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EX-23 - EX-23 - AMERICAN HOMEPATIENT INCg22370exv23.htm
EX-21 - EX-21 - AMERICAN HOMEPATIENT INCg22370exv21.htm
EX-31.1 - EX-31.1 - AMERICAN HOMEPATIENT INCg22370exv31w1.htm
EX-32.2 - EX-32.2 - AMERICAN HOMEPATIENT INCg22370exv32w2.htm
EX-31.2 - EX-31.2 - AMERICAN HOMEPATIENT INCg22370exv31w2.htm
EX-32.1 - EX-32.1 - AMERICAN HOMEPATIENT INCg22370exv32w1.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     .
Commission file number 0-19532
AMERICAN HOMEPATIENT, INC.
(Exact name of registrant as specified in its charter)
     
Delaware   62-1474680
(State or other jurisdiction of   (I.R.S. Employer
Incorporation or organization)   Identification No.)
     
5200 Maryland Way, Suite 400   37027-5018
Brentwood TN   (Zip Code)
(Address of principal executive offices)    
Registrant’s telephone number, including area code: (615) 221-8884
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 the 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 the definitions of “large accelerated filer,” “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 Exchange Act Rule 12-b-2). Yes o No þ
The aggregate market value of registrant’s voting stock held by non-affiliates of the registrant, computed by reference to the price at which the stock was last sold as of June 30, 2009 was $1,800,077. Solely for the purposes of this calculation, all persons who are executive officers or directors of the registrant and all persons who have filed a Schedule 13D or 13G with respect to the registrant’s stock have been deemed to be affiliates.
On March 2, 2010, 17,573,389 shares of the registrant’s $0.01 par value Common Stock were outstanding.
Documents Incorporated by Reference
The following documents are incorporated by reference into Part II, Item 5 and Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K: portions of the Registrant’s definitive proxy statement for its 2010 Annual Meeting of Stockholders.
 
 

 


 

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 EX-21
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 EX-31.1
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     This Annual Report on Form 10-K 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 these 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 health care reform, the ability to enter into strategic alliances and arrangements with managed care providers on an acceptable basis, and current and future changes in 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 Annual Report on Form 10-K. The forward-looking statements are made as of the date of this Annual Report on Form 10-K 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.
Available Information
     The Company files reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Copies of the Company’s reports filed with the SEC may be obtained by the public at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. The Company files such reports with the SEC electronically, and the SEC maintains an Internet site at www.sec.gov that contains the Company’s periodic and current reports, proxy and information statements, and other information filed electronically. The Company’s website address is www.ahom.com. The Company also makes available, free of charge through the Company’s website, a direct link to its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other materials filed with the SEC electronically. The information provided on the Company’s website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.

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PART I
ITEM 1. BUSINESS
Introduction
     American HomePatient, Inc. and its subsidiaries (collectively, the “Company”) provide home health care services and products consisting primarily of respiratory and infusion therapies and the rental and sale of home medical equipment and home health care supplies. These services and products are paid for primarily by Medicare, Medicaid, and other third-party payors. As of December 31, 2009, the Company provided these services to patients primarily in the home through 241 branches in 33 states.
     American HomePatient, Inc. was incorporated in Delaware in September 1991. American HomePatient, Inc.’s principal executive offices are located at 5200 Maryland Way, Suite 400, Brentwood, Tennessee 37027-5018, and its telephone number at that address is (615) 221-8884.
Business
     The Company provides home health care services and products consisting primarily of respiratory therapy services, home infusion therapy services, and the rental and sale of home medical equipment and home health care supplies. For the year ended December 31, 2009, such services and products represented 84%, 9%, and 7% of revenues, respectively. These services and products are paid for primarily by Medicare, Medicaid, and other third-party payors. The Company’s objective is to be a leading provider of home health care products and services in the markets in which it operates.
     As of December 31, 2009, the Company provided services to patients primarily in the home through 241 branches in the following 33 states: Alabama, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia, and Wisconsin. As of December 31, 2009 the Company was an investor in and a manager of eleven joint ventures.
     The Company is required to report information about operating segments in annual financial statements and interim financial reports. The Company is also required to make related disclosures about products and services, geographic areas, and major customers. The Company manages its business as one reporting segment.

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Services and Products
     The Company provides a diversified range of home health care services and products. The following table sets forth the percentage of revenues represented by each line of business for the periods presented:
                         
    Year Ended December 31,
    2009   2008   2007
Home respiratory therapy services
    84 %     81 %     78 %
Home infusion therapy services
    9       10       11  
Home medical equipment and home health supplies
    7       9       11  
 
                       
Total
    100 %     100 %     100 %
 
                       
     Home Respiratory Therapy Services. The Company provides a wide variety of home respiratory services primarily to patients with severe and chronic pulmonary diseases. Patients are referred to a Company branch most often by primary care and pulmonary physicians as well as by hospital discharge planners and case managers. After reviewing pertinent medical records on the patient and confirming insurance coverage information, a Company service technician or respiratory therapist visits the patient’s home to deliver and to prepare the prescribed therapy or equipment. Company representatives coordinate the prescribed therapy with the patient’s physician and train the patient and caregiver in the correct use of the equipment. For patients renting equipment, Company representatives also make periodic follow-up visits to the home to provide additional instructions, perform required equipment maintenance, and deliver oxygen and other supplies.
     The primary respiratory services that the Company provides are:
    Oxygen systems to assist patients with breathing. There are three types of oxygen systems: (i) oxygen concentrators, which are stationary units that filter ordinary room air to provide a continuous flow of oxygen; (ii) liquid oxygen systems, which are thermally-insulated containers of liquid oxygen which can be used as stationary units and/or as portable options for patients; and (iii) high pressure oxygen cylinders, which are used primarily for portability as an adjunct to oxygen concentrators. Oxygen systems are prescribed by physicians for patients with chronic obstructive pulmonary disease, cystic fibrosis, and neurologically-related respiratory problems.
 
    Nebulizers and related inhalation drugs to assist patients with breathing. Nebulizer compressors are used to administer aerosolized medications (such as albuterol) to patients with asthma, bronchitis, chronic obstructive pulmonary disease, and cystic fibrosis. “AerMedsÒ” is the Company’s registered marketing name for its aerosol medications program.
 
    Respiratory assist devices and related supplies to force air through respiratory passage-ways during sleep. These treatments, which utilize continuous positive airway pressure (“CPAP”) or bi-level positive airway pressure therapy, are used on adults with

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      obstructive sleep apnea (“OSA”), a condition in which a patient’s normal breathing patterns are disturbed during sleep.
    The other respiratory services that the Company provides include:
    Home ventilators to sustain a patient’s respiratory function mechanically in cases of severe respiratory failure when a patient can no longer breathe independently;
 
    Non-invasive positive pressure ventilation (“NPPV”) to provide ventilation support via a face mask for patients with chronic respiratory failure and neuromuscular diseases. This therapy enables patients to receive positive pressure ventilation without the invasive procedure of intubation; and
 
    Home respiratory evaluations and related diagnostic equipment to assist physicians in identifying, monitoring and managing their respiratory patients.
     Oxygen systems comprised approximately 37.9% of the Company’s total 2009 revenues. Inhalation drugs and nebulizers comprised approximately 5.5% and 1.5%, respectively, of the Company’s total 2009 revenues. Respiratory assist devices, largely consisting of CPAP devices, and related supplies comprised approximately 36.5% of 2009 revenues. All other respiratory products and services comprised approximately 2.5% of the Company’s total 2009 revenues. Respiratory therapy services are provided by substantially all of the Company’s branches other than the few that are dedicated solely to infusion therapy.
     Home Infusion Therapy Services. The Company provides a wide range of home infusion therapy services. Patients are referred to a Company branch most often by primary care and specialist physicians (such as infectious disease physicians and oncologists) as well as by hospital discharge planners and case managers. After confirming the patient’s treatment plan with the physician, the pharmacist mixes the medications and coordinates with the nurse the delivery of necessary equipment, medication and supplies to the patient’s home. The Company provides the patient and caregiver with detailed instructions on the patient’s prescribed medication, therapy, pump and supplies. For patients renting equipment, the Company also schedules follow-up visits and deliveries in accordance with physicians’ orders.
     Home infusion therapy involves the administration of nutrients, antibiotics, and other medications intravenously (into the vein), subcutaneously (under the skin), intramuscularly (into the muscle), intrathecally (via spinal routes), epidurally (also via spinal routes), or through feeding tubes into the digestive tract. The primary infusion therapy services that the Company provides include the following:
    Enteral nutrition is the infusion of nutrients through a feeding tube inserted directly into the functioning portion of a patient’s digestive tract. This long-term therapy is often prescribed for patients who are unable to eat or to drink normally as a result of a neurological impairment such as a stroke or a neoplasm (tumor).

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    Anti-infective therapy is the infusion of anti-infective medications into a patient’s bloodstream, typically for 5 to 14 days, to treat a variety of serious bacterial and viral infections and diseases.
 
    Total parenteral nutrition (“TPN”) is the long-term provision of nutrients through central vein catheters that are surgically implanted into patients who cannot absorb adequate nutrients enterally due to a chronic gastrointestinal condition.
 
    Pain management involves the infusion of certain drugs into the bloodstream of patients, primarily terminally or chronically ill patients, suffering from acute or chronic pain.
 
    Other infusion therapies include chemotherapy, hydration, growth hormone and immune globulin therapies.
     Enteral nutrition services account for approximately 5.6% of the Company’s total revenues in 2009 and are provided by many of the Company’s branches. Anti-infective therapy, TPN, pain management, and other infusion revenues accounted for approximately 3.9% of the Company’s total revenues in 2009. Other infusion therapies are currently provided by 3 of the Company’s 241 branches.
     Home Medical Equipment and Medical Supplies. The Company provides a variety of equipment and supplies to serve the needs of home care patients. Revenues from home medical equipment and supplies are derived principally from the rental and sale of wheelchairs, hospital beds, ambulatory aids, bathroom aids and safety equipment, and rehabilitation equipment. Sales of home medical equipment and medical supplies account for 6.8% of the Company’s revenues in 2009 and are provided by most of the Company’s 241 branches.
Operations
     Organization. Currently, the Company’s operations are divided into 11 geographic areas with each area headed by an area vice president. Each area vice president typically oversees the operations of approximately 20 to 30 branches. Area vice presidents focus on revenue development and cost control and assist local management with decision-making to improve responsiveness and ensure quality in local markets. The Company operates regional billing centers that report directly to the corporate reimbursement department under the leadership of the Senior Vice President of Innovation and Technology and two regional vice presidents of reimbursement. Additionally, the Company has four regional patient service centers that perform certain customer service functions and report to the Vice President of Contact Care Integration. This organizational structure adds specialized knowledge and focused management resources to the billing, compliance, and reimbursement functions. The Company also operates a centralized CPAP support center that performs CPAP supply order processing and fulfillment, a centralized oxygen support center that coordinates scheduling and routing of portable oxygen deliveries for the Company’s branches, and a centralized pharmacy that performs inhalation drug order processing and fulfillment.

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     The Company’s branches are typically staffed with a general manager, clinicians such as respiratory therapists, service technicians, and customer service representatives. In most of its markets, the Company employs account executives who are responsible for local sales efforts. Account executives report directly to the general manager of their respective branch and indirectly to their respective area director of sales.
     The Company tries to appropriately balance between centralized and decentralized management with an increased emphasis on centralizing functions to improve productivity. Operating managers are encouraged to promptly and effectively respond to local market demands, while the Company provides through its corporate office management support, compliance oversight and training, marketing and managed care expertise, sales training and support, product development, and financial and information systems. The Company retains centralized control over those functions necessary to monitor quality of patient care and to maximize operational efficiency. Services performed at the corporate office include financial and accounting functions, treasury, corporate compliance, human resources, reimbursement oversight, sales and marketing support, clinical policy and procedure development, regulatory affairs and licensure, and information system design. The Company’s patient service centers provide centralized order intake and revenue qualification. Additionally, the Company has centralized its distribution of inhalation drugs and CPAP supplies. Management regularly analyzes the Company’s structure for opportunities to improve operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – General – Productivity and Profitability” for additional discussion of centralization initiatives to improve productivity.
     Commitment to Quality. The Company maintains quality and performance improvement programs related to the proper implementation of its service standards. Management believes that the Company has developed and implemented service policies and procedures that comply with the standards required by the Accreditation Commission for Health Care, Inc. (ACHC), its current accrediting agency. As of January 1, 2008, the Company transitioned its accrediting agency from the Joint Commission to ACHC, which, like the Joint Commission, is a deemed accreditation organization for suppliers of durable medical equipment, prosthetics, orthotics, and supplies. As a deemed accreditation organization, ACHC’s accreditation is recognized by Centers for Medicare and Medicaid Services (“CMS”) as proof that the Company has met or exceeds CMS’ quality standards in order to bill the Medicare Part B program. All of the Company’s operating branch locations are ACHC-accredited. The Company has Quality Improvement Advisory Boards at many of its branches, and branch general managers conduct quarterly quality improvement reviews. Area Quality Managers (AQMs) conduct quality compliance audits at each branch to ensure compliance with state and federal regulations, accreditation and quality standards, FDA regulations and internal standards. The AQMs also help train all new clinical personnel on the Company’s policies and procedures.
     Training and Retention of Quality Personnel. Management recognizes that the Company’s business depends on its personnel. The Company attempts to recruit knowledgeable talent for all positions including account executives who are capable of gaining new business from the local medical community. In addition, the Company provides sales training and orientation to general managers and account executives.

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     Management Information Systems. Management believes that periodic refinement and upgrading of its management information systems, which permit management to closely monitor the activities of the Company’s operations, is important to the Company’s business. The Company’s financial systems provide, among other things, monthly budget analyses, trended financial data, financial comparisons to prior periods, and comparisons among Company branches. These systems also provide a means for management to monitor key statistical data for each branch, such as accounts receivable, payor mix, cash collections, revenue mix and expense trends. Additionally, Medicare and other third party claims are billed electronically through the Company’s systems thereby facilitating and improving the timeliness of accounts receivable collections. The Company also maintains a communication network that provides company-wide access to email and the Internet. The Company maintains a proprietary intranet, which is a productivity-driven, secure website focused on reducing paperwork, disseminating information throughout the Company, and facilitating communication among the Company’s employees.
     Corporate Compliance. The Company’s goal is to operate its business with honesty and integrity and in compliance with the numerous laws and regulations that govern its operations. The Company’s corporate compliance program is designed to help accomplish these goals through employee training and education, a confidential disclosure program, written policy guidelines, periodic reviews, compliance audits, and other programs. The Company’s corporate compliance program is monitored by its Compliance Officer and the Compliance Committee. The Compliance Committee, which meets quarterly, is comprised of the Company’s President and CEO, Chief Operating Officer, Chief Financial Officer, Senior Vice President of Innovation and Technology, Senior Vice President of Field Operations, Vice President of Human Resources, and Director of Financial Reporting and Internal Audit. The Compliance Committee is advised by legal counsel. There can be no assurance that the Company’s compliance activities will prevent or detect violations of the governing laws and regulations. See “Business – Government Regulation.”
Hospital Joint Ventures
     As of December 31, 2009, the Company owns 50% of nine home health care businesses and 70% of two other home health care businesses. The remaining ownership interest of each of these businesses is owned by local hospitals. Through management agreements, the Company is responsible for the management of these businesses and receives fixed monthly management fees or monthly management fees based upon a percentage of net revenues, net income or cash collections. The operations of the 70%-owned joint ventures are consolidated with the operations of the Company. The operations of the 50%-owned joint ventures are not consolidated with the operations of the Company and are instead accounted for by the Company under the equity method.
     The Company’s joint ventures typically are 50/50 equity partnerships with an initial term of between three and ten years and with the following typical provisions: (i) the Company contributes assets of an existing business in the designated market or contributes cash to fund half of the initial working capital required for the joint venture to commence operations; (ii) the hospital partner contributes similar assets and/or an amount of cash equal in the aggregate to the fair market value of the Company’s net contribution; (iii) the Company is the managing partner for the joint venture and receives a monthly management and administrative fee; and (iv) distributions, to the extent made, are generally made on a quarterly basis and are consistent with each partner’s capital

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contributions. Within the joint venture’s designated market, all services provided within the geographic market are deemed to be revenues of the joint venture including revenues from sources other than the joint venture partner.
Revenues
     The Company derives substantially all of its revenues from third-party payors including Medicare, private insurers, and Medicaid. Medicare is a federally-funded and administered health insurance program that provides coverage for beneficiaries who require certain medical services and products. Medicaid is a state-administered reimbursement program that provides reimbursement for certain medical services and products. Amounts paid under these programs are generally based upon fixed rates. Revenues are recorded at the expected reimbursement rates when the services are provided, merchandise is delivered, or equipment is rented to patients. Revenues are recorded at net realizable amounts estimated to be paid by customers and third party payors. Although amounts earned under the Medicare and Medicaid programs are subject to review by such third-party payors, subsequent adjustments to such reimbursements are historically insignificant as these reimbursements are based on fixed fee schedules. In the opinion of management, adequate provision has been made for any adjustment that may result from such reviews. Any differences between estimated settlements and final determinations are reflected in operations in the period known.
     Sales revenues and related services include all product sales to patients and 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 the provision of services related to the delivery of these products. Sales revenues are recognized at the time of delivery and recorded at the expected payment amount based upon the type of product and the payor. Rentals and other patient revenues are derived from the rental of equipment related to the provision of respiratory therapy, home health care equipment, and enteral pumps. All rentals of the equipment are provided by the Company on a month-to-month basis and revenue is recorded at the expected payment amount based upon the type of rental and the payor. Certain pieces of equipment are subject to capped rental arrangements, whereby title to the equipment transfers to the patient at the end of the capped rental payment period.
     Once initial delivery of rental equipment is made to the patient, a monthly billing cycle is established based on the initial date of delivery. The Company recognizes rental revenue ratably over the monthly service period and defers revenue for the portion of the monthly bill which is unearned. The fixed monthly rental encompasses the rental of the product, delivery, set-up, instruction, maintenance, repairs, and providing backup systems when needed, and as such, no separate revenue is earned from the initial equipment delivery and setup process. Routine maintenance and servicing of the equipment is the responsibility of the Company for as long as the patient is renting the equipment.
     Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis, and therefore, are excluded from revenues in the consolidated statements of operations.

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     The following table sets forth the percentage of the Company’s revenues from each source indicated for the years presented:
                         
    Year Ended December 31,
    2009   2008   2007
Medicare
    50 %     52 %     53 %
Private pay, primarily private insurance
    42       40       39  
Medicaid
    8       8       8  
 
                       
Total
    100 %     100 %     100 %
 
                       
     Because the Company derives a significant portion of its revenues from Medicare and Medicaid reimbursement, material changes in Medicare and Medicaid reimbursement have a material impact on its revenues and, consequently, on its business operations and financial results. Reimbursement levels typically are subject to downward pressure as the federal and state governments and managed care payors seek to reduce payments. Thus, since its inception the Company has experienced numerous reimbursement reductions related to its products and services and regularly learns of proposals for other reductions, some of which are subsequently implemented as proposed or in a modified form. The Company anticipates that future reductions will occur whether through administrative action, legislative changes, or otherwise.
     Management is working to counter the adverse impact of the reimbursement reductions currently in effect as well as future reimbursement reductions through a variety of initiatives designed to grow revenues, improve productivity, and reduce costs. See “Business – Sales and Marketing” for a discussion of the Company’s initiatives to grow revenues and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – General – 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 impact could be material. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Trends, Events, and Uncertainties” for a discussion of reimbursement changes already enacted that will further affect the Company in 2010 and beyond.
Collections
     The Company has three key initiatives in place to maintain and/or improve collections of accounts receivable: (i) proper staffing and training; (ii) process redesign and standardization; and (iii) billing center specific goals geared toward improved cash collections and reduced accounts receivable.
     Net patient accounts receivable at December 31, 2009 was $25.9 million compared to net patient accounts receivable of $38.3 million at December 31, 2008.
     An important indicator of the Company’s accounts receivable collection efforts is the monitoring of the days sales outstanding (“DSO”). The Company monitors DSO trends for each of

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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. The table below shows the Company’s DSO, net of discontinued operations, for the periods indicated and is calculated 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:
                         
    Year Ended December 31,
    2009   2008   2007
DSO
  39 days   51 days   57 days
     The decrease in DSO at December 31, 2009 compared to December 31, 2008 primarily is the result of process improvements which have increased cash collections and decreased unbilled revenue.
     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’s level of DSO and net patient receivables is affected by the extended time required to obtain necessary billing documentation.
     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 $3.8 million and $5.2 million for December 31, 2009 and December 31, 2008, respectively, net of valuation allowances. This decrease primarily is the result of improvements made in CMN procurement processes.
Sales and Marketing
     The Company has increased its focus on sales and marketing efforts over the past several years in an effort to improve revenues. During this time, management implemented changes designed to improve the effectiveness of the Company’s selling efforts. These include revisions to the Account Executive commission plans and a restructuring of the sales organization. Management believes these actions have resulted in a more focused sales management team.
     The Company’s sales and marketing focus for 2010 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 revenues will be critical to the Company’s success. Management will continue to review and monitor progress with its sales and marketing efforts.

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Competition
     The home health care industry is consolidating but remains highly fragmented and competition varies significantly from market to market. There are still relatively few barriers to entry in the local markets served by the Company, and the Company could encounter competition from new market entrants. However, management believes Medicare reimbursement reductions affecting home oxygen beginning in 2009 could limit new market entrants and could drive some less efficient competitors out of this market. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Trends, Events, and Uncertainties – Reimbursement Changes and the Company’s Response” for discussion of Medicare reimbursement reductions. In small and mid-size markets, a large percentage of the Company’s competition comes from local independent operators or hospital-based facilities. In the larger markets, regional and national providers account for a significant portion of competition and may have more resources to market their business. Management believes that the competitive factors most important in the Company’s lines of business are ability to develop and to maintain relationships with referral sources, reputation with referral sources, ease of doing business with the provider, quality of service, clinical expertise, and the range of services offered.
     Third-party payors and their case managers actively monitor and direct the care delivered to their beneficiaries. Accordingly, relationships with such payors and their case managers and inclusion within preferred provider and other networks of approved or accredited providers has become a prerequisite in many cases to the Company’s ability to serve many of the patients it treats. Similarly, the ability of the Company and its competitors to align themselves with other healthcare service providers may increase in importance as managed care providers and provider networks seek out providers who offer a broad range of services, substantially discounted prices, and geographic coverage.

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Branch Locations
     The Company’s 241 home health care branches as of December 31, 2009 are listed below:
                         
Alabama
  Florida   Kentucky   Nebraska   Ohio   Tennessee   Virginia
Birmingham
  Altamonte Springs   Bowling Green   Hastings1   Bryan   Chattanooga   Charlottesville
Dothan
  Ft. Lauderdale   Lexington   Lincoln1   Chillicothe   Clarksville   Chesapeake
Huntsville
  Ft. Myers   London   Norfolk1   Cincinnati   Cookeville   Farmville
Mobile
  Ft. Walton Beach   Louisville   Omaha1   Columbus   Dayton   Harrisonburg
Montgomery1
  Gainesville   Middlesboro       Dayton   Dickson   Lorton
 
  Holly Hill   Paducah   Nevada   Heath   Erin   Newport News
Arizona
  Jacksonville       Las Vegas   Mansfield   Jackson   Onancock1
Globe
  Leesburg   Maine       Marion   Johnson City   Radford
Tempe
  Lynn Haven   Hermon   New Mexico   Maumee   Kingsport   Richmond
 
  Pensacola   Lewiston   Alamogordo   Middleburg Heights   Knoxville   Roanoke
Arkansas
  Rockledge       Albuquerque   Sandusky   Nashville    
Batesville
  St. Augustine   Maryland   Clovis   Springfield   Oneida   Washington
Benton1
  Tallahassee (2)   Cumberland   Farmington   Twinsburg   Tullahoma   Lakewood
Bentonville
  Tampa (2)   Salisbury1   Grants   Zanesville   Union City   Yakima
El Dorado
          Las Cruces            
Ft. Smith
  Georgia   Michigan   Roswell   Oklahoma   Texas   West Virginia
Harrison
  Albany   West Branch1       Tulsa   Austin   Lewisburg
Heber Springs1
  Brunswick       New York       Bay City   Rainelle
Hot Springs
  Dublin   Minnesota   Albany   Pennsylvania   Bryan   Wheeling
Jonesboro
  Eastman   Rochester   Geneva   Brookville   Conroe    
Little Rock1
  Evans       Marcy   Camp Hill   Corpus Christi   Wisconsin
Mena
  Ft. Oglethorpe   Mississippi   Oneonta   Chambersburg   Harlingen   Marshfield
Mtn. Home
  Savannah   Tupelo   Painted Post   Danville   Houston   Oak Creek
N. Little Rock1
  Suwanee       Pleasant Valley   Erie   Lake Jackson   Onalaska
Paragould
  Valdosta   Missouri   Syracuse   Hanover Township   Longview   Racine
Pine Bluff
  Waycross   Cameron   Watertown   Johnstown   Lubbock   Woodruff
Russellville
      Crystal City   Webster   Lewistown   Lufkin    
Warren
  Illinois   Hannibal   Williamsville   Philipsburg   McAllen    
 
  Collinsville   Jefferson City       Pittsburgh   Mount Pleasant    
Colorado
  Mt. Vernon   Kansas City   North Carolina   Pottsville   Nacogdoches    
Centennial
  Peoria   Kirksville   Asheboro   Scottdale   Paris    
Cortez
  Springfield   Mountain Grove   Asheville1   State College   San Angelo    
Durango
      Perryville   Boone1   Trevose   San Antonio    
Pagosa Springs
  Iowa   Potosi   Brevard1   Waynesboro   Sunnyvale    
 
  Atlantic1   Rolla   Charlotte   Williamsport   Temple    
Connecticut
  Decorah   Springfield   Concord   York   Tyler    
Cheshire
  Dubuque   St. Louis   Durham       Victoria    
Danville
  Marshalltown   St. Peters   Gastonia   South Carolina   Woodway    
New Britain
  Mason City   Warrensburg   Hickory1   Columbia        
 
  North Liberty   Waynesville   Maiden1   Conway1        
Delaware
  Ottumwa       Marion1   Florence        
Dover
  Pleasant Hill       Monroe   Greenville        
Newark
  Sioux City       Salisbury   Hartsville        
 
  Waterloo       Sanford1   Lancaster        
 
          Spruce Pine1   Myrtle Beach1        
 
  Kansas       Whiteville   Pawley’s Island1        
 
  Pittsburg       Wilmington   Rock Hill1        
 
          Winston-Salem   Summerville        
 
              Union1        
 
1   Owned by a joint venture.
 
2   City has multiple locations.

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Supplies and Equipment
     The Company centrally purchases home medical and respiratory equipment and other materials and products required in connection with the Company’s business from select suppliers.
Insurance
     The Company maintains a commercial general liability policy which is on a claims-made basis. This insurance is renewed annually and includes product liability coverage on the medical equipment that it sells or rents with per claim coverage limits of up to $1.0 million per claim with a $5.0 million general liability annual aggregate. The Company’s professional liability policy is on a claims-made basis and is renewable annually with per claim coverage limits of up to $1.0 million per claim and $5.0 million in the aggregate. The Company’s commercial general liability policy and the professional liability policy have a maximum policy aggregate of $7.0 million. Defense costs are included in addition to the limits of insurance. The Company retains the first $50,000 of each professional or general liability claim subject to a $500,000 aggregate for all such claims. The Company also maintains excess liability coverage with limits of $20.0 million per claim and $20.0 million in the aggregate. Management believes the manufacturers of the equipment it sells or rents currently maintain their own insurance, and for many of the Company’s significant vendors, a certificate of insurance has been received and the Company has been added by endorsement as an additional insured. However, there can be no assurance that such manufacturers will continue to maintain their own insurance, that such insurance will be adequate or available to protect the Company, or that the Company will not have liability independent of that of such manufacturers and/or their insurance coverage.
     The Company is insured for vehicle liability for up to $1.0 million of each claim with a $250,000 deductible for each claim. This deductible reduces the limit of insurance. The Company retains the first $250,000 of each workers compensation claim and is insured for any additional liabilities from each such claim. The Company did not maintain annual aggregate stop-loss coverage for the years 2007, 2008, and 2009, as such coverage was not economically available. The Company has not maintained aggregate stop-loss coverage since 2001.
     The Company is self-insured for health insurance for substantially all employees for the first $150,000 on a per person, per year basis. In addition, an aggregating specific deductible must be satisfied in the amount of $140,000 before stop loss insurance would apply. The Company has also maintained annual aggregate stop loss coverage of $10.1 million for 2009. Liabilities in excess of this aggregate amount (up to $1.0 million) are the responsibility of the insurer. The health insurance policies are limited to maximum lifetime reimbursements of $2.0 million per person for 2007, 2008, and 2009.
     The Company maintains insurance protecting its directors and officers.
     The Company provides accruals for its portion of the settlement of outstanding claims and claims incurred but not reported at amounts believed to be adequate. The differences between actual settlements and accruals are included in expense once a probable amount is known. See

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies.”
     There can be no assurance that any of the Company’s insurance will be sufficient to cover any judgments, settlements or costs relating to any pending or future legal proceedings or that any such insurance will be available to the Company in the future on satisfactory terms, if at all. If the insurance carried by the Company is not sufficient to cover any judgments, settlements or costs relating to pending or future legal proceedings, the Company’s business and financial condition could be materially adversely affected.
Employees
     At December 31, 2009, the Company had approximately 2,177 full-time employees, 94 part-time employees, and 77 employees used on an “as needed” basis only. Approximately 102 individuals were employed at the corporate office in Brentwood, Tennessee. None of the employees work under a union contract.
Trademarks
     The Company owns and uses a variety of marks, including American HomePatient®, AerMeds®; American CPAP DirectTM; Redi ü ®; EnterCaresm; CHF Heart Matters®; Rest Assured...We’re the Home Sleep Specialistssm; and Breathe, Nourish, Move, Thrivesm, which have either been registered at the federal or state level or are being used pursuant to common law rights.
Government Regulation
     General. The Company, as a participant in the health care industry, is subject to extensive federal, state, and local regulation. In addition to the Federal False Claims Act (“False Claims Act”) and other federal and state anti-kickback and self-referral laws applicable to all of the Company’s operations (discussed more fully below), the Company’s operations are subject to federal laws covering the repackaging and dispensing of drugs (including oxygen) and regulating interstate motor-carrier transportation. The Company’s operations also are subject to state laws (most notably licensing and controlled substances registration) governing pharmacies, nursing services and certain types of home health agency activities.
     The Federal False Claims Act imposes civil liability on individuals or entities that submit false or fraudulent claims to the government for payment. False Claims Act penalties for violations can include sanctions, including civil monetary penalties.
     As a provider of services under the federal reimbursement programs such as Medicare, Medicaid and TRICARE, the Company is subject to the federal statute known as the anti-kickback statute, also known as the “fraud and abuse law.” This law prohibits any bribe, kickback, rebate, or remuneration of any kind in return for, or as an inducement for, the referral of patients for government-reimbursed health care services.

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     The Company is also subject to the federal physician self-referral prohibition, known as the “Stark Law,” which, with certain exceptions, prohibits physicians from referring patients to entities with which they have a financial relationship. Many states in which the Company operates have adopted similar fraud and abuse and self-referral laws, as well as laws that prohibit certain direct or indirect payments or fee-splitting arrangements between health care providers, under the theory that such arrangements are designed to induce or to encourage the referral of patients to a particular provider. In many states these laws apply to services reimbursed by all payor sources.
     In 1996, the Health Insurance Portability and Accountability Act (“HIPAA”) introduced a new category of federal criminal health care fraud offenses relating to health care benefits, which are referred to as Federal Health Care Offenses. The specific offenses are: health care fraud, theft or embezzlement, false statements, obstruction of an investigation, and money laundering. These crimes can apply to claims submitted not only to government reimbursement programs such as Medicare, Medicaid, and TRICARE but also to claims submitted to any third-party payor, and they carry penalties including fines and imprisonment. HIPAA has mandated an extensive set of regulations to protect the privacy and security of individually identifiable health information.
     The Company must follow strict requirements relating to documentation. As required by law, it is Company policy that certain service charges (as defined by Medicare) falling under Medicare Part B are confirmed with a certificate of medical necessity signed by a physician. In January 1999 the OIG published a draft Model Compliance Plan for the Durable Medical Equipment, Prosthetics, Orthotics, and Supply Industry. The OIG has stressed the importance for all health care providers to have an effective compliance plan. The Company has created and implemented a compliance program which it believes meets the elements of the OIG’s Model Plan for the industry. As part of its compliance program, the Company performs internal audits of the adequacy of billing documentation. The Company’s policy is to voluntarily refund to the government any reimbursements previously received for claims with insufficient documentation that are identified in this process and that cannot be corrected. The Company periodically reviews and updates its policies and procedures in an effort to comply with applicable laws and regulations; however, certain proceedings have been and may in the future be commenced against the Company alleging violations of applicable laws governing the operation of the Company’s business and its billing practices.
     The Company is also subject to state laws governing Medicaid, professional training, licensure, financial relationships with physicians, and the dispensing and storage of pharmaceuticals. The facilities operated by the Company must comply with all applicable laws, regulations, and licensing standards. Many of the Company’s employees must maintain licenses to provide some of the services offered by the Company. Additionally, certain of the Company’s employees are subject to state laws and regulations governing the professional practice of respiratory therapy, pharmacy and nursing.
     Information about individuals and other health care providers who have been sanctioned or excluded from participation in government reimbursement programs is readily available on the internet, and all health care providers, including the Company, are held responsible for carefully screening entities and individuals they employ or do business with in order to avoid contracting with an excluded provider. No one may bill government programs for services or supplies provided

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by an excluded provider, and the federal government may also impose sanctions, including financial penalties, on companies that contract with excluded providers.
     Health care law is an area of extensive and dynamic regulatory oversight. Changes in laws or regulations or new interpretations of existing laws or regulations can have a dramatic effect on permissible activities, the relative costs associated with doing business, and the amount and availability of reimbursement from government and other third-party payors. There can be no assurance that federal, state, or local governments will not impose additional standards or change existing standards or interpretations.
     Enforcement Activities. In recent years, various state and federal regulatory agencies have stepped up investigative and enforcement activities with respect to the health care industry, and many health care providers, including the Company and other durable medical equipment suppliers, have received subpoenas and other requests for information in connection with their business operations and practices. From time to time, the Company also receives notices and subpoenas from various government agencies concerning plans to audit the Company, or requesting information regarding certain aspects of the Company’s business. The Company customarily cooperates with the various agencies in responding to such subpoenas and requests. The Company expects to incur legal expenses in the future in connection with existing and future investigations.
     The government has broad authority and discretion in enforcing applicable laws and regulations; therefore, the scope and outcome of any such investigations, inquiries, or legal actions cannot be predicted. There can be no assurance that federal, state or local governments will not impose additional regulations upon the Company’s activities nor that the Company’s past activities will not be found to have violated some of the governing laws and regulations. Any such regulatory changes or findings of violations of laws could adversely affect the Company’s business and financial position, and could even result in the exclusion of the Company from participating in Medicare, Medicaid, and other contracts for goods or services reimbursed by the government.
Legal Proceedings
     The Company is involved in certain claims and legal actions, most of which arise in the ordinary course of its business. Although the ultimate outcomes of these actions are not determinable at this time, the Company does not believe that the resolution of any presently pending claims and lawsuits will, in the aggregate, have a material adverse effect on the Company’s financial condition or results of operations.

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ITEM 1A. RISK FACTORS
     This section summarizes certain risks, among others, that should be considered by stockholders and prospective investors in the Company. Many of these risks are also discussed in other sections of this report.
The Company’s secured debt became due on August 1, 2009 and was not repaid.
     The Company maintains a significant amount of debt. The Company has long-term 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. The Company was not able to repay or refinance this debt at or prior to maturity. 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. Furthermore, the Company’s independent registered public accounting firm added an explanatory paragraph to their report on the Company’s consolidated financial statements for the years ended December 31, 2009 and 2008 that noted these conditions indicated that the Company may be unable to continue as a going concern. 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. 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 current forbearance agreement (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”), 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Trends, Events and Uncertainties” and “Liquidity and Capital Resources.”
Reductions in Medicare and Medicaid reimbursement rates, as well as reductions from other third party payors, are having a material adverse effect on the Company’s results of operations and financial condition, and future reductions could have further adverse effects.
     On February 8, 2006, the Deficit Reduction Act of 2005 (“DRA”) was signed into law. The DRA has reduced the reimbursement of certain products provided by the Company and significantly reduced reimbursement related to oxygen beginning in 2009. On July 15, 2008, the Medicare Improvement for Patients and Providers Act of 2008 (the “MIPPA”) was enacted and has further reduced reimbursement for certain products. These reductions have had and will continue to have a material adverse effect on the Company’s revenues, net income, cash flows and capital resources. Enacted reimbursement cuts, as well as, pending and proposed reimbursement cuts may negatively affect the Company’s business and prospects. See

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Trends, Events and Uncertainties – Reimbursement Changes and the Company’s Response.”
     For the year ended December 31, 2009, the percentage of the Company’s revenues derived from Medicare, Medicaid and all other payors was 50%, 8%, and 42%, respectively. The revenues and profitability of the Company may be impacted by the efforts of payors to contain or reduce the costs of health care by delaying payments, lowering reimbursement rates, narrowing the scope of covered services, increasing case management review of services, and negotiating reduced contract pricing. Reductions in reimbursement levels under Medicare, Medicaid or private pay programs and any changes in applicable government regulations could have a material adverse effect on the Company’s revenues and net income. Additional Medicare reimbursement reductions have been proposed that would have a substantial and material adverse effect on the Company’s revenues, net income, cash flows and capital resources. Changes in the mix of the Company’s patients among Medicare, Medicaid and private pay categories and among different types of private pay sources may also affect the Company’s revenues and profitability. There can be no assurance that the Company will continue to maintain its current payor mix, revenue mix, or reimbursement levels, a change in any of which could have a material adverse effect on the Company’s revenues, net income, cash flows and capital resources. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Highland Capital Management, L.P. controls approximately 48% of the Company’s common stock and controls a majority of the Company’s $226.4 million secured debt, which may allow Highland to exert significant influence on certain aspects of our business.
     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 represents approximately 48% of the outstanding shares of the Company. Highland also controls a majority of the Company’s secured promissory notes that represent $226.4 million of secured debt. Highland could exert significant influence on all matters requiring shareholder approval including the election of directors and the approval of significant corporate transactions. Because of its control of the Company’s debt, Highland’s interests may be different than those of holders of common stock who are not also holders of debt.
The Company maintains substantial leverage.
     As a result of the amount of debt, a substantial portion of the Company’s cash flow from operations has been dedicated to servicing debt. The substantial leverage could adversely affect the Company’s ability to grow its business or to withstand adverse economic conditions and reimbursement changes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

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The Company is subject to extensive government regulation, and the Company’s inability to comply with existing or future laws, regulations or standards could have a material adverse effect on the Company’s operations, financial condition, business, or prospects.
     The Company is subject to extensive and frequently changing federal, state, and local regulation. In addition, new laws and regulations are adopted periodically to regulate products and services in the health care industry. Changes in laws or regulations or new interpretations of existing laws or regulations can have a dramatic effect on operating methods, costs and reimbursement amounts provided by government and other third-party payors. There can be no assurance that the Company is in compliance with all applicable existing laws and regulations or that the Company will be able to comply with any new laws or regulations that may be enacted in the future. Changes in applicable laws, any failure by the Company to comply with existing or future laws, regulations or standards, or discovery of past regulatory noncompliance by the Company could have a material adverse effect on the Company’s operations, financial condition, business, or prospects.
Because of reimbursement reductions, the Company must continue to find ways to grow revenues and reduce expenses in order to generate earnings and cash flow.
     The Company has implemented, and is currently implementing, a number of expense reduction initiatives in response to reimbursement reductions. Any future significant reimbursement cuts would require the Company to alter significantly its business model and cost structure, as well as the services it provides to patients, in order to avoid substantial losses. Measures undertaken to reduce expenses by improving efficiency can have an unintended negative impact on revenues, referrals, billing, collections and other aspects of the Company’s business, any of which can have a material adverse effect on the Company’s operations, financial condition, business, or prospects. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The Company has substantial accounts receivable, and increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on the Company’s cash flows and results of operations.
     The Company has substantial accounts receivable as evidenced by DSO of 39 days as of December 31, 2009. No assurances can be given that future bad debt expense will not increase above current operating levels as a result of difficulties associated with the Company’s billing activities and meeting payor documentation requirements and claim submission deadlines. Increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on cash flows and results of operations.

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New healthcare legislation or other changes in the administration or interpretation of government health care programs or initiatives may have a material adverse effect on the Company.
     The health care industry continues to undergo dramatic changes influenced in large part by federal legislative initiatives. It is likely new federal health care initiatives will continue to arise. The Medicare Prescription Drug and Improvement Act of 2003 and the Deficit Reduction Act of 2005 have had, and will continue to have, a material negative impact on the level of reimbursement. The Medicare Improvements for Patients and Providers Act of 2008 has had a material negative impact beginning in 2009. Potential reimbursement reductions associated with competitive bidding could adversely affect the Company’s future profitability. Additionally, from time to time other modifications to Medicare reimbursement have been discussed. There can be no assurance that these or other federal legislative and regulatory initiatives will not be adopted in the future. One or more of these initiatives could materially limit patient access to, or the Company’s reimbursement for, products and services provided by the Company. Also, many states have proposed decreases in Medicaid reimbursement. There can be no assurance that the adoption of such legislation or other changes in the administration or interpretation of government health care programs or initiatives will not have a material adverse effect on the Company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Trends, Events, and Uncertainties – Reimbursement Changes and the Company’s Response.”
The Company depends on retaining and obtaining profitable managed care contracts, and the Company’s business may be materially adversely affected if it is unable to retain or obtain such managed care contracts.
     As managed care plays a significant role in markets in which the Company operates, the Company’s success will, in part, depend on retaining and obtaining profitable managed care contracts. There can be no assurance that the Company will retain or obtain such managed care contracts. In addition, reimbursement rates under managed care contracts are likely to continue to experience downward pressure as a result of payors’ efforts to contain or reduce the costs of health care by increasing case management review of services, by increasing retrospective payment audits, and by negotiating reduced contract pricing. Therefore, even if the Company is successful in retaining and obtaining managed care contracts, it could experience declining profitability if the Company does not also decrease its cost for providing services and/or increase higher margin services.
The Company’s common stock trades on the over-the-counter bulletin board, which reduces the liquidity of an investment in the Company.
     Trading of the Company’s common stock under its current trading symbol, AHOM or AHOM.OB, is conducted on the over-the-counter bulletin board which may limit the Company’s ability to raise additional capital and the ability of shareholders to sell their shares.

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Compliance with privacy regulations under HIPAA could result in significant costs to the Company and delays in its collection of accounts receivable.
     HIPAA Administrative Simplification requires all entities engaged in certain electronic transactions to meet specific standards to ensure the confidentiality and security of individually identifiable health information. In addition, HIPAA mandates the standardization of various types of electronic transactions and the codes and identifiers used for these transactions. The Company has implemented these standards. However, there is always the potential that some state Medicaid programs that are not fully compliant with the electronic transaction standards could result in delays in collections of accounts receivables.
     On February 17, 2009, the American Recovery and Reinvestment Act of 2009 was signed into law. This new legislation contains significant expansions of the HIPAA Privacy and Security Rules and numerous other changes that will affect the Company due to the major impact on health care information and technology.
     The new provisions include: (1) heightened enforcement and increased penalties for covered entities; (2) extension of security provisions to business associates, vendors, and others; (3) new stringent security breach notification requirements; and, (4) patients’ rights to restrict access to protected health information.
     Most of the provisions of the law took effect on February 17, 2010, one year after enactment, although increased penalty provisions went into effect immediately. Other provisions require implementing regulations and will take two years or longer to take effect. Any failure to comply with this new legislation could have a material adverse effect on the Company’s financial results and financial condition.
The Company is highly dependent upon its senior management.
     The Company’s historical financial results, debt maturity issue, and reimbursement environment, among other factors, may limit the Company’s ability to attract and retain qualified personnel, which in turn could adversely affect profitability.
The market in which the Company operates is highly competitive, and if the Company is unable to compete successfully, its business will be materially adversely affected.
     The home health care market is highly fragmented and competition varies significantly from market to market. Currently, there are relatively few barriers to entry, and the Company could encounter competition from new market entrants. In small and mid-size markets, the majority of the Company’s competition comes from local independent operators or hospital-based facilities. In larger markets, regional and national providers account for a significant portion of competition. Some of the Company’s present and potential competitors are significantly larger than the Company and have, or may obtain, greater financial and marketing resources than the Company.

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The provision of healthcare services entails an inherent risk of liability, and the Company’s insurance may not be sufficient to effectively protect the Company from all claims.
     The provision of healthcare services entails an inherent risk of liability. Certain participants in the home healthcare industry may be subject to lawsuits that may involve large claims and significant defense costs. It is expected that the Company periodically will be subject to such suits as a result of the nature of its business. The Company currently maintains product and professional liability insurance intended to cover such claims in amounts which management believes are in keeping with industry standards. There can be no assurance that the Company will be able to obtain liability insurance coverage in the future on acceptable terms, if at all. There can be no assurance that claims in excess of the Company’s insurance coverage will not arise. A successful claim against the Company in excess of the Company’s insurance coverage could have a material adverse effect upon the operations, financial condition or prospects of the Company. Claims against the Company, regardless of their merit or eventual outcome, may also have a material adverse effect upon the Company’s ability to attract patients or to expand its business. In addition, the Company maintains a large deductible for its workers’ compensation, auto liability, commercial general and professional liability insurance. The Company is self-insured for its employee health insurance and is at risk for claims up to individual stop loss and aggregate stop loss amounts.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
     None.
ITEM 2. PROPERTIES
     As of December 31, 2009, the Company leased space for its corporate headquarters in the Parklane Building, Maryland Farms Office Park, Brentwood, Tennessee. The Company entered into an amended lease effective April 5, 2006 that provided for 29,000 square feet of leased space. The amended lease has a base monthly rent of $47,000 and expires in July 2010.
     The Company owns a facility in Waterloo, Iowa, which consists of approximately 35,000 square feet and owns a 50% interest in one of its branches located in Little Rock, Arkansas, which consists of approximately 16,000 square feet.
     The Company leases the operating space required for its remaining branches, patient service centers, and billing centers. A typical branch occupies between 1,000 and 4,000 square feet and generally combines office and warehouse space. Approximately one-half of the square footage of a typical branch consists of warehouse space. Lease terms on most of the leased properties range from two to three years. Management believes that the Company’s owned and leased properties are adequate for its present needs and that suitable additional or replacement space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
     None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
     None.

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PART II
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
     The Company’s common stock is currently traded in the over-the-counter market or, on application by broker-dealers, in the NASD’s Electronic Bulletin Board under the symbol AHOM or AHOM.OB. The following table sets forth representative bid quotations of the common stock for each quarter of calendar years 2009 and 2008. The following bid quotations reflect interdealer prices without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. See “Business — Risk Factors” regarding the over-the-counter bulletin board and liquidity.
                 
    Bid Quotations
Fiscal Period   High   Low
2009 1st Quarter
  $ 0.26     $ 0.12  
2009 2nd Quarter
  $ 0.46     $ 0.16  
2009 3rd Quarter
  $ 0.32     $ 0.25  
2009 4th Quarter
  $ 0.27     $ 0.10  
 
               
2008 1st Quarter
  $ 1.30     $ 0.67  
2008 2nd Quarter
  $ 1.00     $ 0.65  
2008 3rd Quarter
  $ 0.80     $ 0.26  
2008 4th Quarter
  $ 0.32     $ 0.10  
     On March 2, 2010, there were 1,374 holders of record of the common stock and the closing sale price for the common stock was $0.16 per share.
     The Company has not paid cash dividends on its common stock and anticipates that, for the foreseeable future, any earnings will be retained for use in its business or for debt service and no cash dividends will be paid. See – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
     Information regarding the Company’s equity compensation plans is incorporated by reference to the Company’s definitive proxy statement (“Proxy Statement”) for its 2010 annual meeting of stockholders.

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     The following graph compares the cumulative total returns of the Company’s Common Stock with those of NASDAQ Market (U.S.) Index and the Home Health Care Services Group (SIC number 8082) Index, a peer group index. The peer group includes approximately 15 companies, excluding the Company.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among American Home Patient, Inc., The NASDAQ Composite Index
And SIC Code 8082
(PERFORMANCE GRAPH)
 
* $100 invested on 12/31/04 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
     The performance graph shown above and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such a filing.

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ITEM 6. SELECTED FINANCIAL DATA
     The selected financial data below is derived from the Company’s financial statements and should be read in conjunction with the related financial statements. Medicare reimbursement reductions in 2006, 2007, 2008, and 2009, and reorganization items from the bankruptcy filing in 2002 affect the comparability of the financial data presented.
     See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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    Year Ended December 31,  
    2009     2008     2007     2006     2005  
    (dollars in thousands, except per share data)  
Income Statement Data:
                                       
Revenues
  $ 236,297     $ 266,854     $ 293,027     $ 321,768     $ 321,965  
Cost of sales and related services
    52,891       56,612       70,601       84,322       79,012  
Cost of rentals and other revenues, including rental equipment depreciation expense
    29,674       34,682       41,412       45,106       39,879  
Operating expenses
    124,548       132,523       139,638       150,138       153,051  
Bad debt expense
    3,517       4,635       8,164       10,771       9,396  
General and administrative expenses
    20,909       19,841       19,194       18,052       16,749  
Depreciation, excluding rental equipment, and amortization
    3,866       4,102       3,361       3,598       3,610  
Interest expense, net
    14,734       15,618       15,828       17,162       17,141  
Other income, net
    (345 )     (1,040 )     (2,249 )     (335 )     (365 )
Change of control (income) expense
    (12 )     (77 )     5,637              
 
                             
 
                                       
Total expenses
    249,782       266,896       301,586       328,814       318,473  
 
                             
 
                                       
Earnings from unconsolidated joint ventures
    5,243       6,201       5,754       5,373       4,816  
 
                             
 
                                       
(Loss) income from continuing operations before reorganization items and income taxes
    (8,242 )     6,159       (2,805 )     (1,673 )     8,308  
Reorganization items
                      291       384  
Provision for income taxes
    4,515       5,054       4,097       348       327  
 
                             
 
                                       
Net (loss) income from continuing operations
  $ (12,757 )   $ 1,105     $ (6,902 )   $ (2,312 )   $ 7,597  
 
                                       
Less: Net income attributable to the noncontrolling interests
    (341 )     (408 )     (390 )     (421 )     (417 )
 
                             
 
                                       
Net (loss) income from continuing operations attributable to American HomePatient
    (13,098 )     697       (7,292 )     (2,733 )     7,180  
 
                             
(Loss) income from discontinued operations, including gain on disposal of assets, net of tax
          (183 )     1,770       146       564  
 
                             
 
                                       
Net (loss) income attributable to American HomePatient
  $ (13,098 )   $ 514     $ (5,522 )   $ (2,587 )   $ 7,744  
 
                             
 
                                       
Net (loss) income per common share attributable to American HomePatient, Inc. common shareholders — Basic
                                       
- Continuing operations
  $ (0.75 )   $ 0.04     $ (0.41 )   $ (0.16 )   $ 0.42  
- Discontinued operations
          (0.01 )     0.10       0.01       0.03  
 
                             
Net (loss) income per common share attributable to American HomePatient, Inc. common shareholders — Basic
  $ (0.75 )   $ 0.03     $ (0.31 )   $ (0.15 )   $ 0.45  
 
                             
 
                                       
Net (loss) income per common share attributable to American HomePatient, Inc. common shareholders — Diluted
                                       
- Continuing operations
  $ (0.75 )   $ 0.04     $ (0.41 )   $ (0.16 )   $ 0.40  
- Discontinued operations
          (0.01 )     0.10       0.01       0.03  
 
                             
Net (loss) income per common share attributable to American HomePatient, Inc. common shareholders — Diluted
  $ (0.75 )   $ 0.03     $ (0.31 )   $ (0.15 )   $ 0.43  
 
                             
 
                                       
Weighted average shares outstanding — Basic
    17,573,000       17,573,000       17,573,000       17,543,000       17,296,000  
Weighted average shares outstanding — Diluted
    17,573,000       17,741,000       17,573,000       17,543,000       17,973,000  
 
    Year Ended December 31,
    2009   2008   2007   2006   2005
    (dollars in thousands)
Balance Sheet Data:
                                       
Working capital
  $ (198,112 )   $ (197,332 )   $ 24,846     $ 31,340     $ 35,135  
Total assets
    239,297       254,526       270,128       276,671       287,634  
Total debt and capital leases, including current portion
    229,123       234,310       244,410       251,257       251,019  
Shareholders’ deficit
    (36,979 )     (24,157 )     (25,865 )     (20,698 )     (11,821 )

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
     The Company provides home health care services and products to patients through its 241 branches in 33 states. These services and products are primarily paid for by Medicare, Medicaid, and other third-party payors. As a result, prices for the Company’s products and services are primarily set by the payors and not by the Company. Since the Company cannot affect pricing, it can improve operating results primarily by increasing revenues through increased volume of sales and rentals and by controlling expenses. The Company can also improve cash flow by limiting the amount of time that it takes to collect payment after delivering products and services. Key indicators of performance include:
     Sales and Rentals. Over the past several years the Company has increased its focus on sales and marketing initiatives in an effort to improve revenues, especially related to respiratory product lines, though the Company’s efforts have produced mixed results. While growth has been achieved in certain product lines, other lines have not increased or have declined. The Company has also de-emphasized certain less profitable product lines, resulting in a decrease in revenue associated with these lines, and Medicare reimbursement reductions have further decreased revenue. See “Year Ended December 31, 2009 Compared to Year ended December 31, 2008 – Revenues” for a discussion of revenue decreases. Continuing to improve the Company’s sales and marketing efforts will be critical to the Company’s success. Management closely tracks overall increases and decreases in sales and rentals as well as increases and decreases by product-line and branch location and region. Management’s intent is to identify geographic or product line weaknesses and take corrective actions. Reductions in reimbursement levels can more than offset an increased volume of sales and rentals. See “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 as a percentage of net revenue decreased from 1.7% in 2008 to 1.5% in 2009. This decrease in bad debt expense as a percentage of net revenue is due to improvements made in billing and collection processes which have increased cash collections and decreased unbilled revenues.
     Cash Flow. The Company’s funding of day-to-day operations and all payments required to the Company’s Lenders 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 for the Company’s Lenders and certain forbearance holders in which the agent and forbearance holders agreed to forbear from exercising rights and remedies prior to March 16, 2010, pursuant to the terms 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

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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.”
     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, net of discontinued operations, decreased from 51 days at December 31, 2008 to 39 days at December 31, 2009 primarily due to improved cash collections on current billings and improved timeliness in obtaining necessary billing documentation.
     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 $3.8 million and $5.2 million for December 31, 2009 and December 31, 2008, respectively, net of valuation allowances. This decrease primarily is the result of improvements made in CMN procurement processes.
     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

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improve asset utilization through an 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. During 2009, the Company closed or consolidated two branch locations and opened one branch location. The Company did not close or consolidate any billing centers in 2009. The Company did not exit any lines of business as a result of these branch closures, and as such, they are not deemed discontinued operations. See “Trends, Events, and Uncertainties – Reimbursement Changes and the Company’s Response” for additional discussion.
     Discontinued Operations. Effective April 1, 2007, the Company sold the assets of its home nursing business located in Tallahassee, Florida to Amedisys Home Health, Inc. of Florida. The sales price was $3.1 million, of which $2.8 million was received in cash at closing, and the remainder was received according to the terms of a promissory note. The Company recorded a gain in the second quarter of 2007 of $3.0 million associated with this sale. The cash and note proceeds from this transaction were utilized to pay down long-term debt.
     Since the Company exited its home nursing line of business, the Company has presented the nursing business as discontinued operations in 2008 and 2007.
     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.

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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 year ended December 31, 2009, the Company reduced its change of control expense by $12,000 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 December 31, 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.
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

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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 2010 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 was 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

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    month. MIPPA also established new payment rules and supplier responsibilities following the 36 month rental period, the most significant of which are described below.
  o   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.
 
  o   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.
 
  o   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.
 
  o   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 after the initial 36 month cap. Suppliers may not be reimbursed for more than 30 minutes of labor for this one in-home visit. Effective July 2010, beginning six months after the 36 month cap, a maintenance and servicing payment of $66 will be paid every six months. The maintenance and servicing fee covers all maintenance and servicing needed during the six month period. The supplier is responsible for performing all necessary maintenance, servicing and repair of the equipment at the time it is needed and must also visit the beneficiary’s home during the first month of each six month period to inspect the

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      equipment and perform any necessary maintenance and servicing needed at the time of each visit.
 
  o   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 were reduced in the twelve months of 2009 by approximately $17.5 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 reduced the Company’s net revenue and net income in the twelve months of 2009 by approximately $1.6 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

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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 was restarted in 2009 and, except for a few exceptions, included 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 closed December 21, 2009. The Company participated in the bidding process in nine of the ten markets included in the re-bid first round of bidding. 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 called for a nationwide 9.5% reduction in Medicare rates which began on January 1, 2009 for products included in the first round of competitive bidding. This 9.5% reduction reduced the Company’s net revenue and net income by approximately $8.3 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 was reduced by approximately $27.4 million in the twelve months of 2009. This includes approximately $17.5 million associated with the 36 month rental cap for oxygen equipment, approximately $1.6 million associated with reductions in oxygen fee schedule payment amounts, and approximately $8.3 million related to the 9.5% reduction associated with the delay of competitive bidding, all of which are described above. 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 2009 compared to 2008.

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     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. A portion of the reimbursement reduction impact described above was offset by the full year impact of productivity improvements and cost reductions implemented in 2008, additional productivity improvements and cost reductions implemented in 2009, and growth in respiratory revenue in 2009, especially sleep therapy revenues. 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 2010 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 were 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

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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. During 2009, the Company’s net revenue and net income were reduced by approximately $2.5 million as a result of the implementation of the Medicare PAP policy. The Company cannot accurately predict the future 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 was March 2, 2009, however existing suppliers were not required to furnish the bond until October 2, 2009. This rule requires the Company to obtain a surety bond for each of its 241 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 did 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.
     Provider Enrollment, Chain and Ownership System: Section 1833(q) of the Social Security Act requires that all physicians and non-physician practitioners that meet certain

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definitions be uniquely identified for all claims and services that are ordered or referred. To meet this requirement, in April 2009, CMS expanded their current policy to require all health care practitioners be listed in the government health plan’s national on-line Provider Enrollment, Chain and Ownership System (“PECOS”). PECOS tracks physician and non-physician practitioners to ensure they are of the type/specialty eligible to order or refer services for Medicare beneficiaries. Under this new policy, Medicare claims submitted by the Company beginning January 3, 2011 that are the result of an order or a referral from a practitioner not registered in PECOS will not be paid. The original implementation date for denying payment was January 5, 2010, but was postponed to April 5, 2010, and more recently postponed to January 3, 2011. Medicare claims submitted by the Company prior to January 3, 2011 that are the result of an order or a referral from a practitioner not registered in PECOS will be paid, but the Company will receive a warning indicating the practitioner is not registered. The Company is working with its referring physicians towards PECOS compliance but there can be no assurance that practitioners will be properly enrolled in PECOS, and as such the Company’s revenues and cash collections could be impacted beginning in 2011.
     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 Medicare 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

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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 2010 and beyond. See “Risk Factors.”
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 preparation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis management evaluates its critical accounting policies and estimates.
     A “critical accounting policy” is one which is both important to the understanding of the financial condition and results of operations of the Company and requires management’s most difficult, subjective, or complex judgments, and often requires management to make estimates about the effect of matters that are inherently uncertain. Management believes the following accounting policies fit this definition:

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     Revenue Recognition and Allowance for Doubtful Accounts. The Company provides credit for a substantial part of its non third-party reimbursed revenues and continually monitors the creditworthiness and collectibility of amounts due from its patients. Approximately 58% of the Company’s 2009 revenues were derived from participation in Medicare and state Medicaid programs. Amounts paid under these programs are generally based upon a fixed rate. Revenues are recorded at the expected reimbursement rates when the services are provided or when merchandise or equipment is delivered to patients. Revenues are recorded net of estimated contractual adjustments or other reimbursement adjustments. Although amounts earned under the Medicare and Medicaid programs are subject to review by such third-party payors, subsequent adjustments to reimbursements as a result of such reviews are historically insignificant as these reimbursements are based on fixed fee schedules. In the opinion of management, adequate provision has been made for any adjustment that may result from such reviews. Any differences between estimated settlements and final determinations are reflected as an adjustment to revenue in the period known.
     Sales revenues and related services include all product sales to patients and are derived from the sale of sleep therapy supplies, 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 other supplies and the provision of services related to the delivery of these products. Sales revenues are recognized at the time of delivery and recorded at the expected payment amount based upon the type of product and the payor. Rentals and other patient revenues are derived from the rental of equipment related to the provision of respiratory therapy, home health care equipment, and enteral pumps. All rentals of the equipment are provided by the Company on a month-to-month basis and revenue is recorded at the expected payment amount based upon the type of rental and the payor. Certain pieces of equipment are subject to capped rental arrangements, whereby title to the equipment transfers to the patient at the end of the capped rental payment period.
     Once initial delivery of rental equipment is made to the patient, a monthly billing cycle is established based on the initial date of delivery. The Company recognizes rental revenue ratably over the monthly service period and defers revenue for the portion of the monthly bill which is unearned. The fixed monthly rental encompasses the rental of the product, delivery, set-up, instruction, maintenance, repairs, and providing backup systems when needed, and as such, no separate revenue is earned from the initial equipment delivery and setup process. Routine maintenance and servicing of the equipment is the responsibility of the Company for as long as the patient is renting the equipment.
     Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the consolidated statements of operations.
     The Company recognizes revenues at the time services are performed or products are delivered. As such, a portion of patient receivables consists of unbilled revenue for which the Company has not obtained all of the necessary medical documentation required to produce a bill, but has provided the service or equipment. The Company calculates its allowance for doubtful accounts based upon the type of receivable (billed or unbilled) as well as the age of the receivable. As a receivable balance ages, an increasingly larger allowance is recorded for the receivable. Management believes that the recorded allowance for doubtful accounts is adequate,

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and that historical collections substantiate the percentages used in the allowance valuation process. However, the Company is subject to further loss to the extent uncollectible receivables exceed its allowance for doubtful accounts. If the Company were to experience a deterioration in the aging of its accounts receivable due to disruptions or a slow down in cash collections, the Company’s allowance for doubtful accounts and bad debt expense would likely increase from current levels. Conversely, an improvement in the Company’s cash collection trends and in its receivable aging would likely result in a decrease in both the allowance for doubtful accounts and bad debt expense.
     The Company’s allowance for doubtful accounts totaled approximately $3.4 million and $5.9 million as of December 31, 2009 and 2008, respectively.
     Included in the Company’s accounts receivable are amounts pending approval from third- party payors, primarily balances due from patients applying for Medicaid benefits for the first time. Since the vast majority of the Company’s receivables are for established patients and for patients already having coverage prior to receiving services, amounts pending third-party approval are immaterial.
     The table below details an aging by payor of the Company’s gross patient accounts receivable as of December 31, 2009.
                                                                                 
                    Orders                                   Unbilled           Unapplied
(in thousands)   Total   Current   0-90   31-60   61-90   91-120   121-180   91-180   >180   Cash
Managed Care
  $ 8,792     $ 5,872     $ 548     $ 1,143     $ 673     $ 295     $ 309     $ 68     $ (116 )   $  
Medicaid
  $ 2,606       1,416       222       416       290       151       174       40       (103 )      
Medicare
  $ 10,066       7,233       1,245       566       320       183       109       261       149        
Other Payors
  $ 2,858       1,703       102       532       223       161       135       12       (10 )      
Private Pay
  $ 3,413       1,229       1       791       583       509       141             159        
     
A/R Aged by Payor
  $ 27,735     $ 17,453     $ 2,118     $ 3,448     $ 2,089     $ 1,299     $ 868     $ 381     $ 79     $  
 
Other Unbilled A/R
  $ 1,818             1,818                                            
 
Unapplied Cash
  $ (306 )                                                     (306 )
     
 
Total Aged A/R
  $ 29,247     $ 17,453     $ 3,936     $ 3,448     $ 2,089     $ 1,299     $ 868     $ 381     $ 79     $ (306 )
     
     Other unbilled accounts receivable is primarily comprised of open orders and manually accrued accounts receivable for which aging data by payor is not available.
     Inventory Valuation and Cost of Sales Recognition. Inventory consists of certain equipment and supplies which are priced at the lower of cost (on a first-in, first-out basis) or market value. The Company recognizes cost of sales and relieves inventory on an interim basis using an estimated gross margin percentage, based upon the type of product sold and payor mix, and performs physical counts of inventory at each branch on an annual basis. The Company records a valuation allowance for obsolete and slow moving items and for specific inventory. The Company is subject to loss for inventory adjustments in excess of the recorded inventory valuation allowance. The inventory valuation allowance was $0.2 million and $0.6 million at December 31, 2009 and 2008, respectively.
     Rental Equipment Valuation. Equipment is rented to patients on a month-to-month basis for use in their homes and is depreciated over the equipment’s estimated useful life. On an annual basis, the Company performs physical counts of rental equipment on hand at each branch

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and reconciles all recorded rental assets to internal billing reports. Any resulting adjustment for unlocated, damaged, or obsolete equipment is charged to rental equipment depreciation expense. Since rental equipment is maintained in the patient’s home, the Company is subject to loss resulting from lost equipment as well as losses for damaged, outdated, or obsolete equipment. Management records a valuation allowance for its estimated lost, damaged, outdated, or obsolete rental equipment based upon analytical data derived from the Company’s automated asset management system. The rental equipment valuation was $0.9 million at December 31, 2009 and 2008.
     Valuation of Long-lived Assets. Management evaluates the Company’s long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Management utilizes estimated undiscounted future cash flows to determine if an impairment exists. If this analysis indicates an impairment exists, the amount of loss would be determined based upon a comparison of the estimated fair value with the carrying value of the asset. While management believes that the estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect the evaluations.
     Valuation of Goodwill. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is reviewed for impairment at least annually in accordance with the provisions of FASB ASC Topic 350, Intangibles – Goodwill and Other (Statement No. 142, Goodwill and Other Intangible Assets). 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.
     The liabilities of the Company continue to exceed its assets resulting in a negative carrying value of approximately $37.0 million at December 31, 2009. The equity based fair value of the Company and its one reporting unit is approximately $2.3 million at December 31, 2009. Accordingly, the Company’s fair value exceeds its carrying value as of December 31, 2009 and, by definition, no goodwill impairment is indicated. As long as the Company has a negative carrying value and has a positive fair value (market capitalization), goodwill impairment will not be indicated pursuant to ASC 350, which states “if the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired.”
     The Company is currently working toward a resolution of its debt maturity issue. If the resolution of this issue includes additional equity resulting in a positive carrying value of the Company and the positive carrying value exceeds the fair value of the reporting unit, goodwill of the Company in the amount of $122.1 million at December 31, 2009 may be partially or completely impaired at that time.

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     Self Insurance. Self-insurance accruals primarily represent the accrual for self-insurance or large deductible risks associated with workers’ compensation insurance, auto liability, commercial general and professional liability insurance. The Company is insured for workers’ compensation and auto liability but retains the first $250,000 of risk exposure for each claim. The Company did not maintain annual aggregate stop loss coverage for the years 2009, 2008, and 2007, as such coverage was not economically available. The Company’s liability includes known claims and an estimate of claims incurred but not yet reported. The estimated liability for workers’ compensation claims totaled approximately $3.0 million and $3.1 million as of December 31, 2009 and 2008, respectively. The estimated liability for auto claims totaled approximately $1.0 million and $1.2 million as of December 31, 2009 and 2008, respectively. The estimated total liability for commercial general and professional liability claims was $0.4 million and $0.5 million as of December 31, 2009 and 2008, respectively. The Company utilizes analyses prepared by a third-party administrator based on historical claims information to determine the required accrual and related expense associated with workers’ compensation, auto liability, commercial general and professional liability insurance. The Company records claims expense by plan year based on the lesser of the aggregate stop loss (if applicable) or the developed losses as calculated by the third-party administrator.
     The Company is also self-insured for health insurance for substantially all employees for the first $150,000 on a per person, per year basis. In addition, an aggregating specific deductible must be satisfied in the amount of $140,000 before stop loss insurance would apply. The Company has also maintained annual aggregate stop loss coverage of $10.1 million for 2009. The health insurance policies are limited to maximum lifetime reimbursements of $2.0 million per person for 2009, 2008 and 2007. The estimated liability for health insurance claims totaled approximately $0.8 million as of December 31, 2009 and 2008. The Company reviews health insurance trends and payment history and maintains an accrual for incurred but unpaid reported claims and for incurred but not yet reported claims based upon its assessment of the lag time in reporting and paying claims. Judgments made by the Company include: assessing historical paid claims; average lags between the claims’ incurred dates, reported dates and paid dates; the frequency of claims; and the severity of claims.
     The Company is required to maintain cash collateral accounts with the insurance companies related to its self-insurance obligations. The Company maintained cash collateral balances of $6.7 million at December 31, 2009, related to its self-insured obligations, which is included in other assets.
     Management continually analyzes its accrued liabilities for incurred but not reported claims and for reported but not paid claims related to its self-insurance programs, and believes these accruals to be adequate. However, significant judgment is involved in assessing these accruals, and the Company is at risk for differences between actual settlement amounts and recorded accruals. Any resulting adjustments are included in expense once a probable amount is known.

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RESULTS OF OPERATIONS
Summary of Statement of Operations Reporting
     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 sleep therapy supplies, 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 branch 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 related discussion set forth items from the Company’s consolidated statements of operations as a percentage of revenues for the periods indicated:
                         
    Year Ended December 31,
    2009   2008   2007
Revenues
    100 %     100 %     100 %
Cost of sales and related services
    22       21       24  
Cost of rentals, including rental equipment depreciation
    13       13       14  
Operating expenses
    53       50       48  
Bad debt expense
    1       2       3  
General and administrative
    9       7       7  
Depreciation, excluding rental equipment, and amortization
    2       1       1  
Interest expense, net
    6       6       5  
Other income, net
                (1 )
Change of control expense
                2  
 
                       
Total expenses
    106       100       103  
 
                       
Earnings from unconsolidated joint ventures
    2       2       (2 )
(Loss) income from continuing operations before income taxes
    (4 )     2       (1 )
Provision for income taxes
    2       2       1  
 
                       
Net (loss) income from continuing operations
    (6 )%     0 %     (2 )%
 
                       
Less: Net income attributable to noncontrolling interests
                 
 
                       
Net (loss) income from continuing operations attributable to American HomePatient
    (6 )     0       (2 )
 
                       
Operating income from discontinued operations, including gain on disposal, net of tax
                1  
 
                       
Net (loss) income attributable to American HomePatient
    (6 )%     0 %     (1 )%
 
                       

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Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
     Revenues. Revenues decreased from $266.9 million in 2008 to $236.3 million in 2009, a decrease of $30.6 million, or 11.5%. The majority of this revenue decrease was attributable to Medicare reimbursement reductions effective January 1, 2009 which reduced revenue by approximately $27.4 million for the year ended 2009. A change in inhalation drug product mix resulting from Medicare reimbursement reductions which began April 1, 2008 reduced revenue by an additional $3.0 million for the year ended 2009. Also contributing to the revenue decrease was the Company’s reduced emphasis on less profitable product lines such as non-respiratory durable medical equipment and infusion therapy as well as the impact of the Medicare PAP policy implemented November 1, 2008 (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Trends, Events, and Uncertainties – Positive Airway Pressure Devices”). These decreases were partially offset by growth in oxygen patients and sleep therapy revenues, 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 decreased from $104.5 million in 2008 to $102.6 million in 2009, a decrease of $1.9 million, or 1.8%. This decrease is primarily the result of a decrease in revenue associated with non-focus product lines, a change in inhalation drug product mix and Medicare reimbursement reductions, partially offset by an increase in sleep therapy revenue.
          Rental Revenues. Rental revenues decreased from $162.3 million in 2008 to $133.7 million in 2009, a decrease of $28.6 million, or 17.6%. This decrease is primarily the result of Medicare reimbursement reductions, the Medicare PAP policy, 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 $56.6 million in 2008 to $52.9 million in 2009, a decrease of $3.7 million, or 6.5%. As a percentage of sales and related services revenues, cost of sales and related services decreased from 54.2% for 2008 to 51.5% for 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 $34.7 million in 2008 to $29.7 million in 2009, a decrease of $5.0 million, or 14.4%. As a percentage of rental revenues, cost of rental revenue increased from 21.4% for 2008 to 22.2% for 2009. This increase in percentage is primarily the result of a reduction in revenue associated with Medicare reimbursement cuts effective January 1, 2009, partially offset by reductions in purchases of supplies for patients renting equipment and reduced rental equipment depreciation expense. The reduction in rental equipment depreciation expense is primarily due 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 $132.5 million in 2008 to $124.5 million in 2009, a decrease of $8.0 million or 6.0%. 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 49.7% for 2008 to 52.7% for 2009. This increase in

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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 $4.6 million in 2008 to $3.5 million in 2009, a decrease of $1.1 million, or 23.9%. As a percentage of revenues, bad debt expense decreased from 1.7% for 2008 to 1.5% for 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 $19.8 million in 2008 to $20.9 million in 2009, an increase of $1.1 million, or 5.6%. 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 year related to the debt maturity issue. As a percentage of revenues, general and administrative expenses increased from 7.4% for 2008 to 8.8% for 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 decreased from $4.1 million in 2008 to $3.9 million in 2009, a decrease of $0.2 million, or 4.9%. The decrease is primarily due to certain leasehold improvements becoming fully amortized.
     Interest Expense, Net. Interest expense, net, decreased from $15.6 million in 2008 to $14.7 million in 2009, a decrease of $0.9 million, or 5.8%. This decrease is primarily attributable to a reduced debt balance and interest income recorded in 2009 related to cash collateral held by insurance companies associated with self-insurance obligations.
     Other Income, Net. Other income, net, was $1.0 million for 2008 and $0.3 million for 2009. Other income, net, for 2008 was comprised of $0.4 million income related to proceeds received from a legal settlement and income related to various life insurance policies. Other income, net, for 2009 was primarily comprised of income related to various life insurance policies.
     Earnings from Unconsolidated Joint Ventures. Earnings from unconsolidated joint ventures were $6.2 million for 2008 and $5.2 million for 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 $5.1 million and $4.5 million for 2008 and 2009, respectively. This expense primarily relates to non-cash deferred state and federal income taxes associated with indefinite lived intangible assets and state income tax expense.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
     Revenues. Revenues decreased from $293.0 million in 2007 to $266.9 million in 2008, a decrease of $26.1 million, or 8.9%. This revenue decrease was primarily attributable to a change in inhalation drug product mix and the Company’s de-emphasis of less profitable product lines

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such as non-respiratory durable medical equipment and infusion therapy. Also contributing to the overall decrease in revenues was the effect of Company initiatives implemented in 2007 designed to improve patient co-pay collections and provide appropriate service levels to patients. The Company believes most of the revenue lost as a result of these initiatives was unprofitable. The following is a discussion of the components of revenues:
          Sales and Related Services Revenues. Sales and related services revenues decreased from $122.3 million in 2007 to $104.5 million in 2008, a decrease of $17.8 million, or 14.6%. This decrease is primarily the result of a decrease in revenue associated with less profitable product lines and a change in inhalation drug product mix as described above.
          Rental Revenues. Rental revenues decreased from $170.8 million in 2007 to $162.3 million in 2008, a decrease of $8.5 million, or 5.0%. This decrease is primarily the result of a decrease in revenue associated with less profitable product lines, and revenue lost as a result of initiatives designed to improve patient co-pay collections and to provide appropriate service levels to patients, as described above.
     Cost of Sales and Related Services. Cost of sales and related services decreased from $70.6 million in 2007 to $56.6 million in 2008, a decrease of $14.0 million, or 19.8%. As a percentage of revenues, cost of sales and related services decreased from 24.1% for 2007 to 21.2% for 2008. As a percentage of sales and related services revenues, cost of sales and related services decreased from 57.7% for 2007 to 54.2% for 2008. This decrease is primarily attributable to a change in inhalation drug product mix.
     Cost of Rental Revenues. Cost of rental revenues decreased from $41.4 million in 2007 to $34.7 million in 2008, a decrease of $6.7 million, or 16.2%. As a percentage of revenues, cost of rental revenues decreased from 14.1% for 2007 to 13.0% for 2008. As a percentage of rental revenues, cost of rental revenue decreased from 24.3% for 2007 to 21.4% for 2008. This decrease is primarily due to a reduction in the purchases of oxygen for portability and a decrease in depreciation expense associated with improvements in the management of rental equipment assets.
     Operating Expenses. Operating expenses decreased from $139.6 million in 2007 to $132.5 million in 2008, a decrease of $7.1 million or 5.1%. The decrease is primarily the result of improved operating efficiencies and the resulting reduced operating costs, partially offset by increases in certain expenses associated with the development and implementation of initiatives designed to provide additional productivity improvements. As a percentage of revenues, operating expenses were 47.7% and 49.7% for 2007 and 2008, respectively. The increase in operating expenses as a percentage of net revenue is due primarily to a decrease in inhalation drug revenue associated with a change in product mix, which does not affect operating expenses.
     Bad Debt Expense. Bad debt expense decreased from $8.2 million in 2007 to $4.6 million in 2008, a decrease of $3.6 million, or 43.9%. As a percentage of revenues, bad debt expense was 2.8% and 1.7% for 2007 and 2008, respectively. This decrease is due primarily to improvements made in the Company’s accounts receivable collection processes.
     General and Administrative Expenses. General and administrative expenses increased from $19.2 million in 2007 to $19.8 million in 2008, an increase of $0.6 million, or 3.1%. General and administrative expenses continue to be affected in the current year by increases in certain

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expenses associated with the implementation of enhancements to information systems and processes and additional centralization of field activities. As a percentage of revenues, general and administrative expenses were 6.6% and 7.4% for 2007 and 2008, respectively.
     Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization expenses increased from $3.4 million in 2007 to $4.1 million in 2008, an increase of $0.7 million, or 20.6%. The increase is primarily due to depreciation expense associated with the addition of computer equipment and software.
     Interest Expense, Net. Interest expense, net, decreased from $15.8 million in 2007 to $15.6 million in 2008, a decrease of $0.2 million, or 1.3%. This decrease is primarily attributable to a reduced debt balance.
     Other Income, Net. Other income, net, was $2.2 million for 2007 and $1.0 million for 2008. The decrease is primarily due to income related to various life insurance policies that were converted to guaranteed policies in 2007. Additionally, the Company recorded income of $0.4 million in 2008 related to proceeds received from the settlement of a legal dispute.
     Change of Control Expense (Income). Change of control expense (income) was $5.6 million and $(0.1) million for 2007 and 2008, respectively. In April 2007 an investor acquired more than 35% of the Company’s common stock, which constituted a change of control under the terms of the employment agreement between the Company and Joseph F. Furlong, the Company’s chief executive officer. This change of control gave Mr. Furlong the right to receive a lump sum severance payment in the event he or the Company terminated his employment within one year after the change of control. In the second quarter of 2007, the Company recorded an expense of $6.6 million related to this potential liability, which included the lump sum severance payment, expense related to the acceleration of options and the potential buyout of options, and reimbursement of certain taxes related to the payment. For the remainder of 2007, the Company reduced this 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. During 2008, the Company reduced this expense by $0.1 million primarily due to revaluation of the fair value of Mr. Furlong’s outstanding stock options as of December 31, 2008.
     Earnings from Unconsolidated Joint Ventures. Earnings from unconsolidated joint ventures were $5.8 million for 2007 and $6.2 million for 2008. This increase is due to improved earnings of several joint ventures.
     Provision for Income Taxes. The provision for income taxes was $4.1 million and $5.1 million for 2007 and 2008, respectively. This expense primarily relates to non-cash deferred state and federal income taxes associated with indefinite lived intangible assets and state income tax expense.
Liquidity and Capital Resources
     The Company has long-term debt of $226.4 million, as evidenced by a promissory note to the agent for the Lenders. This indebtedness is secured by substantially all of the assets of the Company and matured on August 1, 2009. 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

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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. 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. A series of forbearance agreements 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 was effective February 12, 2010 and expires March 16, 2010. 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. 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.
     At December 31, 2009 the Company had current assets of $66.0 million and current liabilities of $264.2 million, resulting in working capital deficit of $(198.2) million and a current ratio of 0.3x as compared to a working capital deficit of $(197.3) million and a current ratio of 0.3x at December 31, 2008. The current ratio for both periods has been significantly affected by the Company’s secured debt balance being classified as a current liability due to the August 1, 2009 maturity date.
     Under the terms of the secured debt that matured on August 1, 2009, interest was payable monthly on the secured debt at a rate of 6.785% per annum. Payments of principal were payable 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, prior to the August 1, 2009 maturity date, in an amount equal to one-half of the anticipated Excess cash flow. Since the maturity date, the Company has continued to pay interest on a monthly basis in an amount consistent with the original terms of the secured debt.
     The Company does not have access to a revolving line of credit. As of December 31, 2009, the Company had unrestricted cash and cash equivalents of approximately $21.9 million.
     The Company’s principal cash requirements (other than the repayment of its matured secured debt) are for working capital, capital expenditures, leases, and interest payments on its debt. The Company must meet these on-going cash requirements with existing cash balances and net cash provided by operations.
     While management’s cash flow projections and related operating plans indicate that the Company can adequately fund its operating activities and continue existing interest payments through existing cash and cash flow, cash flows from operations and available cash were not sufficient to repay the Company’s secured debt that matured on August 1, 2009. In light of the current general credit market conditions, there can be no assurances that the Company will be

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able to deal successfully with the debt maturity issue on a timely basis or at all. As a result, the Company’s independent registered public accounting firm added an explanatory paragraph to their report on the Company’s consolidated financial statements for the years ended December 31, 2009 and 2008 that noted these conditions indicated that the Company may be unable to continue as a going concern. Further Medicare reimbursement reductions could have a material adverse impact on the Company’s ability to meet its debt service requirements, required capital expenditures, or working capital requirements. If existing cash and cash flow are not sufficient, there can be no assurance the Company will be able to obtain additional funds from other sources on terms acceptable to the Company or at all.
     The Company’s future cash flow will continue to be dependent upon the respective amounts of current assets (principally cash, accounts receivable and inventories) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on the Company’s liquidity. The Company has various types of accounts receivable, such as receivables from patients, contracts, and former owners of acquired businesses. The majority of the Company’s accounts receivable are patient receivables. Accounts receivable are generally outstanding for longer periods of time in the health care industry than in many other industries because of requirements to provide third-party payors with additional information subsequent to billing and the time required by such payors to process claims. Certain accounts receivable frequently are outstanding for more than 90 days, particularly where the account receivable relates to services for a patient receiving a new medical therapy or covered by private insurance or Medicaid. Net patient accounts receivable were $25.9 million and $38.3 million at December 31, 2009 and December 31, 2008, respectively. Average DSO was approximately 39 and 51 days at December 31, 2009 and December 31, 2008, respectively. 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’s level of DSO and net patient receivables is affected by the extended time required to obtain necessary billing documentation.
     The table below provides an aging of the Company’s gross patient accounts receivable as of December 31, 2009 and December 31, 2008.
                                 
                            Greater than
(In thousands)   Total   0-90   91-180   180 days
December 31, 2009
  $ 29,247     $ 26,620     $ 2,548     $ 79  
Percent of total
    100 %     91 %     9 %     0 %
 
                               
December 31, 2008
  $ 44,153     $ 38,146     $ 4,285     $ 1,722  
Percent of total
    100 %     86 %     10 %     4 %
     The Company’s liquidity and capital resources have been, and likely will continue to be, materially adversely impacted by Medicare reimbursement reductions. See “Trends, Events, and Uncertainties — Reimbursement Changes and the Company’s Response.”
     Net cash provided by operating activities increased from $35.4 million in 2008 to $37.0 million in 2009, an increase of $1.6 million. Payments made for additions to property and equipment, net were $16.9 million in 2009 compared to $21.1 million for the same period in 2008. Additionally, the Company entered into $6.4 million of capital leases for equipment for

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the year ended 2009 and entered into $1.2 million of capital leases for equipment for the same period in 2008. Net cash used in financing activities decreased from $12.1 million in 2008 to $12.0 million in 2009. The cash used in financing activities for the year ended 2009 includes $11.6 million of principal payments on long-term debt and capital leases. The cash used in financing for the year ended 2008 includes $11.3 million of principal payments on long-term debt and capital leases.
Contractual Obligations and Commercial Commitments
     The following is a tabular disclosure of all contractual obligations and commitments of the Company as of December 31, 2009:
                                                 
                                            2014 &  
    Total     2010     2011     2012     2013     thereafter  
Secured debt and capital leases
  $ 229,123,000     $ 229,120,000     $ 3,000     $     $     $  
 
                                               
Interest on secured debt and capital leases*
    3,158,000       3,158,000                          
 
                                               
Operating lease obligations
    12,115,000       6,529,000       3,755,000       1,517,000       314,000        
 
                                   
 
                                               
Total contractual cash obligations
  $ 244,396,000     $ 238,807,000     $ 3,758,000     $ 1,517,000     $ 314,000     $  
 
                                   
     The Secured debt is comprised entirely of amounts owed to the Lenders that matured on August 1, 2009. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
     Capital leases consist primarily of leases of office and computer equipment. Operating leases are non-cancelable leases on certain vehicles and buildings.
     At December 31, 2009 the Company had no off-balance sheet commitments or guarantees outstanding.
     At December 31, 2009 the Company had one letter of credit for $250,000 which expires in January 2011. The letter of credit secures the Company’s obligations with respect to its professional liability insurance. The letter of credit is secured by a certificate of deposit, which is included in restricted cash.
 
* Interest on the Secured Debt in the table above includes interest obligations through March 15, 2010, which is the final day of the forbearance period per the current forbearance agreement.
Recently Issued Accounting Standards
     The FASB issued Accounting Standards Update (“ASU”) 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets (FASB Statement No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140) in December 2009. ASU 2009-16 removes the concept of a qualifying special-purpose entity (“QSPE”) from Accounting Standards Codification (“ASC”) Topic 860, Transfers and Servicing, and the exception

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from applying ASC 810-10 to ASPEs, thereby requiring transferors of financial assets to evaluate whether to consolidate transferees that previously were considered QSPEs. Transferor-imposed constraints on transferees whose sole purpose is to engage in securitization or asset-backed financing activities are evaluated in the same manner under the provisions of the ASU as transferor-imposed constraints on QSPEs were evaluated under the provisions of Topic 860 prior to the effective date of the ASU when determining whether a transfer of financial assets qualifies for sale accounting. The ASU also clarifies the Topic 860 sale-accounting criteria pertaining to legal isolation and effective control and creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale. The ASU is effective for periods beginning after December 15, 2009, and may not be early adopted. The Company expects that the adoption of ASU 2009-16 will not have a material impact on its consolidated financial statements.
     The FASB issued ASU 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R)) in December 2009. ASU 2009-17, which amends the Variable Interest Entity (“VIE”) Subsections of ASC Subtopic 810-10, Consolidation — Overall, revises the test for determining the primary beneficiary of a VIE from a primarily quantitative risks and rewards calculation based on the VIE’s expected losses and expected residual returns to a primarily qualitative analysis based on identifying the party or related-party group (if any) with (a) the power to direct the activities that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. The ASU requires kick-out rights and participating rights to be ignored in evaluating whether a variable interest holder meets the power criterion unless those rights are unilaterally exercisable by a single party or related party group. The ASU also revises the criteria for determining whether fees paid by an entity to a decision maker or another service provider are a variable interest in the entity and revises the Topic 810 scope characteristic that identifies an entity as a VIE if the equity-at-risk investors as a group do not have the right to control the entity through their equity interests to address the impact of kick-out rights and participating rights on the analysis. Finally, the ASU adds a new requirement to reconsider whether an entity is a VIE if the holders of the equity investment at risk as a group lose the power, through the rights of those interests, to direct the activities that most significantly impact the VIE’s economic performance, and requires a company to reassess on an ongoing basis whether it is deemed to be the primary beneficiary of a VIE. ASU 2009-17 is effective for periods beginning after December 15, 2009 and may not be early adopted. Adoption of ASU 2009-17 will result in the Company consolidating its 50%-owned joint ventures beginning January 1, 2010.
     In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (EITF Issue No. 08-1, Revenue Arrangements with Multiple Deliverables). ASU 2009-13 amends ASC 650-25 to eliminate the requirement that all undelivered elements have vendor specific objective evidence of selling price (“VSOE”) or third party evidence of selling price (“TPE”) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. In the absence of VSOE and TPE for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. The overall arrangement fee will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. Application of the “residual method’ of allocating an overall arrangement fee between delivered and undelivered elements will no longer be

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permitted upon adoption of ASU 2009-13. Additionally, the new guidance will require entities to disclose more information about their multiple-element revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company expects that the adoption of ASU 2009-13 will not have a material impact on its consolidated financial statements.
Recently Adopted Accounting Standards
     The Company adopted FASB Statement No. 141(R), “Business Combinations,” as codified in FASB 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 did not have a material impact on the Company’s consolidated financial position and results of operations.
     In May 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 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. The adoption of ASC 855-10-05 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.

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ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     The Company is not subject to material interest rate sensitivity since there is a fixed interest rate for both the $226.4 million secured debt and the Company’s unsecured debt. Interest expense associated with other debts would not materially impact the Company as most of those interest rates are fixed. The Company does not own and is not a party to any market risk sensitive instruments. As previously discussed herein, 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. Additionally, there can be no assurance that any such resolution of the debt maturity issue would result in the Company’s secured debt continuing at a fixed, rather than variable, interest rate.
     The Company has not experienced large increases in either the cost of supplies or operating expenses due to inflation. With reductions in reimbursement by government and private medical insurance programs and pressure to contain the costs of such programs, we bear the risk that reimbursement rates set by such programs will not keep pace with inflation.
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
     Financial statements are contained on pages F-62 through F-98 of this Report and are incorporated herein by reference.
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
     None.
ITEM 9A(T).   CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
     The Company’s chief executive officer and chief financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of December 31, 2009. Based on such evaluation, such officers have concluded that, as of December 31, 2009, these disclosure controls and procedures were effective.

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Management’s Report on Internal Control Over Financial Reporting
     The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of management, including the CEO and the CFO, an evaluation was conducted of the effectiveness of the Company’s internal control over financial reporting based on criteria established in the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2009. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
     There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.   OTHER INFORMATION
     None.

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PART III
ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
     Information concerning directors, executive officers, and corporate governance of the Company is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2010 annual meeting of stockholders of the Company.
ITEM 11.   EXECUTIVE COMPENSATION
     Executive compensation information is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2010 annual meeting of stockholders of the Company.
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
     The equity compensation plan information and the security ownership of certain beneficial owners and management information are incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2010 annual meeting of stockholders of the Company.
ITEM 13.   CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
     Information concerning certain relationships, related transactions, and director independence of the Company is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2010 annual meeting of stockholders of the Company.
ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES
     Information concerning the Company’s principal accounting fees and services is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2010 annual meeting of stockholders of the Company.

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PART IV
ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
     Financial statements and schedules of the Company required to be included in Part II, Item 8 are listed below.
     
    Form 10-K Pages
Financial Statements
   
 
   
  F-62
  F-63 – F-64
  F-65 – F-66
  F-67
  F-68 – F-69
  F-70 – F-98
 
   
Financial Statement Schedules
   
 
   
Schedule I Condensed Financial Information of Registrant(1)
   
  S-1
Schedule III Real Estate and Accumulated Depreciation(2)
   
Schedule IV Mortgage Loans on Real Estate(2)
   
Schedule V Supplemental Information Concerning Property-Casualty Insurance Operations(2)
   
 
(1)   Omitted because test for inclusion was not met.
 
(2)   Omitted because schedule not applicable to Company.
Exhibits
     The Exhibits filed as part of the Report on Form 10-K are listed in the Index to Exhibits immediately following the financial statement schedules.

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     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
 
  AMERICAN HOMEPATIENT, INC.    
 
       
 
  /s/ JOSEPH F. FURLONG, III
 
Joseph F. Furlong, III, President,
   
 
  Chief Executive Officer and Director    
 
       
 
  /s/ STEPHEN L. CLANTON    
 
       
 
  Stephen L. Clanton    
 
  Chief Financial Officer    
 
       
 
  /s/ ROBERT L. FRINGER    
 
       
 
  Robert L. Fringer    
 
  Principal Accounting Officer    
Date: March 4, 2010

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     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
         
/s/ Henry T. Blackstock
 
          Henry T. Blackstock
  Director    March 4, 2010
 
       
/s/ Joseph F. Furlong, III
 
          Joseph F. Furlong, III
  Director, President, and Chief Executive Officer    March 4, 2010
 
       
/s/ Donald R. Millard
 
          Donald R. Millard
  Director    March 4, 2010
 
       
/s/ William C. O’Neil
 
          William C. O’Neil
  Director    March 4, 2010
 
       
/s/ W. Wayne Woody
 
          W. Wayne Woody
  Director    March 4, 2010

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American HomePatient, Inc. and Subsidiaries
Consolidated Financial Statements
As of December 31, 2009 and 2008 and for each of the years in the three year period ended December 31, 2009
Together with Report of Independent Registered Public Accounting Firm

 


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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
American HomePatient, Inc:
We have audited the accompanying consolidated balance sheets of American HomePatient, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ deficit and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2009. In connection with our audits of the consolidated financial statements, we have also audited the financial statement Schedule II- Valuation and Qualifying Accounts as of December 31, 2009. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American HomePatient, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2 to the consolidated financial statements, the Company has a net capital deficiency and has a net working capital deficiency resulting from $226.4 million of debt that matured on August 1, 2009 that raise substantial doubt about its ability to continue as a going concern. As a result of a series of forbearance agreements entered into, the agent and forbearance holders agreed to forbear from exercising the rights and remedies available to them as a result of the Company’s failure to repay the outstanding principal balance until March 16, 2010. Management’s plans in regard to these matters are also described in note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/KPMG LLP
Nashville, TN
March 4, 2010

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
                 
ASSETS   2009     2008  
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 21,944,000     $ 13,488,000  
Restricted cash
    250,000       250,000  
Accounts receivable, less allowance for doubtful accounts of $3,396,000 and $5,869,000, respectively
    26,371,000       39,061,000  
Inventories, net of inventory valuation allowances of $212,000 and $577,000, respectively
    10,808,000       10,789,000  
Prepaid expenses and other current assets
    6,675,000       9,863,000  
 
           
Total current assets
    66,048,000       73,451,000  
 
           
 
               
Property and equipment
    126,550,000       134,603,000  
Less accumulated depreciation and amortization
    (96,294,000 )     (102,561,000 )
 
           
Property and equipment, net
    30,256,000       32,042,000  
 
           
 
               
Goodwill
    122,093,000       122,093,000  
Investment in joint ventures
    4,034,000       8,704,000  
Other assets
    16,866,000       18,236,000  
 
           
Total other assets
    142,993,000       149,033,000  
 
           
TOTAL ASSETS
  $ 239,297,000     $ 254,526,000  
 
           
(Continued)

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
(Continued)
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT   2009     2008  
CURRENT LIABILITIES:
               
Current portion of long-term debt and capital leases
  $ 229,120,000     $ 234,259,000  
Accounts payable
    13,849,000       11,989,000  
Other payables
    761,000       878,000  
Deferred revenue
    5,292,000       6,261,000  
Accrued expenses:
               
Payroll and related benefits
    6,704,000       10,302,000  
Insurance, including self-insurance accruals
    5,258,000       5,531,000  
Other
    3,176,000       1,563,000  
 
           
Total current liabilities
    264,160,000       270,783,000  
 
           
 
               
NONCURRENT LIABILITIES:
               
Capital leases, less current portion
    3,000       51,000  
Deferred tax liability
    12,031,000       7,841,000  
Other noncurrent liabilities
    82,000       8,000  
 
           
Total noncurrent liabilities
    12,116,000       7,900,000  
 
           
 
               
Total liabilities
    276,276,000       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
    177,094,000       176,788,000  
Accumulated deficit
    (214,681,000 )     (201,583,000 )
 
           
Total American HomePatient, Inc. shareholders’ deficit
    (37,411,000 )     (24,619,000 )
 
           
Noncontrolling interests
    432,000       462,000  
 
           
Total shareholders’ deficit
    (36,979,000 )     (24,157,000 )
 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
  $ 239,297,000     $ 254,526,000  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
                         
    2009     2008     2007  
REVENUES:
                       
Sales and related service revenues, net
  $ 102,605,000     $ 104,520,000     $ 122,274,000  
Rental revenues, net
    133,692,000       162,334,000       170,753,000  
 
                 
Total revenues, net
    236,297,000       266,854,000       293,027,000  
 
                 
 
                       
EXPENSES:
                       
Cost of sales and related services
    52,891,000       56,612,000       70,601,000  
Cost of rentals and other revenues, including rental equipment depreciation of $21,824,000, $26,085,000, and $31,055,000, respectively
    29,674,000       34,682,000       41,412,000  
Operating expenses
    124,548,000       132,523,000       139,638,000  
Bad debt expense
    3,517,000       4,635,000       8,164,000  
General and administrative
    20,909,000       19,841,000       19,194,000  
Depreciation, excluding rental equipment, and amortization
    3,866,000       4,102,000       3,361,000  
Interest expense, net
    14,734,000       15,618,000       15,828,000  
Other income, net
    (345,000 )     (1,040,000 )     (2,249,000 )
Change of control (income) expense
    (12,000 )     (77,000 )     5,637,000  
 
                 
Total expenses
    249,782,000       266,896,000       301,586,000  
 
                 
 
                       
Earnings from unconsolidated joint ventures
    5,243,000       6,201,000       5,754,000  
 
                 
 
                       
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    (8,242,000 )     6,159,000       (2,805,000 )
 
                       
Provision for income taxes
    4,515,000       5,054,000       4,097,000  
 
                 
 
                       
NET (LOSS) INCOME FROM CONTINUING OPERATIONS
  $ (12,757,000 )   $ 1,105,000     $ (6,902,000 )
 
                       
Less: net income attributable to the noncontrolling interests
    (341,000 )     (408,000 )     (390,000 )
 
                 
 
                       
NET (LOSS) INCOME FROM CONTINUING OPERATIONS ATTRIBUTABLE TO AMERICAN HOMEPATIENT
  $ (13,098,000 )   $ 697,000     $ (7,292,000 )
 
                       
DISCONTINUED OPERATIONS:
                       
(Loss) income from discontinued operations, including gain on disposal of assets of $3,001,000 in 2007, net of tax
          (183,000 )     1,770,000  
 
                 
 
                       
NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN HOMEPATIENT
  $ (13,098,000 )   $ 514,000     $ (5,522,000 )
 
                 
The accompanying notes are an integral part of these consolidated financial statements.

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Continued)
                         
    2009     2008     2007  
NET (LOSS) INCOME PER COMMON SHARE ATTRIBUTABLE TO AMERICAN HOMEPATIENT, INC. COMMON SHAREHOLDERS — BASIC
                       
(Loss) income from continuing operations
  $ (0.75 )   $ 0.04     $ (0.41 )
(Loss) income from discontinued operations
  $     $ (0.01 )   $ 0.10  
 
                 
NET (LOSS) INCOME PER COMMON SHARE — BASIC
  $ (0.75 )   $ 0.03     $ (0.31 )
 
                 
 
                       
NET (LOSS) INCOME PER COMMON SHARE ATTRIBUTABLE TO AMERICAN HOMEPATIENT, INC. COMMON SHAREHOLDERS — DILUTED
                       
(Loss) income from continuing operations
  $ (0.75 )   $ 0.04     $ (0.41 )
(Loss) income from discontinued operations
  $     $ (0.01 )   $ 0.10  
 
                 
NET (LOSS) INCOME PER COMMON SHARE — DILUTED
  $ (0.75 )   $ 0.03     $ (0.31 )
 
                 
 
                       
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
                       
- Basic
    17,573,000       17,573,000       17,573,000  
 
                 
- Diluted
    17,573,000       17,741,000       17,573,000  
 
                 
The accompanying notes are an integral part of these consolidated financial statements.

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT AND
COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
                                                 
    Common Stock     Noncontrolling     Additional     Accumulated        
    Shares     Amount     Interests     paid-in Capital     Deficit     Total  
BALANCE, December 31, 2006
    17,573,000     $ 176,000     $ 618,000     $ 175,083,000     $ (196,575,000 )   $ (20,698,000 )
 
                                               
Non-cash compensation expense for stock options
                      698,000             698,000  
Non-cash change of control expense
                      (275,000 )           (275,000 )
Net loss and comprehensive loss
                            (5,522,000 )     (5,522,000 )
Net income attributable to minority interest holders
                390,000                   390,000  
Distributions to minority interest holders
                (458,000 )                 (458,000 )
 
                                   
BALANCE, December 31, 2007
    17,573,000     $ 176,000     $ 550,000     $ 175,506,000     $ (202,097,000 )   $ (25,865,000 )
 
                                               
Non-cash compensation expense for stock options
                      391,000             391,000  
Non-cash change of control income
                      891,000             891,000  
Net income and comprehensive income
                            514,000       514,000  
Net income attributable to minority interest holders
                408,000                   408,000  
Distributions to minority interest holders
                (496,000 )                 (496,000 )
 
                                   
BALANCE, December 31, 2008
    17,573,000     $ 176,000     $ 462,000     $ 176,788,000     $ (201,583,000 )   $ (24,157,000 )
 
                                               
Non-cash compensation expense for stock options
                      282,000             282,000  
Non-cash change of control income
                      24,000             24,000  
Net loss and comprehensive loss
                            (13,098,000 )     (13,098,000 )
Net income attributable to minority interest holders
                341,000                   341,000  
Distributions to minority interest holders
                (371,000 )                 (371,000 )
 
                                   
BALANCE, December 31, 2009
    17,573,000     $ 176,000     $ 432,000     $ 177,094,000     $ (214,681,000 )   $ (36,979,000 )
 
                                   
The accompanying notes are an integral part of these consolidated financial statements.

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
                         
    2009     2008     2007  
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net (loss) income
  $ (13,098,000 )   $ 514,000     $ (5,522,000 )
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
                       
Change of control (income) expense
    (12,000 )     (77,000 )     5,637,000  
Gain on sale of nursing agency
                (3,001,000 )
Gain on sale of infusion branch
    (184,000 )     (2,000 )      
Deferred tax expense
    4,190,000       4,367,000       3,474,000  
Depreciation and amortization
    25,690,000       30,187,000       34,440,000  
Bad debt expense
    3,517,000       4,635,000       9,240,000  
Stock compensation expense
    282,000       391,000       698,000  
Equity in earnings of unconsolidated joint ventures
    (3,395,000 )     (4,304,000 )     (3,852,000 )
Minority interest
    341,000       408,000       390,000  
 
                       
Change in assets and liabilities
                       
Restricted cash
                400,000  
Accounts receivable
    9,173,000       1,446,000       87,000  
Inventories
    (106,000 )     506,000       691,000  
Prepaid expenses and other current assets
    3,188,000       3,236,000       (8,669,000 )
Deferred revenue
    (969,000 )     (4,000 )     (832,000 )
Accounts payable, other payables and accrued expenses
    (675,000 )     (9,003,000 )     (3,048,000 )
Other assets and liabilities
    1,013,000       (997,000 )     (1,724,000 )
Due to or from unconsolidated joint ventures, net
    8,065,000       4,047,000       4,096,000  
 
                 
Net cash provided by operating activities
    37,020,000       35,350,000       32,505,000  
 
                 
 
                       
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Cash paid for additions to property and equipment, net
    (16,863,000 )     (21,126,000 )     (17,968,000 )
Proceeds from sale of nursing agency, net
                2,757,000  
Proceeds from sale of infusion branch
    271,000       338,000        
Cash paid for acquisitions
                (407,000 )
 
                 
Net cash used in investing activities
  $ (16,592,000 )   $ (20,788,000 )   $ (15,618,000 )
 
                 
(Continued)

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
(Continued)
                         
    2009     2008     2007  
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Distributions to minority interest owners
  $ (371,000 )   $ (496,000 )   $ (458,000 )
Principal payments on long-term debt and capital leases
    (11,601,000 )     (11,322,000 )     (12,223,000 )
Proceeds on short-term note payable
    413,000             3,520,000  
Principal payments on short-term note payable
    (413,000 )     (274,000 )     (3,494,000 )
 
                 
Net cash used in financing activities
    (11,972,000 )     (12,092,000 )     (12,655,000 )
 
                 
 
                       
INCREASE IN CASH AND CASH EQUIVALENTS
    8,456,000       2,470,000       4,232,000  
 
                       
CASH AND CASH EQUIVALENTS, beginning of year
    13,488,000       11,018,000       6,786,000  
 
                 
CASH AND CASH EQUIVALENTS, end of year
  $ 21,944,000     $ 13,488,000     $ 11,018,000  
 
                 
 
                       
SUPPLEMENTAL INFORMATION:
                       
Cash payments of interest
  $ 14,364,000     $ 16,443,000     $ 16,884,000  
 
                 
Cash payments of income taxes
  $ 293,000     $ 657,000     $ 610,000  
 
                 
 
                       
Non-Cash Activity:
                       
Capital leases entered into for property and equipment
  $ 6,414,000     $ 1,222,000     $ 5,376,000  
Changes in accounts payable related to purchases of property and equipment
  $ 196,000     $ (1,285,000 )   $ (65,000 )
Change of control:
                       
Other liabilities
  $ 36,000     $ 968,000     $ 5,912,000  
Additional paid-in capital
  $ 24,000     $ 891,000     $ (275,000 )
 
                       
Supplemental Disclosure of Investing Activities:
                       
Disposition:
                       
Gain on sale
  $ 184,000     $ 2,000     $ 3,001,000  
Inventories sold
    87,000       321,000       16,000  
Property and equipment, net, sold
          15,000       50,000  
Promissory note received from sale of nursing agency
                (310,000 )
 
                 
Proceeds from sale
  $ 271,000     $ 338,000     $ 2,757,000  
 
                 
 
                       
Acquisition:
                       
Rental equipment acquired
  $     $     $ 113,000  
Inventory acquired
                35,000  
Goodwill acquired
                259,000  
 
                 
Cash paid for acquisition
  $     $     $ 407,000  
 
                 
The accompanying notes are an integral part of these consolidated financial statements.

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
1. ORGANIZATION AND BACKGROUND
American HomePatient, Inc. and subsidiaries (the “Company” or “American HomePatient”) provides home health care services and products consisting primarily of respiratory and infusion therapies and the rental and sale of home medical equipment and home health care supplies. These services and products are paid for primarily by Medicare, Medicaid, and other third-party payors. As of December 31, 2009, the Company provides these services to patients, primarily in the home, through 241 centers in 33 states.
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 December 31, 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 December 31, 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”). 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 was effective February 12, 2010 and expires March 16, 2010. 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. In accordance with the Variable Interest Entity Subsections of FASB ASC Subtopic 810-10 Consolidation-Overall (FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities), the Company must also consolidate any variable interest entities (VIEs) of which it is the primary beneficiary, as defined. When the Company does not have a controlling interest in an entity, but exerts significant influence over the entity, the Company applies the equity method of accounting. Investments in 50% owned joint ventures are accounted for using the equity method, and the results of 70% owned joint ventures are consolidated in the accompanying consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation.

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The Company evaluated subsequent events through March 4, 2010, the date of the issuance of the Company’s condensed consolidated financial statements.
The Company has not identified any variable interest entities at December 31, 2009 or 2008, for which consolidation is required.
Revenues
The Company’s principal business is to provide home health care services and products to patients, primarily in the home. Approximately 58% of the Company’s revenues in 2009, 60% of the Company’s revenue in 2008 and 61% of the Company’s revenue in 2007 are from participation in Medicare and state Medicaid programs. Amounts paid under these programs are generally based upon fixed rates. Revenues are recorded at the expected reimbursement rates when the services are provided, merchandise delivered or equipment rented to patients. Revenues are recorded at net realizable amounts estimated to be paid by customers and third-party payors. Although amounts earned under the Medicare and Medicaid programs are subject to review by such third-party payors, subsequent adjustments to reimbursements as a result of such reviews are historically insignificant as these reimbursements are based on fixed fee schedules. In the opinion of management, adequate provision has been made for any adjustment that may result from such reviews. Any differences between estimated settlements and final determinations are reflected as a reduction to revenue in the period known.
Sales revenues and related services include all product sales to patients and 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 the provision of services related to the delivery of these products. Sales revenues are recognized at the time of delivery and recorded at the expected payment amount based upon the type of product and the payor. Rentals and other patient revenues are derived from the rental of equipment related to the provision of respiratory therapy, home health care equipment, and enteral pumps. All rentals of the equipment are provided by the Company on a month-to-month basis and revenue is recorded at the expected payment amount based upon the type of rental and the payor. Certain pieces of equipment are subject to capped rental arrangements, whereby title to the equipment transfers to the patient at the end of the capped rental payment period.
Once initial delivery of rental equipment is made to the patient, a monthly billing cycle is established based on the initial date of delivery. The Company recognizes rental revenue ratably over the monthly service period and defers revenue for the portion of the monthly bill which is unearned. The fixed monthly rental encompasses the rental of the product, delivery, set-up, instruction, maintenance, repairs, and providing backup systems when needed, and as such, no separate revenue is earned from the initial equipment delivery and setup process. Routine maintenance and servicing of the equipment is the responsibility of the Company for as long as the patient is renting the equipment.
Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the consolidated statements of operations.
The following table sets forth the percentage of revenues represented by each line of business for the periods presented:
                         
    Year Ended December 31,
    2009   2008   2007
Home respiratory therapy services
    84 %     81 %     78 %
Home infusion therapy services
    9       10       11  
Home medical equipment and home health supplies
    7       9       11  
 
                       
Total
    100 %     100 %     100 %
 
                       

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Cash Equivalents
Cash equivalents at December 31, 2009 and 2008 consist of overnight repurchase agreements with an original term of less than three months. The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
Restricted Cash
Restricted cash at December 31, 2009 and 2008 consists of one certificate of deposit, which is used as collateral for a letter of credit associated with the Company’s professional liability insurance.
Accounts Receivable
The Company provides credit for a substantial portion of its non third-party reimbursed revenues and continually monitors the credit worthiness and collectibility of amounts due from its patients. The Company recognizes revenues at the time services are performed or products delivered. A portion of patient receivables consists of unbilled receivables for which the Company has not obtained all of the necessary medical documentation, but has provided the service or equipment. The Company determines its allowance for doubtful accounts based upon the type of receivable (billed or unbilled) as well as the age of the receivable. As a receivable balance ages, an increasingly larger allowance is recorded for the receivable. Historical collections substantiate the percentages of aged receivables for which an allowance is established. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.
Inventory
Inventory consists of certain equipment and supplies which are priced at the lower of cost (on a first-in, first-out basis) or market value. The Company recognizes cost of sales and relieves inventory at estimated amounts on an interim basis based upon the type of product sold and payor mix, and performs physical counts of inventory at each branch on an annual basis. Any resulting adjustment from these physical counts is charged to cost of sales. The allowance established by management for the valuation of inventory consists of an allowance for obsolete and slow moving items.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at December 31, 2009 and 2008 are primarily comprised of prepaid insurance premiums and include other deposits from which the Company expects to benefit within the next year. At December 31, 2009 and 2008, prepaid insurance premiums comprised $2,872,000 and $3,136,000 of prepaid expenses and other current assets, respectively.
Property and Equipment
Property and equipment are stated at cost and are depreciated or amortized primarily using the straight-line method over the estimated useful lives of the assets for financial reporting purposes and the accelerated cost recovery method for income tax reporting purposes. Assets under capital leases and leasehold improvements under operating leases are amortized and depreciated over the lesser of their estimated useful life or the base term of the lease for financial reporting purposes. The estimated useful lives are as follows: buildings and improvements, 25 years; rental equipment, 18 months to 5 years; furniture, fixtures and equipment, 4-7 years; leasehold improvements, 3-5 years; and delivery equipment, 3 years.
Equipment is rented to patients on a month-to-month basis for use in their homes and is depreciated over the equipment’s estimated useful life to the Company. On an annual basis the Company performs physical counts of rental equipment on hand at each branch and reconciles all recorded rental assets to internal billing reports. Any resulting adjustment for unlocated, damaged, or obsolete equipment is charged to rental

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equipment depreciation expense. Since rental equipment is maintained in the patient’s home, the Company is subject to loss resulting from lost equipment as well as losses for damaged, outdated, or obsolete equipment. Management records a valuation allowance for its estimated lost, damaged, outdated, or obsolete rental equipment based upon analytical data derived from the Company’s automated asset management system.
Maintenance and repairs are charged to expense as incurred, and major betterments and improvements are capitalized. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed and the resulting gain or loss is reflected in the consolidated statements of operations.
Property and equipment obtained through purchase acquisitions are stated at their estimated fair value determined on their respective dates of acquisition.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount in which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is reviewed for impairment at least annually in accordance with the provisions of FASB ASC Topic 350, Intangibles — Goodwill and Other (Statement No. 142, Goodwill and Other Intangible Assets). 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.
The liabilities of the Company continue to exceed its assets resulting in a negative carrying value of approximately $37.0 million at December 31, 2009. The equity based fair value of the Company and its one reporting unit is approximately $2.3 million at December 31, 2009. Accordingly, the Company’s fair value exceeds its carrying value as of December 31, 2009 and, by definition, no goodwill impairment is indicated. As long as the Company has a negative carrying value and has a positive fair value (market capitalization), goodwill impairment will not be indicated pursuant to ASC 350, which states “if the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired.”
The Company is currently working toward a resolution of its debt maturity issue (see Note 2). If the resolution of this issue includes additional equity resulting in a positive carrying value of the Company and the positive carrying value exceeds the fair value of the reporting unit, goodwill of the Company in the amount of $122.1 million at December 31, 2009 may be partially or completely impaired at that time.

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Investments in Unconsolidated Joint Ventures
Investments in unconsolidated joint ventures of nine companies are accounted for by the equity method. The Company would recognize an impairment when there is a loss in value in the equity method investment which is determined to be an other than temporary decline.
Other Assets
Other assets include deposits with vendors and lessors which total $8,043,000 and $9,116,000 as of December 31, 2009 and 2008, respectively. The Company also has other assets of $8,352,000 and $8,141,000 at December 31, 2009 and 2008, respectively, relating to life insurance arrangements that were recorded in connection with the prior acquisitions of certain home health care businesses and life insurance arrangements assigned to the Company by former employees. The majority of these assets are recorded at the amount to be received discounted over the remaining life expectancy of the insured. These amounts are reflected in other assets in the accompanying consolidated balance sheets.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and the tax credit carryforwards. Deferred tax assets and liabilities are measured using the expected tax rates that will be in effect when the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
The Company’s policy for recording interest and penalties associated with audits is to record such items as an other expense and not as a component of income tax expense.
Stock Based Compensation
Stock-based compensation costs are based on the estimated fair value of the respective options and the proportion vesting in the period. Deductions for stock-based employee compensation 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 485,000 options granted during the first quarter ended March 31, 2008. The estimated fair value of these options was $0.76 per share using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 97%; expected life of 5 years; and risk-free interest rate of 2.92%. There were 10,000 options granted on June 4, 2008. The estimated fair value of these options was $0.62 per share using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 94%; expected life of 5 years; and risk-free interest rate of 3.26%. There were 30,000 options granted on June 9, 2008. The estimated fair value of these options was $0.67 per share using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 94%; expected life of 5 years; and risk-free interest rate of 3.41%. There were no options granted during the third quarter ended September 30, 2008. There were 40,000 options granted on December 31, 2008. The estimated fair value of these options was $0.09 per share using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 98%; expected life of 5 years; and risk-free interest rate of 1.55%.

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    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. There were 40,000 options granted on December 31, 2009. The estimated fair value of these options was $0.10 per share using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 98%; expected life of 5 years; and risk-free interest rate of 2.69%.
 
    The Company recognized $282,000 and $391,000 of stock-based compensation expense during the years ended December 31, 2009 and 2008, 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.
 
    Segment Disclosures
 
    Public business enterprises or other enterprises that are required to file financial statements with the Securities and Exchange Commission (“SEC”) are required to report information about operating segments in annual financial statements and report selected information about operating segments in interim financial reports. Certain disclosures about products and services, geographic areas, and major customers are also required. The Company manages its business as one operating segment.
 
    Comprehensive Income (Loss)
 
    The Company did not have any components of comprehensive income (loss) other than net income (loss) in all periods presented.
 
    Use of Estimates
 
    The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the valuation of accounts receivable, inventory, goodwill, deferred tax assets and liabilities, and deferred revenue; the carrying amount of property and equipment; and the amount of self insurance accruals for healthcare, vehicle, and workers’ compensation claims. Actual results could differ from those estimates.
 
    Fair Value Measurements
 
    On January 1, 2008, the Company adopted the provisions of FASB Statement No. 157, Fair Value Measurements, included in ASC Topic 820, Fair Value Measurements and Disclosures, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Statement 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 (Statement 157) also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
 
    On January 1, 2009, the Company adopted the provisions of ASC Topic 820 (Statement 157) to fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.

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    Management utilizes quoted market prices or pricing information of similar instruments to estimate the fair value of financial instruments. The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximate fair value because of the short-term nature of these items.
 
    At December 31, 2009 and 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 existed for comparable debt instruments and because of the Company’s inability to estimate the fair value without incurring excessive costs.
 
    Fair Value Option
 
    Effective January 1, 2008, the Company adopted the Fair Value Option provisions of the Subsections of ASC Subtopic 825-10, Financial Instruments – Overall, included in FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. ASC Subtopic 825-10 (Statement 159) gives the Company the irrevocable option to report most financial assets and financial liabilities at fair value on an instrument-by-instrument basis, with changes in fair value reported in earnings. Adoption of ASC Subtopic 825-10 did not impact the Company’s financial position and results of operations.
 
    Reclassifications
 
    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 reclassifications did not affect net income attributable to the Company for any prior period.
 
    Recently Issued Accounting Standards
 
    The FASB issued Accounting Standards Update (“ASU”) 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets (FASB Statement No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140) in December 2009. ASU 2009-16 removes the concept of a qualifying special-purpose entity (“QSPE”) from Accounting Standards Codification (“ASC”) Topic 860, Transfers and Servicing, and the exception from applying ASC 810-10 to ASPEs, thereby requiring transferors of financial assets to evaluate whether to consolidate transferees that previously were considered QSPEs. Transferor-imposed constraints on transferees whose sole purpose is to engage in securitization or asset-backed financing activities are evaluated in the same manner under the provisions of the ASU as transferor-imposed constraints on QSPEs were evaluated under the provisions of Topic 860 prior to the effective date of the ASU when determining whether a transfer of financial assets qualifies for sale accounting. The ASU also clarifies the Topic 860 sale-accounting criteria pertaining to legal isolation and effective control and creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale. The ASU is effective for periods beginning after December 15, 2009, and may not be early adopted. The Company expects that the adoption of ASU 2009-16 will not have a material impact on its consolidated financial statements.
    The FASB issued ASU 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R)) in December 2009. ASU 2009-17, which amends the Variable Interest Entity (“VIE”) Subsections of ASC Subtopic 810-10, Consolidation – Overall, revises the test for determining the primary beneficiary of a VIE from a primarily quantitative risks and rewards calculation based on the VIE’s expected losses and expected residual returns to a primarily qualitative analysis based on identifying the party or related-party group (if any) with (a) the power to direct the activities that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. The ASU requires kick-out rights and participating rights to be ignored in evaluating whether a variable interest holder meets the power criterion unless those rights are unilaterally exercisable by a single party or related party group. The ASU also revises the criteria for determining whether fees paid by an entity to a decision maker or another service provider are a variable interest in the entity and revises the Topic 810 scope characteristic that identifies an entity as a VIE if the

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    equity-at-risk investors as a group do not have the right to control the entity through their equity interests to address the impact of kick-out rights and participating rights on the analysis. Finally, the ASU adds a new requirement to reconsider whether an entity is a VIE if the holders of the equity investment at risk as a group lose the power, through the rights of those interests, to direct the activities that most significantly impact the VIE’s economic performance, and requires a company to reassess on an ongoing basis whether it is deemed to be the primary beneficiary of a VIE. ASU 2009-17 is effective for periods beginning after December 15, 2009 and may not be early adopted. Adoption of ASU 2009-17 will result in the Company consolidating its 50%-owned joint ventures beginning January 1, 2010.
    In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (EITF Issue No. 08-1, Revenue Arrangements with Multiple Deliverables). ASU 2009-13 amends ASC 650-25 to eliminate the requirement that all undelivered elements have vendor specific objective evidence of selling price (“VSOE”) or third party evidence of selling price (“TPE”) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. In the absence of VSOE and TPE for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. The overall arrangement fee will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. Application of the “residual method’ of allocating an overall arrangement fee between delivered and undelivered elements will no longer be permitted upon adoption of ASU 2009-13. Additionally, the new guidance will require entities to disclose more information about their multiple-element revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company expects that the adoption of ASU 2009-13 will not have a material impact on its consolidated financial statements.
4.   DISCONTINUED OPERATIONS
 
    Effective April 1, 2007, the Company sold the assets of its home nursing business located in Tallahassee, Florida to Amedisys Home Health, Inc. of Florida. The sales price was $3.1 million, of which $2.8 million was received in cash at closing, with the remainder to be received according to the terms of a promissory note. The Company recorded a gain in the second quarter of 2007 of $3.0 million associated with this sale. The cash and note proceeds from this transaction were utilized to pay down long-term debt.
 
    Since the Company exited its home nursing line of business, the Company has presented the nursing business as discontinued operations in 2008 and 2007, with comparable presentation for prior years.
5.   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.

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    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 year ended December 31, 2009 the Company reduced its change of control expense by $12,000, 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 December 31, 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.
6.   FAIR VALUE MEASUREMENTS AND FAIR VALUE OPTION
 
    The Company adopted ASC Topic 820 (Statement 157) on January 1, 2008 for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. On January 1, 2009, the Company adopted the provisions of ASC Topic 820 (Statement 157) for fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. ASC Topic 820 (Statement 157) establishes 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.

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    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 cash, 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 December 31, 2009 and 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 existed for comparable debt instruments and because of the Company’s inability to estimate the fair value without incurring excessive costs.
7.   INVESTMENT IN JOINT VENTURES
 
    The Company owns 50% of nine home health care businesses, and 70% of two home health care businesses as of December 31, 2009 and 2008 (the “Joint Ventures”). The remaining ownership percentage of each joint venture is owned by local hospitals or other investors within the same community. Under management agreements, the Company is responsible for the management of these businesses and receives fixed monthly management fees or monthly management fees based upon a percentage of net revenues, net income or cash collections. The operations of the two 70% owned joint ventures are consolidated with the operations of the Company. The operations of the nine 50% owned joint ventures are not consolidated with the operations of the Company and are accounted for by the Company under the equity method of accounting.
 
    The Company provides accounting and receivable billing services to the joint ventures. The joint ventures are charged for their share of such costs based on contract terms. The Company’s earnings from unconsolidated joint ventures include equity in earnings of 50% owned joint ventures, management fees and fees for accounting and receivable billing services. Management fees and fees for accounting and receivable billing services were approximately $1,848,000, $1,897,000, and $1,902,000 for 2009, 2008, and 2007, respectively. The Company’s investment in unconsolidated joint ventures includes payables to joint ventures totaling $3,046,000 as of December 31, 2009 and receivables from joint ventures totaling $582,000 as of December 31, 2008. Minority interest represents the outside partners’ 30% ownership interests in the consolidated joint ventures, and totals $432,000 and $462,000 as of December 31, 2009 and 2008, respectively.

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    Summarized financial information of the nine 50% owned joint ventures at December 31, 2009 and 2008 and for each of the years in the three year period ending December 31, 2009 is as follows:
                         
    2009     2008     2007  
Cash
  $ 1,669,000     $ 5,343,000      
Accounts receivable, net
    3,594,000       4,947,000        
Property and equipment, net
    3,534,000       3,683,000        
Other assets
    6,028,000       3,233,000        
 
                 
Total assets
  $ 14,825,000     $ 17,206,000      
 
                 
 
                       
Accounts payable and accrued expenses
  $ 893,000     $ 1,283,000      
Partners’ capital
    13,932,000       15,923,000        
 
                 
Total liabilities and partners’ capital
  $ 14,825,000     $ 17,206,000      
 
                 
 
                       
Net sales and rental revenues
  $ 33,507,000     $ 35,511,000     $ 35,969,000  
Cost of sales and rentals, including rental depreciation
    10,106,000       9,632,000       9,409,000  
Operating and management fees
    16,303,000       16,938,000       18,683,000  
Depreciation, excluding rental equipment, amortization and interest expense
    122,000       143,000       169,000  
 
                 
Total expenses
    26,531,000       26,713,000       28,261,000  
 
                 
Pre-tax income
  $ 6,976,000     $ 8,798,000     $ 7,708,000  
 
                 
8.   ACCOUNTS RECEIVABLE
 
    The Company’s accounts receivable consist of the following components:
                 
    December 31,  
    2009     2008  
Patient receivables:
               
Medicare and related copay portions
  $ 10,630,000     $ 16,764,000  
All other, principally commercial insurance companies, and related copay portions
    18,617,000       27,389,000  
 
           
 
    29,247,000       44,153,000  
 
               
Other receivables, principally due from vendors and former owners of acquired businesses
    520,000       777,000  
 
           
Total accounts receivable
    29,767,000       44,930,000  
 
               
Less: Allowance for doubtful accounts
    3,396,000       5,869,000  
 
           
Accounts receivable, net
  $ 26,371,000     $ 39,061,000  
 
           
    Of the patient receivables, $4.6 million and $6.5 million are unbilled as of December 31, 2009 and 2008, respectively.

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9.   PROPERTY AND EQUIPMENT
 
    Property and equipment, at cost, consists of the following:
                 
    December 31,  
    2009     2008  
Land
    51,000       51,000  
Buildings and improvements
    5,162,000       4,909,000  
Rental equipment
    81,327,000       90,658,000  
Furniture, fixtures and equipment
    39,862,000       38,793,000  
Delivery equipment
    148,000       192,000  
 
           
 
  $ 126,550,000     $ 134,603,000  
 
           
    Depreciation expense was $25.3 million, $29.7 million, and $34.0 million for the years ended December 31, 2009, 2008, and 2007, respectively.
 
    Property and equipment under capital leases are included under the various equipment categories. As of December 31, 2009 and 2008, gross property held under capital leases totals $8,630,000 and $4,324,000, respectively, and related accumulated amortization was $3,795,000 and $2,741,000, respectively.
 
    Rental equipment is net of valuation allowances of $895,000 and $890,000 at December 31, 2009 and 2008, respectively.
 
    As of December 31, 2009 and 2008, respectively, accumulated depreciation includes $57,528,000 and $64,889,000 of accumulated depreciation related to rental equipment.
 
    Additions to property and equipment consist primarily of medical equipment rented to patients, computer equipment, office equipment, leasehold improvements, and furniture and fixtures. Additions to property and equipment, net, were $16.9 million, $21.1 million, and $18.0 million for the years ended December 31, 2009, 2008, and 2007, respectively. In addition to these cash outlays, the Company also acquired equipment by entering into capital leases of $6.4 million, $1.2 million, and $5.4 million for the years ended December 31, 2009, 2008, and 2007, respectively.
10.   GOODWILL
 
  The changes in the carrying amount of goodwill are as follows:
         
Balance at December 31, 2009 and 2008
  $ 122,093,000  
 
     

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11.   DEBT AND CAPITAL LEASES
 
    At December 31, 2009 and 2008 debt and capital lease obligations consist of the following:
                 
    December 31,  
    2009     2008  
Debt which is secured by substantially all assets of the Company and was due August 1, 2009. As a result of the Approved Plan, the secured debt bears interest at 6.785%, payable monthly
  $ 226,358,000     $ 233,569,000  
 
               
Capital lease obligations, monthly payments until 2011
    2,765,000       741,000  
 
           
Total debt and capital leases
    229,123,000       234,310,000  
Less: current portion
    (229,120,000 )     (234,259,000 )
 
           
Debt and capital leases, less current portion
  $ 3,000     $ 51,000  
 
           
    The Approved Plan provides that principal is payable annually on the secured debt on March 31 of each year in the amount of the Company’s Excess Cash Flow (defined in the Approved Plan as cash in excess of $7.0 million at the end of the Company’s fiscal year) for the previous fiscal year, with an estimated prepayment due on each previous September 30 in an amount equal to one-half of the anticipated March payment. The Company’s remaining Excess Cash Flow payment due after computing the actual 2007 Excess Cash Flow was $4.0 million, which was paid on March 31, 2008. On September 30, 2008, the Company made a payment of $5.0 million, which was one-half of the estimated 2008 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.
 
    A series of forbearance agreements have been entered into by and among the Company, the Agent for the Company’s lenders, 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 was effective February 12, 2010 and expires March 16, 2010.
 
    The Company has certain debt covenants that restrict the transfer or sale of collateral other than in the ordinary course of business without written consent, or allowing other non-permitted liens on the collateral.

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    Capital Leases
 
    The Company leases certain equipment under capital leases. Future minimum rental payments required on capital leases beginning January 1, 2010 are as follows:
         
2010
  $ 2,763,000  
2011
    3,000  
 
     
 
    2,766,000  
Less amounts representing interest ranging from 1.9% to 4.3%
    (1,000 )
 
     
 
  $ 2,765,000  
 
     
12.   COMMITMENTS AND CONTINGENCIES
   Operating Lease Commitments
   The Company has noncancelable operating leases on certain land, vehicles, buildings and equipment. Some of the leases contain renewal options and require the Company to pay all executory costs such as maintenance. The Company accounts for operating leases on a straight-line basis over the base term of the leases, with the difference between actual lease payments and straight-line expenses over the lease term included in deferred rent. The minimum future rental commitments on noncancelable operating leases (with initial or remaining lease terms in excess of one year), net of sublease proceeds, for the next five years and thereafter beginning January 1, 2009 are as follows:
                         
    Minimum Lease     Sublease     Net Lease  
    Payments     Proceeds     Commitments  
2010
  $ 6,529,000     $ (104,000 )   $ 6,425,000  
2011
    3,755,000       (65,000 )     3,690,000  
2012
    1,517,000             1,517,000  
2013
    314,000             314,000  
2014
                 
 
                 
 
  $ 12,115,000     $ (169,000 )   $ 11,946,000  
 
                 
   Rent expense for all operating leases was approximately $10,427,000, $12,110,000, and $13,591,000 in 2009, 2008, and 2007, respectively.
   Litigation
   The Company is subject to certain known or possible litigation incidental to the Company’s business, which, in management’s opinion, will not have a material adverse effect on the Company’s results of operations or financial condition.
   The Company maintains insurance for general liability, director and officer liability and property. Certain policies are subject to deductibles. In addition to the insurance coverage provided, the Company indemnifies certain officers and directors for actions taken on behalf of the Company.

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    Employment and Consulting Agreements
 
    The Company has employment agreements with certain members of management which provide for the payment to these members of amounts from one-half to two times their annual compensation (including bonus and certain benefits in some instances) in the event of a termination without cause, a constructive discharge (as defined in the employment agreements) or upon a change in control of the Company (as defined in the employment agreements). The terms of such agreements automatically renew for one year unless notice is given pursuant to the terms thereof. The maximum contingent liability under these agreements at December 31, 2009 is approximately $4,838,000.
 
    Self-Insurance
 
    Self-insurance accruals primarily represent the accrual for self-insurance or large deductible risks associated with workers’ compensation insurance, vehicle liability, commercial general and professional liability insurance. The Company is insured for workers’ compensation and vehicle liability but retains the first $250,000 of risk exposure for each claim. The Company did not maintain annual aggregate stop loss coverage for the years 2009, 2008 and 2007, as such coverage was not economically available. The Company’s liability includes known claims and an estimate of claims incurred but not yet reported. The estimated liability for workers’ compensation claims totaled approximately $2,978,000 and $3,113,000 as of December 31, 2009 and 2008, respectively. The estimated liability for vehicle claims totaled approximately $1,048,000 and $1,153,000 as of December 31, 2009 and 2008, respectively. The estimated total liability for commercial general and professional liability claims was $396,000 and $493,000 as of December 31, 2009 and 2008, respectively. The Company utilizes analyses prepared by a third-party administrator based on historical claims information to determine the required accrual and related expense associated with workers’ compensation, vehicle liability, commercial general and professional liability insurance. The Company records claims expense by plan year based on the lesser of the aggregate stop loss (if applicable) or the developed losses as calculated by the third-party administrator.
 
    The Company is also self-insured for health insurance for substantially all employees for the first $150,000 on a per person, per year basis. In addition, an aggregating specific deductible must be satisfied in the amount of $140,000 before stop loss insurance would apply. The Company has also maintained an annual aggregate stop loss coverage of $10.1 million for 2009. The health insurance policies are limited to maximum lifetime reimbursements of $2,000,000 per person for 2009, 2008 and 2007. The estimated liability for health insurance claims totaled $839,000 and $775,000 as of December 31, 2009 and 2008, respectively. The Company reviews health insurance trends and payment history and maintains an accrual for incurred but unpaid reported claims and for incurred but not yet reported claims based upon its assessment of lag time in reporting and paying claims.
 
    Management continually analyzes its accruals for incurred but not reported claims and for reported but unpaid claims related to its self-insurance programs and believes these accruals to be adequate. However, significant judgment is involved in assessing these accruals, and the Company is at risk for differences between actual settlement amounts and recorded accruals, and any resulting adjustments are included in expense once a probable amount is known.
 
    The Company is required to maintain cash collateral accounts with the insurance companies related to its self-insurance obligations. As of December 31, 2009 and 2008, the Company maintained cash collateral balances of $6.7 million, which is included in other assets.
 
    Letters of Credit
 
    At December 31, 2009, the Company had one letter of credit for $250,000 which expires in January 2011. The letter of credit secures the Company’s obligations with respect to its professional liability insurance. The letter of credit is secured by a certificate of deposit, which is included in restricted cash.

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    401K Retirement Savings Plan
 
    The Company maintains a 401k Retirement Savings Plan (the “401k”), administered by Massachusetts Mutual Life Insurance Company, to provide a tax deferred retirement savings plan to its employees. To qualify, employees must be at least 21 years of age, with twelve months of continuous employment and must work at least twenty hours per week. Employees may contribute up to 100% of their compensation, not exceeding a limit set annually by the Internal Revenue Service. The Company matches 25% of the first 3% of employee contributions. The Company match was suspended July 1, 2009. For the years ended December 31, 2009, 2008, and 2007, expense of $159,000, $281,000, and $282,000, respectively, associated with the Company’s matching is included in the consolidated statements of operations.
 
    Government Regulation
 
    The Company, as a participant in the health care industry, is subject to extensive federal, state and local regulation. In addition to the Federal False Claims Act (“False Claims Act”) and other federal and state anti-kickback and self-referral laws applicable to all of the Company’s operations (discussed more fully below), the operations of the Company’s home health care centers are subject to federal laws covering the repackaging and dispensing of drugs (including oxygen) and regulating interstate motor-carrier transportation. Such centers also are subject to state laws (most notably licensing and controlled substances registration) governing pharmacies, nursing services and certain types of home health agency activities.
 
    The Federal False Claims Act imposes civil liability on individuals or entities that submit false or fraudulent claims to the government for payment. False Claims Act penalties for violations can include sanctions, including civil monetary penalties.
 
    As a provider of services under the federal reimbursement programs such as Medicare, Medicaid and TRICARE, the Company is subject to the federal statute known as the anti-kickback statute, also known as the “fraud and abuse law.” This law prohibits any bribe, kickback, rebate or remuneration of any kind in return for, or as an inducement for, the referral of patients for government-reimbursed health care services.
 
    The Company is also subject to the federal physician self-referral prohibition, known as the “Stark Law,” which, with certain exceptions, prohibits physicians from referring patients to entities with which they have a financial relationship. Many states in which the Company operates have adopted similar fraud and abuse and self-referral laws, as well as laws that prohibit certain direct or indirect payments or fee-splitting arrangements between health care providers, under the theory that such arrangements are designed to induce or to encourage the referral of patients to a particular provider. In many states, these laws apply to services reimbursed by all payor sources.
 
    In 1996, the Health Insurance Portability and Accountability Act (“HIPAA”) introduced a new category of federal criminal health care fraud offenses. If a violation of a federal criminal law relates to a health care benefit, then an individual is guilty of committing a Federal Health Care Offense. The specific offenses are: health care fraud, theft or embezzlement, false statements, obstruction of an investigation, and money laundering. These crimes can apply to claims submitted not only to government reimbursement programs such as Medicare, Medicaid and TRICARE, but to any third-party payor, and carry penalties including fines and imprisonment.
 
    HIPPA mandated an extensive set of regulations to protect the privacy of individually identifiable health information.
 
    The Company must follow strict requirements with paperwork and billing. As required by law, it is Company policy that certain service charges (as defined by Medicare) falling under Medicare Part B are confirmed with a Certificate for Medical Necessity (“CMN”) signed by a physician. In January 1999, the Office of Inspector General of the Department of Health and Human Services (“OIG”) published a draft Model Compliance Plan for the Durable Medical Equipment, Prosthetics, Orthotics and Supply Industry. The OIG has stressed the importance for all health care providers to have an effective compliance plan. The Company has created and implemented a compliance program, which it believes meets the elements of the OIG’s Model Plan for the industry. As part of its compliance program, the Company performs internal audits of the adequacy of billing documentation. The Company’s policy is to voluntarily refund to the government any reimbursements

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    previously received for claims with insufficient documentation that are identified in this process and that cannot be corrected. The Company periodically reviews and updates its policies and procedures in an effort to comply with applicable laws and regulations; however, certain proceedings have been and may in the future be commenced against the Company alleging violations of applicable laws governing the operation of the Company’s business and its billing practices.
 
    The Company is also subject to state laws governing Medicaid, professional training, licensure, financial relationships with physicians and the dispensing and storage of pharmaceuticals. The facilities operated by the Company must comply with all applicable laws, regulations and licensing standards. Many of the Company’s employees must maintain licenses to provide some of the services offered by the Company. Additionally, certain of the Company’s employees are subject to state laws and regulations governing the professional practice of respiratory therapy, pharmacy and nursing.
 
    Information about individuals and other health care providers who have been sanctioned or excluded from participation in government reimbursement programs is readily available on the Internet, and all health care providers, including the Company, are held responsible for carefully screening entities and individuals they employ or do business with, to avoid contracting with an excluded provider. The entity cannot bill government programs for services or supplies provided by an excluded provider, and the federal government may also impose sanctions, including financial penalties, on companies that contract with excluded providers.
 
    Health care law is an area of extensive and dynamic regulatory oversight. Changes in laws or regulations or new interpretations of existing laws or regulations can have a dramatic effect on permissible activities, the relative costs associated with doing business, and the amount and availability of reimbursement from government and other third-party payors. There can be no assurance that federal, state, or local governments will not impose additional standards or change existing standards or interpretations.
 
    In recent years, various state and federal regulatory agencies have stepped up investigative and enforcement activities with respect to the health care industry, and many health care providers, including the Company and other durable medical equipment suppliers, have received subpoenas and other requests for information in connection with their business operations and practices. From time to time, the Company also receives notices and subpoenas from various government agencies concerning plans to audit the Company, or requesting information regarding certain aspects of the Company’s business. The Company cooperates with the various agencies in responding to such subpoenas and requests. The Company expects to incur additional legal expenses in the future in connection with existing and future investigations.
 
    The government has broad authority and discretion in enforcing applicable laws and regulations; therefore, the scope and outcome of any such investigations, inquiries, or legal actions cannot be predicted. There can be no assurance that federal, state or local governments will not impose additional regulations upon the Company’s activities nor that the Company’s past activities will not be found to have violated some of the governing laws and regulations. Any such regulatory changes or findings of violations of laws could adversely affect the Company’s business and financial position, and could even result in the exclusion of the Company from participating in Medicare, Medicaid, and other contracts for goods or services reimbursed by the government.
13.   SHAREHOLDERS’ EQUITY AND STOCK PLANS
    Nonqualified Stock Option Plans
 
    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.

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    An analysis of stock options outstanding under the 1991 Plan is as follows:
                 
            Weighted  
            Average  
    Options     Exercise Price  
Outstanding at December 31, 2006
    2,221,250     $ 3.45  
Granted
    525,000       1.63  
Exercised
           
Canceled
    (207,100 )     9.14  
 
             
 
               
Outstanding at December 31, 2007
    2,539,150       2.61  
Granted
    525,000       1.02  
Exercised
           
Canceled
    (533,150 )     5.45  
 
             
 
               
Outstanding at December 31, 2008
    2,531,000       1.68  
Granted
    415,000       0.22  
Exercised
           
Canceled
    (210,000 )     0.54  
 
             
 
               
Outstanding at December 31, 2009
    2,736,000     $ 1.55  
 
           

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    There were no stock options exercised in 2009 or 2008. At December 31, 2009, there was $0.2 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average of 1.2 years.
                 
            Weighted  
            Average  
            Grant-date  
          Nonvested Options   Options     Fair Value  
Balance at December 31, 2007
    481,250     $ 1.82  
Granted
    525,000       0.75  
Vested
    (217,084 )     2.04  
Forfeited
    (31,000 )     1.71  
 
             
 
               
Balance at December 31, 2008
    758,166       1.02  
Granted
    415,000       0.17  
Vested
    (328,249 )     1.26  
Forfeited
    (10,000 )     0.17  
 
             
 
               
Balance at December 31, 2009
    834,917     $ 0.52  
 
           

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    Options granted under the 1991 Plan as of December 31, 2009 have the following characteristics:
                                                                         
                                                    Weighted              
                                                    Average              
                                                    Exercise              
                            Weighted                     Price of     Weighted        
                            Average             Options     Options     Average        
                    Weighted     Remaining             Exercisable     Exercisable     Remaining        
                    Average     Contractual     Aggregate     at     at     Contractual     Aggregate  
Year of   Options     Exercise     Exercise     Life in     Intrinsic     Dec. 31,     Dec. 31,     Life in     Intrinsic  
Grant   Outstanding     Prices     Price     Years     Value     2009     2009     Years     Value  
2000
    220,000     $0.17 to $0.30   $ 0.18       0.85             220,000     $ 0.18       0.85        
2004
    450,000     $1.31 to $1.80   $ 1.64       4.39             450,000     $ 1.64       4.39        
2005
    170,000     $2.21 to $3.55   $ 2.97       5.10             170,000     $ 2.97       5.10        
2006
    470,000     $0.61 to $3.30   $ 3.24       6.14             467,500     $ 3.26       6.14        
2007
    496,000     $1.25 to $2.40   $ 1.63       7.24             418,583     $ 1.63       7.23        
2008
    525,000     $0.85 to $1.03   $ 1.02       8.18             175,000     $ 1.02       8.18        
2009
    405,000     $ 0.22     $ 0.22       9.16                   $       9.16        
 
                                                               
 
    2,736,000                             $       1,901,083                     $  
 
                                                               
    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 have a three year vesting period and expire in ten years. Options granted in 2008 and 2009 have a three year vesting period and expire in ten years. As of December 31, 2009, shares available for future grants of options under the 1991 Plan total 310,109.

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    Options granted under the 1991 Plan as of December 31, 2008 have the following characteristics:
                                                                         
                                                    Weighted              
                                                    Average              
                                                    Exercise              
                            Weighted                     Price of     Weighted        
                            Average             Options     Options     Average        
                    Weighted     Remaining             Exercisable     Exercisable     Remaining        
                    Average     Contractual     Aggregate     at     at     Contractual     Aggregate  
Year of   Options     Exercise     Exercise     Life in     Intrinsic     Dec. 31,     Dec. 31,     Life in     Intrinsic  
Grant   Outstanding     Prices     Price     Years     Value     2008     2008     Years     Value  
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 have a three year vesting period and expire in ten years. Options granted in 2008 have a three year vesting period and expire in ten years. As of December 31, 2008, shares available for future grants of options under the 1991 Plan total 515,109.

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    Under the 1995 Nonqualified Stock Option Plan for Directors (the “1995 Plan”), as amended as of February 10, 2000, 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, 2006
    468,000     $ 1.62  
Granted
    40,000       1.12  
Exercised
           
Canceled
    (6,000 )     21.06  
 
             
 
               
Outstanding at December 31, 2007
    502,000       1.35  
Granted
    40,000       0.12  
Exercised
           
Canceled
    (6,000 )     1.69  
 
             
 
               
Outstanding at December 31, 2008
    536,000       1.25  
Granted
    40,000       0.14  
Exercised
           
Canceled
    (6,000 )     0.53  
 
             
 
               
Outstanding at December 31, 2009
    570,000     $ 1.18  
 
           

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    Options granted under the 1995 Plan as of December 31, 2009 have the following characteristics:
                                                         
                            Weighted             Weighted        
                            Average             Average        
                    Weighted     Remaining             Exercise        
                    Average     Contractual             Price of     Aggregate  
Year of   Options     Exercise     Exercise     Life in     Options     Options     Intrinsic  
Grant   Outstanding     Prices     Price     Years     Exercisable     Exercisable     Value  
2000
    140,000     $0.20 to $0.30   $ 0.26       0.61       140,000     $ 0.26        
2001
    15,000     $0.75     $ 0.75       2.00       15,000     $ 0.75        
2002
    15,000     $0.15     $ 0.15       3.00       15,000     $ 0.15        
2003
    80,000     $1.29     $ 1.29       4.00       80,000     $ 1.29        
2004
    100,000     $1.18 to $3.46   $ 2.32       4.71       100,000     $ 2.32        
2005
    50,000     $3.27     $ 3.27       6.00       50,000     $ 3.27        
2006
    50,000     $1.40     $ 1.40       7.01       50,000     $ 1.40        
2007
    40,000     $1.12     $ 1.12       8.01       40,000     $ 1.12        
2008
    40,000     $0.12     $ 0.12       9.01       40,000     $ 0.12       400  
2009
    40,000     $0.14     $ 0.14       10.00       40,000     $ 0.14        
 
                                                 
 
    570,000                               570,000             $ 400  
 
                                                 
    Options granted under the 1995 Plan as of December 31, 2008 have the following characteristics:
                                                         
                            Weighted             Weighted        
                            Average             Average        
                    Weighted     Remaining             Exercise        
                    Average     Contractual             Price of     Aggregate  
Year of   Options     Exercise     Exercise     Life in     Options     Options     Intrinsic  
Grant   Outstanding     Prices     Price     Years     Exercisable     Exercisable     Value  
1999
    6,000     $0.53     $ 0.53       1.00       6,000     $ 0.53        
2000
    140,000     $0.20 to $0.30   $ 0.26       1.61       140,000     $ 0.26        
2001
    15,000     $0.75     $ 0.75       3.00       15,000     $ 0.75        
2002
    15,000     $0.15     $ 0.15       4.00       15,000     $ 0.15        
2003
    80,000     $1.29     $ 1.29       5.00       80,000     $ 1.29        
2004
    100,000     $1.18 to $3.46   $ 2.32       5.71       100,000     $ 2.32        
2005
    50,000     $3.27     $ 3.27       7.00       50,000     $ 3.27        
2006
    50,000     $1.40     $ 1.40       8.00       50,000     $ 1.40        
2007
    40,000     $1.12     $ 1.12       9.00       40,000     $ 1.12        
2008
    40,000     $0.12     $ 0.12       10.00       40,000     $ 0.12       800  
 
                                                 
 
    536,000                               536,000             $ 800  
 
                                                 
    The Directors’ options are fully vested upon issuance and expire ten years from date of issuance.
 
    Preferred Stock
 
    The Company’s certificate of incorporation was amended in 1996 to authorize the issuance of up to 5,000,000 shares of preferred stock. The Company’s Board of Directors is authorized to establish the terms and rights of each such series, including the voting powers, designations, preferences, and other special rights, qualifications, limitations or restrictions thereof. As of December 31, 2009, no preferred shares have been issued.

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    Income Per Common Share
 
    Income per share is measured at two levels: basic income per share and diluted income per share. Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted 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 income per share, the outstanding stock options are considered dilutive using the treasury stock method.
 
    For the years ended December 31, 2009, 2008 and 2007, approximately 2,708,000, 2,737,000, and 1,310,000 shares, respectively, attributable to the exercise of outstanding options were excluded from the calculation of diluted earnings per share because their effect was antidilutive.
14.   INCOME TAXES
    The provision (benefit) for income taxes is comprised of the following components:
                         
    For the Years Ended December 31,  
    2009     2008     2007  
Current
                       
Federal
  $     $     $  
State
    325,000       687,000       623,000  
 
                 
 
    325,000       687,000       623,000  
 
                 
 
                       
Deferred
                       
Federal
    3,760,000       3,919,000       3,116,000  
State
    430,000       448,000       358,000  
 
                 
 
    4,190,000       4,367,000       3,474,000  
 
                 
Provision for income taxes
  $ 4,515,000     $ 5,054,000     $ 4,097,000  
 
                 
    The difference between the actual income tax provision and the tax provision computed by applying the statutory federal income tax rate to income from operations before income taxes is attributable to the following:
                         
    For the Years Ended December 31,  
    2009     2008     2007  
(Benefit) provision for federal income taxes at statutory rate
  $ (2,989,000 )   $ 2,032,000     $ (499,000 )
State income taxes, net of federal tax benefit
    630,000       883,000       405,000  
Valuation allowance
    6,262,000       1,791,000       1,637,000  
Other non-deductible expenses
    612,000       348,000       2,554,000  
 
                 
Provision for income taxes
  $ 4,515,000     $ 5,054,000     $ 4,097,000  
 
                 

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    The net deferred tax assets and liabilities are as follows:
                 
    December 31,  
    2009     2008  
Current deferred tax assets:
               
Allowance for doubtful accounts
  $ 1,306,000     $ 2,245,000  
Accrued liabilities and other
    3,340,000       3,383,000  
 
           
 
    4,646,000       5,628,000  
Less valuation allowance
    (4,646,000 )     (5,628,000 )
 
           
Net current deferred tax assets
  $     $  
 
           
 
               
Noncurrent deferred tax assets (liabilities):
               
Tax amortization in excess of financial reporting amortization
  $ (12,031,000 )   $ (7,841,000 )
Financial reporting amortization in excess of tax amortization
    167,000       171,000  
Net operating loss carryforwards
    73,242,000       65,319,000  
Noncurrent asset valuation reserves
    348,000       346,000  
Financial reporting depreciation in excess of tax depreciation
    5,474,000       5,589,000  
Other
    1,071,000       1,633,000  
 
           
 
    68,271,000       65,217,000  
Less valuation allowance
    (80,302,000 )     (73,058,000 )
 
           
Net noncurrent deferred tax liabilities
  $ (12,031,000 )   $ (7,841,000 )
 
           
    For the year ended December 31, 2002, amortization of the Company’s indefinite-life intangible assets, consisting of goodwill, ceased for financial statement purposes. As of December 31, 2006, the Company’s deferred tax asset relating to indefinite-life intangibles was $1.2 million, which was fully reserved by a valuation allowance. As a result of additional tax amortization during 2007, 2008, and 2009, this deferred tax asset relating to indefinite-life intangibles became a deferred tax liability of $7.8 million as of December 31, 2008 and $12.0 million as of December 31, 2009. The Company cannot determine when the reversal of the deferred tax liability relating to its indefinite-life intangible assets will occur, or whether such reversal would occur within the Company’s net operating loss carry-forward period. For the years ended December 31, 2009 and 2008, the Company recognized a non-cash charge totaling $4.2 million and $4.4 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.
 
    State income taxes were $0.3 million, $0.7 million, and $0.6 million for the years ended December 31, 2009, 2008, and 2007, respectively.
 
    In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of approximately $162,972,000 prior to the expiration of the federal net operating loss carryforwards beginning in 2019. Taxable loss for the year ended December 31, 2009 is estimated to be $16,831,000 and the actual taxable loss for the year ended December 31, 2008 was $8,163,000. Based upon the historical taxable losses, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences; thus, the Company recorded a valuation allowance to fully reserve all net deferred tax assets as of December 31, 2009 and 2008. The increase in the valuation allowance in 2009 and 2008 was $6,262,000 and $1,793,000, respectively.

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    The Company adopted the provisions of FIN 48, included in ASC Subtopic 740-10, on January 1, 2007 and has analyzed filing positions in all of the federal and state jurisdictions as of December 31, 2007, where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company has identified its federal tax return and its state income tax returns filed in Texas, Florida, New York, Pennsylvania, Arkansas, Ohio, Iowa and Tennessee as its “major” tax jurisdictions. The periods subject to examination for the Company’s federal return are the 2006 through 2008 tax years. The periods subject to examination for the Company’s state returns in major tax jurisdictions are years 2005 through 2008. As of December 31, 2009, there were no active federal, state or local income tax audits.
 
    As a result of the implementation of ASC 740-10, the Company recognized no material adjustment in the liability for unrecognized tax benefits. A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows:
         
Gross unrecognized tax benefits at December 31, 2007
  $ 1,288,000  
Increases for tax positions of prior years
    44,000  
Decreases for tax positions of prior years
     
Lapse of statute of limitations
    (82,000 )
 
     
Gross unrecognized tax benefits at December 31, 2008
  $ 1,250,000  
Increases for tax positions of prior years
     
Decreases for tax positions of prior years
     
Lapse of statute of limitations
    (68,000 )
 
     
Gross unrecognized tax benefits at December 31, 2009
  $ 1,182,000  
 
     
    The Company had approximately $12,000 and $18,000 of accrued interest related to uncertain tax positions at December 31, 2009 and December 31, 2008, respectively. The total amount of unrecognized tax benefits that would affect the Company’s tax rate if recognized relates solely to certain state matters and is $92,000 and $158,000 as of December 31, 2009 and December 31, 2008, respectively.
 
    On April 10, 2007, the acquisition of 5,368,982 shares of the Company’s common stock by Highland Capital 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. The Company is in the process of assessing the potential limitation of its state net operating loss carryforwards resulting from the ownership change but does not anticipate the limitation to be material.
15.   INSURANCE
    The Company maintains a commercial general liability policy which is on a claims-made basis. This insurance is renewed annually and includes product liability coverage on the medical equipment that it sells or rents with per claim coverage limits of up to $1.0 million per claim with a $5.0 million product liability annual aggregate and a $3.0 million general liability annual aggregate. The Company’s professional liability policy is on a claims-made basis and is renewable annually with per claim coverage limits of up to $1.0 million per claim and $5.0 million in the aggregate. The Company’s commercial general liability policy and the professional liability policy have a maximum policy aggregate of $7.0 million, including defense costs. The Company retains the first $50,000 of each professional or general liability claim subject to a $500,000 aggregate. After the $500,000 aggregate has been reached, a $10,000 per claim deductible applies to all future claims applicable to this policy period. The Company also maintains excess liability coverage with limits of $20.0 million per claim and $20.0 million in the aggregate. Management believes the manufacturers of the equipment it sells or rents currently maintain their own insurance, and in some cases the Company has received evidence of such coverage and has been added by endorsement as an additional insured; however, there can be no assurance that such manufacturers will continue to do so, that such insurance will be adequate or available to protect the Company, or that the Company will not have liability independent of that of such manufacturers and/or their insurance coverage.

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    The Company is insured for vehicle liability coverage for $1.0 million per accident; subject to a per claim deductible of $250,000. The Company is insured for workers compensation losses; subject to a per claim deductible of $250,000. The Company also provides accruals for the settlement of outstanding claims and claims incurred but not reported at amounts believed to be adequate. The differences between actual settlements and accruals are included in expense once a probable amount is known. The Company did not maintain annual aggregate stop-loss coverage for the years 2007, 2008 and 2009, as such coverage was not economically available.
 
    There can be no assurance that any of the Company’s insurance will be sufficient to cover any judgments, settlements or costs relating to any pending or future legal proceedings or that any such insurance will be available to the Company in the future on satisfactory terms, if at all. If the insurance protection purchased by the Company is not sufficient to cover any judgments, settlements or costs relating to pending or future legal proceedings, the Company’s business and financial condition could be materially adversely affected.

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16.   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
    The following are the Company’s 2009 and 2008 quarterly financial information (amounts in thousands, except per share data):
                                         
    First     Second     Third     Fourth     Full  
2009   Quarter     Quarter     Quarter     Quarter     Year  
Revenues, net
  $ 58,311     $ 57,686     $ 58,991     $ 61,309     $ 236,297  
 
                             
 
                                       
(Loss) income from operations before income taxes
    (3,930 )     (2,654 )     (1,755 )     97       (8,242 )
 
                             
 
                                       
Provision for income taxes
    1,164       1,266       874       1,211       4,515  
 
                             
 
                                       
Net loss
  $ (5,094 )   $ (3,920 )   $ (2,629 )   $ (1,114 )   $ (12,757 )
 
                             
 
                                       
Less: net income attributable to the noncontrolling interests
  $ (74 )   $ (69 )   $ (91 )   $ (107 )   $ (341 )
 
                             
 
                                       
Net loss attributable to American HomePatient
  $ (5,168 )   $ (3,989 )   $ (2,720 )   $ (1,221 )   $ (13,098 )
 
                             
 
                                       
Net (loss) income per common share attributable to American HomePatient
                                       
- Basic
  $ (0.29 )   $ (0.23 )   $ (0.15 )   $ (0.08 )   $ (0.75 )
 
                             
- Diluted
  $ (0.29 )   $ (0.23 )   $ (0.15 )   $ (0.08 )   $ (0.75 )
 
                             

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    First     Second     Third     Fourth     Full  
2008   Quarter     Quarter     Quarter     Quarter     Year  
Revenues, net
  $ 69,214     $ 64,194     $ 65,641     $ 67,805     $ 266,854  
 
                             
 
                                       
Income (loss) from continuing operations before income taxes
    1,919       (603 )     1,688       3,155       6,159  
 
                             
 
                                       
Provision for income taxes
    1,270       1,410       1,012       1,362       5,054  
 
                             
 
                                       
Net income (loss) from continuing operations
  $ 649     $ (2,013 )   $ 676     $ 1,793     $ 1,105  
 
                             
 
                                       
Less: net income attributable to the noncontrolling interests
  $ (95 )   $ (119 )   $ (92 )   $ (102 )   $ (408 )
 
                             
 
                                       
Net income (loss) from continuing operations attributable to American HomePatient
  $ 554     $ (2,132 )   $ 584     $ 1,691     $ 697  
 
                             
 
                                       
Loss from discontinued operations
                      (183 )     (183 )
 
                             
 
                                       
Net income (loss)
  $ 554     $ (2,132 )   $ 584     $ 1,508     $ 514  
 
                             
 
                                       
Net income (loss) per common share attributable to American HomePatient — Basic
                                       
Income (loss) from continuing operations
  $ 0.03     $ (0.12 )   $ 0.03     $ 0.10     $ 0.04  
Loss from discontinued operations
                      (0.01 )     (0.01 )
 
                             
Net income (loss) per common share attributable to American HomePatient — Basic
  $ 0.03     $ (0.12 )   $ 0.03     $ 0.09     $ 0.03  
 
                             
Net income (loss) per common share attributable to American HomePatient — Diluted
                                       
Income (loss) from continuing operations
  $ 0.03     $ (0.12 )   $ 0.03     $ 0.10     $ 0.04  
Loss from discontinued operations
                      (0.01 )     (0.01 )
 
                             
Net income (loss) per common share attributable to American HomePatient — Diluted
  $ 0.03     $ (0.12 )   $ 0.03     $ 0.09     $ 0.03  
 
                             

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2009, 2008 and 2007
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
                                 
Column A   Column B     Column C     Column D     Column E  
            Additions     Deductions        
    Balance at             Write-offs     Balance at  
    Beginning     Bad Debt     Net of     End of  
Description   of Period     Expense     Recoveries     Period  
For the year ended December 31, 2009:
  $ 5,869,000     $ 3,517,000     $ 5,990,000     $ 3,396,000  
 
                       
 
                               
For the year ended December 31, 2008:
  $ 11,822,000     $ 4,818,000     $ 10,771,000     $ 5,869,000  
 
                       
 
                               
For the year ended December 31, 2007:
  $ 17,076,000     $ 9,240,000     $ 14,494,000     $ 11,822,000  
 
                       
S-1

 


Table of Contents

INDEX TO EXHIBITS
     
Exhibit Number   Description of Exhibit
 
   
2.1
  Second Amended Joint Plan of Reorganization Proposed by the Debtors and the Official Unsecured Creditors Committee dated January 2, 2003 (incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on March 27, 2003).
 
   
3.1
  Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement No. 33-42777 on Form S-1).
 
   
3.2
  Certificate of Amendment to the Certificate of Incorporation of the Company dated October 31, 1991 (incorporated by reference to Exhibit 3.2 to Amendment No. 2 to the Company’s Registration Statement No. 33-42777 on Form S-1).
 
   
3.3
  Certificate of Amendment to the Certificate of Incorporation of the Company Dated May 14, 1992 (incorporated by reference to the Company’s Registration Statement on Form S-8 dated February 16, 1993).
 
   
3.4
  Certificate of Ownership and Merger merging American HomePatient, Inc. into Diversicare Inc. dated May 11, 1994 (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement No. 33-89568 on Form S-2).
 
   
3.5
  Certificate of Amendment to the Certificate of Incorporation of the Company dated June 8, 1996 (incorporated by reference to Exhibit 3.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004).
 
   
3.6
  Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement No. 33-42777 on Form S-1).
 
   
3.7
  Amendment to the Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated November 5, 2007).
 
   
10.1
  Amended and Restated American HomePatient, Inc. 1991 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10 to the Company’s Registration Statement on Form S-8 filed on April 5, 2004).
 
   
10.2
  Amendment No. 1 to Amended and Restated American HomePatient, Inc. 1991 Nonqualified Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 filed on May 17, 2005).
 
   
10.3
  1995 Nonqualified Stock Option Plan for Directors (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004).

 


Table of Contents

     
Exhibit Number   Description of Exhibit
 
   
10.4
  Amendment No. 1 to 1995 Nonqualified Stock Option Plan for Directors (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004).
 
   
10.5
  Amendment No. 2 to 1995 Nonqualified Stock Option Plan for Directors (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-8 filed on May 17, 2005).
 
   
10.6
  Lease and addendum as amended dated October 25, 1995, by and between Principal Mutual Life Insurance Company and American HomePatient, Inc. (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004).
 
   
10.7
  Employment Agreement dated November 26, 2008 between the Company and Joseph F. Furlong, III (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 26, 2008).
 
   
10.8
  Form of Promissory Note dated July 1, 2003, by American HomePatient, Inc. and certain of its direct and indirect subsidiaries (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
 
   
10.9
  Second Amended and Restated Assignment and Borrower Security Agreement dated July 1, 2003, by and between American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
 
   
10.10
  Second Amended and Restated Assignment and Subsidiary Security Agreement dated July 1, 2003, by and between certain direct and indirect subsidiaries of American HomePatient, Inc. and Bank of Montreal, as (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
 
   
10.11
  Amended and Restated Borrower Partnership Security Agreement dated July 1, 2003, by and between American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
 
   
10.12
  Amended and Restated Subsidiary Partnership Security Agreement dated July 1, 2003, by and between certain direct and indirect subsidiaries of American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
 
   
10.13
  Second Amended and Restated Borrower Pledge Agreement dated July 1, 2003, by and between American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).

 


Table of Contents

     
Exhibit Number   Description of Exhibit
 
   
10.14
  Second Amended and Restated Subsidiary Pledge Agreement dated July 1, 2003, by and between certain direct and indirect subsidiaries of American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
 
   
10.15
  Amended and Restated Concentration Bank Agreement dated July 1, 2003, by and between American HomePatient, Inc., PNC Bank, National Association, and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
 
   
10.16
  Second Amended and Restated Collection Bank Agreement dated July 1, 2003, by and between American HomePatient, Inc., PNC Bank, National Association, and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
 
   
10.17
  Employment Agreement effective January 21, 2005 between the Company and Stephen Clanton (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 26, 2005).
 
   
10.18
  Employment Agreement effective February 9, 2005 between the Company and Frank Powers (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 28, 2005).
 
   
10.19
  Amendment No. 1 to Employment Agreement effective November 10, 2006 between the Company and Stephen Clanton (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated November 13, 2006).
 
   
10.20
  Amendment No. 1 to Employment Agreement effective November 10, 2006 between the Company and Frank Powers (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated November 13, 2006).
 
   
10.21
  Amendment to lease dated April 5, 2006, by and between Principal Mutual Life Insurance Company and American HomePatient, Inc. (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).
 
   
10.22
  Offer Letter accepted by James P. Reichmann on June 18, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 21, 2007).
 
   
10.23
  Confidentiality, Non-Competition and Severance Pay Agreement dated June 18, 2007 with James P. Reichmann (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated June 21, 2007).

 


Table of Contents

     
Exhibit Number   Description of Exhibit
 
   
10.24
  Amendment No. 2 to Amended and Restated American HomePatient, Inc. 1991 Nonqualified Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 3, 2008).
 
   
10.25
  Forbearance Agreement dated July 2, 2009, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
 
   
10.26
  Second Forbearance Agreement dated August 31, 2009, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
 
   
10.27
  Third Forbearance Agreement dated October 1, 2009, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
 
   
10.28
  Fourth Forbearance Agreement dated October 30, 2009, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein.
 
   
10.29
  Fifth Forbearance Agreement dated November 30, 2009, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein.
 
   
10.30
  Sixth Forbearance Agreement dated December 15, 2009, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein.
 
   
21
  Subsidiary List.
 
   
23
  Consent of KPMG LLP.
 
   
31.1
  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Chief Executive Officer.
 
   
31.2
  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer.
 
32.1
  Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer.
 
   
32.2
  Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer.