-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C4V0zZa/rCrVF1V5G3HSwEjOLUSf3TATaf3T4qPnPA4UL2kRvUU8DQhl/rn9S99n ezjVuIyTEXa0fdim01afLQ== 0001157523-07-002760.txt : 20070316 0001157523-07-002760.hdr.sgml : 20070316 20070316171333 ACCESSION NUMBER: 0001157523-07-002760 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070316 DATE AS OF CHANGE: 20070316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL HOSPITAL SERVICES INC CENTRAL INDEX KEY: 0000886171 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS EQUIPMENT RENTAL & LEASING [7350] IRS NUMBER: 410760940 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20086 FILM NUMBER: 07701110 BUSINESS ADDRESS: STREET 1: 7700 FRANCE AVE S STREET 2: SUITE 275 CITY: EDINA STATE: MN ZIP: 55435 BUSINESS PHONE: 952-893-3200 MAIL ADDRESS: STREET 1: 7700 FRANCE AVE S STREET 2: SUITE 275 CITY: EDINA STATE: MN ZIP: 55435 10-K 1 a5356432.htm UNIVERSAL HOSPITAL SERVICES, INC. 10-K UNIVERSAL HOSPITAL SERVICES, INC. 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-K

 
(Mark One)

x
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2006

or

o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to _________.
 
Commission File Number: 000-20086
UNIVERSAL HOSPITAL SERVICES, INC.
(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.)
 
7700 France Avenue South, Suite 275
 Edina, Minnesota 55435-5228
(Address of principal executive offices, including zip code)
 
(952) 893-3200
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x  No o
 
 
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 o No x  
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Larger accelerated filer o
 Accelerated filer o
Non-accelerated filer x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
 
The number of shares of common stock, $.01 par value, outstanding as of March 1, 2007 was 123,463,600.21.

 
DOCUMENTS INCORPORATED BY REFERENCE
None.
 

FORM 10-K TABLE OF CONTENTS
   
PAGE
 
     
   
 
 
 
  
 
     
   
 
     
   
 



OUR COMPANY

Universal Hospital Services, Inc. (“we”, “our” or “UHS”) is a leading, nationwide provider of medical equipment outsourcing and lifecycle services to the health care industry. Our customers include national, regional and local acute care hospitals, alternate site providers (such as nursing homes and home care providers) and medical equipment manufacturers. Our diverse customer base includes more than 3,600 acute care hospitals and approximately 3,300 alternate site providers. We also have extensive and long-standing relationships with over 220 major medical equipment manufacturers and the nation’s largest group purchasing organizations (“GPOs”) and integrated delivery networks (“IDNs”). All of our services leverage our nationwide network of 79 offices and more than 65 years of experience managing and servicing all aspects of movable medical equipment. The fees for these services are paid directly by our customers and not through reimbursement from governmental or other third-party payors. We commenced operations in 1939, originally incorporated in Minnesota in 1954 and reincorporated in Delaware in 2001.
 
As a leading medical equipment lifecycle services company, we design and offer comprehensive solutions for our customers that increase equipment and staff productivity and support optimal patient care.
 

We report our financial results in three segments to reflect how we manage our business. Our operating segments consist of Medical Equipment Outsourcing, Technical and Professional Services, and Medical Equipment Sales and Remarketing. We evaluate the performance of our operating segments based on gross margin. The accounting policies of the individual operating segments are the same as those of the entire company. Our revenue, profits, and assets for our operating segments for the prior three years are described in “Item 6 - Selected Financial Data.”
 
Technical and Professional
Services Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Medical Equipment Sales and
Remarketing Segment
  graph
Medical Equipment
Outsourcing Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technical and Professional
Services Segment

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Medical Equipment Outsourcing Segment - Manage & Utilize

Our flagship business is our Medical Equipment Outsourcing segment, which accounted for $176.9 million, or approximately 78.6%, of our revenues for the year ended December 31, 2006. This segment represented 77.7% and 78.4% of total revenue for the years ended December 31, 2005, and 2004, respectively. We own approximately 173,000 pieces of movable medical equipment, primarily in the categories of respiratory therapy, newborn care, critical care, patient monitors, and specialty beds and pressure area management.

We currently provide outsourcing services to more than 3,600 acute care hospitals in the United States, including some of the nation’s premier health care institutions.

We have contracts in place with the leading national GPOs for both the acute care and alternate site markets. We also have agreements directly with national acute care and alternate site providers. We expect much of our future growth in this segment to be driven by our customers outsourcing more of their movable medical equipment needs and taking full advantage of our expanded offering of long-term outsourcing agreements and Asset Management Partnership Programs (“AMPPs”).

In our outsourcing programs we provide our customers with the use of movable medical equipment for patient care use. We perform regular and preventative maintenance on the equipment and retain detailed records for documentation. UHS is responsible for all repairs, testing and cleaning of the equipment. Our service includes prompt replacement of any non-working equipment and the flexibility to upgrade technology as a hospital's product of choice changes. We have three primary outsourcing programs:

·  
Supplemental and Peak Needs Usage. Our basic outsourcing program is renting patient-ready, movable medical equipment to our customers on a supplemental or peak needs basis. Many of our customers have traditionally owned only the amounts and types of such equipment necessary to service their usual and customary patient census and their typical range of treatment offerings. Our customers rely on us to fulfill many of their equipment needs when they experience a spike or peak in patient census, do not have the resources to maintain their owned equipment in patient-ready condition or require equipment for less common treatments. The equipment can be obtained on a daily, monthly or pay-per-use basis. Supplemental and peak needs activity is impacted by changes in hospital patient census and patient acuity which typically fluctuate on a seasonal basis;

·  
Long-Term Outsourcing Agreements. We also offer our customers the opportunity to obtain movable medical equipment through long-term outsourcing agreements. By executing a long-term outsourcing agreement, our customers are able to secure the availability of an identified pool of patient-ready equipment and to pay for it on a monthly, yearly or pay-per-use basis; and
 
2
 
Asset Management Partnership Programs. Our AMPP programs allow our customers to fully outsource the responsibilities and costs of effectively managing movable medical equipment at their facility, with the added benefit of enhancing equipment utilization. With UHS asset management, equipment types and quantities are adjusted to meet changes in patient census and acuity. Our employees work at the customers’ sites to integrate our equipment management process and proprietary management software technology tools into the customers’ day-to-day operations. We assume full responsibility for delivering equipment where and when it is needed, removing equipment that is no longer in use and sanitizing, testing and repairing equipment between each patient use. We also perform required training and ‘‘in service’’ sessions to keep our customers’ staffs fully-trained and knowledgeable about the use and operation of key equipment. As of December 31, 2006, we had 56 Asset Management Partnership Programs.

Our medical equipment programs enable health care providers to replace the fixed costs of owning and/or leasing medical equipment with variable costs that are more closely related to their revenues and current equipment needs. They also eliminate significant capital costs associated with equipment acquisitions. The increased flexibility and services provided to our customers allows them to:

·  
access our extensive data and expertise on the cost, performance, features and functions of all major items of medical equipment;
·  
increase productivity of available equipment;
·  
reduce maintenance and management costs through the use of our technology and knowledgeable outsourcing staff;
·  
increase the productivity and satisfaction of their nursing staff by allowing them to focus on primary patient care responsibilities, leading to lower attrition rates;
·  
reduce the risk of hospital acquired infections;
·  
reduce equipment obsolescence risk; and
·  
facilitate compliance with regulatory and record keeping requirements and manufacturers’ specifications on tracking and maintenance of medical equipment.

Technical and Professional Services Segment - Plan & Acquire; Maintain & Repair

Our Technical and Professional Services segment accounted for $30.4 million, or approximately 13.5%, of our revenues for the year ended December 31, 2006. This segment represented 13.7% and 12.8% of total revenue for the years ended December 31, 2005 and 2004, respectively. We leverage our 65 plus years of experience and our extensive equipment database in repairing and maintaining medical equipment. We offer a broad range of inspection, preventative maintenance, repair, logistic and consulting services through our team of over 250 technicians and professionals located throughout the United States in our nationwide network of offices.

Our Technical and Professional Services segment offerings are less capital intensive than our Medical Equipment Outsourcing segment and provide a complementary alternative for customers that wish to own their medical equipment but lack the expertise, funding or scale to perform maintenance, repair and analytical functions.
 
3

Our technicians are trained and certified on an ongoing basis directly by equipment manufacturers to enable them to be skilled in servicing a wide spectrum of medical equipment. They are required to maintain current certifications, to be trained across equipment lines and to refresh their training on a regular basis. We also operate a quality assurance department to develop and document our own quality standards for our equipment. We utilize proprietary record keeping software to record these services and the records we maintain meet the applicable standards of The Joint Commission (formerly the Joint Commission on Accreditation of Healthcare Organizations or “JCAHO”), the National Fire Protection Association (“NFPA”) and the Food and Drug Administration (“FDA”). These maintenance records are available to our customers and to regulatory agencies to verify the maintenance of the equipment. We have three primary service programs:

·  
Supplemental Maintenance and Repair Services.  We provide maintenance and repair services on a scheduled and unscheduled basis to supplement the customer’s current maintenance management practices. As part of the supplemental and repair services, we provide service documentation that supports the customer’s regulatory reporting requirements. Our maintenance and repair service offerings include fee-for-service arrangements, scheduled maintenance and inspection services, full service maintenance, inspection and repair services and vendor management services in which we manage the manufacturer and/or third party vendors for service delivery, typically on laboratory and radiology equipment.

·  
Resident Biomedical Programs. We also provide full and part-time resident-based equipment maintenance programs that deliver all the benefits of our supplemental maintenance and repair programs, but with the addition of our employees onsite, coordinated management of subcontractors and a broad range of equipment management consulting services. As of December 31, 2006, we had 83 resident biomedical programs within this segment. 

·  
Consulting Services. We provide equipment consulting services as part of our other equipment management programs or as stand alone services. Some examples of our consulting services include technology baseline assessments, product comparison research and equipment utilization studies.

Customers

·  
Large Hospitals. We provide our services to large hospitals on a supplemental and fully outsourced basis. Our services are requested by in-house hospital biomedical departments on a supplemental basis because of our wealth of experience and expertise with movable medical equipment and to alleviate the increasing workload demands on their in-house departments.
·  
Small Hospitals and Critical Access Hospitals. We offer full lifecycle asset management services, including professional and technical services, to small hospitals (those with fewer than 150 beds) and Critical Access Hospitals. Critical Access Hospitals are rural community hospitals that receive cost-based Medicare reimbursement. These customers typically lack the resources to evaluate, acquire, manage, maintain, repair and dispose of medical equipment or technology and draw upon our vast experience in these areas to assist them. Our premier service to these customers is our resident biomedical program.
 
4
 
·  
Alternate Site Providers. We offer our technical and repair services to alternate site providers, such as nursing homes, long-term acute care hospitals and home care providers. Our nationwide service and repair network allows equipment to be repaired on site, or picked up and repaired in one of our nationwide offices.

·  
Manufacturers. We provide our services to medical equipment manufacturers that may not have the nationwide support or infrastructure to service their products. Our offerings include logistics and loaner management programs, depot or on-site warranty repair, non-warranty repair, product recall, field upgrades, routine maintenance or repairs, and onsite installation and in-service education.

While our contracts with GPOs once were solely to provide medical equipment outsourcing services, we have expanded some of our agreements with these organizations to include Technical and Professional Services.

Medical Equipment Sales and Remarketing Segment - Redeploy & Remarket
 
Our Medical Equipment Sales and Remarketing segment accounted for $17.7 million, or approximately 7.9%, of our revenues for the year ended December 31, 2006. This segment represented 8.6% and 8.8% of total revenue for the years ended December 31, 2005 and 2004, respectively. This segment includes three distinct business activities:

·  
Medical Equipment Remarketing and Disposal. We are one of the nation’s largest buyers and sellers of pre-owned movable medical equipment. We also buy, source, remarket and dispose of pre-owned medical equipment for our customers through our Asset Recovery Program. This program provides our customers the ability to sell their unneeded assets for immediate cash or credit. We provide fair market value assessments and buy-out proposals on equipment the customer intends to trade-in for equipment upgrades so that the customer can evaluate the manufacturer’s offer. Customers can also take advantage of our disposal services, pursuant to which we dispose equipment that has no remaining economic value in a safe and environmentally appropriate manner. We educate hospitals in evaluating and optimizing upgrades based on the changes in technology and market conditions for their current equipment.

UHS remarkets used medical equipment to hospitals, alternate care providers, veterinarians and equipment brokers. This segment of our business focuses on providing solutions to customers that have capital budget dollars available. We offer a wide range of equipment from our standard movable medical equipment to diagnostic, ultrasound and x-ray equipment.
 
5
 
·  
Specialty Medical Equipment Sales and Distribution. We use our national infrastructure to provide sales and distribution for manufacturers of specialty medical equipment on a limited and exclusive basis. Our distribution services include providing demo services and product maintenance services. We act as a distributor for only a limited number of products that are particularly suited to our national distribution network or that fit with our ability to provide technical support. We currently sell equipment in selected product lines including, but not limited to, percussion vests, continuous passive motion machines, patient monitors, patient transfer systems and infant security systems.
 
·  
Sales of Disposables. We offer our customers single use disposable items. Most of these items are used in connection with our outsourced equipment. We do not view this as a core growth business. We offer these products as a convenience to customers and to complement our full medical equipment lifecycle offerings.

BUSINESS OPERATIONS

District Offices

We currently operate 79 district offices, which allows us to service customers throughout the United States. Each district office maintains an inventory of equipment and other items tailored to accommodate the needs of individual customers within its geographical area. Should additional or unusual equipment be required by one of our customers, a district office can draw upon the resources of all of our other districts. With access to approximately 173,000 owned pieces of equipment, we can often obtain the necessary equipment within 24 hours.

Depending on the district office size and demands, our district offices are staffed by multi-disciplined teams of sales professionals, service representatives, customer account representatives and biomedical equipment technicians trained to provide the spectrum of services we offer our customers.

Centers of Excellence

Our district office network is supported by six strategically located Centers of Excellence that focus on providing more specialized depot technical services on a regional and national basis. The Centers of Excellence also provide overflow support and specialized depot service functions for our district offices and customized depot service operations for our manufacturer customers. Our Centers of Excellence are ISO Certified, which is a minimum requirement of many of our equipment manufacturer customers.

6

map

Centralized Functions

Our corporate office is located in Edina, Minnesota. We have centralized many of the key elements of our equipment and service offerings in order to maximize our operating efficiencies and uniformity of service. Some of the critical aspects of our business that we have centralized include contract administration, purchasing, pricing, logistics and information technology.

Rental Equipment Fleet

We acquire medical equipment to meet our customers’ needs in five primary product areas: respiratory therapy, newborn care, critical care, patient monitors and specialty bed and pressure area management. We maintain one of the most technologically advanced equipment fleets in the industry, routinely acquiring new and pre-owned equipment to enhance our fleet. Our specialized equipment portfolio managers evaluate new products each year to keep abreast of current market technology and to determine whether to add new products to our equipment fleet. In making equipment purchases, we consider a variety of factors, including manufacturer credibility, repair and maintenance costs, anticipated user demand, equipment mobility and anticipated obsolescence. As of December 31, 2006, we owned approximately 173,000 pieces of equipment available for use by our customers.
 
7
 
Our ten largest manufacturers of movable medical equipment supplied approximately 62% (measured in dollars spent) of our direct movable medical equipment purchases. In 2006, our largest movable medical equipment supplier was Cardinal Health Inc., which accounted for approximately 12% of our movable medical equipment purchases.
 
We seek to ensure availability of equipment at favorable prices. We generally do not enter into long-term fixed price contracts with suppliers of our equipment. We may receive price discounts related to the volume of our purchases. The purchase price we pay for equipment generally averages in the range of $1,000 to $35,000 per item.

OUR STRENGTHS

We believe our business model presents an attractive value proposition to our customers and has resulted in significant growth in recent years. We service customers across the spectrum of the equipment life cycle as a result of our position as one of the industry’s largest purchasers, outsourcers and resellers of movable medical equipment.

We attribute our historical success to, and believe that our potential for future growth comes from, the following strengths:

Unique position in the health care arena. We believe that we are the only national company providing full movable medical equipment lifecycle services to the health care industry. While we have competitors that may offer various stages of the lifecycle, none provide the comprehensive approach to customers that we do. Our extensive and long-standing relationships with more than 3,600 hospitals, approximately 3,300 alternate site providers, over 220 medical equipment manufacturers and the nation’s most prominent GPOs and IDNs present a unique position in the health care arena.

We are uniquely positioned in the health care industry as a result of our:

·  
investment in the industry’s largest, most extensive and modern fleet of movable medical equipment;
·  
nationwide infrastructure for service and logistics;
·  
proprietary medical equipment management software and tools;
·  
commitment to customer service that has earned us a reputation as a leader in quality and service in our industry; and
·  
extensive knowledge and experience in acquiring, managing, maintaining and remarketing medical equipment.

Large, modern equipment fleet. We own and manage an extensive, modern fleet of movable medical equipment, consisting of approximately 173,000 owned units. This modern equipment fleet, along with our quality assurance programs and tools, places us in a leadership position in the areas of quality and patient safety. It also places us in a unique position to service “high end” acute care hospitals, such as teaching, research or specialty institutions that demand the most current technology to satisfy the increasingly complex needs of their patients.
 
8
 
Nationwide infrastructure. We have a broad, nationwide service network coupled with focused and customized operations at the local level. Our extensive network of district offices and Centers of Excellence and our 24-hours-a-day, 365 days-a-year service capabilities enable us to compete effectively for large, national contracts as well as to drive growth regionally and locally.
 
Proprietary software and asset management tools. We have used our more than 65 years of experience and our extensive database of equipment management information to develop sophisticated software technology and management tools. These tools have allowed us to become a leader in meeting the demands of customers by delivering sophisticated asset management programs that we use to drive cost efficiencies, equipment productivity and patient safety programs. We believe that our continued and significant investment in new tools and technology will help us to continue to provide these benefits to the health care industry.

Superior customer service. We have a long-standing reputation among our customers for service and quality. This reputation is largely due to our customer service culture, which is continuously reinforced through significant investment in hiring and training resources. We strive to seamlessly integrate our employees and service offerings into the operations of our customers. This aggressive focus on customer service has helped us achieve a high customer retention rate.

Proven management team. We have an industry leading management team with significant depth of health care experience. Our management team has successfully supervised the development of our competitive strategy, continually enhanced our service and product offerings, established our nationwide coverage and furthered our reputation as the industry’s service and quality leader.

Industry with favorable fundamentals. Our business benefits from the overall favorable trends in health care in general and our segments in particular. There is a fundamental shift in the needs of hospitals and alternate site providers from supplemental and peak needs supply of movable medical equipment to full equipment lifecycle asset management programs. This move to full outsourcing is not unlike trends in similar services at hospitals including food service, laundry, professional staffing and technology. The strong fundamentals in medical equipment outsourcing are being driven by the following trends:

·  
Favorable demographic trends. According to the U.S. Census Bureau, individuals aged 65 and older in the United States comprise the fastest growing segment of the population, and that segment is expected to grow to approximately 40 million by 2010. As a result, over time the number of patients and the volume of hospital admissions are expected to grow. The aging population and increasing life expectancy are increasing demand for health care services.
 
9
 
·  
Increase in obesity. The U.S. population is getting heavier with 46 states now having obesity prevalence rates over 20%, compared to zero states with such rates in 1991 (Source: CDC Obesity Trends 2005). Therefore, health care facilities must be prepared for the needs of obese and morbidly obese patients.
 
·  
Increased capital and operating expense pressures. As hospitals continue to experience tight capital and operating budgets, and while the cost and complexity of medical equipment increases, we expect that hospitals will increasingly look to us to source these capital equipment needs and manage medical equipment to achieve capital operating expense savings and efficiencies.

·  
Nursing and professional staffing satisfaction. As hospitals continue to experience staffing pressures, we expect that they will increasingly turn to our programs to alleviate medical equipment management duties for nurses and professional staff to increase their overall job satisfaction levels.

·  
Demand for better patient safety and outcomes. Hospitals across the United States are focused on improving patient safety and outcomes, while minimizing incidents of hospital acquired infections. We expect, and have experienced hospitals turning to UHS, to assist them in managing their equipment to help them to minimize infectious incidents, thereby improving patient safety and outcomes while reducing the cost of infections.

Strong value proposition. With our focus and expertise in medical equipment lifecycle management, we are able to create a strong value proposition for our customers. We provide our customers with the ability to improve their performance with respect to equipment acquisition, efficiency, utilization, management, maintenance, repair and disposal. We also can help our customers improve employee satisfaction, patient safety and outcomes and regulatory compliance.

No direct reimbursement risk. Many health care providers rely on payment from patients or reimbursement from governmental or other third party payors. Our fees are paid directly by our acute care hospital, alternate site and manufacturer customers rather than through third party payors. Accordingly, our exposure to uncollectible patient or reimbursement receivables or government reimbursement changes is reduced, as evidenced by our bad debt expense of approximately 0.5% of total revenues for the year ended December 31, 2006.

GROWTH STRATEGY

Historically, we have experienced significant and sustained organic and strategic growth. Our overall growth strategy is to continue to grow both organically and through strategic acquisitions.
 
10

Organic Growth

We believe that the following external and market factors will provide us significant growth opportunities:

·  
the aging population;
·  
increasing life expectancy;
·  
increasing patient acuity;
·  
continued increase in the number and sophistication of medical technologies;
·  
increasing cost and staffing pressures in hospitals; and
·  
continuing growth of outsourcing of non-core functions by hospitals, alternate site providers and manufacturers.

Our organic growth will be driven internally by the following factors:

·  
growing our rental business through customer education and increasing the numbers and types of equipment we offer in our programs;
·  
converting transactional rental and biomedical service customers to fully outsourced resident-based programs;
·  
aggressively growing our less capital intensive technical and professional services and equipment sales and remarketing businesses;
·  
increasing the number of hospitals, alternative care facilities and manufacturers to which we provide services;
·  
expanding our relationships with GPOs and other national account customers;
·  
leveraging our broad range of service offerings to give us opportunities to serve new customers and to provide new services to existing customers; and
·  
expanding existing offerings and developing new service offerings to our customers.

Acquisitions

In recent years, we have made and successfully integrated several strategic acquisitions that have helped us expand our business by increasing our market share in existing markets, adding additional service offerings, and enabling us to penetrate new geographic regions. We intend to continue to pursue a disciplined course of growing our business with complementary acquisitions, and we regularly evaluate potential acquisitions.

COMPETITION

An analysis of our competition as it relates to our three business segments follows:

Medical Equipment Outsourcing Segment

We believe that the strongest competition to our outsourcing programs is the traditional purchase and lease alternatives for obtaining movable medical equipment. Currently, many acute care hospitals and alternate site providers view outsourcing primarily as a means of meeting short-term or peak supplemental needs, rather than as a long-term alternative to purchasing or leasing equipment and managing that equipment through its full lifecycle. Although we believe that we can demonstrate the cost-effectiveness of outsourcing patient-ready movable medical equipment and its management in the health care setting, we believe that many health care providers will continue to purchase or lease and manage internally a substantial portion of their movable medical equipment until they are educated in the advantages and efficiencies of outsourcing.
 
11

Our largest national competitor in medical equipment outsourcing is Hill-Rom, a subsidiary of Hillenbrand Industries. Our other competition consists of regional or local companies and some movable medical equipment manufacturers and dealers that provide equipment outsourcing to augment their movable medical equipment sales. Local and regional companies often have difficulty maintaining equipment fleets with the latest technology available due to capital constraints and are frequently challenged with the lack of a full product offering. As such, most of our competitors tend to compete on price.

Technical and Professional Services Segment

We face significant and direct competition in the technical and professional services area from many national, regional and local service providers, as well as from medical equipment manufacturers. In addition, many of our customers choose to perform these functions using their own personnel. We believe that through our nationwide network of highly trained technicians, strong customer relationships and extensive equipment database, we offer customers an attractive alternative for performing biomedical repair services on their equipment.

Medical Equipment Sales and Remarketing Segment

In medical equipment sales, we face significant direct competition from a variety of manufacturers and distributors on a nationwide basis. As a result, we are selective in our pursuit of these opportunities. The equipment remarketing market is highly fragmented with low barriers to entry. In addition to manufacturers seeking to control the remarketing and disposal of their own products, we compete with a number of localized or specialized providers of remarketing and disposal services.

EMPLOYEES

We had 1,274 employees as of December 31, 2006, including 1,120 full-time and 154 part-time employees. Of such employees, 119 were sales representatives, 769 were operations personnel, 126 were employed in corporate support functions and 260 were hospital service personnel.

None of our employees are covered by a collective bargaining agreement, and we have experienced no work stoppages to date. We believe that our relations with our employees are good.
 
12
 
INTELLECTUAL PROPERTY

We use ‘‘UHS®’’ and the UHS logo in connection with our services and have registered these marks with the United States Patent and Trademark Office. We use the “Equipment Lifecycle Services”sm, and the Equipment Lifecycle Services logo as service marks in connection with our services. We have applied for federal trademark registration of the Equipment Lifecycle Services logo with the United States Patent and Trademark Office. We also own the CHAMP® service mark. U.S. service mark registrations are generally for a term of 10 years, renewable every 10 years as the mark is used in the regular course of business.

We have a domain name registration for UHS.com, which serves as our main website, and my.UHS.com and myservice.UHS.com, which are web-based tools that provide 24 hour on-demand access to equipment reports for all equipment outsourced or maintained by us.

We have developed a number of proprietary software programs to directly service or support our customers including the Asset Information Management System for Central Services (“AIMS/CS”), Resource for Equipment Documentation System (“REDS”) and Operator Error Identification System (“OEIS”). AIMS/CS is a medical equipment inventory management system that allows customers to track the location and usage of their leased and owned medical equipment using barcodes and hand held laser scanners. Our proprietary REDS and OEIS programs are specifically designed to help customers meet medical equipment documentation and reporting needs under applicable regulations and standards, such as those promulgated by the FDA and The Joint Commission. We have also developed proprietary software tools that allow our employees to manage and maintain our extensive equipment fleet and serve our customers more effectively and efficiently.

MARKETING

We market our programs primarily through our direct sales force, which consisted of 119 professional sales representatives as of December 31, 2006. Our direct sales force is organized into two regions and twelve sales divisions. We support our direct sales force with product specialists, who provide expert support to our resident biomedical programs and specialty bed offerings. Our national accounts team also supports our direct sales force through focusing on securing GPO, IDN and alternate care national and regional contracts.
 
We also market through our website, www.uhs.com, participation in numerous national and regional conventions, interaction with industry groups and opinion leaders and placement of articles and advertisements in industry-leading publications.
 
In our marketing efforts we primarily target key decision makers, such as administrators, chief executive officers and chief financial officers as well as materials managers, department heads and directors of purchasing, nursing and central supply. We also promote our programs and services to hospital, manufacturer and alternate care provider groups and associations.
 
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SEASONALITY/BUSINESS INTERRUPTION

Quarterly operating results are typically affected by seasonal factors. Historically, our first and fourth quarters are the strongest, reflecting increased hospital census and patient acuity during the fall and winter months. Our business can also be impacted by natural disasters, such as hurricanes and earthquakes, which affect our ability to transfer equipment to and from our customers and equipment recalls, which can cause equipment to be removed from market use.

REGULATORY MATTERS

Sarbanes-Oxley  

There were no meaningful external costs incurred during 2006 related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”). We incurred third party costs related to SOX compliance totaling $0.6 million and $0.2 million in 2005 and 2004, respectively. On December 15, 2006, the Securities and Exchange Commission (“SEC”) announced that the compliance date for non-accelerated filers (such as UHS) to provide management’s assessment regarding internal control over financial reporting was extended to the first fiscal year ending on or after December 15, 2007, and the compliance date to file the auditor’s attestation report was extended to the first fiscal year ending on or after December 15, 2008.

Regulation of Medical Equipment 

Our customers are subject to documentation and safety reporting regulations and standards with respect to the medical equipment they use, including those established by the FDA, The Joint Commisssion and the NFPA. Some states and municipalities also have similar regulations.

Our REDS and OEIS programs (see description in “Intellectual Property” section of this Form 10-K) are specifically designed to help customers meet documentation and reporting needs under such regulations and standards. We also monitor changes in regulations and standards and work to accommodate the needs of customers by providing specific product and manufacturer information upon request. Manufacturers of medical equipment are subject to regulation by agencies and organizations such as the FDA, Underwriters Laboratories and the NFPA. We believe that all movable medical equipment we outsource conforms to these regulations.

The Safe Medical Devices Act of 1990 (“SMDA”), which amended the Food, Drug and Cosmetic Act (“FDCA”), requires manufacturers, user facilities and importers of medical devices to report deaths and serious injuries which a device has or may have caused or to which a device has or may have contributed. In addition, the SMDA requires the establishment and maintenance of adverse event files and various other FDA reports. Manufacturers and importers are also required to report certain device malfunctions. We work with our customers to assist them in meeting their reporting obligations under the FDCA, including those requirements added by the SMDA.
 
14

As a distributor of medical devices, we are required by the FDCA to maintain device complaint records containing any incident information regarding the identity, quality, durability, reliability, safety, effectiveness or performance of a device. We are required to retain copies of these records for a period of two years from the date of inclusion of the record in the file or for a period of time equivalent to the expected life of the device, whichever is greater, even if we cease to distribute the device. Finally, we are required to provide authorized FDA employees access to copy and verify these records upon their request. We have current compliance records regarding maintenance, repairs, modification and user-error with respect to all of our equipment.

Besides the FDA, a number of states regulate medical device distributors and wholesalers either through pharmacy or device distributor licensure. Currently, we hold licenses in 12 states. Some licensure regulations and statutes in additional states may apply to our activities. Although our failure to possess such licenses in these states for our existing operations may subject us to certain monetary fines, we do not believe the extent of such fines, in the aggregate, would be material to our liquidity, financial condition or results of operation.

In addition, we are required to provide information to the manufacturer regarding the permanent disposal or any change in ownership of certain categories of medical outsourcing equipment. We believe our medical equipment tracking systems are in material compliance with these regulations.

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) applies to certain covered entities, including health plans, health care clearinghouses and health care providers. HIPAA regulations protect individually identifiable health information, including information in an electronic format, by, among other things, setting forth specific standards under which such information may be used and disclosed, providing patients rights to obtain and amend their health information and establishing certain administrative requirements for covered entities.

Because of our self-insured health plans, we are a covered entity under the HIPAA regulations. Also, we may be obligated contractually to comply with certain HIPAA requirements as a business associate of various health care providers. In addition, various state legislatures have enacted and may continue to enact additional privacy legislation that is not preempted by the federal law, which may impose additional burdens on us. Moreover, other federal privacy legislation may be enacted. Accordingly, we have made and, as new standards go into effect, we expect to continue to make administrative, operational and information infrastructure changes in order to comply with these rules.
 
15

Third Party Reimbursement

Our fees are paid directly by our customers rather than through direct reimbursement from private insurers or governmental entities, such as Medicare or Medicaid. We do not bill the patient, the insurer or other third party payors directly for services provided for hospital inpatients or outpatients. Sometimes, our customers are eligible to receive third party reimbursement for our services. Consequently, the reimbursement policies of such third party payors have a direct effect on the ability of health care providers to pay for our services and an indirect effect on our level of charges. Also, in certain circumstances, third party payors may take regulatory or other action against service providers even though the service provider does not receive direct reimbursement from third party payors.

Hospitals and alternate site providers are facing continued cost containment pressures from public and private insurers and other managed care providers, such as health maintenance organizations, preferred provider organizations and managed fee-for-service plans, as these organizations continue to place controls on the reimbursement and utilization of health care services. We believe that these payors have followed or will follow the federal government in limiting reimbursement through preferred provider contracts, discounted fee arrangements and capitated (fixed patient care reimbursement) managed care arrangements. In addition to promoting managed care plans, employers are increasingly self funding their benefit programs and shifting costs to employees through increased deductibles, co-payments and employee contributions. Hospitals and health care facilities are also experiencing an increase in unreimbursable care or “charity care” which causes increased economic pressures on these organizations. We believe that these cost reduction efforts will place additional pressures on health care providers’ operating margins and will encourage efficient equipment management practices, such as use of our outsourcing and AMPP services.

Liability and Insurance

Although we do not manufacture any medical equipment, our business entails the risk of claims related to the outsourcing, sale and service of medical equipment. In addition, our instruction of hospital employees with respect to the equipment’s use and our professional consulting services are sources of potential claims. We have not suffered a material loss due to a claim; however, any such claim, if made, could have a material adverse effect on our business. While we do not currently provide any services that entail contact or services directly with patients, expansion of services in the future could entail such activities and open the Company to claims from patients.

We maintain a number of insurance policies including commercial general liability coverage (product and premises liability insurance), automobile liability insurance, worker’s compensation insurance and professional liability insurance. We also maintain excess liability coverage. Our policies are subject to annual renewal. We believe that our current insurance coverage is adequate. Claims exceeding such coverage may be made and we may not be able to continue to obtain liability insurance at acceptable levels of cost and coverage.
 
16

Our business faces many risks. Any of the risks discussed below, or elsewhere in this Form 10-K or our other filings with the SEC, could have a material impact on our business, financial condition or results of operations. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations.
 
If the patient census of our customers decreases, the revenues generated by our business could decrease.
 
Our operating results are dependent in part upon the amount and types of equipment necessary to service our customers’ needs, which are heavily influenced by the total number of patients our customers are serving at any time (which we refer to as “patient census”). At times of lower patient census, our customers have a decreased need for our services on a supplemental or peak needs basis. Our operating results can vary depending on, for example, the timing and severity of the cold and flu season, local, regional or national epidemics, and the impact of national catastrophes, as well as other factors affecting patient census.
 
If we are unable to fund our significant cash needs, we may be unable to expand our business as planned or to service our debt.
 
We require substantial cash to operate our Medical Equipment Outsourcing programs and service our debt. Our outsourcing programs require us to invest a significant amount of cash in movable medical equipment purchases. To the extent that such expenditures cannot be funded from our operating cash flow, borrowings under our senior secured credit facility or other financing sources, we may not be able to grow as currently planned. We currently expect that over the next 12 months we will invest approximately $55 million in new movable medical equipment and other capital expenditures. This estimate is subject to numerous assumptions, including revenue growth, the number of AMPP signings, and any significant changes in GPO contracts. In addition, a substantial portion of our cash flow from operations must be dedicated to servicing our debt and there are significant restrictions on our ability to incur additional indebtedness under the indenture governing our 10.125% Senior Notes due 2011 and our Amended Credit Agreement.
 
Primarily because of our debt service obligations and debt refinancing charges, we have had a history of net losses. If we consistently incur net losses, it could result in our inability to finance our business in the future. While we had net income of $0.1 million in 2006, we had net losses of $1.6 million and $3.6 million for the years ended 2005 and 2004, respectively.
 
17
 
If we are unable to meet certain financial and operating covenants contained in our Amended Credit Agreement or Senior Notes, our creditors could accelerate the debt or restrict further borrowing.
 
Our Amended Credit Agreement and our 10.125% Senior Notes contain financial and operating covenants. (For a summary of the covenants under the Amended Credit Agreement, see “Covenants Under Our Amended Credit Agreement” in Item 7 of this Form 10-K). If we fail to meet these covenants or obtain appropriate waivers, our creditors have a number of remedies including, but not limited to, acceleration of our debt or placement of restrictions on further borrowing.

If we are unable to change the manner in which health care providers traditionally procure medical equipment, we may not be able to achieve significant revenue growth.
 
We believe that the strongest competition to our outsourcing programs is the traditional purchase or lease alternative for obtaining movable medical equipment. Currently, many acute care hospitals and alternate site providers view outsourcing primarily as a means of meeting short-term or peak supplemental needs, rather than as a long-term, effective and cost efficient alternative to purchasing or leasing equipment. Many health care providers may continue to purchase or lease a substantial portion of their movable medical equipment and to manage and maintain it on their own.
 
Our competitors may engage in significant price competition or liquidate significant amounts of surplus equipment, thereby decreasing the demand for outsourcing services and possibly causing us to reduce the rates we charge for our services.
 
Our competition may engage in competitive practices that may undercut our pricing. In addition, a competitor may liquidate significant amounts of surplus equipment, thereby decreasing the demand for outsourcing services and possibly causing us to reduce the rates we may charge for our services.
 
We have relationships with certain key suppliers, and adverse developments concerning these suppliers could delay our ability to procure equipment or increase our cost of purchasing equipment.
 
We purchased movable medical equipment from over 165 manufacturers in 2006. Our ten largest manufacturers of movable medical equipment accounted for approximately 62% of our direct movable medical equipment purchases in 2006. Adverse developments concerning key suppliers or our relationships with them could force us to seek alternative sources for our movable medical equipment or to purchase such equipment on unfavorable terms. A delay in procuring equipment or an increase in the cost to purchase equipment could limit our ability to provide equipment to our customers on a timely and cost-effective basis. If we are unable to have access to parts or if manufacturers do not provide access to equipment manuals or training, we may not be able to provide certain technical and professional services.
 
18

A substantial portion of our revenues comes from customers with whom we do not have long-term commitments, and cancellations by or disputes with customers could decrease the amount of revenues we generate, thereby reducing our ability to operate and expand our business.
 
Approximately 61% of our outsourcing revenue was derived from customers or customers affiliated with a GPO for the year ended December 31, 2006. The source of the remaining 39% of revenue was from customers with no such contractual commitment. Our customers are generally not obligated to outsource our equipment under long-term commitments. In addition, many of our customers do not sign written agreements with us fixing the rights and obligations of the parties regarding matters such as billing, liability, warranty or use. Therefore, we face risks such as fluctuations in usage, inaccurate or false reporting of usage by customers and disputes over liabilities related to equipment use. We do not have written agreements with some of our AMPP customers for which we provide a substantial portion of the movable medical equipment that they use and provide substantial staffing resources. These arrangements could be terminated by the health care provider without notice or payment of any termination fee. A large number of such terminations may adversely affect our ability to generate revenue growth and sufficient cash flows to support our growth plans.
 
If we are unable to renew our contracts with GPOs or IDNs, we may lose existing customers, thereby reducing the amount of revenues we generate.
 
Our past revenue growth and our strategy for future growth depends, in part, on access to the new customers granted by our major contracts with GPOs and IDNs. In the past, we have been able to renew such contracts when they are up for renewal. If we are unable to renew our current GPO contracts, we may lose a portion of existing business with the customers who are members of such GPOs.
 
Although we do not manufacture any medical equipment, our business entails the risk of claims related to the medical equipment that we outsource and service. We may not have adequate insurance to cover a claim, and it may be more expensive or difficult for us to obtain adequate insurance in the future.
 
We may be liable for claims related to the use of our movable medical equipment or to our maintenance or repair of a customer’s movable medical equipment. Any such claims, if made and upheld, could make our business more expensive to operate and therefore less profitable. We may be subject to claims exceeding our insurance coverage or we may not be able to continue to obtain liability insurance at acceptable levels of cost and coverage. In addition, litigation relating to a claim could adversely affect our existing and potential customer relationships, create adverse public relations and divert management’s time and resources from the operation of the business.

19

Our growth strategy depends in part on our ability to successfully identify and manage our acquisitions and a failure to do so could impede our future revenue growth, thereby weakening our position in the industry with respect to our competitors.

As part of our growth strategy, we intend to pursue acquisitions or other strategic relationships within the health care industry that we believe will enable us to generate revenue growth and enhance our competitive position. Future acquisitions may involve significant cash expenditures that could impede our future revenue growth. In addition, our efforts to execute our acquisition strategy may be affected by our ability to identify suitable candidates and negotiate and close acquisitions. We regularly evaluate potential acquisitions. We may not be successful in acquiring other businesses, and the businesses we do acquire in the future may not ultimately produce returns that justify our related investment.
 
Acquisitions may involve numerous risks, including:

·  
difficulties assimilating personnel and integrating distinct business cultures;
·  
diversion of management’s time and resources from existing operations;
·  
potential loss of key employees or customers of acquired companies; and
·  
exposure to unforeseen liabilities of acquired companies.

If we are unable to continue to grow through acquisitions, our ability to generate revenue growth and enhance our competitive position may be impaired.
 
We depend on our sales professionals and sales specialists and may lose customers when any of our sales professionals or sales specialists leave us.
 
Our revenue growth has been supported by hiring and developing new sales professionals and sales specialists and adding, through acquisitions, established sales professionals and sales specialists whose existing customers generally have become our customers. We have experienced and will continue to experience intense competition for these resources. The success of our programs depends on the relationships developed between our sales professionals and sales specialists and our customers.

Our cash flow fluctuates during the year because operating income as a percentage of revenue fluctuates with our quarterly operating results and we make semi-annual debt service payments.
 
Our results of operations have been and can be expected to be subject to quarterly fluctuations. We may experience increased revenues in the first and fourth quarters of the year, depending upon the timing and severity of the cold and flu season and the related increased hospital census and movable medical equipment usage during that season. Because a significant portion of our expenses are relatively fixed over these periods, our operating income as a percentage of revenue tends to increase during the first and fourth quarter of each year. If the cold and flu season is delayed by as little as one month, or is less severe than in prior periods, our quarterly operating results for a current period can vary significantly from prior periods. Our quarterly results can also fluctuate as a result of other factors such as the timing of acquisitions, new AMPP agreements or new office openings. In addition, semi-annual interest payments on our 10.125% Senior Notes are paid in the second and fourth quarters, thus leading to significant fluctuations in cash flow from operations.
 
20
 
Changes in reimbursement rates and policies by third-party payors for health care items and services may reduce the rates that providers can pay for our services, thereby requiring us to reduce our rates or putting our ability to collect payments at risk.
 
Our health care provider customers that pay us directly for the services we provide to them rely on reimbursement from third party payors for a substantial portion of their operating revenue. These third party payors include both governmental payors such as Medicare and Medicaid and private payors such as insurance companies and managed care organizations. There are widespread efforts to control health care costs in the United States by all of these payor groups. These cost containment initiatives include reimbursement policies based on fixed rates for a particular patient treatment that are unrelated to the providers’ actual costs and requiring health care providers to provide services on a discounted basis. Consequently, these reimbursement policies have a direct effect on health care providers’ ability to pay us for our services and an indirect effect on our level of charges. Ongoing concerns about rising health care costs may cause more restrictive reimbursement policies to be implemented in the future. Restrictions on the amounts or manner of reimbursements to health care providers may affect the financial strength of our customers and amount our customers are able to pay for our services.
 
In periods when significant health care reform initiatives were under consideration and uncertainty remained as to their likely outcome, our profits decreased as the cost of doing business increased. If other significant health care reform initiatives occur, they may have a similar, negative effect.
 
Because the regulatory and political environment for health care significantly influences the capital equipment procurement decisions of health care providers, our ability to generate profits has historically been adversely affected in periods when significant health care reform initiatives were under consideration and uncertainty remained as to their likely outcome.

A portion of our revenues are derived from home care providers and nursing homes, and these health care providers may pose additional credit risks.
 
Our nursing home and home care customers may pose additional credit risks since they are generally less financially sound than hospitals. Nursing homes in particular have experienced significant financial problems since the implementation of the Balanced Budget Act of 1997. We may incur losses in the future due to the credit risks, including potential bankruptcy filings, associated with any of these customers.
 
21

The interests of our major stockholders may conflict with your interests, and these stockholders could cause us to take action that would be against your interests.
 
J.W. Childs Equity Partners, L.P. (“JWC Fund I”), J.W. Childs Equity Partners III, L.P. (“JWC Fund III”), JWC UHS Co-Invest LLC, JWC Fund III Co-Invest LLC, and Halifax Capital Partners, L.P., (“Halifax”), and their respective affiliates beneficially own shares representing over 90% of our outstanding common equity. Accordingly, these stockholders have the power to elect our board of directors, appoint new management and approve any action requiring a stockholder vote, including amendments to our certificate of incorporation and approving mergers or sales of substantially all of our assets. Such concentration of voting power could have the effect of deterring and preventing a change of control of our company that might otherwise be beneficial to our security holders. The directors so elected will have the authority to make decisions affecting our capital structure, including the issuance of additional indebtedness and the declaration of dividends. Circumstances may occur in which the interests of these equity holders could be in conflict with your interests.
 
Consolidation in the health care industry may lead to a reduction in the outsourcing rates we charge, thereby decreasing our revenues.
 
In recent years, many acute care hospitals and alternate site providers have consolidated to create larger health care organizations. We believe this consolidation trend may continue. Any resulting consolidated health care organization may have greater bargaining power over us, which could lead to a reduction in the outsourcing rates that we are able to charge. A reduction in our outsourcing rates may decrease our revenues.

Our competitors may bundle products and services offered to customers, some of which we do not offer.
 
If competitors offer their products and services to customers on a combined basis with reduced prices, and we do not offer some of these products or cannot offer them on comparable terms, we may have a competitive disadvantage that will lower the demand for our services.
 
Our customers operate in a highly regulated environment and the regulations affecting them could lead to additional expenses associated with compliance and licensing, along with penalties resulting from possible violations, thereby increasing our costs and reducing income.
 
The health care industry is required to comply with extensive and complex laws and regulations at the federal, state and local government levels. While the majority of these regulations do not directly apply to us, there are some that do, including the FDCA and certain state pharmaceutical licensing requirements. Although we believe we are in compliance with the FDCA, if the FDA expands the reporting requirements under the FDCA, we may be required to comply with the expanded requirements and may incur substantial additional expenses in doing so. With respect to state licensing requirements, we are currently licensed in 12 states and may be required to be licensed in additional states. Our failure to possess such licenses for our existing operations may subject us to certain additional expenses.
 
22
 
Given that our industry is heavily regulated, we may be subject to additional regulatory requirements. If our operations are found to be in violation of any governmental regulations to which we or our customers are subject, we may be subject to the applicable penalty associated with the violation. Any penalties, damages, fines or curtailment of our operations would significantly increase our costs of doing business, thereby leading to difficulty generating sufficient income to support our business. Also, if we are found to have violated certain federal or state laws or regulations regarding Medicare, Medicaid or other governmental funding sources, we could be subject to fines and possible exclusion from participation in federal and state health care programs.
 
Although we do not manufacture any medical equipment, we own a large fleet of movable medical equipment, which may be subject to equipment recalls or obsolescence.
 
We are required to incur significant expenditures in order to maintain a large and modern equipment fleet. Our equipment may be subject to recalls that could be expensive to implement. We may be required to incur additional costs to repair or replace the equipment at our own expense or we may choose to purchase incremental new equipment from a supplier not affected by the recall. Additionally, our relationship with our customers may be damaged if we cannot promptly replace the equipment that has been recalled.
 
Our success is dependent, in part, on our ability to respond effectively to changes in technology. Since we maintain a large fleet of equipment, we are subject to the risk of equipment obsolescence. If advancements in technology render a substantial portion of our equipment fleet obsolete, we may experience a decrease in demand for our products which could adversely affect our operating results and cause us to invest in new technology to maintain our market share and operating margins.

We may incur increased vendor costs that we cannot pass through to our customers.

Our customer agreements may include limitations on our ability to increase prices over the term of the agreement. On the other hand, we rely on subcontractors to provide some of the services and we do not always have fixed pricing agreements with these subcontractors. Therefore, we are at risk of incurring increased costs that we are unable to pass through to our customer.


None.
 
23

As of December 31, 2006, we operated 79 full service district offices and six technical service Centers of Excellence. We own our Minneapolis, Minnesota district office facility, consisting of approximately 0.89 acres of real property and 24,000 square feet of office, warehouse, processing and technical repair space (the “Property”). On February 1, 2007, we entered into an agreement to sell the Property. This agreement is subject to termination by the purchaser until March 30, 2007. The sale of the Property is expected to close during the second quarter of 2007, subject to the satisfaction of customary closing conditions. During the second quarter of 2007, we expect to move our Minneapolis, Minnesota district office into a new facility, consisting of approximately 22,000 square feet of leased space. We lease our other district offices, averaging approximately 6,100 square feet, and our Centers of Excellence. None of our offices are dedicated to a single business segment. Our corporate office is located at a 41,000 square foot leased facility in Edina, Minnesota.


From time to time, we may become involved in litigation arising out of operations in the normal course of business. As of December 31, 2006, we were not a party to any pending legal proceedings the adverse outcome of which could reasonably be expected to have a material adverse effect on our operating results, financial position, or cash flows.


None.



As of March 1, 2007, there were 59 holders of our common stock, par value $.01 per share. There is no established public trading market for our common stock, and during 2005 and 2006, we did not declare or pay a cash dividend on any class of our common stock. We intend to retain earnings for use in the operation and expansion of our business and therefore do not anticipate paying any cash dividends in the foreseeable future. Our debt instruments contain certain restrictions on our ability to pay cash dividends on our common stock (See Note 6, “Long-Term Debt”, in the audited financial statements included in Item 15 of this Form 10-K, and the information regarding our Amended Credit Agreement contained under the caption “Liquidity and Capital Resources” in Item 7 of this Form 10-K).
 
24

During 2006, pursuant to the exercise of outstanding options, we sold common stock to employees in the amount and on the dates set forth below.
 
Date of Sale
  
Shares Sold
  
Amount of Sale
  
January 24, 2006
  
2,500
  
$ 2,500
 
February 27, 2006
    
1,666
    
1,666
 
March 2, 2006
    
1,666
    
1,666
 
March 7, 2006
    
1,666
    
1,666
 
March 14, 2006
    
1,666
    
1,666
 
March 29, 2006
    
8,333
    
10,000
 
April 4, 2006
    
166
    
166
 
May 17, 2006
    
208
    
250
 
June 9, 2006
    
1,666
    
1,666
 
June 19, 2006
    
5,833
    
7,000
 
November 10, 2006
    
125
    
166
 
               
     
25,495
  
$
28,411
  

The sale on March 29, 2006, was completed pursuant to the exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended. The other sales were completed pursuant to the exemption from registration provided under Rule 701 of the regulations of the Securities Act of 1933, as amended. The proceeds from the sale of such shares were added to our general funds and used for general corporate purposes.

We did not repurchase any of our equity securities during 2006.


The selected financial data presented below under the captions “Statement of Operations Data,” “Other Financial Data,” “Other Operating Data” and “Balance Sheet Data” for and as of each of the years in the five-year period ended December 31, 2006, are derived from our audited financial statements. The selected financial data presented below is qualified in its entirety by, and should be read in conjunction with, the financial statements and notes thereto and other financial and statistical information included elsewhere in this Form 10-K, including the information contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K.

25
 
   
Years Ended December 31,
  
   
(dollars in thousands)
  
   
2006
  
2005
  
2004
  
2003
  
2002
  
Statement of Operations Data:
                      
Total revenues
  
$
225,075
  
$
215,904
  
$
199,600
  
$
171,005
  
$
153,766
  
Cost of medical equipment outsourcing, sales and service
    
130,872
   
127,049
   
113,783
   
95,398
   
82,609
 
Gross margin
    
94,203
   
88,855
   
85,817
   
75,607
   
71,157
 
                                 
Selling, general and administrative:
                               
Recapitalization, stock compensation and severance
    
-
   
-
   
-
   
14,385
   
10,099
 
Other selling, general and administrative.
    
61,940
   
58,455
   
57,713
   
46,956
   
43,053
 
Total selling, general and administrative
    
61,940
   
58,455
   
57,713
   
61,341
   
53,152
 
Operating income
    
32,263
   
30,400
   
28,104
   
14,266
   
18,005
 
Interest expense
    
31,599
   
31,127
   
30,508
   
20,245
   
18,126
 
Loss on early retirement of debt
    
-
   
-
   
-
   
13,272
   
-
 
Income (loss) before income taxes
    
664
   
(727
)
  
(2,404
)
  
(19,251
)
  
(121
)
Income tax expense
    
612
   
842
   
1,188
   
275
   
97
 
Net income (loss)
  
$
52
  
$
(1,569
)
$
(3,592
)
$
(19,526
)
$
(218
)
 
   
Years Ended December 31, 
  
   
 (dollars in thousands)
  
     
2006
    
2005
    
2004
    
2003
    
2002
  
Other Financial Data:
                                
Net cash provided by operating activities
  
$
48,871
  
$
43,963
  
$
37,966
  
$
15,957
  
$
40,186
  
Net cash used in investing activities
    
(51,711
)
  
(40,631
)
  
(65,150
)
  
(36,770
)
  
(38,956
)
Net cash provided by (used in) financing activities
 
$
2,840
  
$
(3,332
)
$
27,184
  
$
20,813
  
$
(1,230
)
Other Operating Data:
                                
Movable medical equipment
                                
(approximate number of units at end of period)
    
173,000
    
161,000
    
150,000
    
144,000
    
138,000
  
Offices (at end of period)
    
79
    
75
    
75
    
69
    
65
  
Number of total customers (at end of period)
    
6,900
    
6,300
    
6,250
    
5,950
    
5,880
  
Depreciation and amortization
  
$
45,454
  
$
46,327
  
$
42,097
  
$
35,532
  
$
32,775
  
EBITDA(1)(2)
  
$
77,717
  
$
74,984
  
$
68,459
  
$
36,525
  
$
50,781
  
 
   
As of December 31,
  
   
(dollars in thousands)
  
   
2006
  
2005
  
2004
  
2003
  
2002
  
Balance Sheet Data:
                      
Working capital (3)
  
$
20,913
  
$
19,379
  
$
17,198
  
$
8,575
  
$
10,043
  
Total assets
  
$
265,006
  
$
249,185
  
$
246,407
  
$
220,219
  
$
202,136
  
Total debt
  
$
310,191
  
$
300,480
  
$
297,302
  
$
271,082
  
$
200,806
  
Shareholders’ deficiency
  
$
(92,981
)
$
(96,799
)
$
(93,058
)
$
(89,903
)
$
(55,358
)
 
(1)  
EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. Management understands that some industry analysts and investors consider EBITDA as a supplementary non-GAAP financial measure useful in analyzing a company’s ability to service debt. EBITDA, however, is not a measure of financial performance under Generally Accepted Accounting Principals (“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 that is available for management’s discretionary use. See note 2 for a reconciliation of net cash provided by operating activities to EBITDA.
(2)  
The following is a reconciliation of net cash provided by operating activities to EBITDA:
 
26

   
Years Ended December 31,
  
   
(dollars in thousands)
  
   
2006
  
2005
  
2004
  
2003
  
2002
  
Net cash provided by operating activities
  
$
48,871
  
$
43,963
  
$
37,966
  
$
15,957
  
$
40,186
  
Changes in operating assets and liabilities
    
678
   
2,327
   
2,245
   
7,916
   
4,122
 
Other non-cash expenses
    
(4,043
)
  
(3,275
)
  
(3,448
)
  
(7,867
)
  
(11,750
)
Income tax expense
    
612
   
842
   
1,188
   
275
   
97
 
Interest expense
    
31,599
   
31,127
   
30,508
   
20,244
   
18,126
 
EBITDA
  
$
77,717
  
$
74,984
  
$
68,459
  
$
36,525
  
$
50,781
  
 
(3)  
Represents total current assets (excluding cash and cash equivalents) less total current liabilities (excluding current portion of long-term debt).
 
Segment Information
 
   
Year Ended December 31, 2006
  
   
(dollars in thousands)
  
   
Medical
Equipment
Outsourcing
  
Technical and Professional
Services
  
Medical
Equipment Sales
and Remarketing
  
Corporate and Unallocated
  
Total
  
Revenues
  
$
176,932
  
$
30,445
  
$
17,698
  
$
-
  
$
225,075
  
Cost of revenue
    
58,987
    
21,068
    
13,387
    
-
   
93,442
  
Movable medical equipment depreciation
    
37,430
    
-
   
-
   
-
   
37,430
  
Gross margin
  
$
80,515
  
$
9,377
  
$
4,311
  
$
-
  
$
94,203
  
                                 
Total assets
  
$
39,395
  
$
1,793
  
$
3,843
  
$
219,975
  
$
265,006
  
 
   
Year Ended December 31, 2005 
  
 
    
(dollars in thousands)
  
 
    
Medical
Equipment Outsourcing
    
Technical and Professional
Services
    
Medical
Equipment Sales
and Remarketing
    
Corporate and Unallocated
    
Total
  
Revenues
  
$
167,687
  
$
29,654
  
$
18,563
  
$
-
  
$
215,904
  
Cost of revenue
    
52,499
    
21,878
    
14,706
    
-
   
89,083
  
Movable medical equipment depreciation
    
37,966
    
-
   
-
   
-
   
37,966
  
Gross margin
  
$
77,222
  
$
7,776
  
$
3,857
  
$
-
  
$
88,855
  
                                 
Total assets
  
$
40,467
  
$
2,496
  
$
3,850
  
$
202,372
  
$
249,185
  
 
 
    
Year Ended December 31, 2004
  
 
    
(dollars in thousands)
  
 
    
Medical Equipment Outsourcing
    
Technical and Professional
Services
    
Medical
Equipment Sales
and Remarketing
    
Corporate and Unallocated
    
Total
  
Revenues
  
$
156,490
  
$
25,491
  
$
17,619
  
$
-
  
$
199,600
  
Cost of revenue
    
47,178
    
17,295
    
13,307
    
-
   
77,780
  
Movable medical equipment depreciation
    
36,003
    
-
   
-
   
-
   
36,003
  
Gross margin
  
$
73,309
  
$
8,196
  
$
4,312
  
$
-
  
$
85,817
  
                                 
Total assets
  
$
41,070
  
$
3,199
  
$
3,858
  
$
198,280
  
$
246,407
  

Segment assets for the three operating business segments (excluding Corporate and Unallocated) primarily include goodwill and intangible assets. Corporate and Unallocated includes all other UHS assets.
27
 
Subsequent Events
 
On February 23, 2007, we entered into a definitive agreement (the “Intellamed Agreement”) with Intellamed, Inc., a Texas corporation (“Intellamed”), providing for our purchase of the assets of the ICMS division of Intellamed and our assumption of certain liabilities in connection therewith for a purchase price of $16.5 million in cash, subject to certain adjustments and earnout consideration. The Intellamed Agreement provides for us to make advances of the purchase price to Intellamed before the closing of this acquisition subject to certain conditions. In connection with the advances, we entered into a promissory note, which provides for Intellamed to re-pay these advances subject to certain conditions. The Intellamed Agreement provides for us to pay earnout consideration to Intellamed during the first and second 12 consecutive month periods following the closing date. On February 27, 2007, we entered into a letter agreement with Intellamed that amends the Intellamed Agreement. This acquisition is expected to close during the second quarter of 2007, subject to obtaining third party consents as more particularly described in the Intellamed Agreement and the satisfaction of customary closing conditions.
 


OVERVIEW

We are a leading nationwide provider of medical equipment outsourcing and services to the health care industry, including national, regional and local acute care hospitals and alternate site providers, such as nursing homes and home care providers. We service customers across the spectrum of the equipment life cycle as a result of our position as the industry’s largest purchaser, outsourcer and reseller of movable medical equipment. Our diverse customer base includes more than 3,600 acute care hospitals and approximately 3,300 alternate site providers. We also have extensive and long-standing relationships with over 220 major medical equipment manufacturers and the nation’s largest GPOs and IDNs. Our service offerings fall into three segments: Medical Equipment Outsourcing, Technical and Professional Services, and Medical Equipment Sales and Remarketing. All of our services leverage our nationwide logistics network and our more than 65 years of experience managing and servicing all aspects of movable medical equipment. These services are paid by our customers and not directly through reimbursement from governmental or other third-party payors.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. However, actual results could differ from these estimates. Management believes the critical accounting policies and areas that require more significant judgments and estimates used in the preparation of our consolidated financial statements to be:
 
28
 
·  
allowance for doubtful accounts;
·  
useful lives assigned to long-lived and intangible assets;
·  
recoverability of long-lived and intangible assets, including goodwill;
·  
measurement of our pension benefit obligation;
·  
self-insurance reserves for worker’s compensation, employee health care and auto insurance plans;
·  
provisions for inventory and equipment obsolescence; and
·  
various other commitments and contingencies.

We estimate the allowance for doubtful accounts considering a number of factors, including:

·  
historical experience;
·  
aging of the accounts receivable; and
·  
specific information obtained by us on the condition and the current creditworthiness of our customers.

If the financial conditions of our customers were to deteriorate and affect the ability of our customers to make payments on their accounts, we may be required to increase our allowance by recording additional bad debt expense. Likewise, should the financial condition of our customers improve and result in payments or settlements of previously reserved amounts, we may be required to record a reduction in bad debt expense to reverse the recorded allowance.

Depreciation and amortization are recognized using the straight-line method over the estimated useful life of the long-lived asset and intangible asset. We estimate useful lives based on historical data and industry trends. We periodically reassess the estimated useful lives of our long-lived and intangible assets. Changes to estimated useful lives would impact the amount of depreciation and amortization expense recorded in earnings and potentially require us to record an impairment charge.

We review long-lived and intangible assets, including goodwill, for impairment annually, or at any time events or circumstances indicate that the carrying value of such assets may not be fully recoverable. For long-lived assets and amortizable intangible assets, an impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the assets compared to its carrying value. For goodwill, an impairment is evaluated based on the fair value of each reporting unit. If an impairment is recognized, the carrying value of the impaired asset is reduced to its fair value based on discounted estimated future cash flows. As of January 1, 2007, no goodwill impairment has been recognized in 2006, 2005 or 2004.
 
29

The measurement of our pension benefit obligation is dependent on a variety of assumptions determined by management and used by our actuaries. These assumptions affect the amount and timing of future contributions and expenses.

The assumptions used in developing the required estimates include discount rate, expected return or earnings on assets, retirement rates and mortality rates. We assume no changes in projected salary costs as the benefits under the plan were frozen in 2002. For year-end 2006, the discount rate assumption is determined by considering the average of bond yield curves constructed from a large population of high-quality, non-callable, corporate bond issues with maturity dates of six months to thirty years. Bond issues in the population are rated no less than Aa by Moody’s Investor Services or AA by Standard & Poors. A single equivalent discount rate reflects the matching of the plan liability cash flows to the yield curve. Prior to 2005, the discount rate assumption was based on the investment yields available at year-end on corporate long-term bonds rated no less than Aa by Moody’s Investor Services or AA by Standard & Poors.

The expected return on plan assets reflects asset allocations, investment strategies and the views of investment managers over a long-term perspective. Retirement and mortality rates are based on anticipated future plan experience. The effects of actual results differing from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in future periods. Our unrecognized actuarial loss on our pension is $3.2 million. This decrease over prior year is primarily attributable to the increase of the discount rate in the current year. Significant differences in actual experience or significant changes in assumptions may materially affect pension obligations.

In determining our pension obligations for 2006, our discount rates increased from 5.5 percent at year-end 2005 to 5.9 percent. The increase in the discount rate and expected returns on plan assets of 8.00% remaining stable are expected to result in relatively flat pension expense in 2007; however, given current assumptions, pension expense should be lower in future periods due to freezing plan benefits in 2002.

We estimate our liability for worker’s compensation and auto self-insurance plans by applying insurance industry standard loss development factors to projected and the Company’s experienced claims information. Significant changes in claims activity would have a direct impact on the amount of expense we recognize in association with these self-insurance programs. Self-insurance costs related to our employee health care are accrued based upon the aggregate of the liability for reported claims and estimated liability for claims development and incurred but not reported.

We maintain a provision for inventory obsolescence to reflect the potential for equipment and supply obsolescence due to equipment recalls, new product introductions, manufacturer defects and other events which may impact the value of inventory items. We determine this provision by analyzing inventory use regularly and assigning reserve percentages based upon inventory turnover and manufacturer activities related to new product introductions. Significant product recalls and/or next generation technology introductions may cause a portion of our inventory to become obsolete. Such activity would lead to increased expense related to inventory obsolescence.
 
30

In the normal course of business, we make estimates of potential loss accruals related to legal, tax, missing equipment and service obligations. These accruals require the use of management’s judgment on the outcome of various issues. Management’s estimates for these items are based on the best available evidence, but due to changes in facts and circumstances, the ultimate outcomes of these accruals could be different than management’s estimates.

ACQUISITIONS

As part of our growth strategy, we regularly review and evaluate potential acquisition opportunities.

On March 24, 2004, we completed the acquisition of Affiliated Clinical Engineering Services, Inc. (“ACES”), located in Boston, Massachusetts. The purchase price was approximately $4.2 million.

On April 15, 2004, we completed the acquisition of certain assets from Galaxy Medical Products, Inc., headquartered in Akron, Ohio. The purchase price was approximately $4.9 million.

On May 4, 2004, we completed the acquisition of substantially all of the assets of Advanced Therapeutics of Wisconsin, Inc., headquartered in Milwaukee, Wisconsin. The purchase price was approximately $5.1 million.

On August 31, 2004, we completed the acquisition of certain assets of Cardinal Health 200, Inc., headquartered in Naperville, Illinois. The purchase price was approximately $0.9 million.

On December 22, 2005, we completed the acquisition of substantially all the assets of Innovative Healthcare Solutions, Inc., headquartered in Esko, Minnesota. The purchase price was approximately $1.1 million.

On February 23, 2007, we entered into a definitive agreement (the “Intellamed Agreement”) with Intellamed, Inc., a Texas corporation (“Intellamed”), providing for our purchase of the assets of the ICMS division of Intellamed and our assumption of certain liabilities in connection therewith for a purchase price of $16.5 million in cash, subject to certain adjustments and earnout consideration. On February 27, 2007, we entered into a letter agreement with Intellamed that amends the Intellamed Agreement. This acquisition is expected to close during the second quarter of 2007, subject to obtaining third party consents as more particularly described in the Intellamed Agreement and the satisfaction of customary closing conditions. In connection with this acquisition, we entered into Amendment No. 1 to the Amended Credit Agreement dated as of February 13, 2007, with General Electric Capital Corporation, as agent for the lenders, and the lenders party thereto (the "Amendment"). The Amendment permits us to consummate this acquisition subject to certain conditions.
 
31
 
We financed the above acquisitions with borrowings under our available credit facilities.

RESULTS OF OPERATIONS

The following table provides information on the percentages of certain items of selected financial data compared to total revenues and also indicates the percentage increase or decrease of this information over the prior comparable period.

               
Percent Increase (Decrease)
  
   
Percent of Total Revenues
  
Year Ended
  
Year Ended
  
   
Years Ended December 31,
 
2006 Over
  
2005 Over
  
               
Year Ended
  
Year Ended
  
Revenue
  
2006
  
2005
  
2004
  
2005
  
2004
  
Medical equipment outsourcing
    
78.6
%
  
77.7
%
  
78.4
%
  
5.5
%
  
7.2
%
Technical and professional services
    
13.5
   
13.7
   
12.8
   
2.7
   
16.3
 
Medical equipment sales and remarketing
   
7.9
   
8.6
   
8.8
   
(4.7
)
  
5.4
 
Total revenues
    
100.0
%
  
100.0
%
  
100.0
%
  
4.2
   
8.2
 
                                 
Cost of Sales
                                
Cost of medical equipment outsourcing
    
26.2
   
24.3
   
23.6
   
12.4
   
11.3
 
Cost of technical and professional services
    
9.4
   
10.1
   
8.7
   
(3.7
)
  
26.5
 
Cost of medical equipment sales and remarketing
    
6.0
   
6.8
   
6.7
   
(9.0
)
  
10.5
 
Movable medical equipment depreciation
    
16.6
   
17.6
   
18.0
   
(1.4
)
  
5.5
 
Total costs of medical equipment outsourcing, technical and professional services and medical equipment sales and remarketing
    
58.2
   
58.8
   
57.0
   
3.0
   
11.7
 
Gross margin
    
41.8
   
41.2
   
43.0
   
6.0
   
3.5
 
                                 
Selling, general and administrative
    
27.5
   
27.1
   
28.9
   
6.0
   
1.3
 
Operating income
    
14.3
   
14.1
   
14.1
   
6.1
   
8.2
 
                                 
Interest expense
    
14.0
   
14.4
   
15.3
   
1.5
   
2.0
 
Income (loss) before income taxes
    
0.3
   
(0.3
)
  
(1.2
)
  
*
    
*
  
                                 
Provision for income taxes
    
0.3
   
0.3
   
0.6
   
*
    
*
  
Net income (loss)
   
-
%
  
(0.6
)%
  
(1.8
)%
  
*
    
*
  
                                 
* Not Meaningful
                                
 
32

Comparison of the year ended December 31, 2006, to the year ended December 31, 2005

Medical Equipment Outsourcing Segment – Manage & Utilize
                  
(dollars in thousands)
  
Year Ended
          
   
December 31,
          
   
2006
  
2005
  
Change
  
% Change
  
                   
Total revenue
  
$
176,932
  
$
167,687
  
$
9,245
    
5.5
%
Cost of revenue
    
58,987
   
52,499
   
6,488
   
12.4
 
Movable medical equipment depreciation
    
37,430
    
37,966
    
(536
)
  
(1.4
)
Gross margin
  
$
80,515
  
$
77,222
  
$
3,293
    
4.3
%
                           
Gross margin %
    
45.5
%
  
46.1
%
            

Total revenue in the Medical Equipment Outsourcing segment rose $9.2 million, or 5.5%, to $176.9 million in 2006. This increase was driven by growth in our acute care customer base, increased activity in our AMPP customers and incremental business from new and existing technology in our fleet, offsetting weak hospital census.

Total cost of revenue in the segment rose $6.5 million, or 12.4%, to $59.0 million in 2006. This increase is primarily attributable to higher repair and maintenance costs associated with our fleet of $2.5 million and higher employee-related costs of $1.9 million due to an increased number of employees. Other increases in this area include increased gasoline expense of $0.6 million, travel expense of $0.6 million, occupancy expense of $0.5 million and other net expense increases of $0.4 million. Increased expenses were primarily driven by increased business activity.

Movable medical equipment depreciation decreased $0.5 million, or 1.4%, to $37.4 million in 2006. This decrease is primarily due to the effects of disposals and equipment reaching the end of its depreciable life.

Gross margin from the Medical Equipment Outsourcing segment for the year ended December 31, 2006, was $80.5 million, representing a $3.3 million, or 4.3% increase from 2005. Gross margin percentage for the Medical Equipment Outsourcing segment decreased from 46.1% in 2005 to 45.5% in 2006. This decrease is primarily attributable to higher repair and maintenance and employee-related costs along with generally weak hospital census.
 
33

Technical and Professional Services Segment – Plan & Acquire; Maintain & Repair
(dollars in thousands)
  
Year Ended
          
   
December 31,
          
   
2006
  
2005
  
Change
  
% Change
  
Total revenue
  
$
30,445
  
$
29,654
  
$
791
    
2.7
%
Cost of revenue
    
21,068
   
21,878
   
(810
)
  
(3.7
)
Gross margin
  
$
9,377
  
$
7,776
  
$
1,601
    
20.6
%
                           
Gross margin %
    
30.8
%
  
26.2
%
            
 
 
Total revenue in the Technical and Professional Services segment rose $0.8 million, or 2.7%, to $30.4 million in 2006. This revenue increase resulted primarily from growth in our resident biomedical programs of $0.8 million and our manufacturer services business of $0.3 million partially offset by a decrease in supplemental or response-based revenues of $0.3 million. These product lines are transactional in nature and such results reflect increased customer demand.

Total cost of revenue in the segment decreased $0.8 million, or 3.7%, to $21.1 million in 2006. This decrease is primarily attributable to a decrease in repair and supply related expenses of $0.6 million and lower travel expense of $0.5 million, partially offset by other increased expenses of $0.3 million.

Gross margin from the Technical and Professional Services segment for the year ended December 31, 2006, totaled $9.4 million, representing a $1.6 million, or 20.6%, increase from 2005. Gross margin percentage for the Technical and Professional Services segment increased from 26.2% in 2005 to 30.8% in 2006. This increase is primarily due to increased resident biomedical revenues and the effect of operating efficiency programs.
 
Medical Equipment Sales and Remarketing Segment – Redeploy & Remarket
(dollars in thousands)
  
Year Ended
          
   
December 31,
          
   
2006
  
2005
  
Change
  
% Change
  
Total revenue
  
$
17,698
  
$
18,563
  
$
(865
)
  
(4.7
)%
Cost of revenue
    
13,387
   
14,706
   
(1,319
)
  
(9.0
)
Gross margin
  
$
4,311
  
$
3,857
  
$
454
    
11.8
%
                           
Gross margin %
    
24.4
%
  
20.8
%
            
 
Total revenue in the Medical Equipment Sales and Remarketing segment decreased $0.9 million, or 4.7%, to $17.7 million in 2006. This decrease was caused by lower sales in disposable, new equipment, and other of $0.6, $0.6 and $0.2, respectively. These decreases were partially offset by increased used equipment sales of $0.5 million. These results are consistent with our strategy to reduce activity with disposable products.
 
34
 
Total cost of revenue in the segment decreased $1.3 million, or 9.0%, to $13.4 million in 2006. This decrease is primarily attributable to lower cost of disposable sales, new equipment sales, used equipment and other sales of $0.6, $0.4, $0.2 and $0.1 million, respectively.

Gross margin from the Medical Equipment Sales and Remarketing segment for the year ended December 31, 2006, was $4.3 million, representing a $0.5 million or 11.8% increase from 2005. Gross margin percentage for the Medical Equipment Sales and Remarketing segment increased from 20.8% in 2005 to 24.4% in 2006. Margins in this segment fluctuate based on equipment mix and used equipment availability.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $3.5 million, or 6.0%, to $61.9 million in 2006. The increase was primarily attributable to $1.6 million of stock compensation expenses related to the adoption of Statement of Financial Accounting Standards No. 123(R) (“SFAS 123(R)”), increased personal property taxes of $0.9 million, the write-off of software development costs previously capitalized of $0.8 million, higher board of directors related expenses of $0.7 million, increased travel and entertainment expense of $0.4 million and other increases totaling $0.2 million. Increases were partially mitigated by a decrease in SOX and data communication expenses of $0.6 and $0.5 million, respectively. Selling, general and administrative expenses as a percentage of total revenue increased to 27.5% in 2006 from 27.1% for 2005.

Interest Expense

Interest expense rose $0.5 million, or 1.5%, to $31.6 million in 2006. The increase in interest expense reflects higher interest rates and increased debt, primarily resulting from capital leases. Our average effective interest rate on variable rate debt increased from 6.6% to 7.5% during 2006.

Income Taxes

Tax expense for 2006 was $0.6 million versus $0.8 million for 2005. Income tax expense relates primarily to valuation allowances established for net operating losses not recognized as well as minimum state taxes.

Net Income (Loss)

Net income (loss) improved $1.6 million to $0.1 million in 2006. The improvement is primarily due to increased revenue generating higher gross margin of $5.3 million, partially offset by increased selling, general and administrative costs of $3.5 million and interest expense of $0.5 million.
 
35
 
EBITDA

EBITDA for the year ended December 31, 2006, was $77.7 million, representing a $2.7 million, or 3.6%, increase from $75.0 million for the same period of 2005. This increase resulted primarily from increased revenue generating higher gross margin of $5.3 million partially offset by increased selling, general and administrative expense.

EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. Management understands that some industry analysts and investors consider EBITDA as a supplementary non-GAAP financial measure useful in analyzing a company’s ability to service debt. EBITDA, however, is not a measure of financial performance under 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 that is available for management’s discretionary use.

For a reconciliation of EBITDA to net cash provided by operating activities, see note (2) under the caption “Selected Financial Data” in Item 6 of this Form 10-K.

Comparison of the year ended December 31, 2005, to the year ended December 31, 2004
Medical Equipment Outsourcing Segment – Manage & Utilize
(dollars in thousands)
  
Year Ended
          
   
December 31,
          
   
2005
  
2004
  
Change
  
% Change
  
Total revenue
  
$
167,687
  
$
156,490
  
$
11,197
    
7.2
%
Cost of revenue
    
52,499
   
47,178
   
5,321
   
11.3
 
Movable medical equipment depreciation
    
37,966
    
36,003
    
1,963
   
5.5
 
Gross margin
  
$
77,222
  
$
73,309
  
$
3,913
    
5.3
%
                           
Gross margin %
    
46.1
%
  
46.8
%
            
 
Total revenue in the Medical Equipment Outsourcing segment rose $11.2 million, or 7.2%, to $167.7 million in 2005. This increase was driven by growth in our acute care customer base, increased activity in our AMPP customers, and incremental business from new and existing technology in our fleet, offsetting weak hospital census and the impacts of equipment recalls.

36
 
Total cost of revenue in the segment rose $5.3 million, or 11.3%, to $52.5 million in 2005. This increase is primarily attributable to higher employee-related costs of $1.5 million due to increased headcount, worker’s compensation costs and higher benefits costs. Facilities and occupancy expenses rose $1.2 million in association with office expansions and relocations as well as higher utility rates. Other increases in this area include repair expenses of $1.2 million, gasoline and other fleet expenses of $0.6 million, freight expenses of $0.6 million and other unfavorable cost variances of $0.2 million, all primarily driven by increased business activity.

Movable medical equipment depreciation increased $2.0 million, or 5.5%, to $38.0 million in 2005. This increase primarily reflects an increase in the average total value of rental equipment during the year.

Gross margin from the Medical Equipment Outsourcing segment for the year ended December 31, 2005, was $77.2 million, representing a $3.9 million, or 5.3% increase from medical equipment outsourcing gross margin of $73.3 million for 2004. Gross margin percentage for the Medical Equipment Outsourcing segment decreased from 46.8% in 2004 to 46.1% in 2005. This decrease is primarily attributable to higher employee-related, repair, occupancy and fleet costs and weak hospital census.
 

Technical and Professional Services Segment – Plan & Acquire; Maintain & Repair
(dollars in thousands)
  
Year Ended
          
   
December 31,
          
   
2005
  
2004
  
Change
  
% Change
  
Total revenue
  
$
29,654
  
$
25,491
  
$
4,163
    
16.3
%
Cost of revenue
    
21,878
   
17,295
   
4,583
   
26.5
 
Gross margin
  
$
7,776
  
$
8,196
  
$
(420
)
  
(5.1
)%
                           
Gross margin %
    
26.2
%
  
32.2
%
            

Total revenue in the Technical and Professional Services segment rose $4.2 million, or 16.3%, to $29.7 million in 2005. This revenue increase resulted from growth in our supplemental, or response-based, business of $2.6 million and manufacturer services business of $0.4 million. These product lines are transactional in nature and such results reflect increased customer demand. We also experienced growth in our resident-based programs of $1.2 million, reflecting higher resident program count and increased activity at existing customers. Fiscal 2005 also benefited from a full year of contribution from the acquisition of ACES, which was not represented in the first quarter of 2004.

Total cost of revenue in the segment rose $4.6 million, or 26.5%, to $21.9 million in 2005. This increase is primarily attributable to greater average technician headcount generating higher employee-related costs of $3.0 million and higher repair costs of $1.6 million.

Gross margin from the Technical and Professional Services segment for the year ended December 31, 2005, totaled $7.8 million, representing a $0.4 million, or 5.1%, decrease from Technical and Professional Services segment gross margin of $8.2 million for 2004.
 
37
 
Gross margin percentage for the Technical and Professional Services segment decreased from 32.2% in 2004 to 26.2% in 2005. This decrease is primarily due to increased competition, in addition to the loss of revenue from a financially-distressed customer during 2005 and increased staffing costs related to the building of our equipment lifecycle services platform. We believe margin levels experienced in 2004 are not sustainable going forward due to increased competition.
 

Medical Equipment Sales and Remarketing Segment – Redeploy & Remarket
(dollars in thousands)
  
Year Ended
          
   
December 31,
          
   
2005
  
2004
  
Change
  
% Change
  
Total revenue
  
$
18,563
  
$
17,619
  
$
944
    
5.4
%
Cost of revenue
    
14,706
   
13,307
   
1,399
   
10.5
 
Gross margin
  
$
3,857
  
$
4,312
  
$
(455
)
  
(10.6
)%
                           
Gross margin %
    
20.8
%
  
24.5
%
            
 
Total revenue in the Medical Equipment Sales and Remarketing segment rose $0.9 million, or 5.4%, to $18.6 million in 2005. This increase was caused by higher new equipment sales of $1.1 million and higher fleet and used equipment sales of $1.6 million, partially offset by reduced sales of disposable items of $1.8 million. These results are consistent with our strategy to reduce activity with disposable products and continue to grow new and used equipment sales.

Total cost of revenue in the segment rose $1.4 million, or 10.5%, to $14.7 million in 2005. This increase is primarily attributable to higher costs of new equipment sales of $1.7 million, used and brokerage equipment of $1.0 million and repair and logistic costs of $0.3 million partially offset by reduced costs of disposable goods sold of $1.6 million.

Gross margin from the Medical Equipment Sales and Remarketing segment for the year ended December 31, 2005, was $3.9 million, representing a $0.4 million or 10.6% decrease from the Medical Equipment Sales and Remarketing segment gross margin of $4.3 million for the same period of 2004. Gross margin percentage for the Medical Equipment Sales and Remarketing segment decreased from 24.5% in 2004 to 20.8% in 2005. Margins in this segment will fluctuate based on equipment mix and used equipment availability, which was constrained in the first quarter of 2005 by robust demand in our outsourcing segment where for-sale inventory was converted to our rental fleet. Additionally, a recall of Baxter’s Colleague infusion pump line resulted in higher rental utilization of older infusion pump models which typically would have been sold.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $0.7 million, or 1.3%, to $58.5 million in 2005 primarily attributable to recruiting, relocation and severance costs related to the realignment of our sales and operations organizations of $0.7 million. Increases in other expenses in this area were mitigated by the effects of continuous improvement efforts and cost controls implemented during the second half of 2005 that resulted in reduced employee-related and travel expenses. Selling, general and administrative expenses as a percentage of total revenue decreased to 27.1% in 2005 from 28.9% for 2004.
 
38
 
Interest Expense

Interest expense rose $0.6 million, or 2.0%, to $31.1 million in 2005. The increase in interest expense reflects increased borrowing as well as higher interest rates. Average total borrowings in 2005 increased to $298.6 million from $288.2 million for 2004, primarily due to the timing of the acquisitions in the first half of 2004. Our average effective interest rate on variable rate debt increased from 5.5% to 6.6% during 2005.

Income Taxes

Tax expense for 2005 was $0.8 million versus $1.2 million for 2004. Income tax expense relates primarily to valuation allowances established for net operating losses not recognized as well as minimum state taxes.

Net Income (Loss)

Net loss improved $2.0 million, or 56.3%, to $1.6 million in 2005. The improvement is primarily due to increased revenue generating higher gross margin of $3.0 million partially offset by increased selling, general and administrative costs of $0.7 million and interest expense of $0.6 million. Net loss in 2005 was also impacted by increased worker’s compensation and auto insurance costs of $0.7 million offset by lower income tax expense of $0.4 million.

EBITDA

EBITDA for the year ended December 31, 2005, was $75.0 million, representing a $6.5 million, or 9.5%, increase from $68.5 million for the same period of 2004. This increase resulted primarily from increased revenue generating higher gross margin of $3.0 million. EBITDA also benefited by $1.2 million related to recording of certain leased vehicles that qualified as capital leases.

EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. Management understands that some industry analysts and investors consider EBITDA as a supplementary non-GAAP financial measure useful in analyzing a company’s ability to service debt. EBITDA, however, is not a measure of financial performance under 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 that is available for management’s discretionary use.

39
 
For a reconciliation of EBITDA to net cash provided by operating activities, see note (2) under the caption “Selected Financial Data” in Item 6 of this Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

Amended and Restated Credit Agreement

General

On May 26, 2005, we entered into an Amended and Restated Credit Agreement (“Amended Credit Agreement”) with a bank group led by General Electric Capital Corporation. Under the terms of the Amended Credit Agreement, we may obtain an aggregate of $125 million. On February 13, 2007, we entered into Amendment No. 1 to the Amended Credit Agreement (the "Amendment"). The Amendment permits us to consummate the acquisition of the assets of the ICMS division of Intellamed, Inc. for a purchase price of $16.5 million in cash, subject to certain adjustments and earnout consideration as more particularly described in Item 6 of this Form 10-K under the caption “Subsequent Events”.
 
Availability under the Amended Credit Agreement as of December 31, 2006, was approximately $77.1 million, representing our borrowing base of approximately $122.4 million less borrowings of $43.0 million and outstanding letters of credit of $2.3 million at that date. Borrowings under the agreement are collateralized by substantially all of our assets.
 
Amounts borrowed under the Amended Credit Agreement generally bear interest on LIBOR-based and index rate formulas. At December 31, 2006, the interest rates were 2.00 percentage points over LIBOR and 0.75 percentage points over the index rate, with the interest rate margins subject to change based upon quarterly leverage ratios. At December 31, 2006, our LIBOR-based rate was 7.35% and our index-based rate was 9.00%, both of which include the credit spreads noted above. The terms of the Amended Credit Agreement also extended the maturity from October 2008 to May 2010. Amounts borrowed under the Amended Credit Agreement are due at the end of the five-year term.

The Amended Credit Agreement contains certain covenants, including restrictions and limitations on dividends, liens, leases, incurrence or guarantees of debt, transactions with affiliates, investments or loans, and mergers, acquisitions, consolidations and asset sales. Furthermore, we are required to maintain compliance with certain financial covenants, including a maximum senior debt leverage ratio and a minimum interest coverage ratio. As of December 31, 2006, we were in compliance with all covenants under the Amended Credit Agreement. (See “Covenants Under Our Amended Credit Agreement” below.)

40
 
Covenants Under Our Amended Credit Agreement

Our senior secured credit facility under our Amended Credit Agreement, as amended February 13, 2007 by Amendment No. 1 permits us to consummate the purchase of the assets of the ICMS division of Intellamed, Inc., and is secured by substantially all of our assets and the assets of some of our future subsidiaries, if any, and by a pledge of all of the capital stock of some of our future subsidiaries, if any. Our ability to borrow under the senior secured credit facility is governed by a borrowing base composed of certain of our accounts receivable and equipment inventory.

Our senior secured credit facility contains affirmative covenants relating to prepayment of our loans upon the occurrence of certain events; access to records and personnel; payment of taxes; delivery of financial statements and reports and agreements with landlords; maintenance of corporate existence and conduct of business; payment of obligations; maintenance of books and records, insurance and rights to intellectual property; compliance with laws, including environmental laws and permits; and indemnification of the lenders under the credit facility for certain claims made against them relating to the credit facility.

The senior credit facility also contains negative covenants (See “Negative Covenants“ in Exhibit 10.21 to Form 8-K filed on May 26, 2005). These covenants are subject to a number of important limitations and exceptions. The negative covenants restrict and limit our ability and the ability of our future subsidiaries (we currently have no subsidiaries), if any, with respect to, among other things:

·  
entering into merger or similar transactions;
·  
making investments, loans and advances;
·  
incurring indebtedness;
·  
entering into affiliate transactions;
·  
changing our capital structure or nature of our business;
·  
incurring guaranteed indebtedness;
·  
granting liens;
·  
selling stock and assets;
·  
engaging in sale-leaseback or similar transactions;
·  
canceling our indebtedness;
·  
paying dividends or making other distributions;
·  
engaging in speculative transactions;
·  
amending the terms of our subordinated debt and certain agreements; and
·  
changing our name, location or fiscal year.

In addition, our senior secured credit facility requires that we comply with the following financial covenants:

·  
Minimum interest coverage ratio. We and our subsidiaries must maintain on a consolidated basis at each date set forth below, a ratio of EBITDA (as defined in our Amended Credit Agreement) to interest expense (as defined in our Amended Credit Agreement) of not less than 2.00 to 1.0 for the twelve-month periods ending on each June 30, September 30, December 31 and March 31. Our interest coverage ratio for the twelve-month period ended on December 31, 2006 was 2.7 to 1.0.
 
41
 
·  
Maximum total senior secured leverage ratio. We and our subsidiaries must maintain on a consolidated basis at each date set forth below, a ratio of funded senior secured debt (as defined in our Amended Credit Agreement) to EBITDA (as defined in our Amended Credit Agreement) of not more than 2.0 to 1.0 as of, and for, each of the twelve-month periods ending on each June 30, September 30, December 31 and March 31. Our total senior secured leverage ratio for the twelve-month period ended on December 31, 2006, was 0.7 to 1.0.

Senior Notes

On May 14, 2004, we exchanged our $260 million in outstanding 10.125% series A senior notes due 2011, which we refer to as the initial notes, for $260 million in registered 10.125% series B notes due 2011, which we refer to as the exchange notes. The terms of the exchange notes are identical to the terms of the initial notes except that the exchange notes are registered under the Securities Act of 1933, and therefore are freely transferable, subject to certain restrictions. The exchange notes evidence the same indebtedness as the initial notes. Interest on the notes is payable on May 1 and November 1 of each year. As of December 31, 2006, we had outstanding $260 million of our senior notes. The indenture governing our notes contains restrictions on our ability to engage in certain activities and limitations on capital expenditures. (See “Covenants Under the Indenture Governing the Senior Notes” below.)

Covenants Under the Indenture Governing the Senior Notes

The indenture governing our notes contains covenants limiting our ability to incur additional debt; 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. These covenants are subject to a number of important limitations and exceptions. See “Description of Notes -- Certain Covenants” in Amendment Number 5 to Form S-4 filed on April 15, 2004.

Liquidity

Our principal sources of liquidity are expected to be cash flows from operating activities and borrowings under our senior secured credit facility. It is anticipated that our principal uses of liquidity will be to fund capital expenditures related to purchases of movable medical equipment, provide working capital, meet debt service requirements and finance our strategic plans, including acquisitions.

We require substantial cash to grow our Medical Equipment Outsourcing programs and service our debt. Our outsourcing programs require us to invest a significant amount of cash in movable medical equipment purchases. To the extent that such expenditures cannot be funded from our operating cash flow, borrowings under our senior secured credit facility or other financing sources, we may not be able to conduct our business or grow as currently planned. We currently expect that over the next 12 months, we will invest approximately $55 million in new movable medical equipment and other capital expenditures. This estimate is subject to numerous assumptions, including revenue growth and the number of AMPP signings.

42
 
The following table sets forth selected historical information regarding our cash flows:
   
Years Ended December 31,
  
   
(dollars in thousands)
  
   
2006
  
2005
  
2004
  
Net cash provided by operating activities
  
$
48,871
  
$
43,963
  
$
37,966
  
Net cash used in investing activities
    
(51,711
)
  
(40,631
)
  
(65,150
)
Net cash provided by (used in) financing activities
 
$
2,840
  
$
(3,332
)
$
27,184
  

Net cash provided by operating activities during the year ended December 31, 2006, was $48.9 million compared to $44.0 million in the same period in 2005. This increase was primarily attributable to increased net earnings of $1.6 million, favorable changes in operating assets and liabilities of $1.7 million and favorable other non-cash expenses of $1.6 million. Net cash used in investing activities during the year ended December 31, 2006, was $51.7 million, compared to $40.6 million in the same period in 2005. This increase was primarily due to increased moveable medical purchases of $12.7 million. Net cash provided by financing activities during the year ended December 31, 2006, was $2.8 million, compared to net cash used in financing activities of $3.3 million in the same period in 2005. This change was primarily attributable to increased net borrowings under our Amended Credit Agreement of $4.1 million resulting from increased moveable medical equipment purchases during 2006 and a $1.5 million reduction in our book overdrafts. Changes in book overdraft relate to changes in checks outstanding.

Net cash provided by operating activities during the year ended December 31, 2005, was $44.0 million compared to $38.0 million in the same period in 2004. This increase was primarily attributable to decreased net loss due to increased revenue generating $3.0 million higher gross margin. Net cash used in investing activities during the year ended December 31, 2005, was $40.6 million, compared to $65.2 million in the same period in 2004. This decrease was primarily due to the $14.0 million reduction in acquisitions and reduced cash payments on net equipment purchases of $9.7 million. Net cash used in financing activities during the year ended December 31, 2005, was $3.3 million, compared to net cash provided by financing activities of $27.2 million in the same period in 2004. This change was primarily attributable to decreased net borrowings under our Amended Credit Agreement of $25.4 million due to the acquisitions and capital expenditures made during 2004, and a $2.2 million reduction in our book overdraft. Changes in book overdraft relate to changes in checks outstanding.
 
43
 
Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities (“SPE”), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2006, we do not have any SPE transactions.

Contractual Obligations

The following is a summary as of December 31, 2006, of our future contractual obligations (in thousands):

   
Payments due by period
  
Contractual Obligations
  
Total
  
2007
  
2008 -2009
  
2010-2011
  
2012 and beyond
  
Long-term debt obligations
  
$
310,191
  
$
3,056
  
$
3,697
  
$
303,438
  
$
-
  
Interest on senior notes
   
127,238
   
26,325
   
52,650
   
48,263
   
-
 
Operating lease obligations
    
51,924
   
6,603
   
13,103
   
10,779
   
21,439
 
Purchase obligations
    
7,469
   
7,469
   
-
   
-
   
-
 
Pension obligations 1
    
-
   
-
   
-
   
-
   
-
 
Total contractual obligations
  
$
496,822
  
$
43,453
  
$
69,450
  
$
362,480
  
$
21,439
  
                                 
Other commercial commitments:
                                
Stand by letter of credit
  
$
2,342
  
$
-
  
$
-
  
$
-
  
$
-
  
 
(1)  
We do not have any significant statutory or contractual funding requirements for our qualified non-contributory defined pension plan. We cannot reasonably determine the exact timing or amount of payments to meet any future funding requirements under the plan.

Based on the level of operating performance expected in 2007, we believe our cash from operations, together with additional borrowings under our Amended Credit Agreement, 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. Availability under our Amended Credit Agreement as of December 31, 2006, was approximately $77.1 million, representing our borrowing base of $122.4 million, net of outstanding letters of credit of $2.3 million and borrowings of $43.0 million at that date.

Our expansion and acquisition strategy may require substantial capital. Sufficient funding for such acquisitions may not be available under our existing revolving credit facility, and we may not be able to raise any necessary additional funds through bank financing or the issuance of equity or debt securities on terms acceptable to us, if at all.
 
44
 
RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Standards Board (“FASB”) issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an Amendment of FASB Statements No. 87, 88, 106 and 123(R). SFAS No. 158 requires employers to recognize the under funded or over funded status of a defined benefit post retirement plan as an asset or liability in its statements of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income. Additionally, SFAS No. 158 requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position. The provisions of SFAS No. 158 are effective for fiscal years ending after June 15, 2007. We are currently evaluating the impact of this statement, but believe the adoption of SFAS No. 158 will not have a material impact on our financial position or results of operations.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. We believe the adoption of SFAS No. 157 will not have a material impact on our financial position or results of operations.
 
In September 2006, the U.S. Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"). This SAB addresses diversity in practice of quantifying financial statement misstatements. It establishes an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company's financial statements and the related financial statement disclosures. The SAB is effective for financial statements issued for fiscal years ending after November 15, 2006. The adoption of SAB 108 does not have an impact on our financial position or results of operations.
 
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of this statement, but believe the adoption of FIN 48 will not have a material impact on our financial position or results of operations.
 
45
 
FORWARD LOOKING STATEMENTS

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

We believe statements in this Annual Report on Form 10-K 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 history of net losses and substantial interest expense; our need for substantial cash to operate and expand our business as planned; our substantial outstanding debt and debt service obligations; restrictions imposed by the terms of our debt; a decrease in the number of patients our customers are serving; our ability to effect change in the manner in which health care providers traditionally procure medical equipment; the absence of long-term commitments with customers; our ability to renew contracts with group purchasing organizations and integrated delivery networks; changes in reimbursement rates and policies by third-party payors; the impact of health care reform initiatives; the impact of significant regulation of the health care industry and the need to comply with those regulations; difficulties or delays in our continued expansion into certain of our businesses/geographic markets and developments of new businesses/geographic markets; and additional credit risks in increasing business with home care providers and nursing homes, impacts of equipment product recalls or obsolescence; increases in vendor costs that cannot be passed through to our customers; and other Risk Factors as set forth herein.

We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events included in this Annual Report on Form 10-K might not occur.


Our primary exposure to market risk is interest rate risk associated with our debt instruments. We use both fixed and variable rate debt as sources of financing. As of December 31, 2006, we had approximately $310.2 million of total debt outstanding, of which $43.0 million was bearing interest at variable rates approximating 7.5%. A 1.0 percentage point change in interest rates on variable rate debt would have resulted in interest expense fluctuating approximately $0.4 million for each of the years ended December 31, 2006, 2005 and 2004. As of December 31, 2006, we had no other significant material exposure to market risk.

We have not, and do not plan to, enter into any derivative financial instruments for trading or speculative purposes.
 
46
 

The following table sets forth certain unaudited quarterly financial data for 2006 and 2005. In our opinion, this unaudited information has been prepared on the same basis as the audited information and includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. The operating results for any one quarter are not necessarily indicative of results for any future period.

Selected Quarterly Finanical Information
(Unaudited)
(dollars in thousands)

   
Year Ended December 31, 2006
  
   
March 31
  
June 30
  
September 30
  
December 31
  
Total revenues
  
$
57,982
  
$
55,128
  
$
54,569
  
$
57,396
  
Gross margin
  
$
26,539
  
$
23,288
  
$
21,349
  
$
23,027
  
Gross margin %
    
45.8
%
  
42.2
%
  
39.1
%
  
40.1
%
Net income (loss)
  
$
3,553
  
$
(181
)
$
(2,217
)
$
(1,103
)
Net cash provided by operating activities
    
20,148
   
4,675
   
18,787
   
5,261
 
Net cash used in investing activities
    
(12,317
)
  
(8,682
)
  
(10,974
)
  
(19,738
)
Net cash (used in) provided by financing activities
 
$
(7,831
)
$
4,007
  
$
(7,813
)
$
14,477
  
 
   
Year Ended December 31, 2005
  
   
March 31
  
June 30
  
September 30
  
December 31
  
Total revenues
  
$
55,271
  
$
53,398
  
$
53,363
  
$
53,872
  
Gross margin
  
$
23,680
  
$
21,834
  
$
20,645
  
$
22,696
  
Gross margin %
    
42.8
%
  
40.9
%
  
38.7
%
  
42.1
%
Net income (loss)
  
$
971
  
$
(1,522
)
$
(1,057
)
$
39
  
Net cash provided by operating activities
    
17,334
   
3,451
   
13,847
   
9,331
 
Net cash used in investing activities
    
(10,077
)
  
(7,835
)
  
(9,914
)
  
(12,805
)
Net cash (used in) provided by financing activities
 
$
(4,258
)
$
1,385
  
$
(3,933
)
$
3,474
  

The Report of the Independent Registered Public Accounting Firm, Financial Statements and Schedules are set forth in Part IV, Item 15 of this report.


None.


Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
 
47

During the fiscal quarter ended December 31, 2006, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


None.



EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth the ages and the current positions of our executive officers and directors as of March 1, 2007.

Name
 
Age
 
Position
David E. Dovenberg
 
62
  
Chairman of the Board of Directors
Gary D. Blackford
 
49
  
President, Chief Executive Officer and Director
Rex T. Clevenger
 
49
  
Senior Vice President and Chief Financial Officer
Walter T. Chesley
  
52
  
Senior Vice President, Human Resources
Diana J. Vance-Bryan
  
50
  
Senior Vice President and General Counsel
Timothy W. Kuck
  
49
  
Senior Vice President, Operations
David G. Lawson
 
50
  
Senior Vice President, Technology, Marketing and Facilities
Joseph P. Schiesl
 
55
  
Senior Vice President, Sales
Jeffrey L. Singer
 
45
  
Senior Vice President, Asset Optimization
Scott M. Madson
  
46
  
Controller and Chief Accounting Officer
Michael N. Cannizzaro
 
57
  
Director
David W. Dupree
  
54
  
Director
Steven G. Segal
 
46
  
Director
Mark J. Tricolli
  
35
  
Director
Brent D. Williams
  
39
  
Director
Edward D. Yun
 
39
  
Director
Samuel B. Humphries
 
64
  
Advisory Director
 
David E. Dovenberg has been Chairman of our Board since 2001 and became Non-Executive Chairman on January 1, 2004. Mr. Dovenberg was our President and Chief Executive Officer from 1998 to 2002. He joined us in 1988 as Vice President, Finance and Chief Financial Officer and served in this role until 1998. Prior to joining us, he had been with The Prudential Insurance Company of America since 1969. From 1979 to 1988, he was a regional Vice President in the area of corporate investments in private placements for Prudential Capital Corporation. He is also a member of the board of directors of Lund International Holdings, Inc., a manufacturer of appearance accessories for light trucks, sport utility vehicles and vans. He holds a Bachelor of Arts degree from Gustavus Adolphus College and a Master’s degree in Economics from the University of Minnesota.
 
48

Gary D. Blackford has been President, Chief Executive Officer and a member of the board of directors since 2002. Prior to joining us, Mr. Blackford was Chief Executive Officer for Curative Health Services from September 2001 to March 2002 and, prior to that, for Shop for School.com, Inc. from June 1999 to June 2001. He also served as Chief Operating Officer of Value Rx from 1994 to 1996 and as Chief Operating Officer and Chief Financial Officer of MedIntel from 1993 to 1994. Mr. Blackford holds a Bachelors of Business Administration degree from The University of Iowa, a Juris Doctor degree from Creighton University and Certified Public Accountant certificate. He is a member of the board of the Twin Cities Ronald McDonald Charities, a non-profit corporation dedicated to helping families live with a child’s serious illness. Mr. Blackford was a member of the board of Compex Technologies, Inc. (NASDAQ: CMPX), a global provider of electro therapy products, until its merger with Encore Medical (NASDAQ: ENMC) in February of 2006.

Rex T. Clevenger joined us in 2004 as Senior Vice President and Chief Financial Officer. He has over 25 years of financial operations and capital markets experience including extensive capital attraction, corporate finance and planning roles as Senior Vice President, Finance for Reliant Resources, Inc. (NYSE: RRI) in Houston from 2000 to 2004, and with privately held Koch Industries in Wichita and Singapore from 1994 to 2000. He also worked in commercial and investment banking roles in Houston and New York, and as a Certified Public Accountant for Arthur Andersen. He is a graduate of the University of Missouri and holds a Bachelor of Science degree in Business Administration.

Walter T. Chesley joined us in 2003 as our Senior Vice President, Human Resources. He has over 25 years of human resources experience, most recently with Children’s Hospitals and Clinics, the largest pediatric health care provider in the upper Midwest, where he was Vice President, Human Resources and Chief Administrative Officer from 2000 to 2003. From 1997 to 2000, Mr. Chesley was Vice President, Human Resources for Ceridian Corporation, a leading provider of human resources management, payroll outsourcing, tax filing and benefits administration services. Prior to that, he was Assistant Vice President of the Dun & Bradstreet Corporation and Reuben H. Donnelley directory publishing division. Mr. Chesley has a Bachelor of Science degree in Communications and Public Relations from Boston University and a Juris Doctor degree from the American University Washington College of Law.

Diana Vance-Bryan joined us in 2006 as Senior Vice President and General Counsel. She has over 20 years of legal experience, primarily in the health care sector. From February 2004 through October 2006, Ms. Vance-Bryan served as Vice President and General Counsel of Novartis Nutrition Corporation, a leading manufacturer of medical nutrition products. Prior to joining Novartis Nutrition Corporation and re-joining Novartis, Ms. Vance-Bryan was a shareholder in the Twin Cities law firm of Briggs and Morgan, P.A. from 2003 through 2004. Ms. Vance-Bryan was Senior Vice President and General Counsel, PreferredOne Administrative Services, Inc. from 2000 through 2003 and earlier in her career she served as Assistant General Counsel, United Healthcare Corporation, now UnitedHealth Group. Ms. Vance-Bryan is a graduate of Mercy Hospital School of Nursing, received a Bachelor of Science degree in nursing from The University of Iowa College of Nursing and a Juris Doctor degree from The University of Iowa College of Law.
 
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Timothy W. Kuck joined us in 2004 as the Vice President of the Central Region. Since October of 2005, Mr. Kuck has been the Senior Vice President of Operations. He has over 20 years of progressive managerial growth in sales, operation, finance and corporate administration. Prior to joining us, Mr. Kuck held the positions of Regional Vice President (1999-2003) and Chief Financial Officer and Secretary (1997-1999) at G&K Services, Inc. Between the years of 1995-1997 at First Data Corporation, which acquired Employee Benefit Plans, Inc., he held the titles of President of EBPLife Insurance Company and Senior Vice President of First Health. During Mr. Kuck’s tenure at Employee Benefit Plans, he held the positions of Chief Financial Officer and Secretary (1993-1995), President of EBPLife Insurance Company (1991-1997) and General Counsel and Secretary (1991-1993). Mr. Kuck also was an attorney at Popham, Haik, Schnobrich & Kaufman, Ltd., in Minneapolis, Minnesota from 1984 to 1991. Mr. Kuck holds a Juris Doctor degree from the University of Minnesota Law School and a Bachelor of Arts degree from Augustana College in South Dakota. Mr. Kuck also has a Certified Public Accountant certification.

David G. Lawson has been Senior Vice President of Technology, Professional Services, Marketing and Facilities since 2002. He has over 25 years of technology experience, 15 of those in the health care/financial services industries with ValueRx, EBP Healthplans, North Central Life Insurance, Norwest Technical and Curative Health Services. He was Chief Administrative Officer of Curative Health Services from October 2001 to March 2002. Prior to that, he was Chief Operating Officer and Chief Technology Officer for Shop for School.com, Inc. from April 1999 to September 2001. Prior to that, he was Chief Information Officer of ValueRx from December 1995 to April 1998. Early in his career he spent four years as a management consultant with Deloitte and Touche and five years with Best Products Limited. He holds a Bachelor of Science degree in Hospital Administration from Concordia College.

Joseph P. Schiesl has been Senior Vice President, Sales since 2003. Mr. Schiesl has over 25 years of experience in health care services businesses. Prior to joining us, Mr. Schiesl was Chief Executive Officer of Thinking Networks, Inc., an internet protocol software services start-up from February 2001 to December 2001. Prior to that, Mr. Schiesl was President of ViTec, Inc., an e-health software services company, from April 1999 to August 2000. From December 1995 to April 1998, Mr. Schiesl was President, Pharmacy Benefit Management Services of ValueRx. Prior to tenure at ValueRx, Mr. Schiesl was Executive Vice President at MedIntel Systems. Earlier in his career, Mr. Schiesl spent two years with Diversified Pharmaceutical Services and 20 years at CyCare Systems. He holds a Bachelor of Arts in Economics from Loras College.
 
50
 
Jeffrey L. Singer has been Senior Vice President, Asset Optimization since 2003. From 1999 to 2003, he was Vice President, Purchasing and Logistics and from 1998 to 1999 he was Vice President of Alternate Care—West. He was Chief Executive Officer of Home Care Instruments, Inc. from 1991 to 1998, and held various other positions at HCI from 1986 to 1991. He holds a Bachelor of Science in Marketing and Logistics.

Scott M. Madson joined UHS in October 2006 as Controller and Chief Accounting Officer. He has over 20 years of accounting and financial management experience, most recently with Nextel Partners, Inc., a wireless telecommunications provider, where he was the Controller from 2004 to 2006. From 1998 to 2004, Mr. Madson was Director of Financial Accounting with RBC Dain Rauscher, a Minneapolis, Minnesota based securities brokerage and investment banking firm. Prior to that, he held financial reporting and internal audit managerial positions at RBC Dain Rauscher as well as audit positions with Deloitte and Touche. Mr. Madson holds a Certified Public Accountant certificate and a Bachelor of Science degree in accounting from the University of Minnesota.

Michael N. Cannizzaro has been a director since May 2001. He has been an Operating Partner of J.W. Childs Associates, L.P. since 2001. Prior to that, he was President and Chief Executive Officer of Beltone Electronics Corporation from 1998 to 2000. He was President of Caremark International’s Prescription Service Division from 1994 to 1997; Vice President, Business Development of Caremark’s Nephrology Service Division from April 1994 to September 1994; and President of Leica North America from 1993 to 1994. He held numerous positions in general management at Baxter Healthcare Corporation from 1976 to 1993, including the position of President of various divisions. He was the Chairman and Chief Executive Officer of National Nephrology Associates, Inc. (“NNA”) from May 2003 until April 2004. He was a director of NNA from July 1999 until April 2004. He is currently Chairman of Insight Health Services Corp., Vice Chairman of Sheridan Healthcare Corp., Chairman of Cornerstone Healthcare Group, and Chairman of CHG Healthcare Services.

David W. Dupree became a director on October 17, 2003. He is the Chief Executive Officer and a Managing Director of The Halifax Group, which he co-founded in January 1999. From 1992 to 1999, Mr. Dupree was a Managing Director and Partner with The Carlyle Group, a global investment firm located in Washington, D.C. Prior to joining The Carlyle Group, Mr. Dupree was a Principal in Corporate Finance with Montgomery Securities and prior to that, he was Co-Head of Equity Private Placements at Alex Brown & Sons Incorporated. Mr. Dupree earned a B.S. from The University of North Carolina at Chapel Hill and received his M.B.A. from the Graduate School of Management at Wake Forest University, where he was past Chairman of the Board of Visitors. Mr. Dupree serves as a Trustee for St. Patrick’s Episcopal School in Washington, D.C. where he was past Chairman of the Finance Committee. Mr. Dupree currently serves on the Boards of Directors of Insight Health Services Corp., Whole Foods Markets, Inc. (NASDAQ: WFMI), EFO Capital Management, and on the Board of Trustees for Wake Forest University. In recent years, Mr. Dupree served on the Boards of Meineke Car Care Centers, Inc., Soil Safe, Inc., National Packaging Solutions Group, and Pharmaceutical Research Associates International, Inc.
 
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Steven G. Segal has been a director since February 1998. Mr. Segal is an Executive-in-Residence/Lecturer at Boston University's School of Management and is a Special Limited Partner of J.W. Childs Associates. From 1995 to 2005, he was a founding partner of J.W. Childs Associates. From 1987 to 1995, he was an executive at Thomas H. Lee Company, most recently holding the position of Managing Director. He is also a director of The NutraSweet Company, InSight Health Services Corp., and Round Grille, Inc. (d/b/a FiRE +iCE). From 2004 to 2006, Mr. Segal was director of MAAX, Inc. where he is now Advisory Director and in such capacity does not vote on matters before
the board.

Mark J. Tricolli became a director on October 17, 2003. He is a Vice President of J.W. Childs Associates, L.P. and has been at J.W. Childs since July 2000. He was an Associate in the Merchant Banking Division of Goldman, Sachs & Co. from August 1999 to June 2000. He was pursuing a degree at business school from 1997 to 1999. During the summer of 1998, he worked at Donaldson, Lufkin & Jenrette. He is also a director of InSight Health Services Corp., JA Holdings, Inc., Sheridan Holdings, Inc., EmployBridge Holding Company and CHG Healthcare Services, Inc..

Brent D. Williams became a director on October 17, 2003. He is a Managing Director of The Halifax Group, L.L.C. and has been with The Halifax Group since its formation in October 1999. He was a director in PaineWebber’s Merchant Banking Division, which he helped to establish, from January 1999 to September 1999. He was a director in PaineWebber’s Investment Banking division from August 1995 to December 1998. He joined PaineWebber from Smith Barney Inc. He is also a director of PolyPipe, Inc., Taylor Logistics and Maverick Healthcare Group. Mr. Williams is a board member for the DFW Chapter of the Association for Corporate Growth and is an advisory board member of the Center For Private Equity Finance at the University of Texas at Austin.

Edward D. Yun has been a director since February 1998. He is a Partner of J.W. Childs Associates, L.P. and has been at J.W. Childs since 1996. From 1994 until 1996 he was an Associate at DLJ Merchant Banking, Inc. He is also a director of Pan Am International Flight Academy, Inc., InSight Health Services Corp., JA Holdings, Inc., Sheridan Holdings, Inc., EmployBridge Holding Company and CHG Healthcare Services, Inc.

Samuel B. Humphries became an advisory director on October 17, 2003, and in such capacity, does not vote on matters before the board of directors. Mr. Humphries served as a director from 1991 to February 1998 and from April 1998 until October 17, 2003. Mr. Humphries was appointed president, chief executive officer and director of HealthTronics, Inc., in May, 2006. Prior to this, he was president and chief executive officer of Uroplasty, Inc., a medical device company. Previously, he was a founding partner of Ascent Medical Technology Fund, L.P., a venture capital fund. Mr. Humphries has over 25 years of healthcare and medical device experience. As President and chief executive officer of American Medical Systems he was an investor and part of an LBO spin-off from Pfizer, Inc. Before joining AMS, Mr. Humphries was president and CEO of Optical Sensors, Inc., a medical device start-up company, where he guided the company from start-up through an IPO. Prior to OSI, Mr. Humphries was at AMS during its formative years where he served first as vice president of world wide sales and marketing, and then as president and chief executive officer. Earlier, he was with the Medical Systems Group of the General Electric Company where he was initially district sales manager and then promoted to national sales manager of the critical care patient monitoring business. Mr. Humphries has served on numerous private and public boards of directors, and served on the board of directors of the Health Industry Manufacturers Association (HIMA, now AdvaMed). In addition to serving as a director of HealthTronics, he also serves on the Board of Directors of Criticare Systems, Inc. Mr. Humphries earned a B.S. in Economics and marketing from the University of Kentucky.
 
52
 
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors

Each director is expected to devote sufficient time, energy and attention to ensure diligent performance of his or her duties. The board met nine times during 2006. All directors attended at least 75% of the board meetings with the exception of David W. Dupree.

Committees of the Board of Directors

The board of directors has four standing committees, which are the compensation committee, audit committee, executive committee and mergers and acquisitions committee. In addition, the board convened a special acquisition committee in December 2006 to consider and decide certain matters involving the acquisition of certain assets of Intellamed, Inc., as more particularly described in Item 6 of this Form 10-K under the caption “Subsequent Events”. The members of the special acquisition committee were David W. Dupree and Edward D. Yun. The special acquisition committee did not meet during 2006. Each of the four standing committees is described below.
 
Compensation Committee

Our board of directors has a compensation committee consisting of certain of our directors. The members of the compensation committee are David W. Dupree, Samuel B. Humphries and Edward D. Yun. Mr. Humphries is the chairman but, as an advisory director, does not vote on matters before such committee. The compensation committee met once during 2006, and all members were present. Under current rules of public trading markets, such as NASDAQ and the New York Stock Exchange, our current compensation committee would not be deemed to be comprised solely of independent directors, because one of our compensation committee members is associated with J.W. Childs Associates, L.P. and one of our compensation committee members is associated with The Halifax Group, L.L.C. Our compensation committee administers our Stock Option Plan, produces an annual compensation committee report, determines the annual compensation to be paid to the named executive officers and makes regular reports to the board of directors concerning executive compensation.
 
53
 
Audit Committee

Our audit committee consists of Samuel B. Humphries, Mark J. Tricolli and Brent D. Williams. Mr. Humphries is the chairman but, as an advisory director, does not vote on matters before such committee. The audit committee met five times during 2006. All audit committee members attended at least 75% of the meeting with the exception of Brent D. Williams. Action taken by our audit committee is required to be taken by unanimous vote. Our audit committee is responsible for reviewing the adequacy of our system of internal accounting controls; reviewing the results of the independent registered public accounting firm’s annual audit, including reviewing the independent registered public accounting firm’s required communication on any significant adjustments, management judgments and estimates, new accounting policies and disagreements with management; reviewing our audited financial statements and discussing the statements with management; reviewing the audit reports submitted by the independent registered public accounting firm and the performance of our independent registered public accounting firm and annually recommending independent registered public accounting firms; adopting and annually assessing our charter; and preparing such reports or statements as may be required by securities laws.

Under current rules of public trading markets, such as NASDAQ and the New York Stock Exchange, our current audit committee would not be deemed to be comprised solely of independent directors since one of our audit committee members is associated with JWC Fund I and JWC Fund III, and one of our audit committee members is associated with Halifax. Our board of directors has determined that the audit committee does not have an “audit committee financial expert” as that term is defined in the SEC regulations, because our board of directors did not believe that any of the members of the audit committee meet the specific qualifications of an ”audit committee financial expert.” However, our board of directors has determined that all of the members of the audit committee are able to read and understand fundamental financial statements and that our audit committee has the financial sophistication and valuable business knowledge necessary to fulfill the duties and the obligations of the audit committee. Our board of directors has concluded that the appointment of an additional director to the audit committee is not necessary at this time.

Executive Committee

The executive committee of our board of directors consists of four of our directors. The members of the executive committee are Gary D. Blackford, David E. Dovenberg, David W. Dupree and Steven G. Segal. Mr. Dovenberg is the chairman. Our executive committee is responsible for such matters as our board of directors may determine from time to time. Our executive committee did not meet during 2006.
 
54

Mergers and Acquisitions Committee

The mergers and acquisitions committee of our board of directors was created in 2004 and consists of Mark Tricolli, Brent D. Williams and Edward D. Yun. Our mergers and acquisitions committee is responsible for reviewing and approving acquisitions in which the total consideration is less than $6 million. Our mergers and acquisitions committee did not meet during 2006.

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

Delaware law and our certificate of incorporation and bylaws provide that we shall, under certain circumstances and subject to certain limitations, indemnify any person made or threatened to be made a party to a proceeding by reason of that person's former or present official capacity with us against judgments, penalties, fines, settlements and reasonable expenses. Any such person also is entitled, subject to limitations, to payment or reimbursement of reasonable expenses in advance of the final disposition of the proceeding.

Pursuant to provisions of the Delaware General Corporation Law, we have adopted provisions in our certificate of incorporation that provide that our directors shall not be personally liable to us or our stockholders for monetary damages for a breach of fiduciary duty as a director, subject to exceptions.

At present, we are aware of no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for indemnification.

CODE OF BUSINESS CONDUCT AND ETHICS

We have adopted a code of conduct and ethics for all employees, directors and officers. Our code of conduct and ethics can be found at our internet website, www.uhs.com. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of our code of conduct and ethics by posting such information on our website at the address specified above.


COMPENSATION DISCUSSION AND ANALYSIS

Compensation Committee

The compensation committee’s responsibilities are discussed in Item 10 of this Form 10-K under the caption “Board Committees.”
 
55
 
The agenda for meetings of the compensation committee is determined by its chairman with the assistance of our chief executive officer. At each meeting, the compensation committee meets in executive session. The compensation committee’s chairman reports the committee’s recommendations on executive compensation to the board of directors. Our human resources and finance departments support the compensation committee in its duties and, along with the chief executive officer, may be delegated authority to fulfill certain administrative duties regarding the compensation programs. The compensation committee has the authority under its charter to retain, approve fees for and terminate advisors, consultants and agents as it deems necessary to assist in the fulfillment of its responsibilities.

Overview of Compensation Program

The compensation committee has responsibility for establishing, implementing and continually monitoring adherence with our compensation philosophy. The compensation committee ensures that total compensation paid to the named executive officers is fair, reasonable and competitive.

Compensation Philosophy and Objectives

The compensation committee believes that the most effective executive compensation program is one that is designed to reward the achievement of specific annual and long-term strategic goals of the Company. The committee evaluates both performance and compensation to ensure the Company maintains its ability to attract and retain superior employees in key positions and compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of other health care services companies. To that end, the compensation committee believes executive compensation packages provided by us to the named executive officers, should include base salary, annual performance-based incentive compensation and long-term equity (stock option) compensation that rewards performance as measured against established goals.

Role of Executive Officers in Compensation Decisions

The compensation committee approves all compensation decisions for the named executive officers, which include the review and approval of the chief executive officer’s compensation as well as the review and approval of the chief executive officer’s recommendations regarding annual performance-based incentive compensation and long-term equity (stock option) compensation to the other named executive officers of the Company.

Setting Executive Compensation

Based on the compensation committee’s compensation philosophy and objectives, the committee has structured the Company’s annual performance-based incentive and long-term equity (stock option) compensation to motivate the named executive officers to achieve the business goals set by us, and to reward the named executive officers for achieving these goals. In furtherance of this, the committee conducts an annual review of its total compensation program for the chief executive officer and the other named executive officers.
56
 
2006 Executive Compensation Components

For our year ended December 31, 2006, the principal components of compensation for named executive officers were:

·  
base salary;
·  
performance-based incentive compensation;
·  
long-term equity incentive (stock option) compensation;
·  
severance and/or change of control benefits;
·  
retirement plans; and
·  
long-term savings plan and other benefits.

Base Salary

The Company provides named executive officers with a base salary to compensate them for services rendered during the fiscal year. Base salary ranges are determined for each named executive based on his or her position and responsibility using data from health care services companies and the compensation committee’s knowledge of and expertise regarding the market. Base salary ranges are designed so that salary opportunities for a given position will be targeted at the midpoint of the base salary established for each range.

During its review of base salaries for the named executives, the compensation committee may consider, but is not limited to any of the following three items:

·  
market data provided by the our human resources department or outside consultants;
·  
internal review of the named executive officer’s compensation, both individually and relative to other named executive officers; and
·  
individual performance of the executive.

Salary levels are typically considered annually as part of our performance review process and upon a promotion or other change in job responsibility. Merit based increases to salaries of the named executive officers are based on the compensation committee’s assessment of the individual’s performance.

Performance-Based Incentive Compensation

The performance-based incentive compensation is offered through the Executive Incentive Program (the “EIP”), an annual cash incentive program. The EIP includes various incentive levels based on the participant’s accountability and impact on our operations, with award opportunities that are established as a percentage of base salary. The range varies from 70% to 85% of base salary for the Company’s named executive officers.
 
57
 
The potential EIP award for each named executive officer is based on the achievement of the corporate financial objective set forth by the compensation committee relating to earnings before interest, income tax, depreciation and amortization as adjusted for stock-based compensation and board of directors expenses (“Adjusted EBITDA”). The potential EIP award is calculated by comparing actual and target Adjusted EBITDA. Each 1% directional variance to target has a 10 times multiplier affect on the potential EIP award with bookends at 110% and 93% of target, correlating to a multiplier effect to incentive levels of 200% to 30%, respectively. Adjusted EBITDA performance at a level below 93% of target results in a zero potential EIP award.

Management understands that some industry analysts and investors consider earnings before interest, income tax, depreciation and amortization (“EBITDA”) as a supplementary non-GAAP financial measure useful in analyzing a company’s ability to service debt. EBITDA, however, is not a measure of financial performance under 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, may not be comparable to other similarly titled measures of other companies. EBITDA does not represent an amount of funds that is available for management’s discretionary use. Adjusted EBITDA (EBITDA before stock-based compensation and board of directors expense) is included because certain compensation plans are based upon this measure.

The named executive officers earn 50% of the actual EIP based on actual Adjusted EBITDA results versus target. The remaining 50% of the actual Adjusted EBITDA results versus target is earned based on attainment of each named executive officer’s specific and quarterly objectives.

During the past five years, the Company achieved performance in excess of the target once, but did not achieve the maximum performance level. The payout percentage in the past five years ranged between approximately 60% and 118% of the participant’s target award opportunity. Generally, the committee sets the minimum, target and maximum levels so the relative difficulty of achieving the target is consistent from year to year.

Awards granted to named executive officers under the EIP on March 9, 2007 for performance in 2006 are reflected in column (g) of the Summary Compensation Table on page 62. The Company expects to pay the EIP in April 2007.
 
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Long-Term Equity Incentive (Stock Option) Compensation

The 2003 Stock Option Plan (“Stock Option Plan”) provides for the award of stock options and is designed to:

·  
enhance the link between the creation of stockholder value and long-term executive incentive compensation;
·  
provide an opportunity for increased equity ownership by executives; and
·  
maintain competitive levels of total compensation.

Stock option award levels vary among participants based on their positions within the Company and are typically granted in the fourth calendar quarter. The exercise price of the stock option award is equal to the fair market value of our common stock on the grant date as determined by applying a peer group EBITDA multiple approach, with a discount applied to such multiple to account for our lack of liquidity. The peer group includes a cross section of publicly traded hospitals, capital-intensive health care service companies, and broad health care companies.

Severance and/or Change of Control Benefits

The Company has adopted an Executive Severance Pay Plan. This plan provides for severance and/or change of control benefits for two named executive officers and employment agreements provide for severance and/or change of control benefits for the other three named executive officers. For a detailed discussion of the foregoing, please refer to the caption “Potential Payments Upon Termination or Change of Control.”

Retirement Plans

Effective December 31, 2002, benefit accruals under our Employees’ Pension Plan (the “Pension Plan”) were frozen for all participants and no new participants have been or will be permitted to enter the Pension Plan after that date. Mr. Singer is the only named executive officer who participates in the Pension Plan.
 
Under the Pension Plan, all employees who attained age 21 and who completed one year of service prior to December 31, 2002, were eligible to participate in the Pension Plan. Additional service or compensation changes of participants after that date are not considered for purposes of computing participant accrued benefit. However, accumulated service after December 31, 2002, continues to be taken into account for purposes of determining a participant’s vested interest and entitlement to an early retirement subsidy and certain death benefits.

Participants earn the right to receive certain benefits upon termination of employment including retirement at the normal retirement age of 65 or upon early retirement on or after age 55. Normal retirement benefits are calculated as more particularly illustrated below. Benefits vest according to the following schedule and are 100% vested at normal retirement.
 
59

 
Years of Service
Vesting Percentage
  
 
Less than 3
-
  
 
3
20%
  
 
4
40%
  
 
5
60%
  
 
6
80%
  
 
7
100%
  

The formulas below provide an illustration as to how the retirement benefits are calculated.

Normal Retirement
 
  First Formula                
                   
  1.6% X
Average
Monthly
Pay (1)
X
Years of
Credited
Service (up
to 25)
-
Social
Security
Benefit
 
=
 
Monthly
Benefit
                   
  Second Formula                
                   
  Years of Credited Service  X  $6.00 = Monthly Benefit    
 
(1) Average monthly pay primarily includes base salary and EIP awards.

Early retirement benefits are determined, generally, in the same manner as described above for normal retirement benefit, but are adjusted to reflect the actuarially determined adjusted payout period.

Long-Term Savings Plan and Other Benefits

The long-term savings plan is a tax-qualified retirement savings plan pursuant to which all employees, including the named executive officers, are able to contribute the lesser of up to 60% of their annual salary or the limit prescribed by the Internal Revenue Service to the Long-Term Savings Plan on a pre-tax basis. The Company will match 50% of up to 6% of base pay that is contributed to the Long-Term Savings Plan. Matching contributions and any earnings on the matching contributions are vested in accordance with the following schedule:

 
Years of Service
Vesting Percentage
  
 
Less than 1
-
  
 
1
33 %
  
 
2
66 %
  
 
3
100 %
  
 
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TAX AND ACCOUNTING IMPLICATIONS

Deductibility of Executive Compensation

Section 162(m) of the Internal Revenue Code provides that the Company may not deduct compensation of more than $1 million that is paid to certain individuals. In addition, Section 280G of the Internal Revenue Code provides that the Company may not deduct compensation paid in connection with a change of control that is treated as an excess parachute payment. The compensation committee reviews and considers the Company’s deductibility of executive compensation. We believe that compensation paid under our EIP is generally 100% deductible for federal income tax purposes, except that potential excess parachute payments exist with respect to our named executive officers. In certain circumstances, however, the compensation committee may elect to approve compensation that is not fully deductible to ensure competitive levels of compensation for our executive officers. For 2006, we believe that all executive officer compensation paid will be fully deductible.

Accounting for Stock-Based Compensation

Beginning January 1, 2006, we began accounting for our stock-based compensation, namely, stock options issued under the Stock Option Plan, as required by SFAS 123(R).

COMPENATION COMMITTEE REPORT

The compensation committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on this review and discussion, recommended to the board of directors that the Compensation Discussion and Analysis be included in this Form 10-K.
 
  THE COMPENSATION COMMITTEE  
     
  Samuel B. Humphries  
     
 
David W. Dupree
  
     
  Edward D. Yun   

EXECUTIVE COMPENSATION

The following tables and accompanying narrative disclosure should be read in conjunction with the Compensation Discussion and Analysis.

SUMMARY COMPENSATION TABLE

The table below sets forth the total compensation earned by and awarded to the named executive officers for our 2006 fiscal year.
 
61
The named executive officers were not entitled to receive payments which would be characterized as “Bonus” payments for the year ended December 31, 2006. Amounts listed under column (g), “Non-Equity Incentive Plan Compensation”, were determined in accordance with the “2006 Executive Incentive Plan Targets”, filed as Exhibit 10.11 to the Annual Report on Form 10-K for the 2005 fiscal year as approved by the compensation committee of our board of directors. The non-equity incentive plan compensation is expected to be paid in April 2007.
 
(a)
  
(b)
  
(c)
  
(d)
  
(e)
  
(f)
  
(g)
  
(h)
  
(i)
  
(j)
  
                           
Change in
          
                           
Pension
         
                           
Value and
          
                       
Non-Equity
  
Non-Qualified
          
                       
Incentive
 
Deferred
          
               
Stock
  
Option
  
Plan
  
Compensation
  
All Other
      
Name and
      
Salary
  
Bonus
  
Awards
  
Awards
  
Compensation
  
Earnings
  
Compensation
  
Total
  
Principal Position
  
Year
  
($)
  
($)
  
($)
  
($) (1)
  
($) (2)
  
($) (3)
  
($) (4)
  
($)
  
Gary D. Blackford
    
2006
  
$
391,923
  
$
-
  
$
-
  
$
507,272
  
$
393,100
    
N/A
 
$
5,878
  
$
1,298,173
  
President, Chief Executive
                                                        
Officer and Director
                                                        
                                                         
Rex T. Clevenger
    
2006
  
$
297,105
  
$
-
  
$
-
  
$
89,607
  
$
270,000
    
N/A
 
$
6,600
  
$
663,312
  
Senior Vice President
                                                       
and Chief Financial
                                                        
Officer
                                                        
                                                         
Joseph P. Schiesl
    
2006
  
$
253,846
  
$
-
  
$
-
  
$
113,172
  
$
170,000
    
N/A
 
$
6,060
  
$
543,077
  
Senior Vice President,
                                                       
Sales
                                                        
                                                         
Timothy W. Kuck
    
2006
  
$
213,069
  
$
-
  
$
-
  
$
87,508
  
$
188,000
    
N/A
 
$
4,185
  
$
492,762
  
Senior Vice President,
                                                        
Operations
                                                        
                                                         
Jeffrey L. Singer
    
2006
  
$
194,082
  
$
-
  
$
-
  
$
68,495
  
$
175,000
  
$
-
  
$
5,823
  
$
443,400
  
Senior Vice President,
                                                       
Asset Optimization
                                                       
 
(1)  
The amounts in column (f) reflect the dollar amount recognized for financial statement reporting purposes for the year ended December 31, 2006, in accordance with SFAS 123(R) of awards pursuant to the Stock Option Plan and may include amounts from awards granted in and before 2006. Assumptions used in the calculation of these amounts are included in footnote 12 to our audited financial statements for the fiscal year ended December 31, 2006 set forth in Part IV, Item 15 of this Form 10-K.

(2)  
The amounts in column (g) reflect the cash awards to the named executive officers under the EIP, which is discussed in detail on page 57 under the caption “Performance-Based Incentive Compensation”.

(3)  
The amount in column (h) for Mr. Singer, the only named executive officer covered by the Pension Plan, reflects the change in the present value of the named executive officer’s benefits under the Pension Plan using interest rate and mortality rate assumptions consistent with those used in our financial statements and includes amounts which Mr. Singer may not be entitled to receive because such amounts are not vested. The amount shown for Mr. Singer does not include a $1,865 decline in the present value of the benefit provided under the Pension Plan. The Pension Plan is discussed in detail on page 59 under the caption “Retirement Plans”.
 
62
 
(4)  
The amounts in column (i) reflect our contributions for the named executive officers to our Long-Term Savings Plan, discussed in detail on page 60 under the caption “Long-Term Savings Plan and Other Benefits”.

GRANTS OF PLAN BASED AWARDS

(a)
  
(b)
  
(c)
  
(d)
  
(e)
  
(f)
  
(g)
  
(h)
  
(i)
  
(j)
  
(k)
  
(l)
  
       
Estimated Future Payouts
Under Non-Equity Incentive Plan
Awards (1)
  
Estimated Future Payouts
Equity Incentive Plan (2)
  
Under
Awards
  
All Other
Stock
Awards:
Number of Shares of
Stock or
  
All Other
Option
Awards:
Number of
Securities
Underlying
 
Exercise or
Base Price
of Option
 
Grant Date
Fair Value
of Option
  
   
Grant
  
Threshold
  
Target
  
Maximum
  
Threshold
  
Target
  
Maximum
  
Units
  
Options
  
Awards
  
Awards
  
Name
  
Date
  
($)
  
($)
  
($)
  
(#)
  
(#)
  
(#)
  
(#)
  
(#)
  
($/sh) (3)
  
($)
  
Gary D. Blackford
    
N/A
  
$
-
  
$
333,135
  
$
666,269
    
-
   
-
   
-
   
-
   
-
   
-
   
-
 
                                                                     
Rex T. Clevenger
    
N/A
  
$
-
  
$
222,829
  
$
445,658
    
-
   
-
   
-
   
-
   
-
   
-
   
-
 
                                                                     
Joseph P. Schiesl
    
N/A
  
$
-
  
$
177,692
  
$
355,384
    
-
   
-
   
-
   
-
   
-
   
-
   
-
 
                                                                     
Timothy W. Kuck
    
N/A
  
$
-
  
$
149,148
  
$
298,297
                                            
 
    
11/15/2006
    
-
   
-
   
-
   
150,000
   
150,000
   
150,000
   
-
   
-
 
$
2.06
  
$
171,549
  
                                                                     
Jeffrey L. Singer
    
N/A
  
$
-
  
$
135,858
  
$
271,715
                                            
 
    
11/15/2006
    
-
   
-
   
-
   
50,000
   
50,000
   
50,000
   
-
   
-
 
$
2.06
  
$
57,183
  
 
(1)  
The amounts shown in columns (c), (d) and (e) reflect the minimum, target and maximum payment levels, respectively, under the Company’s EIP. These amounts are based on the named executive officer’s salary and position as of December 31, 2006.

(2)  
The amounts shown in columns (f), (g) and (h) reflect the number of options granted under our Stock Option Plan.

(3)  
The exercise price of the stock option award is equal to the fair market value of our common stock on the grant date as determined by applying a peer group EBITDA multiple approach, with a discount applied to such multiple to account for our lack of liquidity. The peer group includes a cross section of publicly traded hospitals, capital-intensive health care service companies, and broad health care companies, including by way of example, Apria Healthcare, Lincare Holdings, Inc., Alliance Imaging, Inc., Triad Hospitals, Inc., LifePoint, Inc., Cardinal Health, Inc. and Hillenbrand Industries, Inc.
 
63
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END (1)

(a)
  
(b)
  
(c)
  
(d)
  
(e)
  
(f)
  
(g)
  
   
OPTION AWARDS (2)
  
Name
  
Grant Date
  
Number of
Securities
Underlying Unexercised
Options (#)
Exercisable
  
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
 
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned Options
(#)
 
Option
Exercise
Price ($)
 
Option
Expiration
Date
  
Gary D. Blackford
    
5/1/2004
    
1,400,668
   
4,202,229
   
4,202,229
 
$
1.00
    
5/1/2014
  
                                       
Rex T. Clevenger
    
6/15/2004
    
166,666
   
833,334
   
833,334
 
$
1.00
    
6/15/2014
  
                                       
Joseph P. Schiesl
    
5/1/2004
    
312,488
   
937,513
   
937,513
 
$
1.00
    
5/1/2014
  
                                       
Timothy W. Kuck
    
5/1/2004
    
62,498
   
187,502
   
187,502
 
$
1.00
    
5/1/2014
  
 
    
10/1/2004
    
16,667
   
83,333
   
83,333
 
$
1.20
    
10/1/2014
  
 
    
11/1/2005
    
41,667
   
458,333
   
458,333
 
$
1.33
    
11/1/2015
  
 
    
11/15/2006
    
-
   
150,000
   
150,000
 
$
2.06
    
11/15/2016
  
                                       
Jeffrey L. Singer
    
5/1/2004
    
187,493
   
562,508
   
562,508
 
$
1.00
    
5/1/2014
  
 
    
11/15/2006
    
-
   
50,000
   
50,000
 
$
2.06
    
11/15/2016
  
 
(1)  
All outstanding equity awards are option awards granted under our Stock Option Plan, discussed in detail on page 59 under the caption “Long-Term Equity Incentive (Stock Option) Compensation”.

(2)  
Thirty-three percent of options granted under our Stock Option Plan for our named executive officers vest at a rate of 25% per year over four years of service; the remaining portion vest over an eight-year service period with earlier vesting subject to achievement of certain financial performance targets.

PENSION BENEFITS

The table below shows the actuarial present value of accumulated benefits payable to a named executive officer, including the number of years of service credited to that named executive officer, under our Pension Plan determined using interest rate and mortality rate assumptions consistent with those used in our financial statements. Information regarding our Pension Plan is discussed under the caption “Retirement Plans” on page 59.

(a)
  
(b)
  
(c)
  
(d)
  
(e)
  
Name (1)
  
Plan Name
  
Number of
Years of
Credited Service
(#)
  
Present Value
of Accumulated
Benefit ($)(2)
  
Payments
During Last
Fiscal Year ($)
  
Jeffrey L. Singer
    
UHS Employees' Pension Plan
    
4.4
  
$
34,612
  
$
-
  
 
(1)  
Gary D. Blackford, Rex T. Clevenger, Joseph P. Schiesl and Timothy W. Kuck are not eligible to participate in our Pension Plan.
(2)  
Includes amounts which the named executive officer may not currently be entitled to receive because the amount is not vested.
 
64
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

EMPLOYMENT AGREEMENTS

The compensation to named executive officers Gary Blackford, Rex Clevenger and Joseph Schiesl, who each are parties to an employment agreement with us, in the event of termination of their employment, including death or disability, termination without Cause or resignation for Good Reason, termination for Cause or resignation without Good Reason, or following a Change of Control is described below. The amounts shown assume that this termination was effective as of December 31, 2006, include amounts earned through this time and are estimates of the amounts which would be paid out to the named executive officers upon their termination. The actual amounts to be paid out can only be determined at the time of the named executive officer’s separation from us.

Payments Made Upon Death or Disability

In the event of the death or disability of any of the named executive officers, the named executive officer will receive for 12 months following termination his base salary and the health, life, disability and other benefits that are generally made available by us to our executive employees and paid vacation accrued during the term of his employment agreement up to a maximum of five weeks.
 
“Disability” means the named executive officer becomes physically or mentally disabled, whether totally or partially, either permanently or so that the named executive officer is unable substantially and competently to perform his duties for 90 consecutive days or for 90 days during any six-month period during the term of his employment agreement.
 
Payments Made Upon Termination Without Cause or Resignation For Good Reason
 
In the event of the termination by us of the named executive officer without Cause or the resignation for Good Reason by the named executive officer, the named executive officer will continue to receive for 12 months following termination his base salary and:
 
·  
in the case of termination without Cause, group health plan benefits at the active employee rate in accordance with his group health plan elections on the date of termination for 12 months following termination and paid vacation accrued during the term of his employment agreement up to a maximum of five weeks; or
·  
in the case of resignation for Good Reason, the health, life, disability and other benefits that are generally made available by us to our executive employees and paid vacation accrued during the term of his employment agreement up to a maximum of five weeks.
 
Also, within 10 days following this termination or resignation, the named executive officer will be entitled to receive the following lump sum payment:
 
65
 
·  
in the case of Rex Clevenger or Joseph Schiesl, the amount of his EIP that would have been payable to him for the fiscal year in which the termination occurs had we achieved 100% of the then applicable Adjusted EBITDA target for that fiscal year; or
·  
in the case of Gary Blackford, currently 85% of his base salary in effect on the date of termination.

“Cause” refers to:
 
·  
the commission by the named executive officer of a felony for which he is convicted; or
·  
the material breach by the named executive officer of his agreements or obligations under his employment agreement described in a written notice to the named executive officer that is not capable of being cured or has not been cured within 30 days after receipt.

“Good Reason” other than for Cause means any of the following has occurred:
 
·  
the named executive officer’s base salary or:
·  
in the case of Rex Clevenger or Joseph Schiesl, the EIP as a percentage of base salary to which he may be entitled, due to us reaching the then applicable Adjusted EBITDA target under the EIP; or
·  
in the case of Gary Blackford, the percentage of his base salary he may be entitled due to us reaching the annual Adjusted EBITDA targets provided in his employment agreement has been reduced other than in connection with an across-the-board reduction of approximately the same percentage in executive compensation to executive employees imposed by our board of directors in response to negative financial results or other adverse circumstances affecting us;
·  
our board of directors establishes an unachievable and commercially unreasonable Adjusted EBITDA target that we must achieve for the named executive officer to receive an EIP under his employment agreement;
·  
we have reduced or reassigned a material portion of the named executive officer’s duties, have required the named executive officer to relocate outside the greater Minneapolis, Minnesota area or have relocated our corporate headquarters outside the greater Minneapolis, Minnesota area or have removed or relocated outside the greater Minneapolis area, a material number of our employees or senior management;
·  
we have breached in any material respect the employment agreement of the named executive officer; or
·  
in the case of Gary Blackford, he is not elected or re-elected to our board of directors.
 
66
Payments Made Upon Termination for Cause or Resignation Without Good Reason
 
In the event of the termination by us of the named executive officer’s employment under his employment agreement for Cause or the resignation without Good Reason by the named executive officer, all of the named executive officer’s rights to payments other than payment for services already rendered and any other benefits otherwise due cease immediately in the case of termination for Cause and upon the date of termination in the case of resignation without Good Reason.
 
Payments Made Upon a Change of Control
 
In the event of the termination without Cause or resignation for Good Reason of the named executive officer at any time within six months before, or 24 months following, a Change of Control, or the termination of employment by the named executive officer for any reason during the 30-day period following the six month anniversary of the Change of Control, and notwithstanding and in lieu of amounts provided for resignation without Cause or for resignation for Good Reason, the named executive officer will continue to receive his base salary and the health, life, disability and other benefits that are generally made available by us to our executive employees and paid vacation accrued during the term of his employment agreement up to a maximum of five weeks for 12 months in the case of Joseph Schiesl, 18 months in the case of Rex Clevenger and 24 months in the case of Gary Blackford, in each case following termination.
 
Also, within 10 days following termination, the named executive officer will be entitled to receive the following lump sum payment:
 
·  
in the case Joseph Schiesl, payment of the amount of his EIP that would have been payable to him for the fiscal year in which the termination occurs had we achieved 100% of the then applicable Adjusted EBITDA target for that fiscal year;
·  
in the case of Rex Clevenger, 150% of the amount of his EIP that would have been payable to him for the fiscal year in which the termination occurs had we achieved 100% of the then applicable Adjusted EBITDA target for that fiscal year; or
·  
in the case of Gary Blackford, payment of currently 85% of his base salary in effect on the date of termination.
 
In the event that any payment or benefit received or to be received by Gary Blackford and/or Joseph Schiesl in connection with a Change in Control of us or termination of Gary Blackford and/or Joseph Schiesl’s employment constitutes a “parachute payment,” within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the “Code”) which would be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the individual will receive from us an additional cash payment (the “Gross-Up Payment”) so that, after payment by the individual of all taxes, including income taxes and any related interest and penalties imposed and the Excise Tax imposed upon the Gross-Up Payment, the individual retains an amount of the Gross-Up Payment equal to the Excise Tax imposed on the parachute payments.
 
67
 
“Change of Control” means when any person, as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, other than the Company, J.W. Childs Equity Partners, L.P. or in the case of Rex Clevenger and Joe Schiesl any of its affiliates, any trustee or other fiduciary holding securities under an employee benefit plan of us or any Subsidiary, or any corporation owned, directly or indirectly, by our stockholders, in substantially the same proportions as their ownership of our stock, acquires, in a single transaction or a series of transactions beneficial ownership, as defined in Rule 13d-3 under the Securities Exchange Act of 1934, of securities representing more than 50% of our combined voting power or before a public offering, more than 50% of our outstanding shares of common stock or substantially all of our assets. “Subsidiary” means any corporation in an unbroken chain of corporations beginning with us if, at the time of a Change of Control, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain.
 
The following tables show the potential payments upon a termination or Change of Control of us under the respective named executive officer’s employment agreement.

Gary D. Blackford  
  
President, Chief Executive Officer and Director  
  
        
For Good
  
Without
         
        
Cause or
  
Good Cause
  
Change of
      
        
Without
  
or With
  
Contol
  
Early or
  
   
 Death or
  
Cause
  
Cause
  
Related
  
Normal
  
   
 Disability
  
Termination
  
Termination
  
Termination
  
Retirement
  
Executive Benefits and
 
 on
 
on
  
on
  
on
  
on
 
Payments Upon Separation
  
 12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
Compensation:
                       
Non-Equity Incentive Plan
 
$
-
  
$
340,000
  
$
-
  
$
340,000
  
$
-
  
Stock Options
    
1,484,708
   
1,484,708
   
1,484,708
   
5,939,071
   
1,484,708
 
                                 
Benefits and Perquisites:
                              
Health and Welfare Benefits (1)
    
7,593
   
7,593
   
-
   
14,753
   
-
 
Excise Tax and Gross-Up
    
-
   
-
   
-
   
2,388,264
   
-
 
Severance Payments (2)
    
389,410
   
389,410
   
-
   
756,633
   
-
 
 
(1)  
Reflects the estimated lump-sum present value of all future premiums which will be paid on behalf of Mr. Blackford under our health and welfare plans.
(2)  
Reflects the estimated lump-sum present value of all future payments which Mr. Blackford would be entitled under his employment agreement.
 
68
 
Rex T. Clevenger
  
Senior Vice President and Chief Finanical Officer
  
        
For Good
  
Without
         
        
Cause or
  
Good Cause
  
Change of
      
        
Without
  
or With
  
Contol
  
Early or
  
   
 Death or
  
Cause
  
Cause
  
Related
  
Normal
  
   
 Disability
  
Termination
  
Termination
  
Termination
  
Retirement
  
Executive Benefits and
 
 on
 
on
  
on
  
on
  
on
 
Payments Upon Separation
  
 12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
Compensation:
                       
Non-Equity Incenive Plan
  
$
-
  
$
225,750
  
$
-
  
$
338,625
  
$
-
  
Stock Options
    
176,666
   
176,666
   
176,666
   
1,060,000
   
176,666
 
                                 
Benefits and Perquisites:
                                
Health and Welfare Benefits (1)
    
7,593
   
7,593
   
-
   
11,226
   
-
 
Severance Payments (2)
    
293,712
   
293,712
   
-
   
434,212
   
-
 
 
(1)  
Reflects the estimated lump-sum present value of all future premiums which will be paid on behalf of Mr. Clevenger under our health and welfare plans.
(2)  
Reflects the estimated lump-sum present value of all future payments which Mr. Clevenger would be entitled under his employment agreement.
 
Joseph P. Schiesl  
  
Senior Vice President, Sales  
  
        
For Good
  
Without
         
        
Cause or
  
Good Cause
  
Change of
      
        
Without
  
or With
  
Contol
  
Early or
  
   
 Death or
  
Cause
  
Cause
  
Related
  
Normal
  
   
 Disability
  
Termination
  
Termination
  
Termination
  
Retirement
  
Executive Benefits and
 
 on
 
on
  
on
  
on
  
on
 
Payments Upon Separation
  
 12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
Compensation:
                       
Non-Equity Incenive Plan
  
$
-
  
$
179,096
  
$
-
  
$
179,096
  
$
-
  
Stock Options
    
331,237
   
331,237
   
331,237
   
1,325,000
   
331,237
 
                                 
Benefits and Perquisites:
                                
Health and Welfare Benefits (1)
    
7,593
   
7,593
   
-
   
7,593
   
-
 
Excise Tax and Gross-Up
    
-
   
-
   
-
   
522,866
   
-
 
Severance Payments (2)
    
249,089
   
249,089
   
-
   
249,089
   
-
 
 
(1)  
Reflects the estimated lump-sum present value of all future premiums which will be paid on behalf of Mr. Schiesl under our health and welfare plans.
(2)  
Reflects the estimated lump-sum present value of all future payments which Mr. Schiesl would be entitled under his employment agreement.

EXECUTIVE SEVERANCE PAY PLAN

The compensation to named executive officers Tim Kuck and Jeff Singer under our Executive Severance Pay Plan in the event of termination of their employment, including termination for Cause, voluntary resignation except for Good Cause, death or disability, termination without Cause, resignation for Good Cause or upon a Change of Control is described below. The amounts shown assume that this termination was effective as of December 31, 2006, include amounts earned through that date and are estimates of the amounts which would be paid out to the named executive officers upon their termination. The actual amounts to be paid out can only be determined at the time of the named executive officer’s separation from us.
 
69

Payments Made Upon Termination for Cause, Voluntary Resignation Except for Good Cause or Death or Disability

In the event of termination of employment for Cause, voluntary resignation except for Good Cause or upon the death or disability of a named executive officer, no severance benefits are payable.

“Cause” means:
·  
the continued failure of the named executive officer, whether willful, intentional or grossly negligent, after written notice, to perform substantially his duties (collectively “Duties”) as determined by an immediate supervisor, our chief executive officer or any senior vice president of us other than as a result of a disability;
·  
dishonesty in the performance of the named executive officer’s Duties;
·  
conviction or confession of any act on the named executive officer’s part constituting a felony under the federal or state laws; or
·  
any other willful act or omission on the named executive officer’s part which is materially injurious to the financial condition or business reputation of us or any of our subsidiaries.

“Resignation for Good Cause” means the termination of employment of the named executive officer if, other than for Cause, any of the following has occurred:

·  
we have reduced or reassigned a material portion of the named executive officer’s duties per the named executive officer’s job description;
·  
the named executive officer’s base salary has been reduced other than in connection with an across-the-board reduction of approximately the same percentage in executive compensation to executive employees imposed by our board of directors in response to negative financial results or other adverse circumstances affecting us; or
·  
we have required the named executive officer to relocate in excess of 50 miles from the location where he is currently employed.

Payments Made Upon Termination Without Cause, Resignation for Good Cause or Upon a Change of Control

In the event of termination of employment without Cause, the resignation for Good Cause by the named executive officer or the termination of the employment of the named executive officer upon a Change of Control, the named executive officer will continue to receive his salary and a lump sum payment (the “Lump Sum Payment”) from us equal to the cost for continuing the named executive officer’s existing family medical and dental insurance benefits pursuant to Consolidated Omnibus Budget Reconciliation Act of 1986 for 12 months from the date of termination and other benefits as may be required by law if the named executive officer signs within one month of the date of termination a general release of all claims against us and our affiliates, an agreement providing that the named executive officer not disclose or use confidential information of us and an agreement not to compete with us in the medical equipment rental business, not to solicit for employment or hire any employee of us and not to solicit as a customer or client of medical equipment rental business any customer or client of us for 12 months from the date of termination.
 
70
If the named executive officer finds other employment within 12 months from the date of termination, the amount of salary payable to the named executive officer will be reduced by the value of the compensation that the named executive officer receives in his new employment and the Lump Sum Payment will be discontinued from that date through the end of the 12-month period from the date of termination.

In the event of the resignation of the named executive officer for Good Cause or the termination of the named executive officer upon Change in Control, the named executive officer also will be paid a prorated portion of the EIP earned for the then current fiscal year, based upon the number of days that the named executive officer was employed during that year at the time annual EIPs are paid to our other executives.

“Change of Control” means:

·  
any event as a result of which J.W. Childs Associates, L.P. and Halifax Group L.L.C. collectively cease to own and control all of the economic and voting rights associated with ownership of at least 50.1% of our outstanding capital stock; or
·  
any sale or transfer of all or substantially all of our assets.

The following tables show the potential payments to each of the named executive officers covered by the Executive Severance Pay Plan upon a termination or Change of Control of us under our Executive Severance Pay Plan.
 
71
 
Timothy W. Kuck  
  
Senior Vice President, Operations  
  
                
Without
         
                
Good Cause
  
Change of
      
        
Without
  
For Good
  
or With
  
Contol
  
Early or
  
   
 Death or
  
Cause
  
Cause
  
Cause
  
Related
  
Normal
  
   
 Disability
  
Termination
  
Termination
  
Termination
  
Termination
  
Retirement
  
Executive Benefits and
  
 on
 
on
  
on
  
on
  
on
  
on
 
Payments Upon Separation
  
 12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
Compensation:
                           
Non-Equity Incenive Plan
  
$
-
  
$
-
  
$
149,940
  
$
-
  
$
149,940
  
$
-
  
Stock Options
    
110,997
   
110,997
   
110,997
   
110,997
   
716,000
   
110,997
 
                                       
Benefits and Perquisites:
                                      
Health and Welfare Benefits (1)
    
-
   
7,593
   
7,593
   
-
   
7,593
   
-
 
Severance Payments (2)
    
-
   
208,529
   
208,529
   
-
   
208,529
   
-
 
 
(1)  
Reflects the estimated lump-sum present value of all future premiums which will be paid on behalf of Mr. Kuck under our health and welfare plans.
(2)  
Reflects the estimated lump-sum present value of all future payments which Mr. Kuck would be entitled under the Executive Severance Pay Plan.
 
Jeffrey L. Singer  
  
Senior Vice President, Asset Optimization  
  
                
Without
         
                
Good Cause
  
Change of
      
        
Without
  
For Good
  
or With
  
Contol
  
Early or
  
   
 Death or
  
Cause
  
Cause
  
Cause
  
Related
  
Normal
  
   
 Disability
  
Termination
  
Termination
  
Termination
  
Termination
  
Retirement
  
Executive Benefits and
  
 on
 
on
  
on
  
on
  
on
  
on
 
Payments Upon Separation
  
 12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
Compensation:
                           
Non-Equity Incenive Plan
  
$
-
  
$
-
  
$
140,000
  
$
-
  
$
140,000
  
$
-
  
Stock Options
    
198,742
   
198,742
   
198,742
   
198,742
   
795,000
   
198,742
 
 
                                      
Benefits and Perquisites
                                      
Health and Welfare Benefits (1)
          
7,593
   
7,593
   
-
   
7,593
       
Severance Payments (2)
    
-
   
194,705
   
194,705
   
-
   
194,705
   
-
 
 
(1)  
Reflects the estimated lump-sum present value of all future premiums which will be paid on behalf of Mr. Singer under our health and welfare plans.
(2)  
Reflects the estimated lump-sum present value of all future payments which Mr. Singer would be entitled under the Executive Severance Pay Plan.

2003 STOCK OPTION PLAN

The Stock Option Plan provides for the grant of stock options to any of our full or part-time employees, including officers and directors who are also employees. The exercise price for the stock options equals the estimated fair market value of our common stock on the date such options are granted, as determined by our board of directors. We may also grant stock options to non-employee directors and consultants or independent contractors providing services to us. The exercise price for the options will generally be equal to the fair market value of our common stock on the date such options are granted, as determined by our board of directors. However, the board has discretion to issue such options at exercise prices lower than fair market value. The Stock Option Plan is administered by the compensation committee, which has the authority to select the persons to whom awards are granted, to determine the exercise price, if any, and the number of shares of common stock covered by such awards, and to set other terms and conditions of awards, including any vesting schedule. Our board of directors is permitted to amend, alter, suspend, discontinue or terminate the plan at any time, and either the compensation committee or the board of directors is permitted to amend or terminate any outstanding award, except that an outstanding award may not be amended or terminated without the holder’s consent if such amendment or termination would adversely affect the rights of the holder.
 
72
 
While the terms of the options to be granted under this plan will be determined at the time of grant, our employee stock options issued in 2006 will expire 10 years after grant and are comprised of options with fixed vesting schedules and options that vest upon the achievement of established performance targets. An employee’s unvested options are forfeited when employment is terminated; vested options must be exercised at termination to avoid forfeiture. Before the exercise of an option, the holder has no rights as a stockholder regarding the shares subject to the option, including voting rights.

DIRECTOR COMPENSATION

Except for Samuel Humphries, our advisory director; David Dovenberg, our non-executive chairman of the board; and Gary Blackford, our president, chief executive officer and director, who is included in the Summary Compensation Table on page 62, none of our other directors receive compensation for their services.

Cash Compensation

Mr. Humphries is entitled to receive a quarterly retainer of $5,000 for his service as our advisory director, a per board of directors meeting attendance fee of $1,000 and a per compensation committee meeting attendance fee of $500. Mr. Humphries receives a quarterly fee of $1,250 for his service as our audit committee chairman in addition to the foregoing retainer.

Mr. Dovenberg’s compensation is discussed in detail below under the caption “Director Employment Agreement”.

Stock Option Compensation

In May 2004, Mr. Dovenberg received a grant of stock options to purchase 240,000 shares of our common stock at the fair market value of our common stock on the date of the grant of $1.00 per share under our Stock Option Plan for his service as our non-executive chairman of the board. Until a stock option is exercised, the underlying share cannot be voted. Thirty-three percent of the grant vests twenty-five percent per year over four years of service, the remaining portion vests over an eight-year service period with earlier vesting subject to achievement of certain established financial performance targets.
 
73
In April 2004, Mr. Humphries received a grant of stock options to purchase 72,000 shares of our common stock at the fair market value of our common stock on the date of the grant date of $1.00 per share under our Stock Option Plan for his service as our advisory director. Until a stock option is exercised, the underlying share cannot be voted. These stock options vest over four years of service with 25% of the grant vesting each year.

Director Summary Compensation Table

The table below summarized the compensation paid by the Company to directors for the fiscal year ended December 31, 2006.

(a)
  
 (b)
  
(c)
  
(d)
  
(e)
  
(f)
  
(g)
  
(h)
  
                    
Change in
          
                    
Pension
         
                    
Value and
         
   
 Fees
          
Non-Equity
  
Nonqualified
          
   
 Earned
          
Incentive
  
Deferred
         
   
 or Paid
  
Stock
 
Option
  
Plan
  
Compensation
  
All Other
      
   
 in Cash
  
Awards
  
Awards
  
Compensation
  
Earnings
  
Compensation
  
Total
  
Name (1)
  
 ($) (2)
  
($)
  
($) (3)
  
($)
  
($) (4)
  
($) (5)
  
($)
  
David E. Dovenberg
 
$
150,000
  
$
-
  
$
25,086
  
$
-
  
$
4,275
  
$
4,500
  
$
183,861
  
Samuel B. Humphries
   
37,000
   
-
   
12,663
   
-
   
-
   
8,606
   
58,269
 
 
(1)  
Neither Michael N. Cannizzaro, David W. Dupree, Steven G. Segal, Mark J. Tricolli, Brent D. Williams or Edward D. Yun receive compensation for their service. Gary D. Blackford is included in the Summary Compensation Table.

(2)  
The amount in column (b) for Mr. Dovenberg represents his salary for fiscal year 2006 under his employment agreement which is discussed in detail below under the caption “Director Employment Agreement”. The amounts in column (b) for Mr. Humphries represents quarterly retainer, committee fees and meeting fees which are discussed in detail on page 73 under the caption “Cash Compensation”.

(3)  
The amounts in column (d) reflect the dollar amount recognized for financial statement reporting purposes for the year ended December 31, 2006, in accordance with SFAS 123(R) of awards pursuant to the Stock Option Plan and include amounts from awards granted before 2006. As of December 31, 2006 the following directors had the following number of options outstanding: David E. Dovenberg: 240,000 and Samuel B. Humphries: 72,000. Assumptions used in the calculation of these amounts are included in footnote 12 to the Company’s audited financial statements for the fiscal year ended December 31, 2006, set forth in Part IV, Item 15 of this Form 10-K.

(4)  
The amount in column (f) for Mr. Dovenberg reflects the change in the actuarial present value of the benefit under the Pension Plan using interest rate and mortality rate assumptions consistent with those used in our financial statements and may include amounts which Mr. Dovenberg may not be entitled to receive because such amounts are not vested. Our pension plan is discussed in detail on page 59 under the caption “Retirement Plans”.
 
74
 
(5)  
The amount in column (g) for Mr. Dovenberg reflects our matching contribution to our Long-Term Savings Plan which is discussed in detail on page 60. The amount in column (g) for Mr. Humphries reflects reimbursement for travel expenses Mr. Humphries incurred on our behalf.

Director Employment Agreement

Under Mr. Dovenberg’s employment agreement with us, he is entitled to receive an annual base salary of $100,000 in each of our 2006 through 2008 fiscal years and a pro-rated portion during the first half of our 2009 fiscal year. In February 2006 and March 2007, the board of directors approved a base salary for fiscal years 2006 and 2007, respectively, of $150,000 for Mr. Dovenberg. Mr. Dovenberg also is entitled to receive the health, including dental, life and disability benefits that are generally made available by us to our employees (collectively, the “Benefits”). This employment agreement also provides for payments made upon disability or termination without Cause, resignation for Good Reason, Change in Control, death, termination for Cause or resignation without Good Reason as more particularly described below. The actual amounts to be paid out can only be determined at the time of Mr. Dovenberg’s separation from us.  
 
Payments Made Upon Disability or Termination Without Cause

In the event of the disability of Mr. Dovenberg or the termination by us of him without Cause, he will receive his then base salary annually and continue to receive the Benefits from the date of termination until June 30, 2009. However, if the date of the termination by us of Mr. Dovenberg without Cause is on or after a Change in Control, then Mr. Dovenberg will not be entitled to receive and we will not be obligated to pay the foregoing base salary and the Benefits.

“Disability” means that Mr. Dovenberg becomes physically or mentally disabled, whether totally or partially, either permanently or so that he is unable substantially and competently to perform his duties for 90 consecutive days or for 90 days during any six-month period during the term of his employment agreement.
 
“Cause” refers to:
 
·  
the continued failure of Mr. Dovenberg, whether willful, intentional or grossly negligent, after written notice, to perform substantially his duties under his employment agreement other than as a result of a disability;
·  
dishonesty in the performance of Mr. Dovenberg’s duties under his employment agreement;
·  
the conviction or confession of any act on Mr. Dovenberg’s part constituting a felony under any federal or state law;
·  
any other willful act or omission on Mr. Dovenberg’s part which is materially injurious to the financial condition or business reputation of us or any of our subsidiaries;
·  
the breach of any provision of Mr. Dovenberg’s employment agreement relating to confidentiality, non-competition or non-solicitation (the “Breach”); or
·  
the breach of any provision of Mr. Dovenberg’s employment agreement other than the Breach that is not cured within sixty days after notice from us.
 
75
 
“Change in Control” means when any person, as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, other than us, J.W. Childs Equity Partners, L.P. J.W. Childs Equity Partners III, L.P., or any of the respective affiliates thereof, any trustee or other fiduciary holding securities under an employee benefit plan of us or any of our subsidiaries, or any corporation owned, directly or indirectly, by our stockholders, in substantially the same proportions as their ownership of our stock, acquires, in a single transaction or a series of transactions, beneficial ownership, as defined in Rule 13d-3 under the Securities Exchange Act of 1934, of securities representing more than 50% of our combined voting power or before a public offering, more than 50% of our outstanding shares of common stock or substantially all of our assets.

Payments Made Upon Resignation For Good Reason

In the event of the resignation for Good Reason by Mr. Dovenberg, he will continue to receive his base salary for 18 months following termination. However, if the date of termination is on or after a Change in Control, then Mr. Dovenberg will not be entitled to receive and we will not be obligated to pay the foregoing base salary.

“Good Reason” other than for Cause means any of the following has occurred:
 
·  
Mr. Dovenberg’s base salary has been reduced other than in connection with an across-the-board reduction of approximately the same percentage in executive compensation to executive employees imposed by our board of directors in response to negative financial results or other adverse circumstances affecting us;
·  
we have required Mr. Dovenberg to relocate outside the greater Minneapolis, Minnesota area;
·  
Mr. Dovenberg’s illness, in the good faith determination of our board of directors is likely to result in him becoming disabled and unable to continue his employment with us; or
·  
we have breached Mr. Dovenberg’s employment agreement in any material respect.
 
Payments Made Upon Death, Termination for Cause or Resignation Without Good Reason
 
In the event of death, the termination by us of Mr. Dovenberg for Cause or the resignation by Mr. Dovenberg without Good Reason in each case under his employment agreement, all of Mr. Dovenberg’s rights to payments, other than payment for services already rendered and any other benefits otherwise due, cease immediately.
 
The following table shows the potential payments upon a termination or Change in Control of us under the employment agreement for David Dovenberg.
 
76
 
        
For Cause
                 
        
or Without
          
Change in
      
        
Good Reason
  
Without
  
With Good
  
Contol
  
Early or
  
        
Termination
  
Cause
  
Reason
  
Related
  
Normal
  
   
 Disability
  
or Death
  
Termination
  
Termination
  
Termination
  
Retirement
  
Director Benefits and
 
 on
 
on
  
on
  
on
 
on
  
on
 
Payments Upon Separation
  
 12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
12/31/2006
  
Compensation:
                           
Stock Options
  
$
63,600
  
$
63,600
  
$
63,600
  
$
63,600
  
$
254,400
  
$
63,600
  
                                   
Benefits and Perquisites:
                                      
Health and Welfare Benefits (1) 
    
18,178
   
-
   
18,178
   
-
   
-
   
-
 
Severance Payments (2)
    
349,572
   
-
   
349,572
   
215,883
   
-
   
-
 
 
(1)  
Reflects the estimated lump-sum present value of all future premiums which would be paid on behalf of Mr. Dovenberg under our health and welfare benefit plans.
(2)  
Reflects the estimated lump-sum present value of all future payments which Mr. Dovenberg would be entitled to receive under his employment agreement which is discussed in detail on page 74 under the caption “Director Employment Agreement”.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Our board of directors has a compensation committee consisting of certain of our directors. The members of the compensation committee are David W. Dupree, Samuel B. Humphries and Edward D. Yun. Mr. Humphries is the chairman but, as an advisory director, does not vote on matters before such committee.

For a discussion of the related person transactions between the foregoing members of our compensation committee, their affiliates and us, see Item 13 of this Annual Report on Form 10-K.


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table shows information known to us with respect to the beneficial ownership of our common stock as of March 1, 2007, by:

·  
each person (or group of affiliated persons) known by us to be the owner of more than 5% of our outstanding common stock;
·  
each of our directors and our advisory director;
·  
each of our named executive officers listed in the summary compensation table; and
·  
all of our directors and named executive officers and our advisory director as a group.
 
77
Beneficial ownership is determined in accordance with rules of the SEC, and includes generally voting power and/or investment power with respect to securities. Unless otherwise indicated, the principal address of each of the stockholders below is c/o Universal Hospital Services, Inc.
   
Number of
 
Percentage
 
 
  
Shares
 
of Shares
  
   
Beneficially
 
Beneficially
  
Beneficial owner  
Owned(1)
  
Owned
  
J.W. Childs Equity Partners, L.P(2)(14)
    
52,859,339
    
41.7
%
JWC UHS Co-invest LLC (2)(3)
    
3,978,543
    
3.1
%
JWC Co-invest III LLC(2)
    
737,531
    
*
  
J.W. Childs Equity Partners III, L.P.(2)
    
34,262,469
    
27.0
%
Steven G. Segal(2)(3)
    
91,837,882
    
72.4
%
Michael N. Cannizzaro(2)(3)
    
91,837,882
    
72.4
%
Edward D. Yun(2)(3)
    
91,837,882
    
72.4
%
Mark J. Tricolli(2)(3)
    
91,837,882
    
72.4
%
Halifax Capital Partners, L.P.(4)
    
20,000,000
    
15.8
%
David W. Dupree(4)(5)
    
20,050,000
    
15.8
%
Brent D. Williams(4)(6)
    
20,000,000
    
15.8
%
David E. Dovenberg(7)
    
6,710,724
    
5.3
%
Gary D. Blackford(8)
    
2,946,128
    
2.3
%
Timothy W. Kuck(9)
    
220,831
    
*
  
Samuel B. Humphries(10)
    
314,484
    
*
  
Jeffrey Singer(11)
    
1,300,173
    
1.0
%
Rex T. Clevenger(12)
    
166,666
    
*
  
Joseph S. Schiesl(13)
    
452,088
    
*
  
All officers, directors and advisory directors as a group (17 persons) (15)
    
124,548,962
    
98.2
%
               
* Less than 1%
              
 
(1)  
Except as indicated by footnote, the persons named in the table above have the sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.

(2)  
Directors Segal, Cannizzaro, Yun, and Tricolli may be deemed to beneficially own the shares by virtue of their position with J.W. Childs Equity Partners, L.P., JWC UHS Co-invest LLC(3), JWC Co-invest III LLC and J.W. Childs Equity Partners III, L.P. The address for these stockholders is c/o J.W. Childs Associates, L.P., 111 Huntington Avenue, Boston, Massachusetts 02199-7610.

(3)  
Shares held by JWC UHS Co-invest LLC which may be deemed to be beneficially owned by directors Segal, Cannizzaro and Yun by virtue of their position with J.W. Childs Associates, L.P., an affiliate of J.W. Childs Equity Partners, L.P, J.W. Childs Equity Partners III, L.P., JWC Fund III Co-invest LLC and JWC UHS Co-invest LLC.

(4)  
Directors Dupree and Williams may be deemed to beneficially own the shares by virtue of their position with Halifax Group L.L.C.
 
78
 
(5)  
The address for this stockholder is c/o The Halifax Group, 1133 Connecticut Avenue, N.W., Suite 725, Washington, D.C. 20036.

(6)  
The address for this stockholder is c/o The Halifax Group, 200 Crescent Court, Suite 1040, Dallas, Texas 75201.

(7)  
Includes 122,402 shares of common stock held by Mr. Dovenberg’s son, 68,402 shares of common stock held by Mr. Dovenberg’s daughter, 2,716,790 shares of common stock held by Mr. Dovenberg’s wife, 21,600 shares of common stock held by Mr. Dovenberg’s sister-in-law, 30,600 shares of common stock. held by Mr. Dovenberg’s son-in-law, 30,600 shares of common stock held by Mr. Dovenberg’s daughter-in-law for which Mr. Dovenberg has an irrevocable proxy, which may be deemed to be beneficially owned by Mr. Dovenberg, and options to purchase 60,000 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2007.

(8)  
Includes 670,460 shares of common stock held by Mr. Blackford’s wife, which may be deemed to be beneficially owned by Mr. Blackford, and options to purchase 1,400,668 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2007.

(9)  
Includes options to purchase 120,831 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2007.

(10)  
Includes options to purchase 54,000 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2007.

(11)  
Includes options to purchase 187,493 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2007.
 
(12)  
Includes options to purchase 166,666 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2007.
 
(13)  
Includes options to purchase 312,488 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2007.
   
(14)   On December 2, 2003, J.W. Childs Equity Partners, LP pledged all its shares of common stock to Citibank, N.A. to secure a $10 million term loan. Operation of the pledge could result in a change in control.
   
(15)   Includes options to purchase 2,677,131 shares of common stock that are exercisable or become exercisable within 60 days of March 1, 2007.
 
EQUITY COMPENSATION PLANS
 
The following table summarizes, as of December 31, 2006, the shares of our common stock subject to outstanding awards or available for future awards under our equity compensation plans and arrangements.
 
79
 
Plan Category
  
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights
  
Weighted-average
Exercise Price of
Outstanding
Options, Warrants
and Rights
  
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (excluding shares
reflected in the first
column) (1)
  
Equity Compensation
Plans Approved by
Security Holders
    
16,309,297
 
$
1.14
    
811,394
 
Equity Compensation
Plans Not Approved by
Security Holders
    
-
   
-
   
-
 
Total
    
16,309,297
 
$
1.14
    
811,394
 
 
(1)  
Represents shares remaining available under our Stock Option Plan.


TRANSACTIONS WITH RELATED PERSONS

The board of directors has adopted a written policy and written procedures regarding transactions with related persons. On an annual basis each director and executive officer is obligated to complete a Director and Officer Questionnaire, which requires disclosure of any transactions in which we are a participant and the director, executive officer or any member of his immediate family (each a “related person”), have a direct or indirect material interest. The policy and procedures charge the audit committee with the review, approval and/or ratification of any conflict of interest with a related person.
 
MANAGEMENT AGREEMENTS

Payments under the management agreement described below may be made only to the extent permitted by our senior secured credit facility and the indenture governing the notes.

We are a party to a management agreement with J.W. Childs Associates, L.P. under which we paid to them an annual management fee of $360,000 in our 2006 fiscal year for the ongoing provision of certain consulting and management advisory services.

J.W. Childs Associates, L.P. is the general partner of and owns a 54.5% partnership interest in J.W. Childs Advisors, L.P. Our directors Steven Segal and Edward Yun are limited partners of and own 14.0% and 1.5% partnership interests, respectively in J.W. Childs Advisors, L.P. J.W. Childs Advisors, L.P. is the general partner of and owns a 0.2% partnership interest in J.W. Childs Equity Partners, L.P. Each of Steven Segal, Edward Yun and J.W. Childs Equity Partners, L.P. maybe deemed to be a beneficial owner of more than 5% of our common stock.
 
80
 
J.W. Childs Associates, L.P. is the general partner of and owns a 27.9% partnership interest in J.W. Childs Advisors III, L.P. Our directors Steven Segal, Edward Yun, Michael Cannizzaro and Mark Tricolli are limited partners of and own 15.0%, 8.5%, 2.0% and 1.0% partnership interests, respectively, in J.W. Childs Advisors III, L.P. J.W. Childs Advisors III, L.P. is the general partner of and owns a 0.2% partnership interest in J.W. Childs Equity Partners III, L.P. Each of Steven Segal, Edward Yun, Michael Cannizzaro, Mark Tricolli and J.W. Childs Equity Partners III, L.P. may be deemed to be a beneficial owner of more than 5% of our common stock.

J.W. Childs Associates, L.P. is the managing member of each of JWC UHS Co-invest LLC and JWC Fund III Co-invest, LLC. Our directors Steven Segal, Edward Yun and Michael Cannizzaro are members of and own 15.2%, 1.4% and 5.9% membership interests respectively, in JWC UHS Co-invest LLC and are members of and own 13.2%, 2.7% and 1.1% membership interests, respectively, in JWC Fund III Co-invest, LLC. Our director Mark Tricolli is a member of and owns a 0.5% membership interest in JWC Fund III Co-invest, LLC. Each of Steven Segal, Edward Yun, Michael Cannizzaro and Mark Tricolli may be deemed to be beneficial owner of more than 5% of our common stock.

We are a party to a management agreement with Halifax GenPar, L.P. under which we paid to them an annual management fee of $120,000 in our 2006 fiscal year for the ongoing provision of certain consulting and management advisory services.

The Halifax Group, LLC is the general partner of and owns an approximate 0.75% partnership interest in Halifax GenPar, L.P. Our directors David Dupree and Brent Williams are members of and own 15.7% and 7.7% membership interests, respectively, in The Halifax Group, LLC. Our directors David Dupree and Brent Williams are limited partners of and own 25.9% and 7.5% partnership interests, respectively, in Halifax GenPar, L.P. Halifax GenPar, L.P. is the general partner of and owns an approximate 11% partnership interest in Halifax Capital Partners, L.P. Each of David Dupree, Brent Williams and Halifax Capital Partners, L.P. may be deemed to be a beneficial owner of more than 5% of our common stock.

For additional discussion of the beneficial ownership of our common stock by the foregoing individuals and entities, please refer to Item 12 of this Annual Report of Form 10-K.


The following table presents fees for professional services rendered by PricewaterhouseCoopers LLP for the audit of our annual financial statements for the years ended December 31, 2006 and 2005, and fees billed for other services rendered by PricewaterhouseCoopers LLP during those periods.
 
81
 
Types of Fees
  
2006
  
2005
  
Audit Fees (1)
  
$
233,325
  
$
198,789
  
Audit-Related Fees (2)
    
-
   
58,411
 
Tax Fees (3)
    
71,500
   
76,500
 
All Other Fees (4)
    
2,412
   
2,459
 
 
(1)  
Audit fees consist of services rendered for the audit of the annual financial statements, including required quarterly reviews, statutory and regulatory filings or engagements and services that generally only the auditor can reasonably be expected to provide.
 
(2)  
Audit-related fees were for assurance and related services related to employee benefit plan and consultations concerning financial accounting and reporting standards.
 
(3)  
Tax fees are for professional services rendered for tax compliance, tax advice and tax planning.
 
(4)  
All other fees are for services other than those in the previous categories.
All decisions regarding selection of independent registered public accounting firms and approval of accounting services and fees are made by our audit committee in accordance with the provisions of the Sarbanes-Oxley Act of 2002 and related SEC rules. There are no exceptions to the policy of securing prior approval by our audit committee for any service provided by our independent registered public accounting firm.


 
(a) The following documents are filed as part of this Report:
 
  1. Financial Statements
     
   
Report of Independent Registered Public Accounting Firm
     
    Balance Sheets as of December 31, 2006 and 2005
     
    Statements of Operations for the years ended December 31, 2006, 2005 and 2004
     
    Statements of Shareholders' Equity (Deficiency) and Other Comprehensive Income (Loss) for the years ended December 31, 2006, 2005 and 2004
     
    Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
     
    Notes to Financial Statements
     
  2. Financial Statement Schedule required to be filed by Item 8 and Paragraph (c) of this Item 15.
     
   
Schedule II -Valuation and Qualifying Accounts (follows the signature page)
     
    All other supplemental financial schedules are omitted as not applicable or not required under the rules of Regulation S-X or the information is presented in the financial statements or notes thereto.
     
  3. Exhibits
 
82
 
 
Number
  
Description
 
3.1a
  
Certificate of Amendment to Certificate of Incorporation of Universal Hospital Services, Inc.*
 
3.1b
  
Certificate of Incorporation of Universal Hospital Services, Inc. **
 
3.2a
  
Amended and Restated Bylaws of Universal Hospital Services, Inc.*
 
3.3
  
Certification of Elimination of Series B 13% Cumulative Accruing Pay-In-Kind Preferred Stock of Universal Hospital Services, Inc.***
 
4.1
  
Form of certificate of common stock**
 
4.2
  
Indenture, dated as of October 17, 2003, by and between Universal Hospital Services, Inc. and Wells Fargo Bank, National Association, as Trustee, relating to the registrant’s 10.125% Senior Notes due 2011 (including Form of Note).*
 
4.3
  
Form of Amended and Restated Stockholders’ Agreement, dated October 17, 2003, by and among Universal Hospital Services, Inc., J.W. Childs Equity Partners III, L.P., JWC Fund III Co-invest LLC, Halifax Capital Partners, L.P. and the other stockholders of Universal Hospital Services, Inc.*
 
4.4
  
Exchange and Registration Rights Agreement, dated as of October 17, 2003, among Universal Hospital Services, Inc., Goldman, Sachs & Co,. Credit Suisse First Boston LLC, CIBC World Markets Corp. and Jefferies & Company, Inc.****
 
4.5
  
10.125% Senior Notes due 2011 in the aggregate principal amount of $259,880,000.****
 
4.6
  
10.125% Senior Note due 2011 in the aggregate principal amount of $120,000.****
 
4.7
  
Blanket Issuer Letter of Representations, dated as of October 17, 2003, among Universal Hospital Services, Inc., Wells Fargo Bank, National Association and the Depository Trust Company.****
 
10.1
  
Stock Purchase Agreement, dated as of September 26, 2003, among Universal Hospital Services, Inc., J.W. Childs Equity Partners III, L.P., JWC Fund III Co-invest LLC and Halifax Capital Partners, L.P.*
 
10.2
  
Amendment No. 1, dated October 17, 2003, to the Stock Purchase Agreement, dated as of September 26, 2003, among Universal Hospital Services, Inc., J.W. Childs Equity Partners III, L.P., JWC Fund III Co-invest LLC and Halifax Capital Partners, L.P.*
 
83
 
 
Number
  
Description
10.3
  
Joinder Agreements to Stock Purchase Agreement executed October 28, 2003.*
 
10.4
  
2003 Stock Option Plan of Universal Hospital Services, Inc.****+
 
10.5
  
Executive Severance Pay Plan dated November 1, 2006+
 
10.6
  
Employment Agreement, dated as of June 25, 2002, between
     
Universal Hospital Services, Inc. and Gary D. Blackford*****+
 
10.7
  
Employment Agreement, dated as of February 14, 2003, between
     
Universal Hospital Services, Inc. and Joseph P. Schiesl.***+
 
10.8
  
Employment Agreement, dated as of February 25, 2003 between
     
Universal Hospital Services, Inc. and Walter T. Chesley.***+
 
10.9
  
Employment Agreement between Universal Hospital Services, Inc. and David E. Dovenberg, dated October 17, 2003.*+
 
10.10
  
Employment Agreement between Universal Hospital Services, Inc. and Rex T. Clevenger, dated June 15, 2004.***+
 
10.11
  
2007 Executive Incentive Plan Targets+
 
10.12
  
Amended and Restated Credit Agreement dated as of May 26, 2005, among Universal Hospital Services, Inc., as Borrower, the other credit parties signatory thereto, as Credit Parties, the lenders signatory thereto from time to time, as Lenders, and General Electric Capital Corporation, as Agent, Administrative Agent, Collateral Agent and Lender, and GECC Capital Markets Group, Inc. as Sole Lead Arranger and Sole Bookrunner.******
 
10.13
  
Form of Non-Qualified Stock Option Agreement for the 2003 Stock Option Plan.+
 
10.14
  
Asset Purchase Agreement dated February 23, 2007 by and between Universal Hospital Services, Inc. and Intellamed, Inc.******
 
10.15
  
Letter Agreement dated February 27, 2007 between Universal Hospital Services, Inc. and Intellamed, Inc.******
 
10.16
  
Amendment No. 1 to Credit Agreement dated as of February 13, 2007 by and among Universal Hospital Services, Inc., General Electric Capital Corporation, as agent for lenders, and the lenders party thereto. ******
 
12.1
  
Statement regarding the computation of ratio of earnings to fixed charges.
 
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 of Gary D. Blackford Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2
  
Certification of Rex T. Clevenger Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
84
 
*Previously filed as an Exhibit to the Quarterly Report on Form 10-Q of Universal Hospital Services, Inc. for the fiscal quarter ended September 30, 2003, and incorporated by reference herein.
** Previously filed as an Exhibit to Form S-1/A filed on September 5, 2001, and incorporated by reference herein.
*** Previously filed as an Exhibit to the Quarterly Report on Form 10-Q of Universal Hospital Services, Inc. for the fiscal quarter ended June 30, 2004.
****Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-4 (File No. 333-111606) and incorporated by reference herein.
***** Previously filed as an Exhibit to Form 10-Q filed on August 14, 2002.
****** Previously filed as an Exhibit to the Current Report on Form 8-K of Universal Hospital Services, Inc. dated May 26, 2005.
****** Previously filed as an Exhibit to the Current Report on Form 8-K of Universal Hospital Services, Inc. dated February 23, 2007.
+ Management contracts or compensatory plans or arrangements.
 
 
85
 
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 16, 2007.
 
     
  UNIVERSAL HOSPITAL SERVICES, INC.
 
 		  
 		  
 
Date:  By:   /s/ Gary D. Blackford
 
Gary D. Blackford
  President and Chief Executive Officer
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 15, 2007.
/s/Gary D. Blackford
Gary D. Blackford
  
President and Chief
Executive Officer
(Principal Executive Officer)
     
/s/ Rex T. Clevenger
Rex T. Clevenger
  
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
     
/s/ Scott M. Madson
Scott M. Madson
  
Controller and
Chief Accounting Officer
(Principal Accounting Officer)
     
/s/ David E. Dovenberg
David E. Dovenberg
  
Chairman of the
Board of Directors and
Non-Executive Chairman
     
/s/ Michael N. Cannizzaro
Michael N. Cannizzaro
   Director
     
/s/ David W. Dupree
David W. Dupree
   Director
     
/s/ Steven G. Segal
Steven G. Segal
   Director
     
/s/ Mark J. Tricolli
Mark J. Tricolli
   Director
     
/s/ Brent D. Williams
Brent D. Williams
   Director
     
/s/ Edward D. Yun
Edward D. Yun
   Director
     
/s/ Samuel B. Humphries
Samuel B. Humphries
   Advisory Director
 
86

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT

No annual report relating to the fiscal year ended December 31, 2006 or proxy statement with respect to any annual or other meeting of security holders has been sent to security holders, nor will such information be sent to security holders.
 
 
 
87
 
Universal Hospital Services, Inc.
Index
December 31, 2006 and 2005 
 
 
Page(s)
   
Report of Independent Registered Public Accounting Firm
F-1
   
Financial Statements
  
   
Balance Sheets
F-2
   
Statements of Operations
F-3
   
Statements of Shareholders’ Equity (Deficiency) and Other Comprehensive Income (Loss)
F-4
   
Statements of Cash Flows
F-5
   
Notes to Financial Statements
F-6 to F-23
 
 
Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders of
Universal Hospital Services, Inc.


In our opinion, the financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Universal Hospital Services, Inc. (the “Company”) at December 31, 2006 and 2005 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the financial statements, the Company changed its method of accounting for stock-based compensation effective January 1, 2006.



PricewaterhouseCoopers LLP
Minneapolis Minnesota
March 2, 2007
 
F-1
 
Universal Hospital Services, Inc.
Balance Sheets
December 31, 2006 and 2005
 
(in thousands, except share and per share information)
  
2006
  
2005
  
Assets
          
Current assets:
          
Accounts receivable, net
  
$
42,976
  
$
41,865
  
Inventories
    
4,872
   
5,117
  
Deferred income taxes
    
4,772
   
4,111
  
Other current assets
    
3,121
    
2,375
  
 Total current assets
    
55,741
   
53,468
  
               
Property and equipment, net:
              
Movable medical equipment, net
    
140,548
   
126,775
  
Property and office equipment, net
    
16,079
    
12,695
  
 Total property and equipment, net
    
156,627
   
139,470
  
               
Intangible assets:
              
Goodwill
    
37,062
   
37,062
  
Other, primarily deferred financing costs, net
    
7,607
   
9,434
  
Other intangibles, net
    
7,969
   
9,751
  
 Total assets
  
$
265,006
  
$
249,185
  
               
Liabilities and Shareholders' Equity (Deficiency)
              
Current liabilities:
              
Current portion of long-term debt
  
$
3,056
  
$
1,084
  
Book overdrafts
    
1,788
   
2,480
  
Accounts payable
    
13,678
   
14,393
  
Accrued compensation
    
10,241
   
8,895
  
Accrued interest
    
4,810
   
4,481
  
Other accrued expenses
    
4,311
   
3,840
  
 Total current liabilities
    
37,884
   
35,173
  
               
Long-term debt, less current portion
    
307,135
   
299,396
  
Pension and other long-term liabilities
    
5,769
   
5,249
  
Deferred income taxes
    
7,199
   
6,166
  
               
Commitments and contingencies
             
               
Shareholders' equity (deficiency):
              
Common stock, $0.01 par value; 500,000,000 shares authorized,
             
123,463,600.21 and 123,438,105.21 shares issued and 
              
outstanding at December 31, 2006 and 2005, respectively 
    
1,235
   
1,234
 
Additional paid-in capital
    
2,488
   
820
 
Accumulated deficit
    
(93,527
)
  
(93,579
)
Deferred compensation
    
-
    
(94
)
Accumulated other comprehensive income (loss)
    
(3,177
)
  
(5,180
)
 Total shareholders' equity (deficiency)
    
(92,981
)
  
(96,799
)
 Total liabilities and shareholders' equity (deficiency)
  
$
265,006
  
$
249,185
  

The accompanying notes are an integral part of these financial statements.
 
F-2
 
Universal Hospital Services, Inc.
Statements of Operations
Years Ended December 31, 2006, 2005 and 2004 

(in thousands)
  
2006
  
2005
  
2004
  
               
Revenue
              
Medical equipment outsourcing
  
$
176,932
  
$
167,687
  
$
156,490
  
Technical and professional services
    
30,445
   
29,654
   
25,491
 
Medical equipment sales and remarketing
   
17,698
   
18,563
   
17,619
 
Total revenues
    
225,075
   
215,904
   
199,600
 
                     
Cost of Revenue
                    
Cost of medical equipment outsourcing
    
58,987
   
52,499
   
47,178
 
Cost of technical and professional services
    
21,068
   
21,878
   
17,295
 
Cost of medical equipment sales and remarketing
    
13,387
   
14,706
   
13,307
 
Movable medical equipment depreciation
    
37,430
   
37,966
   
36,003
 
Total costs of medical equipment outsourcing,
technical and professional services and medical
equipment sales and remarketing 
    
130,872
   
127,049
   
113,783
 
Gross margin
    
94,203
   
88,855
   
85,817
 
                     
Selling, general and administrative
    
61,940
   
58,455
   
57,713
 
Operating income
    
32,263
   
30,400
   
28,104
 
                     
Interest expense
    
31,599
   
31,127
   
30,508
 
Income (loss) before income taxes
    
664
   
(727
)
  
(2,404
)
                     
Provision for income taxes
    
612
   
842
   
1,188
 
Net income (loss)
  
$
52
  
$
(1,569
)
$
(3,592
)
 
The accompanying notes are an integral part of the unaudited financial statements.
 
F-3
 
Universal Hospital Services, Inc.
Statements of Shareholders Equity (Deficiency) and Other Comprehensive Income (Loss)
Years Ended December 31, 2006, 2005 and 2004
 

                   
Accumulated
  
Total
  
       
Additional
          
Other
  
Shareholders’
  
   
Common
  
Paid-in
  
Accumulated
  
Deferred
  
Comprehensive
  
Equity
  
(in thousands, except share and per share information)
Stock
  
Capital
  
Deficit
  
Compensation
  
Income (Loss)
  
(Deficiency)
  
                           
Balances at December 31, 2003
  
$
1,228
  
$
-
  
$
(88,375
)
$
-
  
$
(2,756
)
$
(89,903
)
                                       
Repurchase of 43,344 shares of common stock
    
(1
)
  
-
   
(43
)
  
-
   
-
   
(44
)
Issuance of 704,995 shares of common stock
    
7
   
698
   
-
   
-
   
-
   
705
 
Deferred compensation
    
-
   
62
   
-
   
(62
)
  
-
   
-
 
Net loss
    
-
   
-
   
(3,592
)
  
-
   
-
       
Unrealized loss on minimum pension liability adjustment
    
-
   
-
   
-
   
-
   
(224
)
      
Comprehensive loss
                                  
(3,816
)
Balances at December 31, 2004
    
1,234
   
760
   
(92,010
)
  
(62
)
  
(2,980
)
  
(93,058
)
                                       
Issuance of 7,492 shares of common stock
    
-
   
8
   
-
   
-
   
-
   
8
 
Deferred compensation
    
-
   
52
   
-
   
(32
)
  
-
   
20
 
Net loss
    
-
   
-
   
(1,569
)
  
-
   
-
       
Unrealized loss on minimum pension liability adjustment
    
-
   
-
   
-
   
-
   
(2,200
)
      
Comprehensive loss
                                  
(3,769
)
Balances at December 31, 2005
    
1,234
   
820
   
(93,579
)
  
(94
)
  
(5,180
)
  
(96,799
)
                                       
Issuance of 25,495 shares of common stock
    
1
   
28
   
-
   
-
   
-
   
29
 
Stock-based compensation
    
-
   
1,640
   
-
   
94
   
-
   
1,734
 
Net income
    
-
   
-
   
52
   
-
   
-
       
Unrealized gain on minimum pension liability adjustment
    
-
   
-
   
-
   
-
   
2,003
       
Comprehensive income
                                  
2,055
 
Balances at December 31, 2006
  
$
1,235
  
$
2,488
  
$
(93,527
)
$
-
  
$
(3,177
)
$
(92,981
)
 
The accompanying notes are an integral part of the unaudited financial statements.
 
F-4
 
Universal Hospital Services, Inc.
Statements of Cash Flows
Years Ended December 31, 2006, 2005 and 2004

                
(in thousands)
  
 2006
  
2005
  
2004
  
Cash flows from operating activities:
               
Net income (loss)
  
$
52
  
$
(1,569
)
$
(3,592
)
Adjustments to reconcile net income (loss) to net cash provided by
                    
operating activities:
                    
Depreciation
     43,672    
42,804
   
39,217
 
Amortization of intangibles and deferred financing costs
     3,498    
3,523
   
2,880
 
Provision for doubtful accounts
     1,126    
927
   
984
 
Provision for inventory obsolescence
    375    
677
   
509
 
Non-cash stock-based compensation expense
     1,734    
20
   
-
 
Gain on sales and disposals of equipment
     (1,280 )  
(659
)
  
(892
)
Deferred income taxes
    372    
567
   
1,103
 
Changes in operating assets and liabilities
                    
Accounts receivable
     (2,126 )  
(1,999
)
  
(5,416
)
Inventories and other operating assets
     (876 )  
520
   
(2,862
)
Accounts payable, accrued expenses and other 
                    
long-term liabilities
     2,324    
(848
)
  
6,035
 
     
48,871
   
43,963
   
37,966
 
Cash flows from investing activities:
                    
Movable medical equipment purchases
    
(50,783
)
  
(38,096
)
  
(47,118
)
Property and office equipment purchases
    
(4,034
)
  
(4,022
)
  
(6,102
)
Proceeds from disposition of movable medical equipment
    
3,106
   
2,602
   
3,174
 
Acquisitions
    
-
   
(1,115
)
  
(15,104
)
     
(51,711
)
  
(40,631
)
  
(65,150
)
Cash flows from financing activities:
                    
Proceeds under revolving credit facility agreements
    
100,500
   
98,557
   
113,041
 
Payments under revolving credit facility agreements
    
(95,606
)
  
(97,741
)
  
(86,866
)
Payments of principal under capital lease obligations
    
(1,391
)
  
(1,089
)
  
-
 
Change in book overdrafts
    
(692
)
  
(2,211
)
  
801
 
Proceeds from issuance of common stock
    
29
   
8
   
705
 
Repurchase of common stock and options
    
-
   
-
   
(44
)
Payment of deferred financing cost
    
-
   
(856
)
  
(453
)
     
2,840
   
(3,332
)
  
27,184
 
 
   $  -  
$
-
  
$
-
  
                     
Cash and cash equivalents at beginning of period
  
$
-
  
$
-
  
$
-
  
Cash and cash equivalents at end of period
  
$
-
  
$
-
  
$
-
  
                     
Supplemental cash flow information:
                    
Interest paid
  
$
29,532
  
$
29,355
  
$
29,812
  
Movable medical equipment purchases included in accounts payable
  
$
7,407
  
$
5,778
  
$
3,808
  
Income taxes paid (received)
  
$
302
  
$
85
  
$
(98
)
Captial lease purchases
  
$
6,208
  
$
3,450
  
$
-
  
 
The accompanying notes are an integral part of the unaudited financial statements.
 
F-5
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 
1. Description of Business
   
 
Universal Hospital Services, Inc. (“we”, “our”, the “Company” or “UHS”) is a nationwide provider of services to the health care industry. The Company’s services fall into three operating segments: medical equipment outsourcing, technical and professional services, and medical equipment sales and remarketing.
   
2.
Significant Accounting Policies
   
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
   
 
Accounts Receivable and Allowance for Doubtful Accounts
 
Trade accounts receivable are recorded at the invoiced amount. Concentrations of credit risk with respect to trade accounts receivable are limited due to the number of customers and their geographical distribution. The Company performs initial and ongoing credit evaluations of its customers and maintains allowances for potential credit losses. The allowance for doubtful accounts is based on historical loss experience and estimated exposure on specific trade receivables.
   
 
Inventories
 
Inventories consist of supplies and equipment held for resale and are valued at the lower of cost or market. Cost is determined by the average cost method, which approximates the first-in, first-out (“FIFO”) method.
   
 
Movable Medical Equipment
 
Depreciation of movable medical equipment is provided on the straight-line method over the equipment’s estimated useful life, generally four to seven years. The cost and accumulated depreciation of movable medical equipment retired or sold is eliminated from their respective accounts and the resulting gain or loss is recorded as gain or loss on sales and disposals of equipment.
   
 
Property and Office Equipment
 
Property and office equipment includes land, buildings, leasehold improvements and office equipment.
   
 
Depreciation and amortization of property and office equipment is provided on the straight-line method over estimated useful lives of 30 years for buildings, the lesser of the remaining useful life or lease term for leasehold improvements, and 3 to 10 years for shop and office equipment. The cost and accumulated depreciation or amortization of property and equipment retired or sold is eliminated from their respective accounts and the resulting gain or loss is recorded in other selling, general and administrative.
F-6
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 
 
Goodwill
 
Goodwill is the excess cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is tested for impairment on an annual basis or at the time of a triggering event. Fair values are estimated based on the Company’s best estimate of the expected present value of future cash flows compared with the corresponding carrying value of the reporting unit, including goodwill. The Company’s reporting units are its three operating segments. The Company performs its annual goodwill impairment testing during its first quarter, the most recent of which indicated no impairment of goodwill.
   
 
Other Intangible Assets
 
Other intangible assets primarily include customer relationships and noncompete agreements, typically associated with acquisitions. Other intangible assets are amortized on a straight-line basis over their estimated economic lives of three to fifteen years that results in a weighted-average useful life of eight years at December 31, 2006 and 2005. The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period.
   
 
Long-Lived Assets
 
The Company periodically reviews its long-lived assets for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated by the excess of the asset’s carrying value over its fair value.
   
 
Deferred Financing Costs
 
Deferred financing costs associated with issuing debt are deferred and amortized over the related terms using the straight-line method, which approximates the effective interest rate method. Accumulated amortization was $5,573 and $3,857 at December 31, 2006 and 2005, respectively.
   
 
Revenue Recognition
 
Movable medical equipment is outsourced on both short-term and long-term arrangements, and outsourced revenue is recorded in income as equipment is utilized based on an agreed rate per use or time period. Any changes to the rate are billed on a prospective basis. Technical and professional services revenue is recognized as services are provided. Medical equipment sales and remarketing are recorded at the time of shipment, change of ownership or installation completion.
   
 
Income Taxes
 
Deferred income taxes are computed using the asset and liability method, such that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between financial reporting amounts and the tax bases of existing assets and liabilities based on currently enacted tax laws and tax rates in effect for the periods in which the differences are expected to reverse. Income tax expense is the tax payable for the period plus the change during the period in deferred income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
 
F-7
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 
 
Fair Value of Financial Instruments
 
The Company considers that the carrying amount of financial instruments, including accounts receivable, accounts payable, accrued liabilities and notes payable, approximates fair value due to their short maturities. Interest on notes payable is payable at rates which approximate fair value. The fair value of the senior notes, based on the quoted market price for the same or similar issues of debt, is approximately $277,550 and $268,125 at December 31, 2006 and 2005, respectively.
 
 
 
Segment Information
 
The Company’s business is managed and internally reported as three segments.
   
 
Stock-Based Compensation
 
Effective January 1, 2006, we began recording compensation expense associated with stock options in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, as interpreted by SEC Staff Accounting Bulletin No. 107 (“SAB No. 107”). Prior to January 1, 2006, we accounted for our stock-based compensation arrangements according to the provisions of Accounting Principles Board Opinion No. 25 (“APB No. 25”), Accounting for Stock Issued to Employees and related interpretations.
   
 
Prior to January 1, 2006, we measured compensation expense for our stock-based compensation plan using the intrinsic value method in accordance with APB No. 25 as allowed under SFAS No. 123. Under the intrinsic value method, no stock-based compensation expense had been recognized in our consolidated financial statements. Accordingly, compensation cost for stock options granted to employees was measured as the excess, if any, of the value of our stock at the date of the grant over the amount an employee must pay to acquire the stock. Had compensation cost for our stock option plans been determined based on the fair value at the grant date for awards, our net income would have changed to the pro forma amounts indicated below for 2005 and 2004:
 
   
2005
  
2004
  
 
Net loss, as reported
  
$
(1,569
)
$
(3,592
)
 
Add: Stock-based employee compensation
included in reported net income
    
20
    
-
  
 
Less: Total stock-based employee compensation
expense under fair value-based method
    
(1,583
)
  
(516
)
 
Pro forma net loss
  
$
(3,132
)
$
(4,108
)
 
Note 12 contains the significant assumptions used in determining the underlying fair value of options and disclosures as required under SFAS No. 123(R).
 
 
 
Comprehensive Income (Loss)
 
Components of comprehensive income (loss) for the Company include net income (loss) and minimum pension liability adjustments. These amounts are presented in the Statements of Shareholders’ Equity (Deficiency) and Other Comprehensive Income (Loss).
 
F-8
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
 
 
Recent Accounting Pronouncements
 
In September 2006, the Financial Standards Board (“FASB”) issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an Amendment of FASB Statements No. 87, 88, 106 and 123(R). SFAS No. 158 requires employers to recognize the under funded or over funded status of a defined benefit post retirement plan as an asset or liability in its statements of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income. Additionally, SFAS No. 158 requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position. The provisions of SFAS No. 158 are effective for fiscal years ending after June 15, 2007. We are currently evaluating the impact of this statement, but believe the adoption of SFAS No. 158 will not have a material impact on our financial position or results of operations.
   
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. We believe the adoption of SFAS No. 157 will not have a material impact on our financial position or results of operations.
   
 
In September 2006, the U.S. Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"). This SAB addresses diversity in practice of quantifying financial statement misstatements. It establishes an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company's financial statements and the related financial statement disclosures. The SAB is effective for financial statements issued for fiscal years ending after November 15, 2006. The adoption of SAB 108 does not have an impact on our financial position or results of operations.
   
 
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of this statement, but believe the adoption of FIN 48 will not have a material impact on our financial position or results of operations.
 
F-9
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 
3.
Acquisitions
   
 
On December 22, 2005, the Company completed an acquisition of substantially all the assets of Innovative Healthcare Solutions, Inc., headquartered in Esko, Minnesota. The purchase price was approximately $1,115. This acquisition was accounted for using the purchase method. Accordingly, the purchase price was allocated to assets acquired based on their estimated fair values and consisted of equipment of $650 and intangible assets of $465. The operations of the acquired entity have been included in the Company’s outsourcing segment results of operations since the date of acquisition. Historical results of operations of the acquired entity are not material.
   
 
The following 2004 acquisitions related to the medical equipment outsourcing segment:
 
 
·
On April 15, 2004, the Company completed an acquisition of certain assets from Galaxy Medical Products, Inc., headquartered in Akron, Ohio. The purchase price was approximately $4,900.

 
·
On May 4, 2004, the Company completed an acquisition of substantially all of the assets of Advanced Therapeutics of Wisconsin, Inc., headquartered in Milwaukee, Wisconsin. The purchase price was approximately $5,100.
 
 
The following 2004 acquisitions related to the technical and professional services segment:
 
·
On March 24, 2004, the Company completed an acquisition of certain assets from Affiliated Clinical Engineering Services, located in Boston, Massachusetts. The purchase price was approximately $4,200.

 
·
On August 31, 2004, the Company completed an acquisition of certain assets of Cardinal Health 200, Inc., headquartered in Naperville, Illinois. The purchase price was approximately $900.
 
The Company acquired the assets of these businesses in order to expand its customer base and service offerings. The purchase prices of these acquisitions were determined based on evaluations of the assets, and liabilities assumed, cash flow potential and comparable prices for similar businesses. The acquisitions were financed by borrowings under the Company’s revolving credit facility.
 
 
 
The 2004 acquisitions were accounted for using the purchase method. Accordingly, the respective purchase prices were allocated to assets and liabilities based on their estimated fair values. The estimated fair values of assets and liabilities acquired are as follow:
F-10
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)

 
Accounts receivable
  
$
2,608
  
 
Prepaids
    
218
  
 
Inventories
    
706
  
 
Movable medical equipment
    
1,284
  
 
Goodwill
    
714
  
 
Other intangibles
    
11,009
  
 
Other assets
    
13
  
 
Accounts payable and other liabilities
    
(561
)
 
Deferred revenues
    
(887
)
     
$
15,104
  
 
The operations of the above acquired businesses have been included in the Company’s results of operations since the date of the respective acquisitions.
 
 
 
The following summarizes pro forma results of operations, assuming the acquisitions were in effect for the full year of 2004.
 
     
2004
  
 
Total revenues
  
$
203,792
  
 
Net loss
  
$
(3,117
)
 
4.
Book Overdrafts
 
 
 
The Company typically does not maintain cash balances at its principal bank under a policy whereby the net amount of collected balances and cleared checks is, at the Company’s option, applied to or drawn from our credit facility on a daily basis.
   
5.
Selected Financial Statement Information
   
 
Accounts Receivable
 
Accounts receivable at December 31, consists of the following:
 
       
2006
    
2005
  
 
Accounts receivable
  
$
44,326
  
$
43,215
  
 
Less: Allowance for doubtful accounts
    
(1,350
)
  
(1,350
)
 
Accounts receivable, net
  
$
42,976
  
$
41,865
  
 
F-11
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 
Property and Equipment
Property and equipment at December 31, consists of the following:
  
2006
  
2005
  
 
Movable medical equipment
  
$
365,598
  
$
330,364
  
 
Less: Accumulated depreciation
    
(225,050
)
  
(203,589
)
 
Movable medical equipment, net
    
140,548
    
126,775
  
 
Land
    
120
    
120
  
 
Buildings and leasehold improvements
    
6,246
    
5,404
  
 
Office equipment and vehicles
    
28,282
    
23,365
  
       
34,648
    
28,889
  
 
Less: Accumulated depreciation and amortization
    
(18,569
)
  
(16,194
)
 
Property and office equipment, net
    
16,079
    
12,695
  
 
Total property and equipment, net
  
$
156,627
  
$
139,470
  
 
Property and equipment financed under capital leases, gross
  
$
11,399
  
$
5,542
  
 
Less: Accumulated depreciation
    
(4,062
)
  
(3,039
)
 
Property and equipment financed under capital leases, net
  
$
7,337
  
$
2,503
  
 
 
Goodwill
The carrying amount of goodwill remained unchanged during 2006 and 2005 and is presented by reporting segment below:
 
 
      
Technical
  
Medical
      
     
Medical
  
and
  
Equipment
      
     
Equipment
  
Professional
  
Sales and
  
Total
 
     
Outsourcing
  
Services
  
Remarketing
  
Company
  
 
Balance at December 31, 2006 and 2005
 
$
33,160
  
$
135
  
$
3,767
  
$
37,062
  
 
 
Other Intangible Assets
Other intangible assets at December 31, consist of the following:
 
 
 
  
2006
  
2005
  
     
Carrying
 
Accumulated
     
Carrying
 
Accumulated
     
     
Amount
  
Amortization
  
Net
  
Amount
  
Amortization
  
Net
  
 
Customer realtionships
  
$
11,700
  
$
4,091
  
$
7,609
  
$
11,700
  
$
2,599
  
$
9,101
  
 
Non-compete agreements
    
1,320
   
960
   
360
   
1,320
   
670
   
650
 
 
Other intangible assets, net
  
$
13,020
  
$
5,051
  
$
7,969
  
$
13,020
  
$
3,269
  
$
9,751
  
                                         
 
 
Total amortization expense related to intangible assets for the years ended December 31, 2006, 2005 and 2004 was $1,782, $1,779 and $1,136, respectively.
 
F-12
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 
 
At December 31, 2006, future estimated amortization expense related to intangible assets is:
           
 
2007
  
$
1,662
  
 
2008
    
1,602
 
 
2009
    
1,040
 
 
2010
    
786
 
 
2011
    
786
 
 
Thereafter
    
2,093
 
     
$
7,969
  
           
 
Future amortization expense is an estimate. Actual amounts may change due to additional intangible asset acquisitions, impairment, accelerated amortization or other events.
 
6.
Long-Term Debt
 
 
 
Long-term debt at December 31 consists of the following:
 
     
2006
  
2005
  
 
10.125% Senior Notes
  
$
260,000
  
$
260,000
  
 
Amended Credit Agreement
    
43,000
   
38,106
 
 
Capital lease obligations
    
7,191
   
2,374
 
       
310,191
   
300,480
 
 
Less: Current portion of long-term debt
    
(3,056
)
  
(1,084
)
 
Total long-term debt 
  
$
307,135
  
$
299,396
  
 
The 10.125% Senior Notes (“Senior Notes”) mature on November 1, 2011. Interest on the Senior Notes accrues at the rate of 10.125% per annum and is payable semiannually on each May 1 and November 1. The Senior Notes are redeemable, at the Company’s option, in whole or in part, on or after November 1, 2007, at specified redemption prices plus accrued interest to the date of redemption. In addition, the Senior Notes have a change of control provision which gives each holder the right to require the Company to purchase all or a portion of such holders’ Senior Notes upon a change in control, as defined in the agreement, at a purchase price equal to 101% of the principal amount plus accrued interest to the date of purchase. The Senior Notes, subject to certain definitions and exceptions, have covenants that restrict the incurrence of additional debt, the payment of dividends and the issuance of preferred stock. The Senior Notes are uncollateralized.
 
 
 
On May 26, 2005, the Company entered into an Amended and Restated Credit Agreement (“Amended Credit Agreement”) with a consortium of banks. The Amended Credit Agreement increased the aggregate amount the Company may obtain under revolving loans, reduced the applicable borrowing spreads, extended the maturity date, and modified the financial covenants to provide more operating flexibility.
 
 
 
Under the terms of the Amended Credit Agreement, the aggregate amount the Company may obtain under the revolving loans increased from $100,000 to $125,000 and terminates on May 26, 2010.
 
F-13
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 
The Amended Credit Agreement allows for up to $5,000 of the facility to be available for letters of credit. Availability under the Amended Credit Agreement as of December 31, 2006, was $77,105, representing our borrowing base of $122,447 less borrowings of $43,000 and outstanding letters of credit of $2,342. Amounts borrowed under the Amended Credit Agreement are due at the end of the five-year term. Borrowings under the agreement are collateralized by substantially all the assets of the Company.
 
 
 
Amounts borrowed under the Amended Credit Agreement generally bear interest on a LIBOR-based and index-rate formula. The interest rates at December 31, 2006 were 2.00% over LIBOR and 0.75% over the Index Rate with the interest rate margins subject to change based upon quarterly leverage ratios. At December 31, 2006 our LIBOR-based rate was 7.35% and our Index-based Rate was 9.00%, both of which include the credit spreads noted above. Interest on borrowings is paid monthly or as defined by the agreement. In addition, the Amended Credit Agreement also provides that a commitment fee of .375% per annum is payable on the unutilized amount of the facility.
 
 
 
The Amended Credit Agreement, subject to certain definitions and exceptions, contains certain covenants, including restrictions and limitations on dividends, liens, leases, incurrence or guarantees of debt, transactions with affiliates, investments or loans, mergers, acquisitions, consolidations and asset sales. Furthermore, the Company is required to maintain compliance with certain financial covenants, including a maximum senior debt leverage ratio and a minimum interest coverage ratio. The Amended Credit Agreement also contains cross-default provisions and subjective acceleration clauses under which the bank may declare an event of default. The Amended Credit Agreement also prohibits the Company from prepaying the Senior Notes.
   
 
Throughout 2006 the Company capitalized new vehicle leases and vehicle leases which had previously been recorded as operating leases due to a change in the contract with our leasing company. The recording of these vehicles as capital leases resulted in an increase in the Company’s property of $5,723 and long-term debt of $5,725.
   
 
Future minimum lease payments under capital lease agreements are as follows:
 
 
2007
  
$
3,386
  
 
2008
    
2,593
 
 
2009
    
1,316
 
 
2010
    
447
 
 
2011
    
1
 
 
Total minimum lease payments
    
7,743
 
 
Less: Amount representing interest
    
(552
)
 
Capital lease obligations
    
7,191
 
 
Less: Current portion
    
(3,056
)
 
Capital lease obligation, less current portion
  
$
4,135
  
 
F-14
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 
7.
Commitments and Contingencies
 
 
 
Rental expenses were approximately $8,395, $8,066 and $7,963 for the years ended December 31, 2006, 2005 and 2004, respectively. At December 31, 2006, the Company is committed under various noncancellable operating leases for regional sales and service offices, corporate facilities and equipment with minimum annual rental commitments of the following:
 
 
2007
  
$
6,603
  
 
2008
    
6,814
 
 
2009
    
6,289
 
 
2010
    
5,669
 
 
2011
    
5,110
 
 
Thereafter
    
21,439
 
     
$
51,924
  
 
 
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 with assurance. 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.
 
 
 
Management Agreement
 
The Company is a party to management agreements with J. W. Childs Associates, L.P. (an affiliate of Childs) (“Childs Associates”) and Halifax Capital Partners, L.P. (“Halifax”) (together “Equity Sponsors”) pursuant to which the Company pays the Equity Sponsors an annual management fee totaling $480 in consideration of the Equity Sponsors’ ongoing provision of certain consulting and management advisory services. Payments under these management agreements may be made only to the extent permitted by the Amended Credit Agreement and the Senior Notes. The management agreements are for five-year terms and are automatically renewable for successive extension terms of one year, unless the Equity Sponsors give notice of termination. The Equity Sponsors have agreed to terminate the agreement upon the completion of an initial public offering.
   
8.
Employee Benefit Plans
   
 
The Company has a noncontributory defined benefit pension plan. Plan benefits are to be paid to eligible employees at retirement based primarily on years of credited service and on participants’ compensation. The Company uses a December 31 measurement date. Effective December 31, 2002, the Company froze the benefits under the plan.
 
F-15
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)

Change in Benefit Obligation
  
2006
  
2005
  
2004
  
Benefit obligations at beginning of year
  
$
18,234
  
$
15,900
  
$
15,035
  
Interest cost
    
974
    
950
    
877
  
Actuarial loss (gain)
    
(1,281
)
  
1,995
    
526
  
Benefits paid
    
(708
)
  
(611
)
  
(538
)
Benefit obligation at end of year
  
$
17,219
  
$
18,234
  
$
15,900
  
 
Change in Plan Assets
  
2006
  
2005
  
2004
  
Fair value of plan assets at beginning of year
  
$
12,985
  
$
12,244
  
$
11,177
  
Actuarial gain on plan assets
    
1,463
    
547
    
1,188
  
Benefits paid
    
(708
)
  
(611
)
  
(538
)
Employer contribution
    
-
    
805
    
417
  
Fair value of plan assets at end of year
  
$
13,740
  
$
12,985
  
$
12,244
  
 
 
  
2006
  
2005
  
2004
  
Funded status
  
$
(3,478
)
$
(5,249
)
$
(3,656
)
Unrecognized net actuarial loss
    
3,177
    
5,180
    
2,980
  
Accrued benefit liability
  
$
(301
)
$
(69
)
$
(676
)
Amounts recognized in the statements of operations
Accrued benefit cost
  
$
(3,478
)
$
(5,249
)
$
(3,656
)
Accumulated other comprehensive loss
    
3,177
    
5,180
    
2,980
  
Net amount recognized
  
$
(301
)
$
(69
)
$
(676
)
 
The accumulated benefit obligations in excess of plan assets at December 31 are as follows:

   
2006
  
2005
  
2004
  
Projected benefit obligation
  
$
17,219
  
$
18,234
  
$
15,900
  
Accumulated benefit obligation
  
$
17,219
  
$
18,234
  
$
15,900
  
Fair value of plan assets
  
$
13,740
  
$
12,985
  
$
12,244
  
 
 
At December 31, 2006, 2005 and 2004, the accumulated benefit obligations exceed the fair value of plan assets. Therefore, the Company recognized a change in minimum pension obligation in other comprehensive income (loss) of $2,003, ($2,200) and ($224) for 2006, 2005 and 2004, respectively.
 
F-16
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 
Plan Assets
 
Plan asset allocations at December 31 are as follows:
 
Asset Category
  
Target
Allocation
  
2006
  
2005
  
2004
  
Equity securities
    
70
%
  
75
%
  
69
%
  
73
%
Debt securities and cash
    
30
    
25
    
31
    
27
  
     
100
%
  
100
%
  
100
%
  
100
%
 
The pension plan assets are invested with the objective of maximizing long-term returns while minimizing material losses in order to meet future benefit obligations when they come due.
 
 
 
The Company utilizes an investment approach with a mix of equity and debt securities used to maximize the long-term return on plan assets. Risk tolerance is established through consideration of plan liabilities, funded status and corporate financial condition. The investment portfolio consists of a diversified blend of mutual funds and fixed-income investments. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews and annual asset and liability reviews.
   
 
Contributions
 
During 2006, 2005 and 2004, the Company contributed $0, $805 and $417, respectively, in contributions to the defined benefit pension plan. The Company expects to make contributions of approximately $1,100 in 2007.
 
Estimated Future Benefit Payments        
The following benefit payments are expected to be paid:
        
2007
  
$
600
  
2008
  
$
600
  
2009
  
$
700
  
2010
  
$
700
  
2011
  
$
700
  
2012 to 2016
  
$
4,100
  
 
Net Periodic Benefit Cost
Components of net periodic benefit cost are as follows:
  
 
  
 
  
 
  
   
2006
  
2005
  
2004
  
Interest cost
  
$
974
  
$
950
  
$
877
  
Expected return on plan assets
    
(1,010
)
  
(986
)
  
(943
)
Recognized net actuarial loss
    
268
    
234
    
57
  
Net periodic benefit cost
  
$
232
  
$
198
  
$
(9
)
 
F-17
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 
Plan Assumptions
 
The following weighted-average assumptions were used as follows:
 
   
2006
  
2005
  
2004
  
Weighted-average actuarial assumptions used to determine benefit obligations as of December 31:
          
Discount rate
    
5.90
%
  
5.50
%
  
5.75
%
Expected return on assets
    
8.00
%
  
8.00
%
  
8.50
%
                     
Weighted-average assumptions used to determine net periodic benefit cost:
          
 
 
  
 
 
Discount rate
    
5.50
%
  
5.75
%
  
6.25
%
Expected return on assets
    
8.00
%
  
8.50
%
  
8.50
%
Rate of compensation increase
    
None
    
None
    
None
  
 
These assumptions are reviewed on an annual basis. In determining the expected return on plan asset assumption, the Company evaluates the long-term returns earned by the plan, the mix of investments that comprise plan assets and forecasts of future long-term investment returns.
 
 
 
The Company also sponsors a defined contribution plan, which qualifies under Section 401(k) of the Internal Revenue Code and covers substantially all of the Company’s employees. Employees may contribute annually up to 60% of their base compensation either before tax (subject to Internal Revenue Service limitation) or after tax. In 2006 the Company contribution was 50% of the first 6% of base compensation; prior to 2006 the Company contributed 75% of the first 6% of base compensation that an employee contributes. For the years ended December 31, 2006, 2005 and 2004, approximately $937, $1,677 and $1,568, respectively, was expensed as contributions to the Plan.
   
 
The Company is self-insured for employee health care and purchases a stop-loss policy for claims. In addition the company purchases workers’ compensation and automobile liability coverage with a deductible. Self-insurance and deductible costs are accrued based upon the aggregate of the liability for reported claims and an actuarially determined estimated liability for claims development and incurred but not reported.
 
 
9.
Income Taxes
   
 
The provision for income taxes consists of the following:

   
2006
  
2005
  
2004
  
State, payable
  
$
240
  
$
275
  
$
85
  
Deferred
    
372
   
567
   
1,103
 
   
$
612
  
$
842
  
$
1,188
  
 
 
Reconciliations between the Company’s effective income tax rate and the U.S. statutory rate follow:
   
   
 
 
 
F-18
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)

   
2006
  
2005
  
2004
  
Statutory U.S. Federal income tax rate
    
34.0
%
  
(34.0)
%
  
(34.0)
%
State income taxes, net of U.S. Federal
                   
 income tax
    
5.5
   
(5.5
)
  
(4.7
)
Valuation allowance
    
16.7
   
117.5
   
84.6
 
Minimum state taxes
    
36.0
   
37.8
   
3.5
 
 Effective income tax rate
    
92.2
%
  
115.8
%
  
49.4
%
 
The components of the Company's overall deferred tax assets and liabilities at December 31, 2006 and 2005, are as follows:

   
2006
  
2005
  
           
Deferred tax assets
              
 Accounts receivable
  
$
533
  
$
533
  
 Accrued and deferred compensation and pension
    
3,807
   
2,754
 
 Inventories
    
314
   
305
 
 Other assets
    
804
   
512
 
 Net operating loss carryforwards
    
29,293
   
28,971
 
 Deferred tax assets
    
34,751
   
33,075
 
 Valuation allowance
    
(9,945
)
  
(9,734
)
 Net deferred tax assets
    
24,806
   
23,341
 
Deferred tax liabilities
              
 Accelerated depreciation and amortization
    
27,233
   
25,396
 
 Total deferred tax liabilities
    
27,233
   
25,396
 
 Net deferred tax liability
  
$
(2,427
)
$
(2,055
)
 
At December 31, 2006, the Company had available unused net operating loss carryforwards of approximately $74,000. The net operating loss carryforwards will expire at various dates through 2025.
   
 
Under Internal Revenue Code of 1986, certain corporate stock transactions into which the Company has entered or may enter in the future could limit the amount of net operating loss carryforwards which may be utilized on an annual basis to offset taxable income in future periods.
   
10.
Preferred Stock
   
 
Under its Articles of Incorporation, the Company is authorized to issue up to 7,000,000 shares of preferred stock, $0.01 par value per share, from time to time in one or more classes or series. No preferred shares were issued as of December 31, 2006 and 2005.
 
F-19
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 
11.
Shareholders’ Agreement
   
 
The Company’s amended and restated Shareholders’ Agreement, among other things: (i) restricts the ability of certain shareholders of the Company to transfer their shares of the Company’s common stock; (ii) gives shareholders of the Company certain rights of first refusal with respect to shares of common stock; and (iii)  provides the shareholders with certain “tag-along, “drag-along,” and “piggyback” registration rights, as defined.
   
12.
Stock-Based Compensation
   
 
Under the 2003 Stock Option Plan (“2003 Plan”), the Company may grant incentive stock options and stock options and performance awards to the Company’s employees and consultants or independent contractors. A total of 17,120,691 shares are reserved for issuance under the 2003 Plan. Options granted under the plan will vest in whole or in part within four years from the date of grant for certain grants upon the achievement of certain financial targets, or in any case, after eight years. Options are generally granted with option prices based on the estimated fair market values of the Company’s common stock at the date of grant, as determined by the Company’s board of directors.
   
 
Stock option activity for the years ended December 31 is as follows (shares in thousands, per share amounts in dollars):

Option Activity
  
2006
  
2005
  
2004
  
Options outstanding at beginning of year
    
15,066
   
14,522
   
-
 
 Options granted
    
1,745
   
1,332
   
15,453
 
 Options exercised
    
(25
)
  
(7
)
  
(5
)
 Options forfeited or expired
    
(477
)
  
(781
)
  
(926
)
                     
Options outstanding at end of year
    
16,309
   
15,066
   
14,522
 
                     
Options exercisable at end of year
    
3,384
   
2,206
   
1,096
 
                     
Options remaining to be issued
    
812
   
2,055
   
2,599
 
                     
                     
Weighted-Average Exercise Price Per Share
    
2006
    
2005
    
2004
  
 Options granted
  
$
1.98
  
$
1.33
  
$
1.01
  
 Options exercised
  
$
1.11
  
$
1.01
  
$
1.00
  
 Options forfeited or expired
  
$
1.14
  
$
1.07
  
$
1.00
  
At December 31,
                    
 Outstanding
  
$
1.14
  
$
1.04
  
$
1.01
  
 Exercisable
  
$
1.01
  
$
1.01
  
$
1.00
  
 
F-20
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 
 
Options outstanding and exercisable at December 31, 2006 were as follows (share amounts in thousands):
 

   
 Options Outstanding
  
Options Exercisable
  
Exercise Price
  
Shares
  
Remaining
Weighted
Average
Contractual
Life (Years)
  
Weighted
Average
Exercise Price
  
Shares
  
Weighted
Average
Exercise Price
  
$1.00
    
12,827
    
7.36
  
 
$ 1.00
    
3,197
  
 
$ 1.00
  
$1.20
    
497
    
7.75
  
 
$ 1.20
    
83
  
 
$ 1.20
  
$1.33
    
1,244
    
8.83
  
 
$ 1.33
    
104
  
 
$ 1.33
  
$1.41
    
205
    
9.25
  
 
$ 1.41
    
-
  
 
$ 1.41
  
$2.06
    
1,536
    
9.88
  
 
$ 2.06
    
-
  
 
$ 2.06
  
 
 
 
Effective January 1, 2006, we adopted SFAS No. 123(R) using the modified prospective application method. Under this method, as of January 1, 2006, we have applied the provisions of this statement to new and modified awards, as well as to the nonvested portion of awards granted before the required effective date and outstanding at such time.
   
 
The adoption of this pronouncement had no effect on compensation cost recorded in 2005 or 2004 related to stock options and are disclosed on a pro forma basis only in Note 2. As a result of adopting SFAS No. 123(R) on January 1, 2006, our net income for the year ended December 31, 2006 was $1.7 million lower than if we had continued to account for stock-based compensation under APB Opinion No. 25.
   
 
An additional requirement of SFAS No. 123(R) is that estimated forfeitures be considered in determining compensation expense. As previously permitted, we recorded forfeitures when they occurred. We have estimated our forfeiture rate at 2.5% per annum. As of December 31, 2006, the total compensation cost for nonvested awards not yet recognized in our statements of income was $6.2 million, net of the effect of estimated forfeitures. This amount is expected to be recognized over a weighted-average period of 5.8 years.
   
 
All options allow for the purchase of shares of common stock at prices equal to the stock’s market value at the date of grant. A portion of our options vest over four years. The remaining portion vests at the end of eight years, with potential for earlier vesting subject to certain performance or other thresholds. An employee’s unvested options are forfeited when employment is terminated; vested options must be exercised at termination to avoid forfeiture. We determine the fair value of 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’ vesting periods. The following assumptions were used in determining the fair value of stock options granted during the years ended December 31, under the Black-Scholes model:
 
F-21
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 

   
2006
  
2005
  
2004
  
Risk-free interest rate
  
4.64% to 4.69%
 
4.57%
 
4.53% to 5.10%
 
Expected volatility
  
43.1% to 43.7%
 
44.3%
 
45.0%
 
Dividend Yield
  
None
  
None
  
None
  
Expected option life (years)
  
8
  
8
  
10
  
 
The risk-free interest rate for periods within the ten year contractual life of the option is based on the U.S. Treasury yield curve in effect at the grant date and the expected option life of eight years. Expected volatility is based on the historical volatility of the stock of companies within our peer group. The eight year expected life of stock options granted to employees represents the weighted average of the result of the “simplified” method applied to “plain vanilla” options granted during the period, as provided within SAB No. 107.
   
 
The weighted-average grant-date fair values of options granted during the years ended December 31, 2006, 2005 and 2004 were $1.10, $0.75 and $0.64, respectively. 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. The aggregate intrinsic value for outstanding and exercisable options at December 31, 2006 was $15,067 and $3,544, respectively. The total intrinsic value of options exercised during the year ended December 31, 2006 was negligible. The exercise price reflects management’s estimate of fair market value of the underlying stock at the time of option issuance. Shares supporting option exercises are sourced from new share issuances.
   
13.
Business Segments
   
 
The Company operates in three reportable segments:
   
 
·
Medical equipment outsourcing provides customers with the use of movable medical equipment and the Company maintains the equipment for customers by performing preventative maintenance, repairs, cleaning and testing, and maintaining certain reporting records.

 
·
Technical and professional services offers a broad range of inspection, preventative maintenance, repair, logistic and consulting services through the Company’s team of over 250 technicians and professionals located in its nationwide network of offices.

 
·
Medical equipment sales and remarketing buys, sources, remarkets and disposes of pre-owned medical equipment for its customers through the Company’s Asset Recovery Program; provides sales and distribution of specialty medical equipment; and offers its customers disposable items that are used on a single use basis.
 
F-22
 
Universal Hospital Services, Inc.
Notes to Financial Statements
December 31, 2006 and 2005
(dollars in thousands)
 
 
The Company identifies its segments based on its organizational structure and its internal reporting.
 
                 
Amortization
      
 
 
      
Gross
      
and
  
Capital
  
 
 
  
Net Sales
  
Margin
  
Assets
  
Depreciation
  
Expenditures
  
 
Medical equipment outsourcing
                          
 
2006
  
$
176,932
  
$
80,515
  
$
39,395
  
$
1,072
  
$
-
  
 
2005
  
$
167,687
  
$
77,222
  
$
40,467
  
$
1,069
  
$
-
  
 
2004
  
$
156,490
  
$
73,309
  
$
41,070
  
$
619
  
$
-
  
 
Technical and professional services
                          
 
2006
  
$
30,445
  
$
9,377
  
$
1,793
  
$
703
  
$
-
  
 
2005
  
$
29,654
  
$
7,776
  
$
2,496
  
$
703
  
$
-
  
 
2004
  
$
25,491
  
$
8,196
  
$
3,199
  
$
509
  
$
-
  
 
Medical equipment sales and remarketing
                          
 
2006
  
$
17,698
  
$
4,311
  
$
3,843
  
$
7
  
$
-
  
 
2005
  
$
18,563
  
$
3,857
  
$
3,850
  
$
8
  
$
-
  
 
2004
  
$
17,619
  
$
4,312
  
$
3,858
  
$
8
  
$
-
  
 
Corporate and unallocated
                          
 
2006
  
$
-
  
$
-
  
$
219,975
  
$
45,388
  
$
54,817
  
 
2005
  
$
-
  
$
-
  
$
202,372
  
$
44,547
  
$
40,631
  
 
2004
  
$
-
  
$
-
  
$
198,280
  
$
40,961
  
$
53,219
  
 
Total Company
                                
 
2006
  
$
225,075
  
$
94,203
  
$
265,006
  
$
47,170
  
$
54,817
  
 
2005
  
$
215,904
  
$
88,855
  
$
249,185
  
$
46,327
  
$
40,631
  
 
2004
  
$
199,600
  
$
85,817
  
$
246,407
  
$
42,097
  
$
53,219
  
 
 
 
Gross margin represents net revenues less total direct costs.
   
 
Segment assets for the three operating business segments (excluding Corporate and Unallocated) primarily include goodwill and intangible assets. Assets included in Corporate and Unallocated contains all other Company assets.
   
14.
Subsequent Event
   
 
On February 23, 2007, the Company entered into a definitive agreement to purchase the assets and assume certain liabilities of the biomedical services division of Intellamed, Inc. (“Intellamed”), which is based in Bryan, Texas. The purchase price of the transaction is $16,500 in cash, subject to certain adjustments. The agreement, which is expected to close in the second quarter of 2007, also provides for the Company to pay earnout consideration to Intellamed during the first and second 12 full consecutive month periods following the closing date, subject to certain conditions. In addition, the agreement provides for the Company to make advances of the purchase price to Intellamed before closing.
   
 
In connection with this acquisition, we entered into Amendment No. 1 (the “Amendment”) to the Amended Credit Agreement dated as of February 13, 2007. The Amendment permits us to consummate this acquisition subject to certain conditions as defined in the Amendment.
 
F-23
 
Universal Hospital Services, Inc.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
       
Additions
          
Description
  
Balance-
Beginning of
Period
  
Charged to
Costs and
Expense
  
Charged to
Other
Accounts
  
Deductions
 from
Reserves
  
Balance-End
of Period
  
Allowance for Doubtful Accounts
                      
                       
Year ended December 31, 2006
  
$
1,350
  
$
1,126
  
$
1
  
$
1,127
  
$
1,350
  
Year ended December 31, 2005
    
1,500
   
927
   
156
   
1,233
   
1,350
 
Year ended December 31, 2004
    
1,750
    
984
    
26
    
1,260
    
1,500
  
                                 
Allowance for Inventory Obsolescence
                                
                                 
Year ended December 31, 2006
    
562
    
375
    
-
   
462
    
475
  
Year ended December 31, 2005
    
520
    
677
    
-
   
635
    
562
  
Year ended December 31, 2004
    
269
    
509
    
-
   
258
    
520
  
                                 
Income Tax Valuation Allowance
                                
                                 
Year ended December 31, 2006
    
9,734
    
211
    
-
   
-
   
9,945
  
Year ended December 31, 2005
    
8,675
    
1,059
    
-
   
-
   
9,734
  
Year ended December 31, 2004
    
6,898
    
1,777
    
-
   
-
   
8,675
  
EX-10.5 2 a5356432-ex105.htm EXHIBIT 10.5 Exhibit 10.5

Exhibit 10.5
Universal Hospital Services, Inc.
Executive Severance Pay Plan

November 1, 2006
I. Purpose

To provide a severance pay plan for the Executives (as defined below) of the Company who are not eligible for severance pay under any other plan or agreement with the Company. The provisions of this plan will not apply to any Executive who is covered by an employment agreement. Executives who receive severance under this plan will not be eligible to receive severance under any other plan or agreement of the Company. No severance benefits become payable pursuant to this plan in the event of termination of employment upon an Executive’s death or disability. This plan replaces the Executive Severance Pay Plan dated February 1, 2005.

II. Definitions.

 
A.
“Cause” means:
 
 
 (i.)
Executive’s continued failure, whether willful, intentional or grossly negligent, after written notice, to perform substantially Executive’s duties (the “Duties”) as determined by immediate supervisor, Chief Executive Officer or Senior Vice President of the Company (other than as a result of a disability);
 
(ii.)
dishonesty in the performance of Executive’s Duties;
 
(iii.)
conviction or confession of an act or acts on Executive’s part constituting a felony under the laws of the United States or any state thereof; or
 
(iv.)
any other willful act or omission on Executive’s part which is materially injurious to the financial condition or business reputation of the Company or any of its subsidiaries.

 
B.
“Change of Control” means (i) any event as a result of which J.W. Childs and Halifax collectively cease to own and control all of the economic and voting rights associated with ownership of at least 50.1% of the outstanding capital stock of Company; or (ii) any sale or transfer of all or substantially all of the assets of the Company.

 
C.
“Change of Control Period” means the period starting 30 days before the Change in Control and continuing through 6 months after the Change in Control.

 
D.
“Date of Termination” means the date specified as Executive’s last date of employment in the Company’s notice of termination to Executive or Executive’s Notice of Resignation for Good Cause to the Company.

 
 
E.
“Resignation for Good Cause” means: Executive termination of employment upon 30 days’ written notice to the company, for Good Cause. Executive shall have “Good Cause” for termination of  employment if, other than for cause, any of the following has occurred:
 
 
(i.)
The Company has reduced or reassigned a material portion of Executive duties (per Executive job description);
 
(ii.)
The Executive’s base salary has been reduced other than in connection with an across-the-board reduction (of approximately the same percentage) in executive compensation to Executive Employees imposed by the Board in response to negative financial results or other adverse circumstances affecting the Company; or
 
(iii.)
The Company has required Executive to relocate in excess of fifty (50) miles from the location where the Executive is currently employed.

 
F.
“Executive” means the President, any Senior Vice President or any Vice President of the Company, and the Controller as such titles are in use effective November, 1, 2006.

 
G.
“Severance Period” means the period from the Date of Termination through the date, which is 12 months from the Date of Termination.

III. Severance Pay

 
A.
Executives who separate from the Company and who sign the general release and other agreement described in Section IV below are entitled to the severance pay specified below; provided, however, that (1) an Executive that is separated from employment due to dismissal for Cause is not entitled to any severance pay and (2) an Executive that voluntarily resigns, except for Good Cause, from employment is not entitled to severance pay; and (3) the Controller is entitled to the severance pay specified below only if terminated by the Company during the Change of Control Period, but the Controller is not entitled to any severance pay if terminated for Cause.

 
B.
Upon qualifying for severance pay, Executive will be paid the following amounts in the following manner:
 
 
(i.)
Executive will continue to be paid his or her salary through the Severance Period, in the manner and at the times paid during such Executive’s employment with the Company.
 
(ii.)
Company shall pay the Executive a lump sum payment equal to the cost for continuing the Executive’s existing family medical and dental insurance benefits pursuant to Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) for the duration of the Severance Period.
 
(iii.)
If prior to the date which is 12 months after the Date of Termination, Executive finds other employment, the amount of severance payments payable to Executive after such termination in accordance with B(i) above will be reduced by the value of the compensation Executive receives in his or her new employment through the date which is 12 months after the Date of Termination; B(ii) shall be similarly discontinued if similar medical and dental benefits are secured with new employer through the date which is 12 months after the Date of Termination.
 
(iv.)
If termination is pursuant to Resignation for Good Cause, The Company shall provide the Executive a prorated portion of the bonus earned for the then current fiscal year, based upon the number of days Executive was employed during that year. Such Executive bonus shall be payable at the time annual bonuses are paid to the other executives employed by the Company, on that last day of the Company’s fiscal year.
 
(v.)
Executive will be paid or otherwise provided such benefits as may be required by law.
 
(vi.)
All severance payments are subject to any required withholding.
 
 
IV. General Release and Other Agreements.

Executive will not be entitled to receive any of the severance pay described above until such time as Executive signs (A) and effective general release of all claims against the Company and its affiliates in the form and manner prescribed by the Company and (B) an agreement further providing (i) Executive’s agreement not to disclose or use confidential information of the Company, (ii) Executive’s agreement during the Severance Period not to compete with the Company in the medical equipment rental business, (iii) Executives’ agreement during the Severance Period not to solicit for employment or hire any employee of the Company, and (iv) Executive’s agreement during the Severance Period not to solicit as a customer or client of medical equipment rental business and customer or client of the Company. A failure to execute such a general release and other agreements within one month of executive’s Date of Termination shall result in the loss of any rights to receive payments or benefits under this plan.

V.
Amendment and Modification of Plan. This plan may be modified, amended or terminated at any time by the CEO and the Board of Directors of the Company.

VI.
No Employment Rights. Neither this plan for the benefits hereunder shall be a term of the employment of any employee, and the Company shall not be obligated in any way to continue the plan. The terms of this plan shall not give any employee the right to be retained in the employment of the Company.

EX-10.11 3 a5356432-ex1011.htm EXHIBIT 10.11 Exhibit 10.11
 
  Exhibit 10.11
 

2007 Executive Incentive Plan Targets
 
 
 
Senior Manager
2007 Executive Incentive Plan
Target as a Percentage
of 2007 Base Salary
   
Gary D. Blackford
85%
Rex T. Clevenger
75%
Timothy W. Kuck
70%
Joseph P. Schiesl
70%
Jeffrey L. Singer
70%
Walter T. Chesley
65%
David G. Lawson
65%
Diana Vance-Bryan
65%
   
   
   
Target Achievement *
Bonus Payout
   
110%
200%
105%
150%
100%
100%
99%
90%
98%
80%
97%
70%
96%
60%
65%
50%
94%
40%
93%
30%
<93%
zero

             
             
 
* The target is set by the compensation committee and the board of directors
   
 
Scale Methodology
          
             
 
Directionally, every 1% variance to Target has a 10 times multiplier, with bookends
 
at 110% and 93%, subject to to the discretion of the compensation
 
committee and the board of directors.
EX-10.13 4 a5356432-ex1013.htm EXHIBIT 10.13 Exhibit 10.13
Exhibit 10.13
UNIVERSAL HOSPITAL SERVICES, INC.
STOCK OPTION AGREEMENT
(Nonqualified Stock Option)

STOCK OPTION AGREEMENT (this “Option Agreement”) entered into as of ____________, by and between Universal Hospital Services, Inc., a Delaware corporation (the “Company”), and ____________ (the “Optionee”).
 
WHEREAS, the Company has decided to grant the Optionee a non-qualified stock option to acquire shares of the Company’s common stock, $0.01 par value per share (“Shares”), in accordance with the Universal Hospital Services, Inc. 2003 Stock Option Plan (the “Plan”); and
 
WHEREAS, the Optionee desires to accept such option subject to the terms and conditions of this Option Agreement.
 
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the Company and the Optionee, intending to be legally bound, hereby agree as follows:
 
1.  Grant of Option. As of _____________ (the “Grant Date”), the Company grants to the Optionee a nonqualified stock option (the “Option”) to purchase all (or any part) of _______ Shares on the terms and conditions hereinafter set forth. This Option is not intended to be treated as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).
 
2.  Exercise Price. The exercise price (“Exercise Price”) for the Shares covered by the Option shall be $___ per share.
 
3.  Exercisability.
 
(a)  Fixed Vesting Options. This Option shall become exercisable with respect to ___ Shares upon each of __________, __________, __________, and __________. All Options subject to vesting pursuant to this Section 3(a) (the “Fixed Vesting Options”) shall become exercisable upon a Change in Control (as defined in Section 14(b)) if the Optionee continues to be an employee (or a director or consultant, as applicable) of the Company or any Subsidiary at such time, to the extent not then exercisable.
 
(b)  Target Vesting Options. This Option shall become exercisable with respect to up to ____ Shares (the “Annual Eligible Shares”) following the completion of each of the fiscal years ending December 31, _____, _____, _____, _____ and _____ upon and to the extent of the Company’s attainment of the Targets set forth on Schedule I attached hereto and incorporated herein (“Schedule I”) in accordance with the other terms specified in Schedule I. As a point of clarification, if all of the Targets set forth on Schedule I attached hereto are met or exceeded, Options to purchase an aggregate of ____ Shares shall become exercisable following the completion of the applicable Target time periods pursuant to this subsection 3(b). Notwithstanding the foregoing, provided that (i) Optionee shall continue to be an employee, director or consultant of the Company or a Subsidiary, and (ii) the Company shall not have (A) merged or consolidated with another corporation or other entity, whether or not the Company is the surviving entity, or (B) liquidated or sold or otherwise disposed of all or substantially all of its assets to another entity, or (C) been subject to a Change in Control, then this Option shall become exercisable with respect to all of the Shares subject to vesting pursuant to this Section 3(b) (the “Target Vesting Options”) on the eighth (8th) anniversary of the Grant Date.
 
 
 
4.  Term of Options.
 
(a)  Each Option shall expire on the tenth anniversary of the Grant Date, unless terminated earlier pursuant to subsections 4(b) and 4(c) below.
 
(b)  If the Optionee is terminated from his or her employment/consultancy for Cause (as defined in Section 14) or voluntarily terminates his employment/consultancy with the Company at any time without Good Reason (as defined Section 14) or, if the Optionee is a director, the Optionee is removed as a director for Cause (as defined in Section 14), the Option shall terminate on the date of such termination of employment, whether or not then fully exercisable.
 
(c)  If the Optionee dies, is Disabled (as defined in Section 14) while an employee/consultant/director, or is terminated without Cause, or terminates for Good Reason, or, if the Option is a director, is removed without Cause or otherwise resigns as a director, any portion of the Option that is not then fully exercisable shall terminate immediately; provided, however, that the Board of Directors or committee appointed by the Board of Directors for purposes of administration and operation of the Plan (the “Committee”) shall have the discretion to vest any Options that are not exercisable. Any portion of the Option that is then exercisable shall terminate on the 90th day following such termination of employment.
 
5.  Manner of Exercise of Option.
 
(a)  The Optionee may exercise the Option or portion thereof by giving written notice to the Company stating the number of Shares (which shall not be less than 100, unless the total Shares purchased constitute the total number of Shares remaining subject to the Option) to be purchased and accompanied by payment in full of the Exercise Price for such Shares. Payment shall be in cash by wire transfer of immediately available funds to an account specified by the Company by a certified or bank cashier’s check payable to the Company, or at any time Shares are registered under Section 12 of the Securities Exchange Act of 1934, as amended, by means of a “cashless exercise” approved by the Committee, in which a broker: (i) transmits the Exercise Price for any Shares to the Company in cash or acceptable cash equivalents, either (A) against the Optionee’s notice of exercise and the Company’s confirmation that it will deliver to the broker stock certificates issued in the name of the broker for at least that number of Shares having a fair market value equal to the Exercise Price therefor, or (B) as the proceeds of a margin loan to the Optionee; or (ii) agrees to pay the Exercise Price therefor to the Company in cash or acceptable cash equivalents upon the broker’s receipt from the Company of stock certificates issued in the name of the broker for at least that number of Shares having a fair market value equal to the Exercise Price therefor. The Optionee’s written notice of exercise of the Option pursuant to a “cashless exercise” procedure must include the name and address of the broker involved, a clear description of the procedure, and such other information or undertaking by the broker as the Committee shall reasonably require. Upon such purchase, delivery of a certificate for paid-up, non-assessable Shares shall be made at the principal office of the Company to the Optionee (or the person entitled to exercise the Option pursuant to Section 7), not more than 10 days from the date of receipt of the notice by the Company.
 
2
 
 
(b)  Notwithstanding Section 5(a) of this Option Agreement, the Company may delay the issuance of Shares covered by the Option and the delivery of a certificate for such Shares until one of the following conditions is satisfied: (i) the Shares purchased pursuant to the Option are at the time of the issuance of such Shares effectively registered or qualified under applicable federal and state securities laws or (ii) such Shares are exempt from registration and qualification under applicable federal and state securities laws.
 
6.  Administration. This Option Agreement shall be administered by the Committee pursuant to the Plan. The Committee shall be authorized to interpret this Option Agreement and to make all other determinations necessary or advisable for the administration of this Option Agreement. The determinations of the Committee in the administration of this Option Agreement, as described herein, shall be final and conclusive. Each of the Chief Executive Officer, the Chief Financial Officer and the Senior Vice President, Human Resources of the Company shall be authorized to implement this Option Agreement in accordance with its terms and to take such actions of a ministerial nature as shall be necessary to effectuate the intent and purposes thereof.
 
7.  Non-Transferability. Subject to the terms of the Stockholders Agreement (as defined below), the right of the Optionee to exercise the Option shall not be assignable or transferable by the Optionee otherwise than by will or the laws of descent and distribution, and such Shares may be purchased during the lifetime of the Optionee only by him (or his legal representative in the event that the Optionee is Disabled). Any other such transfer shall be null and void and without effect upon any attempted assignment or transfer, except as hereinabove provided, including without limitation any purported assignment, whether voluntary or by operation of law, pledge, hypothecation or other disposition contrary to the provisions hereof, or levy of execution, attachment, trustee process or similar process, whether legal or equitable, upon the Option.
 
8.  Representation Letter and Investment Legend.
 
(a)  In the event that for any reason the Shares to be issued upon exercise of an exercisable Option shall not be effectively registered under the Securities Act of 1933, as amended (the “1933 Act”), upon any date on which the Option is exercised, the Optionee (or the person exercising the Option pursuant to Section 7) shall give a written representation to the Company in the form attached hereto as Exhibit A, and the Company shall place the legend described on Exhibit A, upon any certificate for the Shares issued by reason of such exercise.
 
(b)  The Company shall be under no obligation to qualify Shares or to cause a registration statement or a post-effective amendment to any registration statement to be prepared for the purposes of covering the issue of Shares; provided, that the Company will use its reasonable best efforts to comply with any available exemption from registration and qualification of the Shares under applicable federal and state securities laws.
 
3
 
 
9.  Adjustments upon Changes in Capitalization.
 
(a)  In the event that the outstanding Shares are changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of shares, or dividends payable in capital stock, appropriate adjustment shall be made in the number and kind of shares, and the Exercise Price therefor, as to which the Option, to the extent not theretofore exercised, shall be exercisable.
 
(b)  Unless otherwise determined by the Committee in its sole discretion, in the case of a Change in Control (as hereinafter defined) of the Company, the purchaser(s) of the Company’s assets or stock may, in his, her or its discretion, deliver to the Optionee, to the extent that the Option has become exercisable, the same kind of consideration (net of the Exercise Price for such Shares) that is delivered to the stockholders of the Company as a result of the Change in Control, or the Committee may, in its sole determination, cancel the Option, to the extent not theretofore exercised, in exchange for consideration in cash or in kind, which consideration in either case shall be equal in value to the value of those shares of stock or other consideration the Optionee would have received had the Option been exercised (to the extent the Option has become exercisable but not been exercised) and no disposition of the Shares acquired upon such exercise been made prior to the Change in Control, less the Exercise Price therefor. Upon receipt of such consideration by the Optionee, the Option shall immediately terminate and be of no further force and effect, with respect to both exercisable and unexercisable portions thereof. The value of the stock or other securities the Optionee would have received if the Option had been exercised shall be determined in good faith by the Committee.
 
(c)  Upon dissolution or liquidation of the Company, the Option shall terminate, but the Optionee (if at such time an Employee or consultant) shall have the right, immediately prior to filing of a certificate of dissolution or liquidation, to exercise any then exercisable Options.
 
(d)  No fraction of a Share shall be purchasable or deliverable upon the exercise of the Option, but in the event any adjustment hereunder of the number of shares covered by the Option shall cause such number to include a fraction of a share, such fraction shall be adjusted to the nearest smaller whole number of shares.
 
10.  No Employment Rights Conferred. Nothing contained in this Option Agreement shall be construed or deemed by any person under any circumstances to bind the Company or any of its subsidiaries to continue the employment of the Optionee for the period within which this Option may be exercisable or for any other period.
 
11.  Rights as a Stockholder. The Optionee shall have no rights as a stockholder with respect to any Shares which may be purchased upon the exercisability of this Option unless and until a certificate or certificates representing such Shares are duly issued and delivered to the Optionee. Except as otherwise expressly provided herein, no adjustment shall be made for dividends or other rights for which the record date is prior to the date the stock certificate is issued.
 
12.  Withholding Taxes. The Optionee hereby agrees, as a condition to any exercise of the Option, to provide to the Company an amount sufficient to satisfy its obligation to withhold federal, state and local taxes arising by reason of such exercise (the “Withholding Amount”), if any, by (a) authorizing the Company to withhold the Withholding Amount from his cash compensation, or (b) remitting the Withholding Amount to the Company in cash; provided that, to the extent that the Withholding Amount is not provided by one or a combination of such methods, the Company may at its election withhold from the Shares delivered upon exercise of the Option that number of Shares having a fair market value (in the good faith judgment of the Committee) equal to the Withholding Amount.
 
4
 
 
13.  Execution of Stockholders Agreement. The Optionee acknowledges that he has previously executed and delivered the stockholders agreement by and among the Company and the stockholders of the Company named therein (the “Stockholders Agreement”). The Optionee further agrees that this Option Agreement, the Option and all Shares acquired by him upon exercise of the Option will be subject to the terms and conditions of the Stockholders Agreement, as the same may be amended or modified in accordance with its terms.
 
14.  Definitions. The following terms shall have the following meanings when used in this Agreement and Schedule I to this Agreement:
 
(a)  “Cause,” shall have the meaning set forth in the executed written employment agreement, offer letter or term sheet between the Optionee and the Company (or a subsidiary thereof) or, in the absence of such employment agreement, offer letter or term sheet, the occurrence of any of the following during the term of the Optionee’s employment with the Company (or a subsidiary thereof):
 
(i)  the Optionee has failed to perform substantially his duties or has performed his duties negligently;
 
(ii)  the Optionee has committed any serious crime or offense, as determined by the Board of Directors or the Committee in their respective sole discretion;
 
(iii)  the Optionee has failed or refused to comply with any oral or written policy or directive of the Committee;
 
(iv)  the Optionee has breached any provision or covenant contained in this Option Agreement.
 
(b)  “Change in Control” shall mean when (i) any person, or any two or more persons acting as a group, and all affiliates of such person or persons (a “Group”) (other than any person or Group affiliated with J.W. Childs Associates L.P.), who prior to such time beneficially owned less than 50% of the then outstanding capital stock of the Company shall acquire shares of the Company’s capital stock in one or more transactions or series of transactions, including by merger, and after such transaction or transactions such person or Group and affiliates beneficially own 50% or more of the Company’s outstanding capital stock, or (ii) the Company shall sell all or substantially all of its assets to any Group (other than any person or Group affiliated with J.W. Childs Associates L.P.) which, immediately prior to the time of such transaction, beneficially owned less than a majority of the then outstanding capital stock of the Company.
 
5
 
 
(c)  “Disabled” shall have the meaning set forth in the executed written employment agreement, offer letter or term sheet between the Optionee and the Company (or a subsidiary thereof) or, in the absence of such employment agreement, offer letter or term sheet, the Optionee shall be deemed to have become “Disabled” if, during the term of the Optionee’s employment with the Company (or a subsidiary thereof), the Optionee shall become physically or mentally disabled, whether totally or partially, either permanently or so that the Optionee, in the good faith judgment of the Committee, is unable substantially and competently to perform his duties on behalf of the Company (or a subsidiary thereof) for a period of 90 consecutive days or for 90 days during any six month period during the term of employment. In order to assist the Committee in making that determination, the Optionee shall, as reasonably requested by the Committee, (i) make himself available for medical examinations by one or more physicians chosen by the Committee and (ii) grant to the Committee and any such physicians access to all relevant medical information concerning him, arrange to furnish copies of his medical records to the Committee and use his best efforts to cause his own physicians to be available to discuss his health with the Committee.
 
(d)  “EBITDA” shall have the meaning set forth in Schedule I.
 
(e)  “Good Reason,” with respect to the Optionee, shall have the meaning attributed to it under the executed written employment agreement, offer letter or term sheet between the Optionee and the Company (or a subsidiary thereof) or, in the absence of such employment agreement, offer letter or term sheet, “Good Reason” shall be deemed to have occurred if, other than for Cause, during the term of the Optionee's employment with the Company (or a subsidiary thereof) the Optionee's base salary has been reduced or the method under which the Optionee’s bonus is calculated has been amended in a manner materially adverse to the Optionee, other than in connection with a reduction of executive compensation imposed by the Committee generally on management employees in response to negative financial results or other adverse circumstances affecting the Company or its subsidiaries.
 
(f)  “Person” shall mean an individual, corporation, partnership, limited liability company, trust, unincorporated association, government or any agency or political subdivision thereof, or any other entity.
 
15.  Governing Law. This Option Agreement shall be governed by the laws of the State of Delaware, without regard to any conflicts of law principles thereof that would call for the application of the laws of any other jurisdiction. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Option Agreement may be brought against either of the parties in the courts of the State of Delaware, or if it has or can acquire jurisdiction, in the United States District Court for the District of Delaware, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world, whether within or without the State of Delaware.
 
16.  Incorporation of Terms of Plan. This Option Agreement shall be interpreted under, and in accordance with, all of the terms and provisions of the Plan, which are incorporated herein by reference.
 

6

 
IN WITNESS WHEREOF, the Company has caused this Stock Option Agreement to be executed, by its officer thereunto duly authorized, and the Optionee has executed this Stock Option Agreement, all as of the day and year first above written.
 
 
UNIVERSAL HOSPITAL SERVICES, INC.
  
OPTIONEE
     
    _______________________________________________________
By:_____________________________________________________   Name:
Name: Gary D. Blackford
    
Title: President & CEO   Address:
    _______________________________________________________
    _______________________________________________________
    _______________________________________________________
 
   Telecopier Number:__________________________________________________________
   
Social Security Number:_______________________________________________________

7


SCHEDULE I
 
TARGET VESTING SCHEDULE
 
(a)  Subject to adjustment as provided in (b) and (f) below, for each of the Target Periods specified below, if the Company’s EBITDA (as defined below) in any such Target Period is equal to or greater than the Base EBITDA Target for such Target Period as specified below, the Target Vesting Options will vest and be exercisable with respect to the Annual Eligible Shares. If the Company’s EBITDA for any Target Period exceeds 90% of the Base EBITDA Target for such Target Period, then the amount of Target Vesting Options that will vest for each such Target Period will be that percentage of the Annual Eligible Shares determined according to a linear extrapolation of the amount by which the Company’s EBITDA exceeds 90% of the Base EBITDA Target, such that achievement of 91% of the Base EBITDA Target would result in vesting of 10% of the Annual Eligible Shares and achievement of 100% or more of the Base EBITDA Target would result in vesting of 100% of Annual Eligible Shares.
 
TABLE A
 
Target Period
Annual Eligible Shares
Base
EBITDA Target
(000’s)
Maximum Capital
Expenditures
(000’s)
Fiscal 2007
20% of Target Vesting Shares
$110,000
$77,900
Fiscal 2008
20% of Target Vesting Shares
$125,000
$92,300
Fiscal 2009
20% of Target Vesting Shares
$141,000
$109,000
Fiscal 2010
20% of Target Vesting Shares
$159,000
$126,000
Fiscal 2011
20% of Target Vesting Shares
$179,000
$145,000

Notwithstanding the foregoing,
 
(i)  Excess EBITDA in any Target Period then ended (i.e., the amount by which EBITDA for such Target Period exceeds the Base EBITDA Target for such Target Period) may be carried back to the prior Target Period to permit vesting of Annual Eligible Shares not previously vested, provided that (A) cumulative EBITDA for all Target Periods then ended exceeds the 90% of the cumulative Base EBITDA Targets for all Target Periods then ended and (B) the Annual Eligible Shares from the prior Target Period shall vest in a linear extrapolation of the amount by which the Company’s cumulative EBITDA for all Target Periods then ended exceeds 90% of the cumulative Base EBITDA Targets for such periods, such that achievement of 91% of the cumulative Base EBITDA Targets would result in vesting of 10% of the Annual Eligible Shares not previously vested and achievement of 100% or more of the cumulative Base EBITDA Targets would result in vesting of 100% of Annual Eligible Shares not previously vested; and
 
(ii)  if (A) for the fiscal year ended December 31, 2011 (the “Final Target Period”), EBITDA exceeds the Base EBITDA Target for the Final Target Period and (B) the cumulative EBITDA for all five Target Periods exceeds the cumulative Base EBITDA Targets for all five periods, then the Target Vesting Options shall become exercisable with respect to 100% of the Shares (to the extent not theretofore vested in accordance with this Schedule I).
 
SCHEDULE I-1
 
(b)  Base EBITDA Targets will be adjusted by the Committee in good faith (i) in the event that the Company’s capital expenditures for the Target Period exceed the Maximum Capital Expenditures specified for that Target Period (provided that if the Company spends less than the Maximum Capital Expenditures for a Target Period, then such amount of “under spent” capital expenditures can be applied to the next succeeding Target Period to increase the Maximum Capital Expenditures permitted for such succeeding Target Period) and (ii) in the event the Company acquires or merges with any other company and such acquisition or merger does not qualify as a Change in Control of the Company, to take into account the additional EBITDA expected to be generated by the recently acquired business for Target Periods ending after the date of such acquisition or merger.
 
(c)  In the event a Change in Control of the Company occurs before the end of the fiscal year ending December 31, 2011, and the Optionee is still employed/retained by the Company at such time, any Target Vesting Options subject to vesting for Target Periods ending after such Change in Control shall become exercisable to the same extent and in the same percentage as the percentage of Target Vesting Options that had previously become exercisable bears to the percentage of Target Vesting Options that were eligible to become exercisable in all preceding fiscal years (e.g., if 50% of the eligible options had become vested in the Target Periods prior to a Change in Control, then 50% of the unvested options relating to Target Periods after the Change in Control would become vested). 
 
(d)  
 
(i)  Upper Threshold: In the event that on or prior to December 31, 2010, J.W. Childs Equity Partners III, L.P. (“Childs”) and its affiliates and Halifax Capital Partners, L.P. each receive a net cash return (after dilution from all options) on their total investment in the Company resulting in an amount of cash at least equal to the multiple of their total investment in the Company (the “Actual Ratio”) equal to or greater than the Upper Threshold for the applicable time period below, all Target Vesting Options will become exercisable to the extent not then exercisable:
Upper Threshold
   
2.50 Times
On or before 12/31/08
   
2.85 Times
On or after 01/01/09 but before 1/1/10
   
3.25 Times
On or after 01/01/10 but before 1/1/11
 
(ii) Lower Threshold: In the event that on or prior to December 31, 2010, J.W. Childs Equity Partners III, L.P. (“Childs”) and its affiliates and Halifax Capital Partners, L.P. each receive a net cash return (after dilution from all options) on their total investment in the Company resulting in an amount of cash at least equal to the multiple of their total investment in the Company (the “Actual Ratio”) equal to or greater than the Lower Threshold for the applicable time period below, but less than the Upper Threshold above, the unvested Target Vesting Options will become exercisable as set forth in the formula below:
 

SCHEDULE I-2
 
Lower Threshold
   
2.00 Times
On or before 12/31/08
   
2.35 Times
On or after 01/01/09 but before 1/1/10
   
2.75 Times
On or after 01/01/10 but before 1/1/11
 
Formula:  .5 (TVO) + (.5 (TVO) ((AR-LT)/(UT-LT))) - PVTO = incremental vested TVO
Where: 
TVO= total Target Vesting Options 
 
AR = Actual Ratio
 
LT = Lower Threshold for the applicable time period
 
UT= Upper Threshold for the applicable time period
 
PVTO = Number of previously vested TVOs

If the formula result (incremental vested TVO) is negative, there will be no increase or decrease in vested Target Vesting Options.
 
(e)  “EBITDA” shall mean consolidated earnings of the Company and its subsidiaries, including equity in the earnings from non-consolidated subsidiaries, before interest, taxes, depreciation, amortization, board fees and expenses, non-cash stock compensation or option expense and other similar charges, unusual and non-recurring items approved by the board or Committee and the management fees paid to J.W. Childs Associates, L.P. and Halifax Capital Partners, L.P., or any of their respective affiliates, and after deduction of all operating expenses, minority interest expenses and incentive compensation, all as calculated in accordance with generally accepted accounting principles consistently applied, as reflected in the Company's audited consolidated financial statements. For purposes of calculating EBITDA, in the event that the Company makes an acquisition or disposition of any assets or business, the Committee, in good faith, shall adjust EBITDA for any fiscal year to include or exclude on a pro forma basis, as applicable, the EBITDA for such assets or business for the period of time the assets or business are not owned by the Company for the fiscal year in which the assets or business are acquired or sold.
 
SCHEDULE I-3

EXHIBIT A
 
TO
STOCK OPTION AGREEMENT
 

 
In connection with the purchase by me of _____ shares of common stock, $0.01 par value per share, of Universal Hospital Services, Inc., a Delaware corporation (the “Company”) under the nonqualified stock option granted to me pursuant to that certain Stock Option Agreement dated ____________ (the “Option Agreement”), I hereby acknowledge that I have been informed as follows:
 
1.    The shares of common stock of the Company to be issued to me upon exercise of said option have not been registered under the Securities Act of 1933, as amended (the “Act”), and accordingly, must be held indefinitely unless such shares are subsequently registered under the Act, or an exemption from such registration is available.
 
2.    Routine sales of securities made in reliance upon Rule 144 under the Act can be made only after the holding period and in limited amounts in accordance with the terms and conditions provided by that Rule, and with respect to which that Rule is not applicable, registration or compliance with some other exemption under the Act will be required.
 
3.    The Company is under no obligation to me to register the shares or to comply with any such exemptions under the Act, other than as set forth in the Stockholders Agreement referenced and defined in paragraph 13 of the Option Agreement (the “Stockholders Agreement”).
 
4.    The availability of Rule 144 is dependent upon adequate current public information with respect to the Company being available and, at the time that I may desire to make a sale pursuant to the Rule, the Company may neither wish nor be able to comply with such requirement.
 
5.    The shares of common stock of the Company to be issued to me upon the exercise of said option are subject to the terms and conditions, including restrictions on transfer, of the Stockholders Agreement.
 
In consideration of the issuance of certificates for the shares to me, I hereby represent and warrant that I am acquiring such shares for my own account for investment, and that I will not sell, pledge, hypothecate or otherwise transfer such shares in the absence of an effective registration statement covering the same, except as permitted by an applicable exemption under the Act. In view of this representation and warranty, I agree that there may be affixed to the certificates for the shares to be issued to me, and to all certificates issued hereafter representing such shares (until in the opinion of counsel, which opinion must be reasonably satisfactory in form and substance to counsel for the Company, it is no longer necessary or required) a legend as follows:
 
EXHIBIT A-1
 
 
“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Act”), and may not be sold, transferred, offered for sale, pledged or hypothecated in the absence of an effective registration statement as to the securities under the Act or an opinion of counsel satisfactory to the corporation and its counsel that such registration is not required.”
 
“The securities represented by this certificate are subject to the terms and conditions, including restrictions on transfer, of a Stockholders Agreement among the Universal Hospital Services, Inc. and its stockholders dated as of October 17, 2003, as amended from time to time, a copy of which is on file at the principal office of the corporation.”
 
I further agree that the Company may place a stop order with its transfer agent, prohibiting the transfer of such shares, so long as the legend remains on the certificates representing the shares.
 
I hereby represent and warrant that: My financial situation is such that I can afford to bear the economic risk of holding the shares issued to me upon exercise of said option for an indefinite period of time, I have no need for liquidity with respect to my investment and have adequate means to provide for my current needs and personal contingencies, and can afford to suffer the complete loss of my investment in such shares.
 
(a)    I am either (please check one of the following):
 
1.
 ______
an “accredited investor” within the meaning of Rule 501(a) under the Act, a copy of which is annexed hereto as Annex I, and I, either alone or with my purchaser representative (as such term is defined in Rule 501 under the Act), have such knowledge and experience in financial and business matters that I am capable of evaluating the merits and risks of my investment in the shares issued to me upon exercise of said option. I have indicated the appropriate categories that apply to me in Annex I hereto.
     
2.
 ______
not an “accredited investor” within the meaning of Rule 501(a) under the Act, as I do not fulfill any of the categories set forth in Annex I, but I have such knowledge and experience in financial and business matters that I am capable of evaluating the merits and risks of my investment in the shares issued to me upon exercise of said option.
 
(b)    I have been afforded the opportunity to ask questions of, and to receive answers from, the Company and its representatives concerning the shares issued to me upon exercise of said option and to obtain any additional information I have deemed necessary.
 
(c)    I have a high degree of familiarity with the business, operations, financial condition and prospects of the Company.
 
 
Very truly yours,
 
  Name

EXHIBIT A-2

ANNEX I
 
The following are “accredited investors” for purposes of the offering and sale of Shares.
 
Please check all of the following categories that you fulfill.
 
a.
 ______ 
a bank as defined in section 3(a)(2) of the Securities Act or a savings and loan association or other institution as defined in section 3(a)(5)(A) of the Securities Act, whether acting in its individual or fiduciary capacity; broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934, as amended; insurance company as defined in section 2(13) of the Securities Act; investment company registered under the Investment Company Act of 1940, as amended, or a business development company as defined in section 2(a)(48) of the Investment Company Act of 1940, as amended; Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; employee benefit plan within the meaning of the Optionee Retirement Income Security Act of 1974, as amended, if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which plan fiduciary is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
b.
 ______
a private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940, as amended;
c.
 ______ 
an organization described in section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation, Massachusetts or similar business trust, or a partnership, not formed for the purpose of acquiring the Securities offered, with total assets in excess of $5,000,000;
d.
 ______ 
a director or an executive officer of Universal Hospital Services, Inc.;
e.
 ______
a natural person whose individual net worth, individually or together with his or her spouse, exceeds $1,000,000;

EXHIBIT A-3


f.
 ______
(i)a natural person who had an individual income*  in excess of $200,000 in both of the past two years and who reasonably expects reaching the same income level in the current year; or
   
(ii)a natural person who had a joint income*  with his or her spouse in excess of $300,000 in both of the past two years and who reasonably expects reaching the same income level in the current year;
g.
 ______
a trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Securities offered, whose purchase is directed by a person who either alone or with his purchaser representative has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment, or Universal Hospital Services, Inc. reasonably believes immediately prior to making any sale that such person comes within this definition;
h.
 ______
an entity in which all of the equity owners are accredited investors meeting one or more of the tests under subparagraphs (a) - (g).
     

 
 
 
 
____________________________________________
 
*  For all investors, the term “individual income” means adjusted gross income as reported for federal income tax purposes, less any income attributable to a spouse or to property owned by a spouse, increased by the following amounts (but not included any amounts attributable to a spouse or to property owned by a spouse), and the term “joint income” means adjusted gross income as reported for federal income tax purposes, including any income attributable to a spouse or to a property owned by a spouse, increased by the following amounts (including any amounts attributable to a spouse or to property owned by a spouse): (i) the amount of any interest income received which is tax exempt under section 103 of the Code; (ii) the amount of losses claimed as a limited partner in a limited partnership (as reported on Schedule E of Form 1040); and (iii) any deduction claimed for depletion under section 611 et seq. of the Code.
   
* For all investors, the term “individual income” means adjusted gross income as reported for federal income tax purposes, less any income attributable to a spouse or to property owned by a spouse, increased by the following amounts (but not included any amounts attributable to a spouse or to property owned by a spouse), and the term “joint income” means adjusted gross income as reported for federal income tax purposes, including any income attributable to a spouse or to a property owned by a spouse, increased by the following amounts (including any amounts attributable to a spouse or to property owned by a spouse): (i) the amount of any interest income received which is tax exempt under section 103 of the Code; (ii) the amount of losses claimed as a limited partner in a limited partnership (as reported on Schedule E of Form 1040); and (iii) any deduction claimed for depletion under section 611 et seq. of the Code. 
 

EXHIBIT A-4
 
 EX-12.1 5 a5356432-ex121.htm EXHIBIT 12.1 Voluntary Filer

Exhibit 12.1
 

 
  
DETERMINATION OF RATIO OF EARNINGS TO FIXED CHARGES
  
 
  
(dollars in thousands)
  
   
2006
  
2005
    
2004
    
2003
    
2002
  
Income (loss) before income taxes
 
$
664
  
$
(727
)
  
$
(2,404
)
  
$
(19,251
)
  
$
(121
)
Fixed charges
                                      
Amortization of deferred financing costs
    
-
   
-
     
-
     
856
     
1,079
 
Interest expense
    
31,599
    
31,127
      
30,508
      
20,244
      
18,127
  
Earnings before fixed charges
  
$
32,263
  
$
30,400
    
$
28,106
    
$
1,849
    
$
19,085
  
                                       
Fixed charges
                                      
Amortization of deferred financing costs
  
$
-
  
$
-
    
$
-
    
$
856
    
$
1,079
  
Interest expense
    
31,599
    
31,127
      
30,508
      
20,244
      
18,127
  
Total fixed charges
  
$
31,599
  
$
31,127
    
$
30,508
    
$
21,100
    
$
19,206
  
                                       
Ratio of earnings to fixed charges(1)
    
1.02
   
-
      
-
      
-
      
-
  
                                       

 
(1) If we consistently incur net losses before income tax, we may not be able to maintain a ratio coverage of greater than 1:1. In 2006 we had income before taxes of $664,000 generating a ratio of 1.02 to 1.00. Due to our losses in 2005, 2004, 2003 and 2002 the ratio coverage in the respective years was less than 1.00 to 1.00. We needed to generate additional earnings of $727,000, $2,404,000, $19,251,000 and $121,000 in 2005, 2004, 2003 and 2002, respectively, to achieve a coverage ratio of 1.00:1.00.
 
 

 EX-31.1 6 a5356432-ex311.htm EXHIBIT 31.1 Exhibit 31.1




Exhibit 31.1

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Gary D. Blackford, certify that:

 
1.
 I have reviewed this annual report on Form 10-K of Universal Hospital Services, Inc. (the “registrant”);
       
 
2.
 Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
       
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
       
 
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
       
    (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
       
    (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 
       
    (c)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
       
  5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
       
    (a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
       
    (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
 
Date: March 16, 2007
/s/Gary D. Blackford
 
Gary D. Blackford 
  President and Chief Executive Officer
 
 
 
EX-31.2 7 a5356432-ex312.htm EXHIBIT 31.2 Exhibit 31.2
 
 
Exhibit 31.2 

 
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
I, Rex T. Clevenger, certify that:
 
 
 1. I have reviewed this annual report on Form 10-K of Universal Hospital Services, Inc. (the “registrant”);
 
    
 
 
 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
    
 
 
 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
    
 
 
 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have
       
     (a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
       
     (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
       
     (c)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
       
   5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):   
       
    (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
       
    (b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
       
 
 
 
Date: March 16, 2007
/s/ Rex T. Clevenger
 
Rex T. Clevenger
 
Chief Financial Officer 
 
 
 
 
 EX-32.1 8 a5356432-ex321.htm EXHIBIT 32.1 Exhibit 32.1

Exhibit 32.1



CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report on Form 10-K of Universal Hospital Services, Inc. (the "Company") for the period ended December 31, 2006 as filed with the Securities and Exchange Commission (the "Report"), I, Gary D. Blackford, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)    The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


March 16, 2007
/s/Gary D. Blackford
 
Gary D. Blackford
 
President and Chief Executive Officer
 
 
 



EX-32.2 9 a5356432-ex322.htm EXHIBIT 32.2 Exhibit 32.2


Exhibit 32.2



CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report on Form 10-K of Universal Hospital Services, Inc. (the "Company") for the period ended December 31, 2006 as filed with the Securities and Exchange Commission (the "Report"), I, Rex T. Clevenger, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)    The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
March 16, 2007
/s/Rex T. Clevenger
Rex T. Clevenger
 
Chief Financial Officer
 
 
 
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