UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

American HomePatient, Inc.

 

Delaware		0-19532		62-1474680
(State or other jurisdiction of incorporation or organization)		(Commission File Number)		(IRS Employer Identification No.)

5200 Maryland Way, Suite 400, Brentwood, Tennessee 37027

(615) 221-8884

None

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 þ No o

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

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (do not check if a smaller reporting company)

Smaller reporting company þ

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

17,573,389
(Outstanding shares of the issuer’s common stock as of November 16, 2009)

 

 

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INDEX

				Page No.
PART I		Financial Information
Item 1.		Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets			3
		Interim Condensed Consolidated Statements of Operations — Three and Nine months ended September 30, 2009 and 2008			5
		Interim Condensed Consolidated Statements of Cash Flows — Nine months ended September 30, 2009 and 2008			6
		Notes to Interim Condensed Consolidated Financial Statements			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			40
Item 4T.		Controls and Procedures			40
Report of Independent Registered Public Accounting Firm					41
PART II		Other Information and Signatures
Item 1A.		Risk Factors			42
Item 6.		Exhibits			47
Signatures					49
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-10.8
EX-10.9
EX-10.10
EX-10.11
EX-10.12
EX-15.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

		September 30,				December 31,
ASSETS		2009				2008
CURRENT ASSETS:
Cash and cash equivalents		$	23,920,000			$	13,488,000
Restricted cash			250,000				250,000
Accounts receivable, less allowance for doubtful accounts of $3,952,000 and $5,869,000, respectively			26,838,000				39,061,000
Inventories, net of inventory valuation allowances of $270,000 and $577,000, respectively			11,539,000				10,789,000
Prepaid expenses and other current assets			5,358,000				9,863,000
Total current assets			67,905,000				73,451,000
Property and equipment			126,970,000				134,603,000
Less accumulated depreciation and amortization			(96,986,000	)			(102,561,000	)
Property and equipment, net			29,984,000				32,042,000
Goodwill			122,093,000				122,093,000
Investment in joint ventures			3,825,000				8,704,000
Other assets			16,110,000				18,236,000
Total other assets			142,028,000				149,033,000
TOTAL ASSETS		$	239,917,000			$	254,526,000

(Continued)

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

(Continued)

		September 30,				December 31,
LIABILITIES AND SHAREHOLDERS’ DEFICIT		2009				2008
CURRENT LIABILITIES:
Current portion of long-term debt and capital leases		$	228,960,000			$	234,259,000
Accounts payable			13,249,000				11,989,000
Other payables			644,000				878,000
Short-term note payable			250,000				—
Deferred revenue			5,224,000				6,261,000
Accrued expenses:
Payroll and related benefits			6,913,000				10,302,000
Insurance, including self-insurance accruals			5,904,000				5,531,000
Other			3,632,000				1,563,000
Total current liabilities			264,776,000				270,783,000
NONCURRENT LIABILITIES:
Capital leases, less current portion			12,000				51,000
Deferred tax liability			11,029,000				7,841,000
Other noncurrent liabilities			4,000				8,000
Total noncurrent liabilities			11,045,000				7,900,000
Total liabilities			275,821,000				278,683,000
SHAREHOLDERS’ DEFICIT
American HomePatient, Inc. shareholders’ deficit:
Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued and outstanding			—				—
Common stock, $.01 par value; authorized 35,000,000 shares; issued and outstanding, 17,573,000 shares			176,000				176,000
Additional paid-in capital			176,944,000				176,788,000
Accumulated deficit			(213,460,000	)			(201,583,000	)
Total American HomePatient, Inc. shareholders’ deficit			(36,340,000	)			(24,619,000	)
Noncontrolling interests			436,000				462,000
Total shareholders’ deficit			(35,904,000	)			(24,157,000	)
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT		$	239,917,000			$	254,526,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

		Three Months Ended Sept. 30,								Nine Months Ended Sept. 30,
		2009				2008				2009				2008
REVENUES:
Sales and related service revenues, net		$	25,700,000			$	25,169,000			$	74,661,000			$	77,422,000
Rental revenues, net			33,291,000				40,472,000				100,327,000				121,627,000
Total revenues, net			58,991,000				65,641,000				174,988,000				199,049,000
EXPENSES:
Cost of sales and related services			13,110,000				13,562,000				38,585,000				41,313,000
Cost of rentals and other revenues, including rental equipment depreciation of $5,568,000, $6,236,000, 16,643,000 and $19,822,000, respectively			7,622,000				8,397,000				22,582,000				26,465,000
Operating expenses			30,918,000				32,468,000				93,619,000				100,007,000
Bad debt expense			511,000				1,284,000				2,589,000				4,021,000
General and administrative			5,453,000				4,926,000				15,756,000				14,521,000
Depreciation, excluding rental equipment, and amortization			1,012,000				1,006,000				2,989,000				3,090,000
Interest expense, net			3,912,000				3,944,000				11,600,000				11,758,000
Other income, net			(414,000	)			8,000				(499,000	)			(651,000	)
Change of control income			(3,000	)			(3,000	)			(9,000	)			(74,000	)
Total expenses			62,121,000				65,592,000				187,212,000				200,450,000
Earnings from unconsolidated joint ventures			1,375,000				1,639,000				3,885,000				4,406,000
(LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES			(1,755,000	)			1,688,000				(8,339,000	)			3,005,000
Provision for income taxes			874,000				1,012,000				3,304,000				3,692,000
NET (LOSS) INCOME		$	(2,629,000	)		$	676,000			$	(11,643,000	)		$	(687,000	)
Less: net income attributable to the noncontrolling interests			(91,000	)			(92,000	)			(234,000	)			(307,000	)
NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN HOMEPATIENT, INC.		$	(2,720,000	)		$	584,000			$	(11,877,000	)		$	(994,000	)
NET (LOSS) INCOME PER COMMON SHARE ATTRIBUTABLE TO AMERICAN HOMEPATIENT, INC. COMMON SHAREHOLDERS
- Basic		$	(0.15	)		$	0.03			$	(0.68	)		$	(0.06	)
- Diluted		$	(0.15	)		$	0.03			$	(0.68	)		$	(0.06	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
- Basic			17,573,000				17,573,000				17,573,000				17,573,000
- Diluted			17,573,000				17,714,000				17,573,000				17,573,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

		Nine Months Ended September 30,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(11,877,000	)		$	(994,000	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Change of control income			(9,000	)			(74,000	)
Gain on sale of infusion branch			(184,000	)			(2,000	)
Deferred tax expense			3,188,000				3,286,000
Depreciation and amortization			19,632,000				22,912,000
Bad debt expense			2,589,000				4,021,000
Stock compensation expense			215,000				284,000
Equity in earnings of unconsolidated joint ventures			(2,499,000	)			(3,011,000	)
Minority interest			234,000				307,000
Change in assets and liabilities:
Accounts receivable			9,634,000				4,904,000
Inventories			(837,000	)			241,000
Prepaid expenses and other current assets			4,505,000				6,969,000
Deferred revenue			(1,037,000	)			196,000
Accounts payable, other payables and accrued expenses			(129,000	)			(9,088,000	)
Other assets and liabilities			1,782,000				1,414,000
Due to unconsolidated joint ventures, net			7,378,000				3,921,000
Net cash provided by operating activities			32,585,000				35,286,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash payments for additions to property and equipment, net			(12,525,000	)			(15,507,000	)
Proceeds from sale of infusion branch			271,000				338,000
Net cash used in investing activities		$	(12,254,000	)		$	(15,169,000	)

(Continued)

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

(Continued)

		Nine Months Ended September 30,
		2009				2008
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to minority interest owners		$	(260,000	)		$	(373,000	)
Principal payments on long-term debt and capital leases			(9,889,000	)			(10,591,000	)
Proceeds on short-term note payable			413,000				—
Principal payments on short-term note payable			(163,000	)			(274,000	)
Net cash used in financing activities			(9,899,000	)			(11,238,000	)
INCREASE IN CASH AND CASH EQUIVALENTS			10,432,000				8,879,000
CASH AND CASH EQUIVALENTS, beginning of period			13,488,000				11,018,000
CASH AND CASH EQUIVALENTS, end of period		$	23,920,000			$	19,897,000
SUPPLEMENTAL INFORMATION:
Cash payments of interest		$	10,481,000			$	12,393,000
Cash payments of income taxes		$	215,000			$	554,000
Non-Cash Activity:
Capital leases entered into for property and equipment		$	4,551,000			$	1,222,000
Changes in accounts payable related to purchases of property and equipment		$	158,000			$	(625,000	)
Change of control:
Other liabilities		$	50,000			$	849,000
Additional paid-in capital		$	(59,000	)		$	775,000
Supplemental Disclosure of Investing Activities:
Disposition of infusion branch:
Inventories sold		$	87,000			$	321,000
Property and equipment, net, sold		$	—			$	15,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. BASIS OF PRESENTATION

The interim condensed consolidated financial statements of American HomePatient, Inc. and its subsidiaries (the “Company”) for the three and nine months ended September 30, 2009 and 2008 herein are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of only normally recurring accruals) necessary to present fairly the Company’s financial position at September 30, 2009, its results of operations for the three and nine months ended September 30, 2009 and 2008 and its cash flows for the nine months ended September 30, 2009 and 2008.

The results of operations for the three and nine months ended September 30, 2009 and 2008 are not necessarily indicative of the operating results for the entire respective years. Subsequent events have been evaluated through November 16, 2009, the date of the issuance of the Company’s condensed consolidated financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2008 Annual Report on Form 10-K.

Certain reclassifications of prior year amounts related to presentation of net income attributable to noncontrolling interests have been made to conform to the current year presentation. The reclassification did not affect net income attributable to the Company for any prior period.

2. GOING CONCERN AND LIQUIDITY

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has long-term debt of $226.4 million (the “Secured Debt”) at September 30, 2009, which was due to be repaid in full on August 1, 2009, as evidenced by a promissory note to the agent for the Company’s lenders (the “Lenders”) under a previous senior debt facility that is secured by substantially all of the Company’s assets. Highland Capital Management, L.P. controls a majority of the Secured Debt. The entire amount of the Secured Debt is included in current portion of long-term debt and capital leases at September 30, 2009. A series of forbearance agreements have been entered into by and among the Company, NexBank, SSB (the “Agent”), and a majority of the senior debt holders (the “Forbearance Holders”). See Note 3, “Subsequent Events” for a more detailed discussion. The Company’s cash flow from operations and existing cash were not sufficient to repay the Secured Debt by the maturity date, and the Company was unable to refinance the Secured Debt by the maturity date. As a result, the Company must refinance the debt, extend the maturity, restructure or make other arrangements, some of which could have a material adverse effect on the value of the Company’s common stock. Given the unfavorable conditions in the current debt market, the Company believes that third-party refinancing of the debt will not be possible at this time, which raises substantial doubt about the Company’s ability to continue as a going concern. There can be no assurance that any of the

Company’s efforts to address the debt maturity issue can be completed on favorable terms or at all. Other factors, such as uncertainty regarding the Company’s future profitability could also limit the Company’s ability to resolve the debt maturity issue. Subject to the limitations provided by the forbearance agreement, the Company’s Lenders have the right to foreclose on substantially all assets of the Company, and this would have a material adverse effect on the Company’s liquidity, financial condition, and the value of the Company’s common stock.

3. SUBSEQUENT EVENTS

A series of forbearance agreements, each with a one month term, have been entered into by and among the Company, the Agent, and certain Forbearance Holders. The parties to the forbearance agreements have agreed to not exercise, prior to the expiration of the term of the agreement, any of the rights or remedies available to them as a result of the Company’s failure to repay the Secured Debt on the maturity date. The current forbearance agreement expires December 1, 2009. The Company, the Agent, and the Forbearance Holders continue to work toward a resolution of the debt maturity issue. However, there can be no assurance a resolution will be reached with favorable terms to the Company and its stockholders or at all.

4. STOCK BASED COMPENSATION

The Company records compensation costs for fixed plan stock options based on the estimated fair value of the respective options and the proportion vesting in the period. Deductions for stock-based employee compensation expense are calculated using the Black-Scholes option-pricing model. Allocation of compensation expense is made using historical option terms for option grants made to the Company’s employees and historical Company stock price volatility since the emergence from bankruptcy.

There were 415,000 options granted during the first quarter ended March 31, 2009. The estimated fair value of these options was $0.17 per share using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 101%; expected life of 5 years; and risk-free interest rate of 2.06%. There were no options granted during the second or third quarters of 2009.

The Company recognized $63,000 and $215,000 of stock-based compensation expense in the three and nine months ended September 30, 2009, respectively.

Under the 1991 Nonqualified Stock Option Plan (the “1991 Plan”), as amended, 5,500,000 shares of the Company’s common stock have been reserved for issuance upon exercise of options granted thereunder. The maximum term of any option granted pursuant to the 1991 Plan is ten years. Shares subject to options granted under the 1991 Plan which expire, terminate or are canceled without having been exercised in full become available again for future grants.

An analysis of stock options outstanding under the 1991 Plan is as follows:

						Weighted
						Average
		Options				Exercise Price
Outstanding at December 31, 2008			2,531,000			$	1.68
Granted			415,000				0.22
Exercised			—				—
Canceled			—				—
Outstanding at March 31, 2009			2,946,000			$	1.48
Granted			—				—
Exercised			—				—
Canceled			—				—
Outstanding at June 30, 2009			2,946,000			$	1.48
Granted			—				—
Exercised			—				—
Canceled			—				—
Outstanding at September 30, 2009			2,946,000			$	1.48

There were no stock options exercised during the three and nine months ended September 30, 2009 or 2008. At September 30, 2009, there was $0.3 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 1991 Plan. That cost is expected to be recognized over a weighted-average period of 1.3 years.

						Weighted
						Average
						Grant-date
Nonvested Options		Options				Fair Value
Balance at December 31, 2008			758,166			$	1.02
Granted			415,000				0.17
Vested			(293,666	)			1.29
Forfeited			—				—
Balance at March 31, 2009			879,500			$	0.53
Granted			—				—
Vested			(22,083	)			1.13
Forfeited			—				—
Balance at June 30, 2009			857,417				0.52
Granted			—				—
Vested			(2,500	)			0.47
Forfeited			—				—
Balance at September 30, 2009			854,917			$	0.52

Options granted under the 1991 Plan as of September 30, 2009 have the following characteristics:

																														Weighted
																										Weighted				Average
																										Average				Remaining
																										Exercise				Contractual				Aggregate
														Weighted												Price of				Life in				Intrinsic
														Average								Options				Options				Years of				Value
										Weighted				Remaining								Exercisable				Exercisable				Options				of Options
										Average				Contractual				Aggregate				at				at				Exercisable				Exercisable
Year of		Options				Exercise				Exercise				Life in				Intrinsic				Sept. 30,				Sept. 30,				at Sept. 30,				at Sept. 30,
Grant		Outstanding				Prices				Price				Years				Value				2009				2009				2009				2009
1999			200,000			$	0.56			$	0.56				0.11				—				200,000			$	0.56				0.11				—
2000			220,000			$	0.17 to $0.30			$	0.18				1.10				20,700				220,000			$	0.18				1.10				20,700
2004			450,000			$	1.31 to $1.80			$	1.64				4.64				—				450,000			$	1.64				4.64				—
2005			170,000			$	2.21 to $3.55			$	2.97				5.35				—				170,000			$	2.97				5.35				—
2006			470,000			$	0.61 to $3.30			$	3.24				6.40				—				467,500			$	3.26				6.40				—
2007			496,000			$	1.25 to $2.40			$	1.63				7.50				—				408,583			$	1.63				7.47				—
2008			525,000			$	0.85 to $1.03			$	1.02				8.43				—				175,000			$	1.02				8.43				—
2009			415,000			$	0.22			$	0.22				9.41				20,750				—			$	0.22				9.41				—
			2,946,000															$	41,450				2,091,083											$	20,700

Options granted under the 1991 Plan as of December 31, 2008 have the following characteristics:

																														Weighted
																										Weighted				Average
																										Average				Remaining
																										Exercise				Contractual				Aggregate
														Weighted												Price of				Life in				Intrinsic
														Average								Options				Options				Years of				Value
										Weighted				Remaining								Exercisable				Exercisable				Options				of Options
										Average				Contractual				Aggregate				at				at				Exercisable				Exercisable
Year of		Options				Exercise				Exercise				Life in				Intrinsic				Dec. 31,				Dec. 31,				at Dec. 31,				at Dec. 31,
Grant		Outstanding				Prices				Price				Years				Value				2008				2008				2008				2008
1999			200,000			$	0.56			$	0.56				0.86				—				200,000			$	0.56				0.86				—
2000			220,000			$	0.17 to $0.30			$	0.18				1.85				—				220,000			$	0.18				1.85				—
2004			450,000			$	1.31 to $1.80			$	1.64				5.39				—				450,000			$	1.64				5.39				—
2005			170,000			$	2.21 to $3.55			$	2.97				6.10				—				170,000			$	2.97				6.10				—
2006			470,000			$	0.61 to $3.30			$	3.24				7.14				—				391,667			$	3.27				7.14				—
2007			496,000			$	1.25 to $2.40			$	1.63				8.24				—				341,167			$	1.62				8.22				—
2008			525,000			$	0.85 to $1.03			$	1.02				9.18				—				—			$	—				—				—
			2,531,000															$	—				1,772,834											$	—

Options granted during 1999 vested upon grant or have a three year vesting period and expire in ten years. Options granted during 2000 and 2001 have a three year vesting period and expire in ten years. No options were granted during 2002 or 2003. Options granted during 2004 have a two or three year vesting period and expire in ten years. Options granted during 2005 have a three year vesting period and expire in ten years. Options granted during 2006 have a four year vesting period and expire in ten years. Options granted in 2007, 2008, and 2009 have a three year vesting period and expire in ten years. As of September 30, 2009 and December 31, 2008, shares available for future grants of options under the 1991 Plan total 100,109 and 515,109, respectively.

Under the 1995 Nonqualified Stock Option Plan for Directors (the “1995 Plan”), as amended, 600,000 shares of the Company’s common stock have been reserved for issuance upon exercise

of options granted thereunder. The maximum term of any option granted pursuant to the 1995 Plan is ten years. Shares subject to options granted under the 1995 Plan which expire, terminate or are canceled without having been exercised in full become available for future grants.

An analysis of stock options outstanding under the 1995 Plan is as follows:

						Weighted
						Average
		Options				Exercise Price
Outstanding at December 31, 2008 and September 30, 2009			536,000			$	1.25

Options granted under the 1995 Plan as of December 31, 2008 and September 30, 2009 have the following characteristics:

														Weighted				Weighted
														Average				Average								Weighted				Aggregate				Aggregate
														Remaining				Remaining								Average				Intrinsic				Intrinsic
										Weighted				Contractual				Contractual								Exercise				Value				Value
										Average				Life in				Life in								Price of				of Options				of Options
Year of		Options				Exercise				Exercise				Years				Years				Options				Options				Exercisable				Exercisable
Grant		Outstanding				Prices				Price				12/31/2008				9/30/2009				Exercisable				Exercisable				12/31/2008				9/30/2009
1999			6,000			$	0.53			$	0.53				1.00				0.25				6,000			$	0.53				—				—
2000			140,000			$	0.20 to $0.30			$	0.26				1.61				0.87				140,000			$	0.26				—				1,600
2001			15,000			$	0.75			$	0.75				3.00				2.25				15,000			$	0.75				—				—
2002			15,000			$	0.15			$	0.15				4.00				3.25				15,000			$	0.15				—				1,800
2003			80,000			$	1.29			$	1.29				5.00				4.25				80,000			$	1.29				—				—
2004			100,000			$	1.18 to $3.46			$	2.32				5.71				4.96				100,000			$	2.32				—				—
2005			50,000			$	3.27			$	3.27				7.00				6.25				50,000			$	3.27				—				—
2006			50,000			$	1.40			$	1.40				8.00				7.26				50,000			$	1.40				—				—
2007			40,000			$	1.12			$	1.12				9.00				8.26				40,000			$	1.12				—				—
2008			40,000			$	0.12			$	0.12				10.00				9.26				40,000			$	0.12				800				6,000
			536,000																				536,000							$	800			$	9,400

The Directors’ options are fully vested upon issuance and expire ten years from date of issuance.

5. NET (LOSS) INCOME PER COMMON SHARE

Net (loss) income per share is measured at two levels: basic net (loss) income per share and diluted net (loss) income per share. Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the year. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding, excluding stock options as they would be antidilutive. Diluted net income per share is computed by dividing net income by the weighted average number of common shares after considering the additional dilution related to stock options. In computing diluted net income per share, the stock options are considered dilutive using the treasury stock method.

The following information is necessary to calculate net (loss) income per share for the periods presented:

		Three Months Ended September 30,								Six Months Ended June 30,
		2009				2008				2009				2008
Net (loss) income attributable to American HomePatient, Inc.		$	(2,720,000	)		$	584,000			$	(11,877,000	)		$	(994,000	)
Weighted average common shares outstanding			17,573,000				17,573,000				17,573,000				17,573,000
Effect of dilutive options			—				141,000				—				—
Adjusted diluted common shares outstanding			17,573,000				17,714,000				17,573,000				17,573,000
Net (loss) income per common share attributable to American HomePatient, Inc. common shareholders
- Basic		$	(0.15	)		$	0.03			$	(0.68	)		$	(0.06	)
- Diluted		$	(0.15	)		$	0.03			$	(0.68	)		$	(0.06	)

6. INCOME TAXES

On April 10, 2007, the acquisition of 5,368,982 shares of the Company’s common stock by Highland Capital Management, L.P. resulted in an “ownership change” for purposes of Section 382 of the Internal Revenue Code. As a result, the future utilization of certain net operating loss carryforwards which existed at the time of the “ownership change” will be limited on an annual basis. The Company’s annual Section 382 federal limitation will be approximately $2.0 million, without consideration of the impact of the future potential recognition of built-in gains or losses as provided by Section 382. For state tax purposes, 28 of the Company’s 35 filing states apply rules similar to IRC Section 382, resulting in an NOL carryforward limitation in these jurisdictions.

Amortization of the Company’s indefinite-life intangible assets, consisting of goodwill, ceased for financial statement purposes for the year ended December 31, 2002. The Company had a deferred tax liability of $7.8 million as of December 31, 2008 and $11.0 million at September 30, 2009 relating to indefinite-life intangibles. The Company cannot determine when the reversal of this deferred tax liability will occur, or whether such reversal would occur within the Company’s net operating loss carry-forward period. For the nine months ended September 30, 2009 and

2008, the Company recognized a non-cash charge totaling $3.2 million and $3.3 million, respectively, to income tax expense to increase the valuation allowance against the Company’s deferred tax assets, primarily consisting of net operating loss carry-forwards.

7. CHANGE OF CONTROL

On April 13, 2007, Highland Capital Management, L.P. filed a Schedule 13D/A with the Securities and Exchange Commission reporting beneficial ownership of 8,437,164 shares of Company common stock, which represented approximately 48% of the outstanding shares of the Company as of that date. Under the terms of the employment agreement between the Company and Joseph F. Furlong, III, the Company’s chief executive officer, the acquisition by any person of more than 35% of the Company’s shares constitutes a change of control. Under Mr. Furlong’s employment agreement, this event gave Mr. Furlong the right to receive a lump sum payment in the event he or the Company terminated his employment within one year after the change of control. The Company accrued a liability for this potential payment in the second quarter of 2007 since the ultimate requirement to make this payment was outside of the Company’s control. As such, the Company recorded an expense of $6.6 million in the second quarter of 2007, which was shown as “change of control expense” in the consolidated statements of operations, and a liability in the amount of $6.9 million, which was reflected in other accrued expenses on the consolidated balance sheets. These items were comprised of 300% of Mr. Furlong’s current year salary and maximum bonus, immediate vesting of all unvested options, the buyout of outstanding options, reimbursement of certain personal tax obligations associated with the lump sum payment, as well as payment of certain insurance for up to 3 years after termination and office administrative expenses for up to one year after termination.

The Company also established an irrevocable trust in the second quarter of 2007 to pay the various components of the change of control obligation. During the remainder of 2007, the Company reduced the change of control expense and related liability by $1.0 million due to revaluation of the fair value of Mr. Furlong’s outstanding stock options as of December 31, 2007. This decrease in expense is the result of a decline in the market value of the Company’s common stock at December 31, 2007.

On December 21, 2007, Mr. Furlong’s employment agreement was amended. Per the terms of the amendment, Mr. Furlong received a $3.3 million lump sum payment on January 4, 2008 to induce him to continue his employment with the Company. This payment was made from the irrevocable trust and reduced the Company’s change of control liability. The payment was in lieu of certain amounts Mr. Furlong would otherwise be entitled to under the amended employment agreement if his employment with the Company had terminated. On May 1, 2008, as required for federal and state payroll tax purposes, the Company withheld for remittance to tax authorities approximately $1.5 million. This was the amount due to be reimbursed by the Company to Mr. Furlong for the tax liabilities he incurred in connection with the compensation he received following the change of control as stipulated in his amended employment agreement. The tax liabilities were related to federal excise taxes due on the lump sum payment pursuant to IRS Section 280G. This payment was primarily made from the irrevocable trust. The amended employment agreement also stipulated that all of Mr. Furlong’s stock options were deemed vested and exercisable as of January 2, 2008, and capped the potential buyout of outstanding options at $1.4 million. The $1.4 million is maintained in the irrevocable trust until these options expire or until 90 days after Mr. Furlong’s termination, whichever occurs first. In addition, the amendment stipulated the Company will pay for office administrative expenses for up to 6

months after termination instead of up to one year as originally agreed. The amendment also stipulated that certain insurance will be continued after termination only until January 1, 2011.

On November 26, 2008, the Company executed a new employment agreement with Mr. Furlong (the “New Employment Agreement”), which replaced the prior employment agreement between Mr. Furlong and the Company. The provisions of the New Employment Agreement are retroactive to November 1, 2008. The New Employment Agreement memorializes the terms of the prior employment agreement (as amended) without change with the addition of the termination provision described below and certain clarifying changes to the related definitions.

Under the New Employment Agreement, if Mr. Furlong’s employment terminates due to a “without cause” termination or constructive discharge (as defined in the New Employment Agreement), then Mr. Furlong will receive: (i) an amount equal to the sum of 100% of his base salary plus 100% of his target annual incentive award for the year of termination; and (ii) his pro rata target annual incentive award for the year of termination.

During the nine months ended September 30, 2008 the Company reduced its change of control expense by $74,000, primarily due to revaluation of the fair value of Mr. Furlong’s outstanding stock options as of September 30, 2008. This decrease in expense is the result of a decline in market value of the Company’s common stock from December 31, 2007 to September 30, 2008. During the nine months ended September 30, 2009, the Company reduced its change of control expense by $9,000 as a result of the reduction of the liability associated with the Company’s obligation to pay certain insurance for Mr. Furlong until January 1, 2011. At September 30, 2009 and December 31, 2008 the irrevocable trust had a balance of $1.4 million and was reflected in prepaid expenses and other current assets on the consolidated balance sheets.

8. FAIR VALUE MEASUREMENTS

The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

•		Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
•		Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
•		Level 3 inputs are unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The following is a description of the valuation methodology used for financial assets measured at fair value, including the general classification of such assets pursuant to the valuation hierarchy.

Money Market Accounts — The Company currently has overnight purchase agreements and an irrevocable trust that are primarily invested in money market funds. These items are classified as Level 1 because fair value is determined by quoted market prices in an active market.

At September 30, 2009 and December 31, 2008, it was not practicable to estimate the fair value of the Company’s Secured Debt because of the August 1, 2009 maturity date and no market exists for comparable debt instruments and because of the Company’s inability to estimate the fair value without incurring excessive costs.

9. SECURED DEBT

The Company has Secured Debt of $226.4 million, as evidenced by a promissory note to the agent for the Company’s lenders (“Lenders”). This indebtedness is secured by substantially all of the assets of the Company and matured on August 1, 2009. As described more fully in Note 2, “Going Concern and Liquidity,” the Company was not able to repay this debt at or prior to maturity from cash flow from operations and existing cash, or refinance this debt prior to the maturity date. As described more fully in Note 3, “Subsequent Events,” the Company has entered into a series of monthly forbearance agreements as the Company and the Lenders continue to work toward a resolution of the debt maturity issue.

Under the terms of the Secured Debt, interest was payable monthly on the Secured Debt at a rate of 6.785% per annum. Payments of principal were paid annually on March 31 of each year in the amount of the Company’s Excess Cash Flow (defined as cash in excess of $7.0 million at the end of the Company’s fiscal year) for the previous fiscal year end. An estimated prepayment of the Excess Cash Flow was due on each September 30 in an amount equal to one-half of the anticipated Excess Cash Flow. The Company made a principal payment of $6.5 million on March 31, 2009 which represented the remaining Excess Cash Flow payment due on that date based on actual Excess Cash Flow as of December 31, 2008. Since the maturity date, the Company continues to pay interest on a monthly basis consistent with the original terms of the Secured Debt.

10. RECENTLY ADOPTED ACCOUNTING STANDARDS

The Company adopted FASB Statement No. 141(R), “Business Combinations,” as codified in FASB Accounting Standards Codification (“ASC”) topic 805 (“ASC 805”) and FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment to ARB No. 51,” as codified in FASB ASC topic 810 (“ASC 810”) on January 1, 2009. ASC 805 and ASC 810 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders.

In April 2009, the FASB issued FSP FAS No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” as codified in FASB ASC Section 825-10-65 (“ASC 825-10-65”). ASC 825-10-65 require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. The adoption of ASC 825-10-65 as of the quarter ending June 30, 2009 did not have a material impact on the Company’s consolidated financial position and results of operations.

In June 2009, the FASB issued SFAS No. 165, “Subsequent Events,” as codified in FASB ASC Section 855-10-05 (“ASC 855-10-05”). ASC 855-10-05 establishes general standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are available to be issued (“subsequent events”). More specifically, ASC 855-10-05

sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition in the financial statements, identifies the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that should be made about events or transactions that occur after the balance sheet date. See Footnote No. 1, “Basis of Presentation” for the related disclosures. The adoption of ASC 855-10-05 in the second quarter of 2009 did not have a material impact on our financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162,” and establishes only two levels of U.S. GAAP, authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) became the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. The Company began to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the quarter ended September 30, 2009. As the Codification was not intended to change or alter existing GAAP, it did not have an impact on the Company’s financial statements.

11. GOODWILL IMPAIRMENT ANALYSIS

Goodwill represents the excess of costs over fair value of assets of businesses acquired. Intangible assets with finite useful lives are amortized and goodwill and intangible assets with indefinite lives are not amortized.

Goodwill is tested annually for impairment and more frequently if events and circumstances indicate that the asset might be impaired. The Company has selected September 30 as its annual testing date. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of the reporting unit and compares it to its carrying amount. Second, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

Consistent with prior periods, the Company has determined that its business operates as one reporting unit. As of September 30, 2009, the liabilities of the Company exceeded its assets, resulting in a negative carrying value. Since the Company’s fair value exceeds its carrying value as of September 30, 2009, by definition, no goodwill impairment is indicated.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” “estimates,” “projects,” “may,” “plan,” “will,” “likely,” “could” and words of similar import. Such statements include statements concerning the Company’s business strategy, the ability to satisfy interest expense and principal repayment obligations or to otherwise address those obligations, operations, cost savings initiatives, industry, economic performance, financial condition, liquidity and capital resources, adoption of, or changes in, accounting policies and practices, existing government regulations and changes in, or the failure to comply with, governmental regulations, legislative proposals for healthcare reform, the ability to enter into strategic alliances and arrangements with managed care providers on an acceptable basis, and current and future reimbursement rates, as well as reimbursement reductions and the Company’s ability to mitigate the impact of the reductions. Such statements are not guarantees of future performance and are subject to various risks and uncertainties. The Company’s actual results may differ materially from the results discussed in such forward-looking statements because of a number of factors, including those identified in the “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q. The forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and the Company does not undertake to update the forward-looking statements or to update the reasons that actual results could differ from those projected in the forward-looking statements.

Overview

     American HomePatient, with operations in 33 states, provides home health care services and products consisting primarily of respiratory and infusion therapies, the rental and sale of home medical equipment, and the sale of home health care supplies.

     The following table sets forth the percentage of revenues represented by each line of business for the periods presented:

		Nine months Ended Sept. 30,
		2009				2008
Oxygen systems			38	%			41	%
Sleep therapy			36				29
Inhalation drugs			6				6
Nebulizers			2				2
Other respiratory			2				2
Total home respiratory therapy services			84	%			80	%
Enteral nutrition services			5				5
Other infusion services			4				5
Total home infusion therapy services			9	%			10	%
Total home medical equipment and supplies			7	%			10	%
			100	%			100	%

     The Company’s products and services are primarily paid for by Medicare, Medicaid, and other third-party payors. Since amounts paid under these programs are generally based upon fixed rates, the Company generally is not able to set the prices that it receives for products and services provided to patients. Thus, the Company improves operating results primarily by increasing revenues through increased volume of sales and rentals, shifting product mix toward higher margin product lines, and controlling expenses. The Company can also improve cash flow by limiting the amount of time that it takes to collect payment after providing products and services. Key indicators of performance are:

     Revenue Growth. The Company operates in an industry with pre-set prices subject to reimbursement reductions. Therefore, in order to increase revenue, the Company must increase the volume of sales and rentals. Reductions in reimbursement levels can more than offset an increase in volume. Management closely tracks overall increases and decreases in sales and rentals as well as increases and decreases by product-line and by branch location and geographic area in order to identify product line or geographic weaknesses and take corrective actions. The Company’s sales and marketing focus for 2009 and beyond includes: (i) emphasizing profitable revenue growth by focusing on oxygen and sleep-related products and services and by increasing the Company’s mix of Medicare and profitable managed care business; (ii) strengthening its sales and marketing efforts through a variety of programs and initiatives; (iii) heightened emphasis on sleep therapy and implementation of initiatives to expand sales of CPAP supplies; and (iv) expanding managed care revenue through greater management attention and prioritization of payors to secure managed care contracts at acceptable levels of profitability. Improvement in the Company’s ability to grow higher margin revenues will be critical to the Company’s success. Management will continue to review and monitor progress with its sales and marketing efforts. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Trends, Events, and Uncertainties — Reimbursement Changes and the Company’s Response.”

     Bad Debt Expense. Billing and collecting in the healthcare industry is extremely complex. Rigorous substantive and procedural standards are set by each third party payor, and failure to adhere to these standards can lead to non-payment, which can have a significant impact on the Company’s net income and cash flow. The Company measures bad debt as a percent of net sales and rentals, and management considers this percentage a key indicator in monitoring its billing and collection function. Bad debt expense decreased from $4.0 million for the nine months ended September 30, 2008 to $2.6 million for the nine months ended September 30, 2009. As a percentage of net revenue, bad debt expense decreased from 2.0% for the nine months ended September 30, 2008 to 1.5% for the nine months ended September 30, 2009. This decrease is primarily the result of improved revenue qualification and collection processes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Trends, Events, and Uncertainties — Reimbursement Changes and the Company’s Response.”

     Cash Flow. The Company’s funding of day-to-day operations and all payments required to the Company’s secured creditors comes from cash flow and cash on hand. The Company currently does not have access to a revolving line of credit. The Company’s Secured Debt matured on August 1, 2009. The Company has entered into a series of forbearance agreements with the Agent and certain Forbearance Holders in which the Agent and Forbearance Holders agreed to forbear from exercising rights and remedies prior to December 1, 2009, the expiration date of the current forbearance agreement. The nature of the Company’s business requires substantial capital expenditures in order to buy the equipment used to generate revenues. As a result, management views cash flow as particularly critical to the Company’s operations. The Company’s future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash, accounts receivable, and inventories) and current liabilities (principally accounts payable, accrued expenses and the Secured Debt). Management attempts to monitor and improve cash flow in a number of ways, including inventory utilization analysis, cash flow forecasting, and accounts receivable collection. In that regard, the length of time that it takes to collect receivables can have a significant impact on the Company’s liquidity as described below in “Days Sales Outstanding.” See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

     Days Sales Outstanding. Days sales outstanding (“DSO”) is a tool used by management to assess collections and the consequential impact on cash flow. The Company calculates DSO by dividing net patient accounts receivable by the average daily revenue for the previous 90 days (excluding dispositions and acquisitions), net of bad debt expense. The Company attempts to minimize DSO by screening new patient cases for adequate sources of reimbursement and by providing complete and accurate claims data to relevant payor sources. The Company also monitors DSO trends for each of its branches and billing centers and for the Company in total as part of the management of the billing and collections process. An increase in DSO usually results from certain revenue management processes at the billing centers and/or branches not functioning at optimal levels or a slow-down in the timeliness of payment processing by payors. A decline in DSO usually results from process improvements or more timely payment processing by payors. Management uses DSO trends to monitor, evaluate and improve the performance of the billing centers. DSO was 41 and 51 days at September 30, 2009 and December 31, 2008, respectively. This decrease is primarily the result of improved revenue qualification and collection processes.

     Unbilled Revenues. Another key indicator of the Company’s receivable collection efforts is the amount of unbilled revenue, which is the amount of sales and rental revenues not yet billed to payors due to incomplete documentation or the receipt of the Certificate of Medical Necessity

(“CMN”). The amount of unbilled revenue was $4.0 million and $5.2 million for September 30, 2009 and December 31, 2008, respectively, net of valuation allowances. This decrease primarily is the result of improvements made in the timing of collecting documents necessary for billing.

     Productivity and Profitability. In light of the reimbursement reductions affecting the Company over the past several years and the possibility of continued reimbursement reductions in the future, management has placed significant emphasis on improving productivity and reducing costs over the past several years and will continue to do so. Management considers many of the Company’s expenses to be either fixed costs or cost of goods sold, which are difficult to reduce or eliminate. As a result, management’s primary areas of focus for expense reduction and containment are through productivity improvements related to the Company’s branches and billing centers. These improvements have focused on centralization of certain activities previously performed at branches, consolidation of certain billing center functions, and reduction in costs associated with delivery of products and services to patients. Examples of recent centralization initiatives include the centralization of revenue qualification processes through the Company’s regional billing centers, the centralization of order intake and order processing through the Company’s patient service centers, the centralization of CPAP supply order processing and fulfillment through the Company’s centralized CPAP support center, and the centralization of inhalation drug order processing and fulfillment through the Company’s centralized pharmacy. The Company has also established a centralized oxygen support center to coordinate scheduling and routing of portable oxygen deliveries for the Company’s branches. Initiatives are also in place to improve asset utilization through a newly implemented asset management system, reduce capital expenditures through improved purchasing processes, reduce bad debt expense and revenue deductions through improved revenue qualification and collection processes, reduce costs of delivery of products to patients through improved routing, and reduce facility costs through more effective utilization of leased space. Management utilizes a variety of monitoring tools and analyses to help identify and standardize best practices and to identify and correct deficiencies. Similarly, the Company monitors its business on a branch and product basis to identify opportunities to target growth or contraction. These analyses have historically led to the closure or consolidation of branches and to the emphasis on certain products and new sales initiatives. See “Trends, Events, and Uncertainties — Reimbursement Changes and the Company’s Response” for additional discussion.

Trends, Events, and Uncertainties

     From time to time changes occur in the Company’s industry or its business that make it reasonably likely that aspects of its future operating results will be materially different than its historical operating results. Sometimes these changes have not occurred, but their possibility is sufficient to raise doubt regarding the likelihood that historical operating results are an accurate gauge of future performance. The Company attempts to identify and describe these trends, events, and uncertainties to assist investors in assessing the likely future performance of the Company. Investors should understand that these matters typically are new, sometimes unforeseen, and often are fluid in nature. Moreover, the matters described below are not the only issues that can result in variances between past and future performance nor are they necessarily the only material trends, events, and uncertainties that will affect the Company. As a result, investors are encouraged to use this and other information to ascertain for themselves the likelihood that past performance is indicative of future performance.

     The trends, events, and uncertainties set out in the remainder of this section have been identified by the Company as reasonably likely to materially affect the comparison of historical operating results reported herein to either other past period results or to future operating results.

     The Company’s Secured Debt Matured on August 1, 2009. For a discussion of the Company’s secured debt maturity, see “Risk Factors” and “Management’s Discussion and Analyses of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

     Reimbursement Changes and the Company’s Response. The Company regularly is faced with reimbursement reductions and the prospect of additional reimbursement cuts. The following reimbursement changes already enacted will further impact the Company in 2009 and beyond:

     DRA Reimbursement Impact: The Deficit Reduction Act of 2005 (the “DRA”), which was signed into law on February 8, 2006, affects the Company’s reimbursement in a number of ways including:

	•		The DRA contains a provision that eliminated the Medicare capped rental methodology for certain items of durable medical equipment, including wheelchairs, beds, and respiratory assist devices. The DRA changes the rental period to thirteen months, at which time the rental payments stop and title to the equipment is transferred to the beneficiary. The effective date of the provision to eliminate the capped rental methodology applies to items for which the first rental month occurs on or after January 1, 2006. As a result, the impact of this change will be realized over a period of several years which began in 2007.
	•		The DRA also contains a provision that limits the duration of monthly Medicare rental payments on oxygen equipment to 36 months. Prior to the DRA, Medicare provided indefinite monthly reimbursement for the rental of oxygen equipment as long as the patient needed the equipment and met medical qualifications. The effective date for the implementation of the 36 month rental cap for oxygen equipment was January 1, 2006. In the case of individuals who received oxygen equipment on or prior to December 31, 2005, the 36 month period began on January 1, 2006. Therefore, the financial impact of the reduction in revenue associated with the 36 month cap began in 2009. The DRA provided for the transfer of title of the oxygen equipment from the supplier to the patient at the end of the 36 month period. With the enactment of the Medicare Improvement for Patients and Providers Act of 2008 (“MIPPA”) in July of 2008, the provision related to the transfer of title of oxygen equipment was repealed effective January 1, 2009; however MIPPA did not repeal the cap on rental payments subsequent to the 36th month. MIPPA also established new payment rules and supplier responsibilities following the 36 month rental period, the most significant of which are described below.

•

A supplier’s responsibility to service an oxygen patient ends at the time the oxygen equipment has been in continuous use by the patient for the equipment’s reasonable useful lifetime (currently defined by the Centers for Medicare and Medicaid Services (“CMS”) as five years for oxygen equipment). However, the supplier may replace this equipment and a new 36 month rental period and new reasonable useful lifetime period is started on the date the replacement item is delivered. Oxygen equipment that is lost, stolen, or irreparably damaged may also be replaced and a new 36 month rental period and new reasonable useful lifetime period is started

			(with CMS approval). A new certificate of medical necessity is required when oxygen equipment is replaced in each of the situations described above.
	•		A change in oxygen equipment modalities (e.g. from a concentrator to a stationary liquid system) prior to the end of the reasonable useful lifetime does not result in the start of a new 36 month rental period or new reasonable useful lifetime period, unless the change is medically justified and supported by written documentation from the patient’s physician. In addition, replacing oxygen equipment that is not functioning properly prior to the end of the reasonable useful lifetime period does not result in the start of a new 36 month rental period or new reasonable useful lifetime period. Finally, the transfer by a beneficiary to a new supplier prior to the end of the reasonable useful lifetime period does not result in the start of a new 36 month rental period or new reasonable useful lifetime period.
	•		Suppliers furnishing liquid or gaseous oxygen equipment during the initial 36 month rental period will be required to continue furnishing oxygen contents for any period of medical need following the 36 month rental cap for the remainder of the reasonable useful lifetime of the equipment. The reimbursement rate for portable oxygen contents will increase from approximately $29 per month during the 36 month rental period to approximately $77 per month after the 36 month rental period. At the start of a new 36 month rental period, the reimbursement rate for portable oxygen contents will revert back to approximately $29 per month.
	•		Suppliers are responsible for performing any repairs or maintenance and servicing of the oxygen equipment that is necessary to ensure that the equipment is in good working order for the reasonable useful lifetime of the oxygen equipment. No payment will be made for supplies, repairs, or maintenance and servicing either before or after the initial 36 month rental period, with the exception of one in-home visit by a supplier to inspect oxygen concentrators and transfilling equipment and provide general maintenance nine months after the initial 36 month cap. Suppliers may not be reimbursed for more than 30 minutes of labor for this one in-home visit. Currently, reimbursement for the one in-home visit has only been approved by CMS for 2009.
	•		The Company’s financial results were materially and adversely impacted beginning in 2009 as a result of changes in oxygen reimbursement as described above. Net revenue and net income will be reduced in the twelve months of 2009 by approximately $17.0 million as a result of the reimbursement changes related to the 36 month oxygen cap. (See “Recap of 2009 Impact of Medicare Reimbursement Changes” below for additional discussion.)

•

On August 3, 2006, CMS published a Proposed Rule to implement the changes required by the DRA relating to the payment for oxygen, oxygen equipment, and capped rental DME items. The rule, which became final November 9, 2006 (“DRA Implementation Rule”), establishes revised payment classes and reimbursement rates for oxygen and oxygen equipment effective January 1, 2007, including revised rates for concentrators, liquid and gas stationary systems, and portable liquid and gas equipment. The DRA Implementation Rule also establishes a reimbursement rate for portable oxygen

generating equipment and changes regulations related to maintenance reimbursement and equipment replacement reimbursement. Under the DRA Implementation Rule, during the initial 36 months of rental, the reimbursement rate for concentrators and stationary liquid and gas systems was approximately $199 per month for calendar years 2007 and 2008, approximately $193 per month for 2009, and approximately $189 per month for 2010. Under the DRA Implementation Rule, the reimbursement rate for liquid or gas portable equipment during the initial 36 months of rental is approximately $32 per month from 2007 through 2010. As a result of the enactment of MIPPA in July of 2008, the above reimbursement rates were decreased by 9.5% beginning on January 1, 2009. The reduced oxygen rates as specified in the DRA Implementation Rule that went into effect January 1, 2009 will reduce the Company’s net revenue and net income in the twelve months of 2009 by approximately $1.5 million.

     Competitive Bidding: The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”) froze reimbursement rates for certain durable medical equipment (“DME”) at those rates in effect on October 1, 2003. These reimbursement rates will remain in effect until the competitive bidding process establishes a single payment amount for those items, which amount must be less than the current fee schedule. According to the MMA, competitive bidding will be implemented in phases with ten of the largest metropolitan statistical areas (“MSAs”) included in the program in the first round of bidding and seventy additional MSAs to be added in the second round of bidding, with additional areas to be subsequently added. The MMA specified that the first round of competitive bidding would be implemented in 2008 and the second round in 2009.

     The bidding process for the first round of competitive bidding occurred in the latter half of 2007. The products included in the first round of bidding were: oxygen supplies and equipment; standard power wheelchairs, scooters, and related accessories; complex rehabilitative power wheelchairs and related accessories; mail-order diabetic supplies; enteral nutrients, equipment, and supplies; CPAP devices, Respiratory Assist Devices (“RADs”), and related supplies and accessories; hospital beds and related accessories; Negative Pressure Wound Therapy (“NPWT”) pumps and related supplies and accessories; walkers and related accessories; and support surfaces. The Company participated in the bidding process in eight of the ten markets included in the first round of bidding (Charlotte, Cincinnati, Cleveland, Dallas, Kansas City, Miami, Orlando, and Pittsburgh). In early 2008, the Company was notified that it was a winning supplier in each of the eight markets and the Company chose to accept all contracts awarded. The contract period for the first round of bidding was scheduled to begin July 1, 2008 for a three year period. The Company’s average reduction in reimbursement associated with the first round of competitive bidding was approximately 29%.

     On July 15, 2008, the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”) was enacted. Among other things, this legislation delayed the competitive bidding program to allow time for CMS to make changes to the bidding process. As a result of this legislation, contracts awarded in the first round were terminated and the bidding process for the first round is currently scheduled to be restarted in 2009 and, except for a few exceptions, will include the same products and geographic locations included in the original first round of bidding. On January 16, 2009, CMS published an Interim Final Rule implementing provisions of MIPPA related to the first round re-bidding process and subsequent rounds of bidding. The effective date of the Interim Final Rule was originally to be February 17, 2009, but was subsequently extended to April 18, 2009. The delay was used by CMS to further review the issues of law and policy raised by the Interim Final Rule. On August 3, 2009, CMS published a tentative timeline and bidding

requirements for the first round re-bidding process which was subsequently finalized. Bidder registration began August 17, 2009 and bidding began October 21, 2009 and closes December 21, 2009. Reimbursement rates from the bidding process will be announced in June 2010 and contract suppliers will be announced in September 2010. The reimbursement rates resulting from the bidding process will go into effect January 1, 2011. The second round bidding process is currently scheduled to begin in 2011.

     To offset the savings not realized as a result of the competitive bidding delay, MIPPA calls for a nationwide 9.5% reduction in Medicare rates beginning on January 1, 2009 for products included in the first round of competitive bidding. This 9.5% reduction will reduce the Company’s net revenue and net income by approximately $8.5 million in the twelve months of 2009. MIPPA also requires CMS to make certain changes to the bidding process and repeals the transfer of title of oxygen equipment to Medicare beneficiaries at the end of 36 months of continuous rental, as specified in the Deficit Reduction Act of 2005. See “DRA Reimbursement Impact” below for additional discussion. At this time, the exact timing and financial impact of competitive bidding is not known, but management believes the impact could be material.

     Recap of 2009 Impact of Medicare Reimbursement Changes: As a result of the various Medicare reimbursement changes that became effective January 1, 2009, the Company’s net revenue and net income will be reduced by approximately $27.0 million in the twelve months of 2009. This includes approximately $17.0 million associated with the 36 month rental cap for oxygen equipment, approximately $1.5 million associated with reductions in oxygen fee schedule payment amounts, and approximately $8.5 million related to the 9.5% reduction associated with the delay of competitive bidding, all of which are described above.

     For the nine months ended September 30, 2009, the Medicare reimbursement reductions described above decreased the Company’s revenue and net income by approximately $20.8 million. Additionally, a change in inhalation drug product mix resulting from Medicare reimbursement reductions which began April 1, 2008, decreased the Company’s revenue and net income by an additional $3.0 million for the current nine month period compared to the same nine month period last year.

     Over the past several years in anticipation of continued reductions in reimbursement, the Company has implemented various initiatives to improve productivity and reduce costs. These initiatives have focused on the centralization of certain activities previously performed at branches and billing centers, consolidation of certain billing center functions, and reductions of costs associated with delivery of products and services to patients. The Company has also implemented strategies designed to improve revenue growth, especially in the areas of oxygen and sleep therapy. Management believes that a portion of the reimbursement reduction impact described above will be offset by the full year impact of productivity improvements and cost reductions implemented in 2008, additional productivity improvements and cost reductions being implemented in 2009, and growth in revenue in 2009, especially in the areas of oxygen and sleep therapy. Additionally, management’s cash flow projections and related operating plans indicate that the Company can adequately fund its operating activities and interest payments throughout 2009 through cash flow and existing cash on hand. However, future cash flows from operations will not be sufficient to repay the Secured Debt, which matured on August 1, 2009, as more fully discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” Management cannot provide any assurance that future initiatives

to improve productivity and/or increase revenues will be successful and there can be no guarantee that actual cash flow in 2009 will be consistent with management’s projections.

     Accreditation: The Secretary of the Department of Health and Human Services is required to establish and implement quality standards for suppliers of durable medical equipment, prosthetics, orthotics, and supplies (“DMEPOS”). CMS published the standards on its website on August 14, 2006. In order to continue to bill under Medicare Part B, DMEPOS suppliers will be required to meet these standards through an accreditation process outlined in the CMS final rule on accreditation issued August 18, 2006. In order to participate in the original first round of competitive bidding, all suppliers were required to obtain accreditation by October 31, 2007. All of the Company’s branch locations were accredited by the Joint Commission prior to this date. As of January 1, 2008, all of the Company’s branch locations transitioned from accreditation with the Joint Commission to accreditation with Accreditation Commission for Health Care (“ACHC”).

     In December of 2007, CMS announced that all existing suppliers must be accredited no later than September 30, 2009. New suppliers who submit applications to the National Supplier Clearinghouse (NSC) for a National Provider Identifier (NPI) prior to March 1, 2008 must be accredited before January 1, 2009. Suppliers who submit applications to the NSC for an NPI on or after March 1, 2008, must submit evidence of accreditation prior to the submission of the application. Failure to meet these deadlines could result in the revocation of the supplier’s Medicare billing privileges. As all of the Company’s operations are accredited through ACHC, these deadlines did not impact the Company’s operations.

     Inhalation Drug Changes: A revision of the Nebulizers Local Coverage Determination (“LCD”) was released by the Durable Medical Equipment Medicare Administrative Contractors on April 10, 2008. According to the LCD, effective July 1, 2008, claims for the drug Xopenex were to be paid based on the reimbursement rate for albuterol, which is the least costly medically appropriate alternative to Xopenex. Also according to the LCD, effective July 1, 2008, claims for the drug DuoNeb were to be paid based on the reimbursement rate for the unit dose vials of albuterol and Ipratropium each, which is the least costly medically appropriate alternative to DuoNeb. In June of 2008, prior to implementation of the LCD, CMS provided guidance that the LCDs with effective dates of service on or after July 1, 2008 were being revised to withdraw, pending further review, the provision applying albuterol reimbursement rates to Xopenex. In addition, the effective date for applying the least costly alternative provision to the unit dose combination solution of albuterol and ipratropium (DuoNeb) was being revised and the effective date for this implementation was to be on or after November 1, 2008. However, on October 16, 2008, the United States District Court for the District of Columbia issued an order that permanently enjoined the implementing or enforcing of the April 2008 LCD for DuoNeb or any local coverage determination for DuoNeb that bases reimbursement on a least costly alternative standard. The Company cannot predict the impact this ruling will have on the pending least costly alternative provision for Xopenex. Since the Company does not currently provide significant amounts of Xopenex or DuoNeb, reimbursement changes related to these drugs would not be expected to materially impact the Company’s current revenue or profitability.

     Positive Airway Pressure (PAP) Devices: CMS released a revised National Coverage Determination (“NCD”) on March 13, 2008 for PAP equipment. The major change resulting from the revised NCD was that specified home sleep tests could now be used in qualifying individuals for CPAP devices. In July 2008, the four Medicare Jurisdictions released Local Coverage Determinations (“LCDs”) which provided further coverage guidelines for PAP devices. The

coverage provisions contained in these LCDs, which went beyond the guidelines provided for in the NCD, were to become effective on September 1, 2008. However, on August 18, 2008, all four Jurisdictions rescinded the LCDs.

     The four Jurisdictions published new revised LCDs on September 19, 2008 in order to provide guidance for PAP equipment beyond the guidelines contained in the NCD. The LCDs require, effective November 1, 2008, a face-to-face physician visit prior to the physician ordering sleep testing which should generally contain a sleep history with symptoms associated with obstructive sleep apnea (OSA) and sleep inventory, as well as pertinent physical examination. The LCD also requires an initial three-month trial period during which (no sooner than the 31st day but no later than the 91st day after beginning treatment) there must be an additional face-to-face physician visit. The treating physician must conduct a clinical reevaluation and document that the beneficiary is benefiting from PAP therapy. This policy also requires compliance data be provided to show patient’s use of the CPAP machine for four hours per night 70% of nights within a 30 day timeframe during the initial 90 days of treatment in order to document medical necessity. The Company has adapted its operations as a result of the policy changes outlined in the LCDs. The Company’s revenue and profitability have been and will continue to be negatively impacted by these policy changes. However, the Company cannot accurately predict the ongoing magnitude of the impact at this time as the Company is still working through the newly-implemented processes.

     Surety Bond: In July 2007, CMS issued a proposed rule implementing section 4312 of the Balanced Budget Act of 1997 (the “BBA”), which would require all suppliers of DMEPOS, except those that are government operated, to obtain and retain a surety bond. On January 2, 2009 CMS published a final rule requiring DME suppliers to post a $50,000 bond for each National Provider Identification Number (“NPI number”). The effective date of the final rule is March 2, 2009, however existing suppliers are not required to furnish the bond until October 2, 2009. This rule requires the Company to obtain a surety bond for each of its 242 branch locations billing Medicare using a unique NPI number. The Company obtained the required surety bonds for each of its branch locations effective October 2, 2009 for a term of one year. The costs to obtain the surety bonds for the initial one-year period will not materially impact the Company’s financial results or financial position. However, there can be no assurance that the Company will be able to obtain renewals or that the costs of future renewals will remain at the current level.

     The following proposed changes, if enacted in their proposed or a modified form, could have a significant impact on the Company:

     Proposals to Further Reduce the Reimbursement for Oxygen Equipment: In September 2006, the Office of Inspector General of the Department of Health and Human Services issued a report entitled “Medicare Home Oxygen Equipment: Cost and Servicing.” This report recommended, among other things, that CMS work with Congress to reduce the current 36 month rental period for oxygen equipment and specifically noted the anticipated savings to the Medicare program if the rental period was capped at 13 months. Subsequently, CMS issued a response indicating agreement with this recommendation. Additionally, the proposed budget of the United States Government for fiscal year 2009 included a proposal to limit Medicare reimbursement of rental payments for most oxygen equipment to 13 months from the current 36 months as specified in the DRA. There was no formal action taken on this budget proposal. However, as described above, the recently enacted MIPPA legislation requires a nationwide 9.5% reduction in Medicare reimbursement rates beginning January 1, 2009 for products included in the first round of

competitive bidding (which includes oxygen equipment) and repeals the requirement to transfer title to the oxygen equipment to the beneficiary at the end of the initial 36 months of rental.

     The Company cannot predict future reimbursement for oxygen equipment, but it believes that any significant decrease in the current 36 month rental period or reimbursement rate will have a substantial and material negative financial impact to the Company. Such a decrease may require the Company to alter significantly its business model and cost structure as well as limit or eliminate certain products or services currently provided to patients in order to avoid substantial losses. There can be no assurance that the Company could successfully manage these changes. Additionally, management believes that any further reductions in reimbursement for oxygen equipment could limit access to oxygen therapy for numerous Medicare beneficiaries.

     Proposed Supplier and Quality Standards: In February of 2008, CMS published proposed supplier standards to address concerns about the easy entry into the Medicare program by unqualified and fraudulent providers. The proposed standards include, among other things, prohibition of contracting licensed services to other entities, requirements to maintain a minimum square footage for a business location, maintaining an operating business telephone number, a prohibition on the forwarding of telephone calls from the primary business location to another location, and a requirement for the business location to be open to the public a minimum of 30 hours per week. The proposed standards also include a requirement to maintain a minimum level of comprehensive liability insurance, a prohibition on directly soliciting patients, and a requirement to obtain oxygen only from state licensed oxygen suppliers. The comment period for the proposed supplier standards expired March 25, 2008. The Company provided comments by the stated deadline. Certain of the proposed supplier standards, if enacted in the current form, could significantly increase the Company’s costs of providing services to patients. CMS has not yet published a final rule regarding these proposed standards and the Company cannot predict the ultimate outcome.

     In February 2008, CMS also proposed revised quality standards that are designed to improve the quality of service provided to Medicare beneficiaries. Many of the proposed quality standards included procedures and processes already performed by the Company. Final quality standards were issued in October 2008 and are not expected to have a significant impact on the Company.

     Management is working to counter the adverse impact of the reimbursement reductions currently in effect as well as any future reimbursement reductions through a variety of initiatives designed to grow revenues. See “Overview — Revenue Growth” for a discussion of the Company’s initiatives to grow revenues. In addition, management will continue to be focused on evolving the Company’s business model to improve productivity and reduce costs. These efforts will particularly emphasize centralization and consolidation of functions and improving logistics. See “Overview — Productivity and Profitability” for a discussion of the Company’s initiatives to improve productivity and reduce costs. The magnitude of the adverse impact that reimbursement reductions will have on the Company’s future operating results and financial condition will depend upon the success of the Company’s revenue growth and cost reduction initiatives. Nevertheless, the adverse effect of reimbursement reductions will be material in 2009 and beyond. See “Risk Factors.”

     Product Mix. The Company’s strategy for 2008 was to maintain a diversified offering of home health care services reflective of its current business mix with a strong emphasis on

respiratory services, primarily oxygen and sleep-related products and services. For 2009, respiratory services will remain a primary focus. This emphasis could impact the overall product mix of the Company, which in turn could affect revenues and profitability.

Critical Accounting Policies and Estimates

     Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s consolidated financial statements. The Company’s management considers the following accounting policies to be the most critical in relation to the Company’s consolidated financial statements: revenue recognition and allowance for doubtful accounts, inventory valuation and cost of sales recognition, rental equipment valuation, valuation of long-lived assets, valuation of goodwill and other intangible assets, and self insurance accruals. These policies are presented in detail within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Results of Operations

     The Company reports its revenues as follows: (i) sales and related services revenues; and (ii) rentals and other revenues. Sales and related services revenues are derived from the sale of aerosol medications and respiratory therapy equipment, the provision of infusion therapies, the sale of home health care equipment and medical supplies, and the sale of supplies and services related to the delivery of these products. Rentals and other revenues are derived from the rental of equipment related to the provision of respiratory therapies, home health care equipment, and enteral pumps. Cost of sales and related services includes the cost of equipment and drugs and related supplies sold to patients. Cost of rentals and other revenues includes the costs of oxygen and rental supplies, demurrage for leased oxygen cylinders, rent expense for leased equipment, and rental equipment depreciation expense and excludes delivery expenses and salaries associated with the rental set-up. Operating expenses include operating center labor costs, delivery expenses, area management expenses, selling costs, occupancy costs, billing center costs and other operating costs. General and administrative expenses include corporate and senior management expenses. The majority of the Company’s joint ventures are not consolidated for financial statement reporting purposes. Earnings from unconsolidated joint ventures with hospitals represent the Company’s equity in earnings from unconsolidated joint ventures and management and administrative fees from unconsolidated joint ventures.

     The following table and discussion sets forth items from the Company’s interim condensed consolidated statements of income as a percentage of revenues for the periods indicated:

		Percentage of Revenues
		Three Months Ended								Nine months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Revenues			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales and related services			22.2				20.7				22.1				20.8
Cost of rentals, including rental equipment depreciation			12.9				12.8				12.9				13.3
Operating expenses			52.4				49.5				53.5				50.2
Bad debt expense			0.9				2.0				1.5				2.0
General and administrative			9.2				7.5				9.0				7.3
Depreciation, excluding rental equipment, and amortization			1.7				1.5				1.7				1.6
Interest expense, net			6.6				6.0				6.6				5.9
Other income, net			(0.7	)			—				(0.3	)			(0.3	)
Change of control income			—				—				—				—
Total expenses			105.2				100.0				107.0				100.8
Earnings from unconsolidated joint ventures			2.3				2.5				2.2				2.2
(Loss) income from operations before income taxes			(2.9	)			2.5				(4.8	)			1.4
Provision for income taxes			1.5				1.5				1.9				1.9
Net (loss) income			(4.4	)			1.0				(6.7	)			(0.5	)
Less: net income attributable to the noncontrolling interests			(0.2	)			(0.1	)			(0.1	)			(0.2	)
Net (loss) income attributable to American HomePatient, Inc.			(4.6	)%			0.9	%			(6.8	)%			(0.7	)%

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Revenues. Revenues decreased from $65.6 million for the quarter ended September 30, 2008 to $59.0 million for the same period in 2009, a decrease of $6.6 million, or 10.1%. Medicare reimbursement reductions effective January 1, 2009 reduced revenue by approximately $6.7 million in the third quarter of 2009. The Company’s reduced emphasis on less profitable product lines such as non-respiratory durable medical equipment and infusion therapy also reduced revenue in the current quarter. These decreases were partially offset by an increase in the number of oxygen patients and growth in sleep therapy revenue, the Company’s core product lines. The following is a discussion of the components of revenues:

Sales and Related Services Revenues. Sales and related services revenues increased from $25.2 million for the quarter ended September 30, 2008 to $25.7 million for the same period of 2009, an increase of $0.5 million, or 2.0%. This increase is primarily the result of increased sleep therapy revenue offset by a decrease in revenue associated with non-focus product lines and Medicare reimbursement reductions.

Rental Revenues. Rental revenues decreased from $40.5 million for the quarter ended September 30, 2008 to $33.3 million for the same period in 2009, a decrease of $7.2 million, or 17.8%. This decrease is primarily the result of Medicare reimbursement reductions and a decrease in revenue associated with non-focus product lines, partially offset by an increase in the number of oxygen patients.

Cost of Sales and Related Services. Cost of sales and related services decreased from $13.6 million for the quarter ended September 30, 2008 to $13.1 million for the same period in 2009, a decrease of $0.5 million, or 3.7%. As a percentage of sales and related services revenues, cost of sales and related services decreased from 53.9% for the quarter ended September 30, 2008 to 51.0% for the same period in 2009. This decrease is primarily attributable to improved vendor pricing for certain product lines and reductions in sales of less profitable product lines.

Cost of Rental Revenues. Cost of rental revenues decreased from $8.4 million for the quarter ended September 30, 2008 to $7.6 million for the same period in 2009, a decrease of $0.8 million, or 9.5%. As a percentage of rental revenues, cost of rental revenue increased from 20.7% for the quarter ended September 30, 2008 to 22.9% for the quarter ended September 30, 2009. This increase in percentage is primarily the result of the impact of Medicare reimbursement reductions effective January 1, 2009, partially offset by reductions in purchases of oxygen for portability and reduced rental equipment depreciation expense. The reduction in rental equipment depreciation expense is due primarily to reductions in purchases of rental equipment over the past several years as well as improvements made in the management of rental equipment assets associated with the recent implementation of an upgraded asset management system.

Operating Expenses. Operating expenses decreased from $32.5 million for the quarter ended September 30, 2008 to $30.9 million for the same period in 2009, a decrease of $1.6 million or 4.9%. The decrease is primarily the result of improved operating efficiencies and the resulting reduced operating costs. As a percentage of revenues, operating expenses increased from 49.5% for the quarter ended September 30, 2008 to 52.4% for the quarter ended September 30, 2009. This

increase in percentage is primarily attributable to a reduction in revenue associated with Medicare reimbursement cuts effective January 1, 2009.

Bad Debt Expense. Bad debt expense decreased from $1.3 million for the quarter ended September 30, 2008 to $0.5 million for the same period in 2009, a decrease of $0.8 million, or 61.5%. As a percentage of revenues, bad debt expense decreased from 2.0% for the quarter ended September 30, 2008 to 0.9% for the quarter ended September 30, 2009. This decrease in percentage is primarily due to improved revenue qualification and collection processes.

General and Administrative Expenses. General and administrative expenses increased from $4.9 million for the quarter ended September 30, 2008 to $5.5 million for the same period in 2009, an increase of $0.6 million or 12.2%. General and administrative expenses continue to be affected in the current year by increases in certain expenses associated with the implementation of enhancements to information systems and processes in support of centralization of field activities. The Company has also incurred additional professional fees in the current quarter related to the debt maturity issue. As a percentage of revenues, general and administrative expenses increased from 7.5% for the quarter ended September 30, 2008 to 9.2% for the quarter ended September 30, 2009. This increase in percentage is primarily due to a reduction in revenue associated with Medicare reimbursement cuts effective January 1, 2009.

Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization expenses were $1.0 million for each of the quarters ended September 30, 2008 and 2009.

Interest Expense, Net. Interest expense, net, was $3.9 million for each of the quarters ended September 30, 2008 and 2009.

Other Income, Net. Other income, net, was $0.4 million for the quarter ended September 30, 2009. The majority of other income, net, for the quarter ended September 30, 2009 is due to income related to various life insurance policies.

Earnings from Unconsolidated Joint Ventures. Earnings from unconsolidated joint ventures were $1.6 million for the quarter ended September 30, 2008 and $1.4 million for the quarter ended September 30, 2009. The decrease is primarily attributable to the impact of Medicare reimbursement reductions on the profitability of joint ventures effective January 1, 2009.

Provision for Income Taxes. The provision for income taxes was $1.0 million for the quarter ended September 30, 2008 and $0.9 million for the same period in 2009. This expense primarily relates to non-cash deferred state and federal income taxes associated with indefinite lived intangible assets and state income tax expense.