compensation for the fiscal year ending December 31, 2014 for which he was eligible under the terms of the Company’s Executive Incentive Program (“EIP”), to be paid in accordance with the Company’s normal year-end procedure.

Effective November 4, 2014, the Compensation Committee of our Board of Directors recommended, and the board of directors (the “Parent Board”) of Parent, approved, an amendment (the “Amendment”) to the 2007 Stock Option Plan to remove the 2007 Stock Option Plan’s mandatory ten year limit on the duration of stock options. In addition, the Compensation Committee recommended, and the Parent Board approved, unilateral amendments to certain outstanding stock option agreements. These amendments extend the expiration date of such options to November 4, 2024 and reset the option exercise price at $0.71 per share, which was the fair market value of Parent’s common stock on the amendment date as determined by a third party valuation obtained by the Parent Board. The original options were granted from June 18, 2007 to May 21, 2013 with exercise prices ranging from $1.00 to $1.83. The Amendment to the 2007 Stock Option Plan and the amendments to the individual options do not change the number of options granted, the vesting commencement date, the vesting schedules or any continued service requirements. The amendment will result in additional stock compensation expense estimated at $2 to $3 million, of which approximately $1 million will be recognized in 2014.

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

The following should be read in conjunction with the accompanying consolidated financial statements and notes.

BUSINESS OVERVIEW

Our Company

Universal Hospital Services, Inc. (“we”, “our”, “us”, the “Company”, or “UHS”) is a leading nationwide provider of health care technology management and service solutions to the United States health care industry. We provide our customers comprehensive health care technology management, service and clinical solutions that we believe help reduce capital and operating expenses, increase medical equipment and staff productivity, and support improved patient safety and outcomes.

We commenced operations in 1939, originally incorporated in Minnesota in 1954 and reincorporated in Delaware in 2001. All of our outstanding capital stock is owned by UHS Holdco, Inc. (“Parent”), which acquired the Company in a recapitalization in May 2007. Parent is owned by affiliates of Irving Place Capital Merchant Manager III, L.P. (“IPC”) and certain members of our management.

UHS delivers health care solutions through three segments: Medical Equipment Solutions (“MES”), Clinical Engineering Solutions (“CES”) and Surgical Services (“SS”). As of September 30, 2014, we owned or managed over 700,000 units of medical equipment consisting of approximately 450,000 owned or managed units in our MES segment, over 250,000 units of customer-owned equipment we managed in our CES segment and over 4,000 units of owned or managed mobile surgical equipment in our SS segment. Our diverse customer base includes more than 8,000 national, regional and local acute care hospitals and alternate site providers (such as long-term acute care hospitals, skilled nursing facilities, surgery centers, specialty hospitals, nursing homes and home care providers). We also have relationships with more than 200 medical device manufacturers, many of the nation’s largest group purchasing organizations (“GPOs”) and many health system integrated delivery networks (“IDNs”). All of our solutions leverage our nationwide network of 84 district service centers, five CES Centers of Excellence and an additional seven stand-alone SS service centers, together with our more than 75 years of experience managing and servicing all aspects of medical equipment. Our fees are paid directly by our customers rather than by direct reimbursement from third-party payors, such as private insurers, Medicare or Medicaid.

We report our financial results in three segments. Our reporting segments consist of MES, CES and SS. We evaluate the performance of our reportable segments based on gross margin. The accounting policies of the individual reportable segments are the same as those of the entire company.

In June 2014, Smith & Nephew announced that it had ceased commercial distribution of the RENASYS Negative Pressure Wound Therapy (“NPWT”) product line in the United States following a request from the FDA to obtain additional regulatory clearances through the premarket notification 510(k) process with respect to certain design modifications made to the RENASYS product line. Subsequently, the FDA authorized limited distribution by Smith & Nephew of these products under a Certificate of Medical Necessity (“CMN”) program. The Company is unable to predict when or whether Smith & Nephew will resume full commercial distribution of the RENASYS product line but it has been informed by Smith & Nephew that the 510(k) clearances for these products will take at least three months and probably longer, and that Smith & Nephew is requesting that customers using a CMN transition to alternative NPWT providers by no later than August 31, 2014. The RENASYS product line generated approximately $24 million in annual revenue for the prior twelve month period ended June 30, 2014 from device rental ($14 million) and disposable sales ($10 million) which was included in our MES segment. The net book value of the equipment approximates $4 million as of the end of September 2014. The Company is working with our customers to provide alternative solutions. In late July, the Company signed an agreement with a NPWT manufacturer to provide an alternative solution to our customers, and we have secured over $3 million in annualized rental revenue contracts with our customers. However, many of our customers have met, or may in the future seek to meet, their NPWT needs directly with other manufacturers or service providers. The Company’s future financial results will be negatively impacted by the interruption of commercial distribution of the RENASYS product line and we anticipate losing the majority of the disposable portion of our revenue based on the new agreement with an alternative NPWT manufacturer. The gross margin on the disposable portion of the business is significantly lower than the overall MES segment gross margin. The potential impact will be highly

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dependent upon the outcome of the factors mentioned above. The Company is currently assessing the financial impact to our business and, while highly sensitive to the outcome of the above factors, the Company estimates the net loss in revenue at $7 to $9 million for 2014.

In July 2014, the Company was notified that a national group purchasing organization (“GPO”) awarded a sole source agreement to a competitor of the Company, for all peak need rental equipment, therapy surfaces (wound and pulmonary) and bariatric equipment. This GPO currently has agreements for the purchase or rental of this equipment with multiple vendors, including from the Company under agreements that are expiring December 31, 2014. Under these agreements, the Company supplies equipment to its GPO member customers. The Company generated approximately $26 million of business (over the prior twelve month period ended September 30) in the portions of the business covered under this new agreement which was included in our MES segment. In addition, the Company also maintains certain 360 solutions with customers that are members of this GPO. The Company is working with the national GPO and its members to develop an orderly transition and anticipates that this transition will occur over the next several months. The Company is currently assessing the financial impact to its business and the impact will be dependent upon several factors including the GPO members’ willingness to contract with the Company as a non-contracted vendor and the ability of the new service provider to service all of these GPO members. The Company’s future results will be negatively impacted by the loss of this agreement and, while highly sensitive to the factors mentioned above, the loss in revenue is estimated at $2 to $4 million for the balance of 2014 and estimated at $15 to $20 million on an annual basis. The Company anticipates either selling or redeploying approximately $6 to $8 million in excess equipment currently supporting the existing business, which will reduce the on-going maintenance capital expenditures.

Medical Equipment Solutions

Our MES segment accounted for $67.9 and $68.4 million, or approximately 63.7% and 65.6% of our revenues, for the three months ended September 30, 2014 and 2013, respectively and $216.8 and $215.1 million, or approximately 65.9% and 66.9% of our revenues, for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, the MES segment owned or managed approximately 450,000 units of medical equipment ranging across hundreds of clinical categories, manufacturers and models. These solutions are provided primarily to hospitals and other acute care providers for use through their facilities, including the emergency room, operating room, critical care, intensive care, rehabilitation and general patient care areas.

Our MES segment started more than 75 years ago as our leading medical equipment peak needs usage business and has transformed into providing comprehensive outsourced and on-site solutions that manage all aspects of medical equipment in a health care facility. We currently provide MES solutions to more than 8,000 acute care hospitals and alternate site providers in the United States, including some of the nation’s premier health care institutions. Historically, we have purchased and owned directly the equipment used in our MES programs. We expect much of our future growth in this segment to be driven by our customers outsourcing more of their medical equipment needs and taking full advantage of our diversified product offering, clinical education and support, customized agreements and 360 On-site Managed Solutions.

We have four primary solutions in our MES segment:

Supplemental and Peak Needs Usage Solutions;

Customized Equipment Agreements Solutions;

360 On-site Managed Solutions; and

Specialty Medical Equipment Sales, Distribution and Disposal Solutions.

Clinical Engineering Solutions

Our CES segment accounted for $23.7 and $21.8 million, or approximately 22.3% and 20.9% of our revenues, for the three months ended September 30, 2014 and 2013, respectively and $68.5 and $65.0 million, or approximately 20.8% and 20.2% of our revenues, for the nine months ended September 30, 2014 and 2013, respectively. We offer a broad range of inspection, preventive maintenance, repair, logistic and consulting services through our team of over 370 technicians and professionals located throughout the United States in our nationwide network of service centers. We managed over 250,000 units of customer owned equipment as of September 30, 2014. In addition, as of September 30, 2014, we serviced approximately 450,000 units that we own or directly manage.

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Our CES segment leverages our over 75 years of experience and our extensive equipment database in repairing and maintaining a broad range of health care technologies. Historically, we have been our own largest customer for CES services in order to repair and maintain approximately 450,000 units that we own or directly manage. However, we believe our CES segment has significant future growth potential by offering non-capital based comprehensive solutions as a stand-alone or complementary alternative for customers that own medical equipment but lack the infrastructure, expertise, or scale to perform routine maintenance, repair, record keeping, and lifecycle analysis and planning functions. We also believe hospital and other facility-based clients will face increasing challenges in managing sophisticated medical equipment that requires connectivity and interoperability with information technology systems, compliance with the 10th revision of the International Statistical Classification of Diseases and Related Health Problems (ICD-10), regulatory requirements, integration with EMR, maintenance and management of software databases and management of other medical equipment patient information and safety features.

We have three primary solutions in our CES segment:

Supplemental Maintenance and Repair Solutions;

360 On-site Managed Solutions; and

Health Care Technology Advisory Solutions.

Surgical Services

Our SS segment accounted for $14.9 and $14.1 million, or approximately 14.0% and 13.5% of our revenues, for the three months ended September 30, 2014 and 2013, respectively and $43.9 and $41.5 million, or approximately 13.3% and 12.9% of our revenues, for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, we owned or managed over 4,000 units of mobile surgical equipment in our SS segment, primarily used in the practice of general surgery, orthopedic surgery, otolaryngology, urology, obstetrics, gynecology, podiatry, dermatology and plastic/cosmetics.

SS provides high end, state-of-the-art surgical equipment and associated products along with trained and certified Surgical Equipment Technologists (“technologists”) to assist in the procedural operation of the equipment. We provide these services to over 1,000 acute care hospitals and surgery centers through our nationwide network of 84 district service centers and an additional seven stand-alone SS service centers. Our technologists work in the operating room (“O.R.”) and support physicians and O.R. personnel. The services are offered on a per-procedure basis. Our technologists deliver, set up, and create a safe environment for hospital and clinical personnel operating the equipment and provide all necessary disposable materials needed. Our technologists work closely with our customers to confirm that all certifications and credentials meet requirements to provide on-site services. Our technologists also assist customers in the operation of facility-owned assets and supplement the training and staffing of their personnel. As of September 30, 2014, SS provided solutions in 42 states.

We have two primary solutions in our SS segment:

On-Demand and Scheduled Usage Solutions; and

360 On-site Managed Solutions.

RESULTS OF OPERATIONS

The following discussion addresses:

our financial condition as of September 30, 2014 and

the results of operations for the three-month and nine-month periods ended September 30, 2014 and 2013.

This discussion should be read in conjunction with the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and the Management’s Discussion and Analysis of Financial Condition and Results of Operations section included in our 2013 Annual Report on Form 10-K, filed with the Securities and Exchange Commission.

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The following table provides information on the percentages of certain items of selected financial data compared to total revenues for the three-month and nine-month periods ended September 30, 2014 and 2013. The table below also indicates the percentage increase or decrease over the prior comparable period.


	Percent to Total Revenues				Percent		Percent to Total Revenues				Percent
	Three Months Ended September 30,				Increase		Nine Months Ended September 30,				Increase
	2014		2013		(Decrease)		2014		2013		(Decrease)
Revenue
Medical equipment solutions	63.7	%	65.6	%	(0.7)	%	65.9	%	66.9	%	0.8	%
Clinical engineering solutions	22.3		20.9		8.6		20.8		20.2		5.4
Surgical services	14.0		13.5		5.7		13.3		12.9		5.8
Total revenues	100.0	%	100.0	%	2.1		100.0	%	100.0	%	2.3

Cost of Revenue
Cost of medical equipment solutions	30.2		29.8		3.5		29.7		29.5		3.2
Cost of clinical engineering solutions	17.5		15.6		14.5		16.5		15.6		8.6
Cost of surgical services	7.5		7.6		0.8		7.4		7.2		5.4
Medical equipment depreciation	16.7		17.6		(3.0)		17.0		17.0		2.4
Total costs of revenues	71.9		70.6		4.0		70.6		69.3		4.4
Gross margin	28.1		29.4		(2.6)		29.4		30.7		(2.4)

Selling, general and administrative	24.9		26.0		(2.0)		25.9		27.1		(2.1)
Restructuring, acquisition and integration expenses	—		—		*		0.6		0.1		*
Intangible asset impairment charge	—		—		*		10.6		—		*
Operating income (loss)	3.2		3.4		*		(7.7)		3.5		*

Loss on extinguishment of debt	—		—		*		—		0.6		*
Interest expense	12.5		13.3		(4.1)		12.1		13.0		(4.2)
Loss before income taxes and noncontrolling interest	(9.3)		(9.9)		*		(19.8)		(10.1)		*

Provision (benefit) for income taxes	0.2		(1.3)		*		(4.0)		(0.1)		*
Consolidated net loss	(9.5)	%	(8.6)	%	*		(15.8)	%	(10.0)	%	*

*Not meaningful

Consolidated Results of Operations for the three months ended September 30, 2014 compared to the three months ended September 30, 2013

Total Revenue

Total revenue for the three months ended September 30, 2014 was $106.5 million, compared to $104.3 million for the three months ended September 30, 2013, an increase of $2.2 million or 2.1%. The increase was primarily due to additional revenue in our MES segment related to growth in our 360 On-site Managed Solutions (“360 solutions”) of $3.4 million and growth in our CES segment of $1.9 million related to growth in our 360 solutions. These increases were partially offset by the decline in NPWT device rental and disposable sales due to the interruption of Smith & Nephew commercial distribution of the RENASYS product line.

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Cost of Revenue

Total cost of revenue for the three months ended September 30, 2014 was $76.6 million compared to $73.7 million for the three months ended September 30, 2013, an increase of $2.9 million or 4.0%. The increase was primarily in our MES segment due to an increase in 360 solutions cost of $2.6 million and an increase in our CES 360 solutions cost of $1.7 corresponding with the 360 solutions revenue growth of $5.3 million.

Gross Margin

Total gross margin for the three months ended September 30, 2014 was $29.8 million, or 28.1% of total revenues, compared to $30.6 million, or 29.4% of total revenues, for the three months ended September 30, 2013, a decrease of $0.8 million or 2.6%. The decrease in gross margin as a percent of revenue for the quarter was primarily impacted by business mix with CES growth and an increase in repair and maintenance and service cost for certain program offerings.

Medical Equipment Solutions

(in thousands)


	Three Months Ended
	September 30,
	2014			2013			Change		% Change
Total revenue	$	67,861		$	68,355		$	(494)	(0.7)	%
Cost of revenue		32,204			31,107			1,097	3.5
Medical equipment depreciation		16,340			17,189			(849)	(4.9)
Gross margin	$	19,317		$	20,059		$	(742)	(3.7)

Gross margin %		28.5	%		29.3	%

Total revenue in the MES segment decreased $0.5 million, or 0.7%, to $67.9 million in the third quarter of 2014 as compared to the same period of 2013. The decrease was primarily due to growth in our 360 solutions from both new programs and expansion of existing programs of $3.4 million, which was offset by a decrease related to the decline in NPWT device rental and disposable sales due to the interruption of Smith & Nephew commercial distribution of the RENASYS product line of approximately $3.0 million. Many of our 360 Solution customers utilize more than one of our equipment management program offerings in areas such as infusion, patient handling and negative pressure wound therapy. As of September 30, 2014, we had 203 such active programs, up from 181 as of December 31, 2013.

Total cost of revenue in the segment increased $1.1 million, or 3.5%, to $32.2 million in the third quarter of 2014 as compared to the same period of 2013. This increase is due to an increase in costs to support growth in our 360 solutions of $2.6 million largely due to an increase in employee related expense of $1.3 million and an increase in repair and maintenance and service cost for certain program offerings, partially offset by lower cost of disposables.

Medical equipment depreciation decreased $0.8 million, or 4.9%, to $16.3 million in the third quarter of 2014 as compared to the same period of 2013. The decrease in medical equipment depreciation was primarily due to reduced depreciation rate resulting from disposals of certain medical equipment.

Gross margin percentage for the MES segment decreased from 29.3% in the third quarter of 2013 to 28.5% in the same period of 2014. Gross margin rate was impacted by an increase in repair and maintenance and service cost for certain program offerings, as well as growth in our 360 solutions, which has a lower margin rate than other medical equipment solutions.

Future revenue will be negatively impacted by the loss of revenues resulting from the pending FDA 510(k) clearances on RENASYS NPWT product line and the loss of the agreement related to a national GPO.

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Clinical Engineering Solutions

(in thousands)


	Three Months Ended
	September 30,
	2014			2013			Change		% Change
Total revenue	$	23,717		$	21,839		$	1,878	8.6	%
Cost of revenue		18,670			16,310			2,360	14.5
Gross margin	$	5,047		$	5,529		$	(482)	(8.7)

Gross margin %		21.3	%		25.3	%

Total revenue in the CES segment increased $1.9 million, or 8.6%, to $23.7 million in the third quarter of 2014 as compared to the same period of 2013. The increase was primarily due to growth in our managed 360 solutions, partially offset with weakness in services supporting key manufacturers. As of September 30, 2014, we had 360 solutions implemented in 142 programs in our CES segment, up from 131 programs as of December 31, 2013.

Total cost of revenue in the segment increased $2.4 million, or 14.5%, to $18.7 million in the third quarter of 2014 as compared to the same period of 2013. The increase is primarily attributable to an increase in vendor expenses to support the revenue growth and mix shifts in type of service provided to customers.

Gross margin percentage for the CES segment decreased from 25.3% in the third quarter of 2013 to 21.3% in the same period of 2014. The decrease was primarily due to a higher level of vendor expenses on supported equipment. Gross margin percentage will fluctuate based on the variability of third-party vendor expenses in our 360 solutions and supplemental service programs.

Surgical Services

(in thousands)


	Three Months Ended
	September 30,
	2014			2013			Change		% Change
Total revenue	$	14,887		$	14,084		$	803	5.7	%
Cost of revenue		7,982			7,921			61	0.8
Medical equipment depreciation		1,426			1,125			301	26.8
Gross margin	$	5,479		$	5,038		$	441	8.8

Gross margin %		36.8	%		35.8	%

Total revenue in the SS segment increased $0.8 million, or 5.7%, to $14.9 million in the third quarter of 2014 as compared to the same period of 2013. The increase was driven by organic growth in our surgical services business.

Total cost of revenue in the segment increased $0.1 million, or 0.8%, to $8.0 million in the third quarter of 2014 as compared to the same period of 2013. The increase was primarily attributable to an increase in employee related costs to support growth in our surgical services business.

Medical equipment depreciation increased $0.3 million, or 26.8%, to $1.4 million in the third quarter of 2014 as compared to the same period of 2013. The increase was primarily due to additional medical equipment purchased.

Gross margin percentage for the SS segment increased from 35.8% in the third quarter of 2013 to 36.8% in the same period of 2014. The increase in gross margin percentage was primarily driven by both higher leverage from volume growth and some shift to higher margin modalities.

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Selling, General and Administrative and Interest Expense

(in thousands)


	Three Months Ended
	September 30,
	2014		2013		Change		% Change
Selling, general and administrative	$	26,539	$	27,070	$	(531)	(2.0)	%
Interest expense		13,264		13,834		(570)	(4.1)

*Not meaningful

Selling, General and Administrative

Selling, general and administrative expense decreased $0.5 million, or 2.0%, to $26.5 million for the third quarter of 2014 as compared to the same period of 2013. The decrease was primarily due to decreases in payroll and incentive expenses.

Selling, general and administrative expense as a percentage of total revenue was 24.9% and 26.0% for the quarter ended September 30, 2014 and 2013, respectively.

Interest Expense

Interest expense decreased $0.6 million to $13.3 million for the third quarter of 2014 as compared to the same period of 2013. This decrease was mainly attributable to the decrease in amortization of deferred financing costs combined with an increase in amortization of bond premium.

Income Taxes

Income taxes were an expense of $0.2 and a benefit of $1.3 million for the three months ended September 30, 2014 and 2013, respectively. The tax expense for the three months ended September 30, 2014 primarily relates to state minimum fees. The tax benefit for the three months ended September 30, 2013 primarily related to the reversal of a long-term liability created as a reserve against operating losses from an acquisition in 2011. The Company will continue to incur deferred tax expense in the future as tax amortization occurs. The expected tax benefit from operating loss during the three months ended September 30, 2014 was offset by the recording of additional valuation allowance. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.

Consolidated Net Loss

Consolidated net loss increased $1.2 million to $10.2 million in the third quarter of 2014 as compared to the same period of 2013. Net loss was impacted primarily by the tax benefit recorded in the third quarter of 2013.

Consolidated Results of Operations for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013

Total Revenue

Total revenue for the nine months ended September 30, 2014 was $329.2 million, compared to $321.6 million for the nine months ended September 30, 2013, an increase of $7.6 million or 2.3%. The increase was primarily due to additional revenue in our MES segment related to growth in our 360 solutions of $12.1 million, partially offset by a decrease in peak need usage revenue of $5.6 million and the decline in NPWT device rental and disposable sales due to the interruption of Smith & Nephew commercial distribution of the RENASYS product line.

Cost of Revenue

Total cost of revenue for the nine months ended September 30, 2014 was $232.8 million compared to $222.9 million for the nine months ended September 30, 2013, an increase of $9.9 million or 4.4%. The increase was primarily in our MES segment due to an increase in 360 solutions cost of $6.7 million corresponding with the 360 solutions revenue growth

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and an impairment charge of $2.0 million primarily due to the planned sale of certain pumps and under-utilized patient handling equipment.

Gross Margin

Total gross margin for the nine months ended September 30, 2014 was $96.4 million, or 29.4% of total revenues, compared to $98.7 million, or 30.7% of total revenues, for the nine months ended September 30, 2013, a decrease of $2.3 million or 2.4%. The decrease in gross margin as a percent of revenue was primarily impacted by business mix with CES growth and the reduction in NPWT device rental and asset impairment charges.

Medical Equipment Solutions

(in thousands)


	Nine Months Ended
	September 30,
	2014			2013			Change		% Change
Total revenue	$	216,771		$	215,141		$	1,630	0.8	%
Cost of revenue		97,919			94,918			3,001	3.2
Medical equipment depreciation		51,843			50,620			1,223	2.4
Gross margin	$	67,009		$	69,603		$	(2,594)	(3.7)

Gross margin %		30.9	%		32.4	%

Total revenue in the MES segment increased $1.6 million, or 0.8%, to $216.8 million in the first nine months of 2014 as compared to the same period of 2013. The increase was primarily due to growth in our 360 solutions from both new programs and expansion of existing programs of $12.1 million, partially offset by decreases in peak need usage revenue of $5.6 million and the decline in NPWT device rental and disposable sales due to the interruption of Smith & Nephew commercial distribution of the RENASYS product line. Many of our 360 Solution customers utilize more than one of our equipment management program offerings in areas such as infusion, patient handling, and negative pressure wound therapy. As of September 30, 2014, we had 203 such active programs, up from 181 as of December 31, 2013. Peak need usage revenue was negatively impacted by soft patient census, rate concessions, and, to a lesser extent, conversion of customers to 360 solutions.

Total cost of revenue in the segment increased $3 million, or 3.2%, to $97.9 million in the first nine months of 2014 as compared to the same period of 2013. This increase is due to an increase in costs to support growth in our 360 solutions of $6.7 million largely due to an increase in employee related expense of $4.2 million and an increase in repairs and maintenance and service costs for certain program offerings, partially offset by lower cost of disposables.

Medical equipment depreciation increased $1.2 million, or 2.4%, to $51.8 million in the first nine months of 2014 as compared to the same period of 2013. The increase in medical equipment depreciation was primarily due to an impairment charge of $2.0 million taken on excess infusion equipment sold in the second quarter of 2014 and under-utilized patient handling equipment charge, offset by reduced depreciation rate resulting from impairment and disposals of certain medical equipment.

Gross margin percentage for the MES segment decreased from 32.4% in the first nine months of 2013 to 30.9% in the same period of 2014. This decrease was primarily attributable to the increase in depreciation related to the impairment charges. Gross margin rate was also impacted by the growth in our 360 solutions, which has a lower margin rate than other medical equipment solutions.

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Clinical Engineering Solutions

(in thousands)


	Nine Months Ended
	September 30,
	2014			2013			Change		% Change
Total revenue	$	68,505		$	65,000		$	3,505	5.4	%
Cost of revenue		54,454			50,120			4,334	8.6
Gross margin	$	14,051		$	14,880		$	(829)	(5.6)

Gross margin %		20.5	%		22.9	%

Total revenue in the CES segment increased $3.5 million, or 5.4%, to $68.5 million in the first nine months of 2014 as compared to the same period of 2013. The increase was primarily due to growth in our managed 360 solutions partially offset by rate concessions. As of September 30, 2014, we had 360 solutions implemented in 142 programs in our CES segment, up from 131 programs as of December 31, 2013.

Total cost of revenue in the segment increased $4.3 million, or 8.6%, to $54.5 million in the first nine months of 2014 as compared to the same period of 2013. The increase is primarily attributable to increases in employee related costs and vendor expenses to support the revenue growth and mix shifts in type of service provided to customers.

Gross margin percentage for the CES segment decreased from 22.9% in the first nine months of 2013 to 20.5% in the same period of 2014. The decrease was primarily due to a higher level of employee related costs and vendor expenses on supported equipment. Gross margin percentage will fluctuate based on the variability of third-party vendor expenses in our 360 solutions and supplemental service programs.

Surgical Services

(in thousands)


	Nine Months Ended
	September 30,
	2014			2013			Change		% Change
Total revenue	$	43,890		$	41,486		$	2,404	5.8	%
Cost of revenue		24,418			23,175			1,243	5.4
Medical equipment depreciation		4,153			4,050			103	2.5
Gross margin	$	15,319		$	14,261		$	1,058	7.4

Gross margin %		34.9	%		34.4	%

Total revenue in the SS segment increased $2.4 million, or 5.8%, to $43.9 million in the first nine months of 2014 as compared to the same period of 2013. The increase was driven by organic growth in our surgical services business.

Total cost of revenue in the segment increased $1.2 million, or 5.4%, to $24.4 million in the first nine months of 2014 as compared to the same period of 2013. The increase was primarily attributable to an increase in employee-related costs to support growth in our surgical services business of $0.8 million.

Medical equipment depreciation increased $0.1 million, or 2.5%, to $4.2 million in the first nine months of 2014 as compared to the same period of 2013.

Gross margin percentage for the SS segment increased from 34.4% in the first nine months of 2013 to 34.9% in the same period of 2014. The increase in gross margin percentage was primarily attributable to higher leverage from volume growth and some shift to higher margin modalities.

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Selling, General and Administrative, Restructuring, Acquisition and Integration Expenses, Loss on Extinguishment of Debt and Interest Expense

(in thousands)


	Nine Months Ended
	September 30,
	2014		2013		Change		% Change
Selling, general and administrative	$	85,416	$	87,246	$	(1,830)	(2.1)	%
Restructuring, acquisition and integration expenses		1,820		236		1,584	*
Intangible asset impairment charge		34,900		—		34,900	*
Loss on extinguishment of debt		—		1,853		(1,853)	*
Interest expense		39,922		41,657		(1,735)	(4.2)

*Not meaningful

Selling, General and Administrative

Selling, general and administrative expense decreased $1.8 million, or 2.1%, to $85.4 million for the first nine months of 2014 as compared to the same period of 2013. The decrease was primarily due to a decrease in consulting expense, bad debt and payroll related expenses.

Selling, general and administrative expense as a percentage of total revenue was 25.9% and 27.1% for the nine months ended September 30, 2014 and 2013, respectively.

Restructuring, Acquisition and Integration Expenses

Restructuring, acquisition and integration expenses increased $1.6 million for the first nine months of 2014 as compared to the same period of 2013. The increase was primarily due to additional charges to realign the management team.

Intangible Asset Impairment Charge

During the second quarter of 2014, the Company became aware that future financial results of the Company will be negatively impacted by the loss of revenues resulting from pending FDA 510(k) clearances on RENASYS NPWT product line and the loss of the agreement related to a national GPO. The Company applies a fair value based impairment test to the net book value of goodwill and intangible assets with indefinite lives on an annual basis and on an interim basis if events or circumstances indicate that an impairment loss may have occurred. The review of indefinite-life intangibles for impairment during the second quarter of 2014 indicated that the carrying value of trade names in the MES segment exceeded its estimated fair values. As a result, the Company performed an interim impairment test and recorded a preliminary non-cash impairment charge of $34.9 million during the second quarter of 2014. The calculation of the preliminary impairment charge contains significant judgments and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities. The finalization of the second quarter impairment charge and the result of the third quarter impairment review resulted in no changes to the second quarter preliminary charge.

Loss on Extinguishment of Debt

For the nine months ended 2013, we wrote off $1.9 million of unamortized deferred financing costs related to redemption of our floating rate notes.

Interest Expense

Interest expense decreased $1.7 million to $39.9 million for the first nine months of 2014 as compared to the same period of 2013. This decrease was mainly attributable to the decrease in amortization of deferred financing costs combined with an increase in amortization of bond premium.

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Income Taxes

Income taxes were a benefit of $13.2 and $0.4 million for the nine months ended September 30, 2014 and 2013, respectively. The tax benefit for the nine months ended September 30, 2014 primarily relates to intangible asset impairment charge, partially offset by state minimum fees. The tax benefit for the nine months ended September 30, 2013 primarily relates to two items along with state minimum fees. The first item was to record a deferred tax liability for adjustments in connection with the tax amortization of indefinite-life goodwill. The second item was to reverse a long-term liability created as a reserve against operating losses from an acquisition in 2011. The Company will continue to incur deferred tax expense in the future as tax amortization occurs. The expected tax benefit from operating loss during the nine months ended September 30, 2014 was offset by the recording of additional valuation allowance. In future reporting periods, we will continue to assess the likelihood that deferred tax assets will be realizable.

Consolidated Net Loss

Consolidated net loss increased $20.6 million to $52.4 million in the first nine months of 2014 as compared to the same period of 2013. Net loss was impacted primarily by the intangible asset impairment charge recorded in the second quarter of 2014.

EBITDA

Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) was $84.6 and $82.4 million for the nine months ended September 30, 2014 and 2013, respectively. EBITDA for the nine months ended September 30, 2014, was impacted by growth in our SS segment combined with lower selling, general and administrative expenses and a decrease in loss on extinguishment of debt, partially offset by an increase in restructuring expense.

Future cash flows from operations will be negatively impacted by the loss of revenues resulting from the pending FDA 510(k) clearances on RENASYS NPWT product line and the loss of agreement related to a national GPO.

In addition to using EBITDA internally as a measure of operational performance, we disclose it externally to assist analysts, investors and lenders in their comparisons of operational performance, valuation and debt capacity across companies with differing capital, tax and legal structures. EBITDA, however, is not a measure of financial performance under accounting principles generally accepted in the United States of America (“GAAP”) and should not be considered as an alternative to, or more meaningful than, net income as a measure of operating performance or to cash flows from operating, investing or financing activities or as a measure of liquidity. Since EBITDA is not a measure determined in accordance with GAAP and is thus susceptible to varying interpretations and calculations, EBITDA, as presented, may not be comparable to other similarly titled measures of other companies. EBITDA does not represent an amount of funds

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that is available for management’s discretionary use. A reconciliation of net loss attributable to UHS to EBITDA is included below:


	Nine Months Ended
	September 30,
(in thousands)	2014		2013
Net loss attributable to Universal Hospital Services, Inc.	$	(52,811)	$	(32,382)
Interest expense		39,922		41,657
Benefit for income taxes		(13,232)		(398)
Depreciation, assets impairment and amortization of intangibles		75,860		73,570
Intangible asset impairment charge		34,900		—
EBITDA	$	84,639	$	82,447

Other Financial Data:
Net cash provided by operating activities	$	35,277	$	35,478
Net cash used in investing activities		(41,223)		(45,149)
Net cash provided by financing activities		5,946		9,671

Other Operating Data (as of end of period):
Medical equipment (approximate number of owned outsourcing units)		269,000		274,000
District service centers		84		83
SS stand-alone service centers		7		7
Centers of Excellence		5		6

SEASONALITY

Quarterly operating results are typically affected by seasonal factors. Historically, our first and fourth quarters are the strongest, reflecting increased customer utilization during the fall and winter months.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are expected to be cash flows from operating activities and borrowings under our senior secured credit facility, which provides for loans in an amount of up to $235.0 million, subject to our borrowing base. See Note 8, Long-Term Debt for details related to our senior secured credit facility. It is anticipated that our principal uses of liquidity will be to fund capital expenditures related to purchases of medical equipment, provide working capital, meet debt service requirements and finance our strategic plans.

We require substantial cash to operate our medical equipment solutions programs and service our debt. Our outsourcing programs require us to invest a significant amount of cash in medical equipment purchases. To the extent that such expenditures cannot be funded from our operating cash flow, borrowing under our senior secured credit facility or other financing sources, we may not be able to conduct our business or grow as currently planned.

If we are unable to generate sufficient cash flow from operations in order to service our debt, we will be forced to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing our debt, or seeking additional equity capital. This, to a certain extent, is subject to general economic, financial, competitive, legislative,

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regulatory and other factors that are beyond our control. If we are unable to repay our debt at maturity, we may have to obtain alternative financing, which may not be available to us.

Net cash provided by operating activities was $35.3 and $35.5 million for the nine months ended September 30, 2014 and 2013, respectively.

Net cash used in investing activities was $41.2 and $45.1 million for the nine months ended September 30, 2014 and 2013, respectively. The decrease in net cash used in investing activities was primarily due to higher proceeds from sale of medical equipment, partially offset by higher medical equipment purchases to support the growth in 360 solutions during 2014 compared to the same period of 2013.

Net cash provided by financing activities was $5.9 and $9.7 million for the nine months ended September 30, 2014 and 2013, respectively. The decrease in net cash provided by financing activities was primarily due to lower net borrowings in 2014 compared to the same period of 2013.

Based on the level of operating performance expected in 2014, we believe our cash from operations and additional borrowings under our senior secured credit facility, will meet our liquidity needs for the foreseeable future, exclusive of any borrowings that we may make to finance potential acquisitions. However, if during that period or thereafter we are not successful in generating sufficient cash flows from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, our business could be adversely affected. As of September 30, 2014, we had $129.4 million of availability under the senior secured credit facility based on a borrowing base of $182.2 million less borrowings of $49.2 million and after giving effect to $3.6 million used for letters of credit. As of September 30, 2013, we had $143.4 million of availability under the senior secured credit facility based on a borrowing base of $191.8 million less borrowings of $44.2 million and after giving effect to $4.2 million used for letters of credit.

Our levels of borrowing are further restricted by the financial covenants set forth in our senior secured credit facility agreement and the 2012 Indenture governing our 2012 Notes, as described in Note 8, Long-Term Debt.

The Company was in compliance with all financial covenants for all periods presented.

RECENT ACCOUNTING PRONOUNCEMENT

See Item 1 of Part I, Note 2, Recent Accounting Pronouncements.

SAFE HARBOR STATEMENT

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: We believe statements in this Quarterly Report on Form 10-Q looking forward in time involve risks and uncertainties. The following factors, among others, could adversely affect our business, operations and financial condition, causing our actual results to differ materially from those expressed in any forward-looking statements:

our competitors’ activities;

our customers’ patient census or service needs;

global economic conditions’ effect on our customers;

our ability to maintain existing contracts or contract terms and enter new contracts with customers;

uncertainties as to the effect of non-renewal of existing contracts;

consolidation in the health care industry and its effect on prices;

our relationships with key suppliers;

our ability to change the manner in which health care providers procure medical equipment;

the absence of long-term commitments and cancellations by or disputes with customers;

our dependence on key personnel;

our ability to identify and manage acquisitions;

increases in expenses related to our pension plan;

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our cash flow fluctuation;

the increased credit risks associated with doing business with home care providers and nursing homes;

the risk of claims associated with medical equipment we outsource and service;

increases costs we cannot pass through;

the failure of any management information system;

the inherent limitations on internal controls of our financial reporting;

the uncertainty surrounding health care reform initiatives;

the federal Privacy law risks;

the federal Anti-Kickback law risks;

changes to third-party payor reimbursement for health care items and services;

potential other new healthcare laws or regulations;

our customers operate in a highly regulated environment;

our fleet’s risk of recalls or obsolescence;

our substantial debt service obligations;

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

our history of net losses and substantial interest expense.

For further information on risk applicable to us, please see the disclosure regarding the risk factors as set forth in Item 1A of Part II of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk arising from adverse changes in interest rates, fuel costs and pension valuation. We do not enter into derivatives or other financial instruments for speculative purposes.

Interest Rates

We use both fixed and variable rate debt as sources of financing. At September 30, 2014, we had approximately $ 721.6 million of total debt outstanding of which $ 49.2 million was bearing interest at variable rates. Based on variable debt levels at September 30, 2014, a 1.0 percentage point change in interest rates on variable rate debt would have resulted in annual interest expense fluctuating by approximately $ 0.5 million.

Fuel Costs

We are also exposed to market risks related to changes in the price of gasoline used to fuel our fleet of delivery and sales vehicles. A hypothetical 10% increase in the first nine months of 2014 average price of unleaded gasoline, assuming gasoline usage levels for the nine months ended September 30, 2014, would lead to an annual increase in fuel costs of approximately $ 0.6 million.

Pension

Our pension plan assets, which were approximately $ 19.6 million at December 31, 2013, are subject to volatility that can be caused by fluctuations in general economic conditions. Continued market volatility and disruption could cause further declines in asset values, and if this occurs, we may need to make additional pension plan contributions and our pension expense in future years may increase. A hypothetical 10% decrease in the fair value of plan assets at December 31, 2013 would lead to a decrease in the funded status of the plan of approximately $ 2.0 million.

Other Market Risk

As of September 30, 2014, we have no other material exposure to market risk.

Item 4. Controls and Procedures

(a)

Evaluation of disclosure controls and procedures

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Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934 as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2014.

(b)

Changes in internal control over financial reporting

There were no changes that occurred during the most recent fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.Legal Proceedings

Item 1A. Risk Factors

Our business is subject to various risks and uncertainties. Any of the risks discussed elsewhere in this Quarterly Report on Form 10-Q or our other filings with the Securities and Exchange Commission, including the risk factors set forth in our 2013 Annual Report on Form 10-K, could materially adversely affect our business, financial condition or results of operations.

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

None.

Item 3.Defaults upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

On October 24, 2014, the Company reported in a Current Report on Form 8-K that Timothy W. Kuck resigned from his position as Executive Vice President, Strategy and Business Development of the Company effective November 1, 2014. In connection with his resignation, Mr. Kuck has entered into a mutual termination agreement (“MTA”) with the Company effective November 1, 2014. This MTA includes customary non-competition and release provisions in exchange for separation payments totaling approximately $346,245 along with other benefits. In addition, Mr. Kuck will receive a payment totaling approximately $232,291, which represents a pro-rated portion of the incentive compensation for the fiscal year ending December 31, 2014 for which he was eligible under the terms of the Company’s Executive Incentive Program (“EIP”), to be paid in accordance with the Company’s normal year-end procedure. The EIP is described in the Company’s Form 10-K for the fiscal year ended December 31, 2013. The foregoing description of the terms of Mr. Kuck’s MTA is qualified by reference to the text of the MTA, a copy of which is filed as Exhibit 10.1 to this Form 10-Q.

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Effective November 4, 2014, the Compensation Committee of our Board of Directors recommended, and the board of directors (the “Parent Board”) of UHS Holdco, Inc., our parent company ( “Parent”), approved, an amendment (the “Amendment”) to the Parent’s 2007 Stock Option Plan (the “2007 Stock Option Plan”) to remove the 2007 Stock Option Plan’s mandatory ten year limit on the duration of stock options. In addition, the Compensation Committee recommended, and the Parent Board approved, unilateral amendments to certain outstanding stock option agreements. These amendments extend the expiration date of such options to November 4, 2024 and reset the option exercise price at $0.71 per share, which was the fair market value of Parent’s common stock on the amendment date as determined by a third party valuation obtained by the Parent Board. The original options were granted from June 18, 2007 to May 21, 2013 with exercise prices ranging from $1.00 to $1.83. The Amendment to the 2007 Stock Option Plan and the amendments to the individual options do not change the number of options granted, the vesting commencement date, the vesting schedules or any continued service requirements. The amendment will result in additional stock compensation expense estimated at $2 to $3 million, of which approximately $1 million will be recognized in 2014. The foregoing description of the Amendment to the 2007 Stock Option Plan and amendments of individual options is not complete and is qualified in its entirety by reference to the full text of the Amendment and form of notice to option holders, a copy of each of which is filed as Exhibit 10.2 and Exhibit 10.3, respectively, to this Form 10-Q.

Item 6.Exhibits


Number		Description

10.1		Mutual Termination Agreement and Release, dated November 1, 2014, between Timothy W. Kuck and Universal Hospital Services, Inc.

10.2		2007 Stock Option Plan, as amended and restated November 4, 2014.

10.3		Form of notice to option holders regarding amendments to outstanding options.

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.

101		Financial Statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2014, formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 6, 2014


	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/ James B. Pekarek
	James B. Pekarek
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

Attached files

Agiliti Health, Inc. Reports

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