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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period
Ended: March 31, 2005ORo
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to.
 American HomePatient, Inc. 
 (exact name of registrant as specified in its charter)
 Delaware
    
    0-19532
    
    62-1474680(State or other jurisdiction of
    
    (Commission
    
    (IRS Employer Identification No.)incorporation or organization)
    
    File Number)5200 Maryland Way,
Suite 400, Brentwood, Tennessee
    
    37027(Address of principal executive offices)
    
    (Zip Code)
 (615) 221-8884 (Registrants telephone number, including area code)
 None (Former name, former address and former fiscal year, if changes since last report)
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes o No þ   17,362,389 (Outstanding shares of the issuers common stock as of April 28, 2005)
   1




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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES INDEX Page No.PART I
    
    Financial InformationItem 1.
    
    Financial Statements (Unaudited)Interim Condensed Consolidated Balance Sheets
    
    
    3Interim Condensed Consolidated Statements of Income  Three months ended March 31, 2005 and 2004
    
    
    5Interim
Condensed Consolidated Statements of Cash Flows  Three months
ended March 31, 2005 and 2004
    
    
    6Notes to Interim Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    44Item 4.
    
    Controls and Procedures
    
    
    44Report of Independent Registered Public Accounting Firm
    
    
    45PART II
    
    Other Information and SignaturesItem 1.
    
    Legal Proceedings
    
    
    46Item 6.
    
    Exhibits
    
    
    46Signatures
    
    
    
    
    48Ex-15.1  Awareness Letter of KPMG LLPEx-31.1  Section 302 Certification of the CEOEx-31.2  Section 302 Certification of the CFOEx-32.1  Section 906 Certification of the CEOEx-32.2  Section 906 Certification of the CFO
  2




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PART I. FINANCIAL INFORMATION 
 ITEM 1  FINANCIAL STATEMENTS AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES 
 INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) March 31,
    
    
    December 31,ASSETS
    
    2005
    
    
    2004CURRENT ASSETS:Cash and cash equivalents
    
    $
    9,261,000
    
    
    $
    5,772,000Restricted cash
    
    
    650,000
    
    
    
    650,000Accounts receivable, less allowance for
doubtful accounts of $17,303,000 and
$16,912,000, respectively
    
    
    54,550,000
    
    
    
    52,517,000Inventories, net of inventory valuation
allowances of $436,000 and $468,000,
respectively
    
    
    14,740,000
    
    
    
    15,947,000Prepaid expenses and other current assets
    
    
    5,113,000
    
    
    
    6,361,000Total current assets
    
    
    84,314,000
    
    
    
    81,247,000Property and equipment
    
    
    175,646,000
    
    
    
    174,761,000Less accumulated depreciation and amortization
    
    
    (117,727,000
    )
    
    
    (116,756,000
    )Property and equipment, net
    
    
    57,919,000
    
    
    
    58,005,000Goodwill
    
    
    121,834,000
    
    
    
    121,834,000Investment in joint ventures
    
    
    6,538,000
    
    
    
    6,698,000Other assets
    
    
    15,540,000
    
    
    
    15,280,000Total other assets
    
    
    143,912,000
    
    
    
    143,812,000TOTAL ASSETS
    
    $
    286,145,000
    
    
    $
    283,064,000
 (Continued) 3




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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) (Continued) March 31,
    
    
    December 31,LIABILITIES AND SHAREHOLDERS DEFICIT
    
    2005
    
    

    2004CURRENT LIABILITIES:Current portion of long-term debt and capital leases
    
    $
    880,000
    
    
    $
    885,000Accounts payable
    
    
    20,525,000
    
    
    
    17,842,000Other payables
    
    
    2,028,000
    
    
    
    1,751,000Short-term note payable
    
    
    2,472,000
    
    
    
    3,663,000Accrued expenses:Payroll and related benefits
    
    
    8,563,000
    
    
    
    8,655,000Insurance, including self-insurance accruals
    
    
    7,989,000
    
    
    
    8,213,000Other
    
    
    10,885,000
    
    
    
    8,669,000Total current liabilities
    
    
    53,342,000
    
    
    
    49,678,000NONCURRENT LIABILITIES:Long-term debt and capital leases, less current portion
    
    
    251,033,000
    
    
    
    251,033,000Pre-petition accounts payable
    
    
    477,000
    
    
    
    477,000Other noncurrent liabilities
    
    
    63,000
    
    
    
    2,071,000Total noncurrent liabilities
    
    
    251,573,000
    
    
    
    253,581,000Total liabilities
    
    
    304,915,000
    
    
    
    303,259,000MINORITY INTEREST
    
    
    560,000
    
    
    
    534,000SHAREHOLDERS DEFICITPreferred 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, 17,132,000 and
17,047,000 shares, respectively
    
    
    171,000
    
    
    
    170,000Additional paid-in capital
    
    
    173,743,000
    
    
    
    173,588,000Accumulated deficit
    
    
    (193,244,000
    )
    
    
    (194,487,000
    )Total shareholders deficit
    
    
    (19,330,000
    )
    
    
    (20,729,000
    )TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT
    
    $
    286,145,000
    
    
    $
    283,064,000
 The accompanying notes are an integral part of these consolidated financial statements. 4




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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES 
 INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited) Three Months Ended March 31,2005
    
    
    2004REVENUES:Sales and related service revenues, net
    
    $
    34,185,000
    
    
    $
    36,867,000Rental revenues, net
    
    
    47,303,000
    
    
    
    47,853,000Total revenues, net
    
    
    81,488,000
    
    
    
    84,720,000EXPENSES:Cost of sales and related services
    
    
    19,776,000
    
    
    
    18,617,000Cost of rental revenues, including rental equipment
depreciation of $5,705,000 and $5,511,000, respectively
    
    
    9,549,000
    
    
    
    9,343,000Operating expenses
    
    
    39,989,000
    
    
    
    44,240,000Bad debt expense
    
    
    2,689,000
    
    
    
    2,819,000General and administrative
    
    
    4,199,000
    
    
    
    4,289,000Depreciation, excluding rental equipment, and amortization
    
    
    813,000
    
    
    
    833,000Interest expense, net
    
    
    4,290,000
    
    
    
    4,650,000Other income, net
    
    
    (55,000
    )
    
    
    (78,000
    )Total expenses
    
    
    81,250,000
    
    
    
    84,713,000Earnings from unconsolidated joint ventures
    
    
    1,207,000
    
    
    
    1,052,000INCOME FROM OPERATIONS BEFORE REORGANIZATION ITEMS AND INCOME
TAXES
    
    
    1,445,000
    
    
    
    1,059,000Reorganization items
    
    
    106,000
    
    
    
    INCOME FROM OPERATIONS BEFORE INCOME TAXES
    
    
    1,339,000
    
    
    
    1,059,000Provision for income taxes
    
    
    96,000
    
    
    
    100,000NET INCOME
    
    $
    1,243,000
    
    
    $
    959,000NET INCOME PER COMMON SHARE:- Basic
    
    $
    0.07
    
    
    $
    0.06- Diluted
    
    $
    0.07
    
    
    $
    0.06WEIGHTED AVERAGE COMMON SHARES OUTSTANDING- Basic
    
    
    17,067,000
    
    
    
    16,377,000- Diluted
    
    
    17,867,000
    
    
    
    17,047,000
 The accompanying notes are an integral part of these consolidated financial statements. 5




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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES 
 INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Three Months Ended March 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,243,000
    
    
    $
    959,000Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    6,518,000
    
    
    
    6,344,000Bad debt expense
    
    
    2,689,000
    
    
    
    2,819,000Equity in earnings of unconsolidated joint ventures
    
    
    (741,000
    )
    
    
    (553,000
    )Minority interest
    
    
    95,000
    
    
    
    70,000Reorganization items
    
    
    106,000
    
    
    
    Reorganization items paid
    
    
    (157,000
    )
    
    
    (475,000
    )Change in assets and liabilities:Accounts receivable
    
    
    (4,722,000
    )
    
    
    (3,421,000
    )Inventories
    
    
    1,207,000
    
    
    
    698,000Prepaid expenses and other current assets
    
    
    1,248,000
    
    
    
    1,806,000Accounts payable, other payables and accrued
expenses
    
    
    4,911,000
    
    
    
    2,205,000Other assets and liabilities
    
    
    (2,361,000
    )
    
    
    (53,000
    )Due to unconsolidated joint ventures, net
    
    
    901,000
    
    
    
    2,276,000Net cash provided by operating activities
    
    
    10,937,000
    
    
    
    12,675,000CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property and equipment, net
    
    
    (6,339,000
    )
    
    
    (7,293,000
    )Net cash used in investing activities
    
    
    (6,339,000
    )
    
    
    (7,293,000
    )
 (Continued) 6




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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (Continued) Three Months Ended March 31,2005
    
    
    2004CASH FLOWS FROM FINANCING ACTIVITIES:Distributions to minority interest owners
    
    $
    (69,000
    )
    
    $
    (62,000
    )Proceeds from exercise of employee stock options
    
    
    156,000
    
    
    
    Principal payments on long-term debt and capital leases
    
    
    (5,000
    )
    
    
    (722,000
    )Principal payments on short-term note payable
    
    
    (1,191,000
    )
    
    
    Restricted cash
    
    
    
    
    
    
    (250,000
    )Net cash used in financing activities
    
    
    (1,109,000
    )
    
    
    (1,034,000
    )INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    3,489,000
    
    
    
    4,348,000CASH AND CASH EQUIVALENTS, beginning of period
    
    
    5,772,000
    
    
    
    2,571,000CASH AND CASH EQUIVALENTS, end of period
    
    $
    9,261,000
    
    
    $
    6,919,000SUPPLEMENTAL INFORMATION:Cash payments of interest
    
    $
    4,270,000
    
    
    $
    4,711,000Cash payments of income taxes
    
    $
    11,000
    
    
    $
    184,000
 The accompanying notes are an integral part of these consolidated financial statements. 7




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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES 
 NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) 1. BASIS OF PRESENTATION 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. American
HomePatient, Inc. and subsidiaries (the Company) provides home health care services and products
consisting primarily of respiratory therapies, infusion therapies and the rental and sale of home
medical equipment and home health care supplies. For the three months ended March 31, 2005, these
services represented 72%, 12% and 16% of revenues, respectively. These services and products are
paid for primarily by Medicare, Medicaid and other third-party payors. As of March 31, 2005, the
Company provided these services to patients primarily in the home through 274 centers in 35 states:
Alabama, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Iowa,
Kansas, Kentucky, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada,
New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina,
South Dakota, Tennessee, Texas, Virginia, Washington, West Virginia and Wisconsin. The interim condensed consolidated financial statements of the Company for the three months ended
March 31, 2005 and 2004 herein are unaudited and have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management of the Company, the accompanying unaudited interim
condensed consolidated financial statements reflect all adjustments (consisting of only normally
recurring accruals) necessary to present fairly the financial position at March 31, 2005 and the
results of operations and the cash flows for the three months ended March 31, 2005 and 2004. The results of operations for the three months ended March 31, 2005 and 2004 are not necessarily
indicative of the operating results for the entire respective years. These unaudited interim
condensed consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Companys 2004 Annual Report on Form 10-K. Certain reclassifications have been made to the 2004 interim condensed consolidated financial
statements to conform to the 2005 presentation. 2. PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE American HomePatient, Inc. and 24 of its subsidiaries (collectively, the Debtors) filed voluntary
petitions on July 31, 2002 for relief to reorganize under Chapter 11 of the U.S. Bankruptcy Code
(the Bankruptcy Filing) in the United States Bankruptcy Court for the Middle District of
Tennessee (the Bankruptcy Court). 8




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These cases (the Chapter 11 Cases) were consolidated for the purpose of joint administration
under Case Number 02-08915-GP3-11. On January 2, 2003, the Debtors filed their Second Amended
Joint Plan of Reorganization (the Proposed Plan), proposed by the Debtors and the Official
Committee of Unsecured Creditors appointed by the Office of the United States Trustee in the
Chapter 11 Cases. The holders of the Companys senior debt (the Lenders) objected to the
Proposed Plan. On May 15, 2003, the Bankruptcy Court entered a memorandum opinion overruling the
Lenders objections to the Proposed Plan. On May 27, 2003, the Bankruptcy Court entered an Order
confirming the Proposed Plan (Confirmation Order) (hereafter referred to as the Approved Plan).
On June 30, 2003, the United States District Court for the Middle District of Tennessee (the
District Court) rejected the Lenders request to stay the effective date of the Approved Plan. On July 1, 2003, the Companys Approved Plan became effective and the Company successfully emerged
from bankruptcy protection. The Approved Plan allows the Company to continue its business operations uninterrupted, led by its
current management team, and accomplishes the Companys primary goal of restructuring its long-term
debt obligations to its Lenders. In addition, the Approved Plan provides that the Companys
shareholders retain their equity interest in the Company and that all of the Companys creditors
and vendors will be paid 100% of all amounts they are owed, either immediately or over time with
interest. The Approved Plan provides for the treatment of all of the claims subject to compromise in the
Bankruptcy Filing. The Approved Plan provides for the extension of the maturity on the debt to the
Lenders, a reduction of the related interest cost on such debt, and the payment of all of the
Companys reported liabilities. The Lenders retained their liens on substantially all of the
assets of the Company. Pursuant to the Approved Plan, the Companys secured debt to the Lenders is quantified at $250.0
million and is evidenced by a promissory note in that amount and is secured by various security
agreements. To the Companys knowledge, the Lenders have not executed the agreements. The Company
is no longer a party to a credit agreement. The remainder of the amounts due to the Lenders at
July 1, 2003 over and above the $250.0 million is treated as unsecured. The Approved Plan provides that principal is payable annually on the $250.0 million secured debt on
March 31 of each year, beginning March 31, 2005, in the amount of one-third of the Companys Excess
Cash Flow (defined in the Approved Plan as cash and equivalents in excess of $7.0 million at the
end of the Companys fiscal year) for the previous fiscal year. After the unsecured debt of the
Lenders and the general unsecured debt is paid in full, 100% of the Companys Excess Cash Flow is
paid as a principal payment on the $250.0 million secured debt on March 31 of each year, with an
estimated prepayment due on each previous September 30 in an amount equal to one-half of the
anticipated March payment. Thus an estimated prepayment was due on September 30, 2004 in an amount
equal to one-half of the anticipated payment due on March 31, 2005, however no payment was made as
the Company did not anticipate having excess cash flow for fiscal 2004. The maturity date of the
$250.0 million secured debt is July 1, 9




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2009.
The Approved Plan provides that interest is payable monthly on the $250.0 million secured debt at a
rate of 6.785% per annum. The Approved Plan treats the general unsecured debt and the Lenders unsecured debt in the same
manner. Principal and accrued interest is payable semi-annually in six equal installments (on June
30 and December 31 of each year) beginning December 31, 2003. Interest accrues on this unsecured
debt at an annual rate of 8.3675%. In addition to the six scheduled payments, the holders of the
unsecured debt also received an estimated prepayment of the Pro Rata Payment (as defined in the
Approved Plan) on September 30, 2003. The Company was to make a payment on March 31, 2004 in the
amount of 100% of the Companys Excess Cash Flow for fiscal year 2003, however no payment was made
as the Company did not have excess cash flow for fiscal 2003. The Company is required to make
payments each March 31 in the amount of two thirds of the Companys Excess Cash Flow for the
previous fiscal year, if any. Additionally, an estimated prepayment was due on September 30, 2004
in an amount equal to one-half of the anticipated March 31, 2005 payment, however no payment was
made as the Company did not have excess cash flow for fiscal 2004. At this time the Company is unable to determine how much, if any, excess cash it will have on hand
at December 31, 2005. The Approved Plan allows the Company to make prepayments to the group of holders of unsecured debt,
either in whole or in part, at any time without penalty, which prepayments reduce and are a credit
against any subsequent mandatory payments. Prior to emergence from bankruptcy protection, the Company made adequate protection payments to the
Lenders totaling approximately $15.8 million. Pursuant to the Approved Plan all of the adequate
protection payments have been applied to the Lenders unsecured debt during 2003 as part of the
2003 scheduled payments. The Company has made all payments due under the Approved Plan as of March 31, 2005, and has also
prepaid some of its obligations thereunder. As of March 31, 2005, the Lenders were owed
approximately $251.0 million, comprised of $250.0 million of secured debt and $1.0 million of
unsecured debt. The remaining general unsecured claims (excluding the Government Settlement) as of
March 31, 2005 were approximately $0.5 million. The Bankruptcy Court issued an opinion ruling in favor of the Companys request to reject warrants
originally issued to the Companys Lenders to purchase 3,265,315 shares of the Companys common
stock for $.01 per share. As a result of the ruling, the warrants, which represented approximately
20% of the Companys outstanding common stock, were rejected by the Company. The Bankruptcy Court
determined the damages stemming from rejection of the warrants were $846,000, which is payable by
the Company to the warrant holders as an unsecured debt and is recorded as a component of other
accrued expenses on the consolidated balance sheets. The warrant holders have appealed the damages
calculation determined in this ruling. This liability will be paid to the warrant holders if they
are unsuccessful in their appeal. If the appeal is successful, the amount owed to the warrant
holders could substantially increase, which could materially adversely affect the Companys cash
flow and results from operations. The United States Court of Appeals for the Sixth Circuit has
issued a notification that this appeal will be submitted for decision, without oral argument, on
June 9, 2005. 10




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The Lenders also filed an appeal to the District Court of the order confirming the Approved Plan.
On September 12, 2003 the District Court issued an opinion affirming in all respects the
Confirmation Order. The Lenders have filed an appeal to the order confirming the Approved Plan
with the United States Court of Appeals for the Sixth Circuit. The Company intends to vigorously
defend the Confirmation Order entered by the Bankruptcy Court and upheld by the District Court.
The outcome of the appeal cannot be predicted, and an adverse ruling could have a material adverse
effect on the Company. These adverse effects could include, without limitation, adverse changes in
the interest rate related to its secured and unsecured debt, a change in the proportion of debt
treated as secured debt, issuance of equity securities or an adverse change in the capitalization
of the Company to the detriment of equity holders. There can be no assurance as to the extent or
nature of the adverse effects of a successful Lenders appeal. 3. STOCK BASED COMPENSATION The Company applies the intrinsic-value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25)
and related interpretations including Financial Accounting Standards Board (FASB) Interpretation
No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this
method, compensation expense is recorded only if the current market price of the underlying stock
exceeds the exercise price on the date of grant. SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), and SFAS No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure, an amendment to FASB Statement No. 123 (SFAS No. 148), established
accounting and disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As permitted by existing accounting standards, the
Company has elected to continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS No. 123, as amended. The following
table illustrates the effect on net income if the fair-value-based method had been applied to all
outstanding and unvested awards in each period. Three Months Ended March 31,2005
    
    
    2004Net income  as reported
    
    $
    1,243,000
    
    
    $
    959,000Additional compensation expense
    
    
    (150,000
    )
    
    
    (218,000
    )Net income  pro forma
    
    $
    1,093,000
    
    
    $
    741,000Net income per common share
- as reportedBasic
    
    $
    0.07
    
    
    $
    0.06Diluted
    
    $
    0.07
    
    
    $
    0.06Net income per common share
- pro formaBasic
    
    $
    0.06
    
    
    $
    0.05Diluted
    
    $
    0.06
    
    
    $
    0.04
 11




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4. REORGANIZATION ITEMS Reorganization items represent expenses that are incurred by the Company as a result of
reorganization under Chapter 11 of the Federal Bankruptcy Code. Reorganization items for the three
months ended March 31, 2005 were $106,000 and are comprised primarily of professional fees. 5. LIQUIDITY As discussed in Note 2, on July 1, 2003, the Companys Approved Plan became effective and the
Company emerged from bankruptcy protection. Pursuant to the Approved Plan, as of March 31, 2005
the Company had secured and unsecured debt to the Lenders of $250,000,000 and $1,025,000,
respectively. The Company also had unsecured debt of $477,000. The secured debt is evidenced by a
promissory note in that amount and is secured by various security agreements. The accompanying interim condensed consolidated financial statements were prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. For the year ended December 31, 2004, net cash provided by operating activities was $32,972,000.
For the three months ended March 31, 2005, the Company achieved net income of $1,243,000 and had
$10,937,000 of cash provided by operating activities. Total long-term debt and capital leases have decreased by $5,000 from $251,918,000 at December 31,
2004 to $251,913,000 at March 31, 2005. All of the Companys debt has fixed interest rates, which
on a weighted average was 6.8% at March 31, 2005. The Company has scheduled current debt principal payments of $880,000 and minimum rental
obligations of $10.2 million under long-term operating leases due during the twelve months ending
March 31, 2006. The Company is also obligated to pay any Excess Cash Flow for application on the
Lenders secured and unsecured debt as well as to holders of other unsecured debt. During 2003,
the Company made payments, including some pre-payments, on the Lenders unsecured debt, as well as
on other unsecured debt totaling $26.9 million. The Company has the option to apply the
pre-payments against future required payments, including the required 2005 payments; however, the
Company intends to continue making payments to the Lenders and general unsecured creditors (as
defined in the Approved Plan) if it has sufficient cash. 12




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As of March 31, 2005, the Company had approximately $9,261,000 in unrestricted cash and cash
equivalents and $30,972,000 of working capital. The Companys consolidated cash flows from
operations for the year ended December 31, 2004 and through March 31, 2005 were sufficient to meet
2004 and year to date 2005 debt and lease obligations. The Companys future liquidity and capital
resources will be materially adversely impacted by the Medicare reimbursement reductions contained
in the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The Medicare
reimbursement reductions that became effective January 2004 impacted the Companys profitability
and ability to improve its liquidity and capital resources. The adverse impact that the 2005
reimbursement reductions will have on the Companys operating results and financial condition will
be material in 2005 and beyond. The magnitude of the impact of the reimbursement reductions on the
Companys operating results and financial position will depend upon the success of the Companys
efforts to grow revenues, improve productivity, and reduce costs. See Managements Discussion and
Analysis of Financial Condition and Results of Operations  Trends, Events, and Uncertainties 
Reimbursement Changes and the Companys Response and Risk Factors  Medicare Reimbursement
Reductions. Management believes that the Company can operate on its existing cash and
projected cash flow, and make all payments provided for in the Approved Plan through March 31,
2006. There can be no assurance that the Companys operations will achieve this projected cash
flow. The failure to meet its periodic debt, lease and other financial obligations, or the failure
to extend, refinance or repay any of its debt obligations as they become due would have a material
adverse effect upon the Company. 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 and accrued expenses). In that regard, the level and quality of accounts
receivable can have a significant impact on the Companys liquidity. The Company has various types
of accounts receivable, the majority of which are patient receivables. Accounts receivable are
generally outstanding for longer periods of time in the health care industry than 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 $53,357,000 and $50,581,000 at March
31, 2005 and December 31, 2004, respectively. Average days sales in accounts receivable (DSO)
was approximately 61 and 55 days at March 31, 2005 and December 31, 2004, respectively. The
Company calculates DSO by dividing the previous 90 days of revenue (excluding dispositions and
acquisitions), net of bad debt expense into net patient accounts receivable and multiplying the
ratio by 90 days. The Companys level of DSO and net patient receivables is affected by the
extended time required to obtain necessary billing documentation. The Companys DSO at March 31,
2005 was impacted negatively by annual patient deductibles during the first quarter of the year and
an increase in unbilled revenue resulting from temporary delays in obtaining supporting
documentation needed for billing as a result of changes in procedures being implemented during the
first quarter of 2005. In accordance with the Approved Plan, none of the Companys current debt and lease agreements
contain financial and other restrictive covenants. However, any non-payment, or other default with
respect to the Companys debt obligations could cause the Companys Lenders to attempt to
declare 13




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defaults, accelerate payment obligations or foreclose upon the assets securing such
indebtedness or exercise their remedies with respect to such assets. Any of such events, if
appropriately taken by the Lenders, would have a material adverse impact on the Company. 6. GOVERNMENT INVESTIGATION AND LITIGATION In 2001, the Company entered into a settlement agreement (the Government Settlement) with the
United States of America, acting through the United States Department of Justice (DOJ) and on
behalf of the Office of Inspector General of the Department of Health and Human Services (OIG)
and the TRICARE Management Activity, which resolved a false claims action alleging improprieties by
the Company during the period from January 1, 1995 through December 31, 1998. Pursuant to the
Approved Plan, amounts owed pursuant to the Government Settlement will be paid in full in
accordance with the Government Settlement, and the Company has made all payments due to date under
the Government Settlement. A payment of $1.0 million is due in July 2005 and a final payment of
$2.0 million is due under the Government Settlement in March 2006. During the three month period
ended March 31, 2005, the Company paid $529,000 including interest of $29,000, pursuant to the
Government Settlement. At March 31, 2005, the Company had an accrual of $3,008,000 for its
remaining obligations pursuant to the Government Settlement, which is classified as a current
liability. The accrual related to the Government Settlement is included in other accrued expenses
on the accompanying interim condensed consolidated balance sheets at March 31, 2005. 7. NET INCOME PER COMMON SHARE Net income per share is measured at two levels: basic net income per share and diluted net income
per share. Basic net income per share is computed by dividing net income by the weighted average
number of common shares outstanding during the year. Diluted net income per share is computed by
dividing net income by the weighted average number of common shares after considering the
additional dilution related to stock options and warrants. In computing diluted income per share,
the outstanding stock warrants and stock options are considered dilutive using the treasury stock
method. 14




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##### Table of Contents



The following information is necessary to calculate net income per share for the periods presented: Three Months Ended March 31,2005
    
    
    2004Net income
    
    $
    1,243,000
    
    
    $
    959,000Weighted average common shares outstanding
    
    
    17,067,000
    
    
    
    16,377,000Effect of dilutive options and warrants
    
    
    800,000
    
    
    
    670,000Adjusted diluted common shares outstanding
    
    
    17,897,000
    
    
    
    17,047,000Net income per common share- Basic
    
    $
    0.07
    
    
    $
    0.06- Diluted
    
    $
    0.07
    
    
    $
    0.06
 8. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No.
123R). This statement requires that the compensation cost relating to share-based payment
transactions be recognized in the financial statements. Compensation cost is to be measured based
on the estimated fair value of the equity-based compensation awards issued as of the grant date.
The related compensation expense will be based on the estimated number of awards expected to vest
and will be recognized over the requisite service period for each grant. The statement requires
the use of assumptions and judgments about future events and input to valuation models, which will
require considerable judgment by management. SFAS No. 123R replaces SFAS No. 123, rescinds SFAS
No. 148 and supersedes APB Opinion No. 25. The provisions of SFAS No. 123R are required to be
applied by public companies as of the first annual reporting period that begins after June 15,
2005. The Company continued applying APB Opinion No. 25 to equity-based compensation awards
through March 31, 2005. At the effective date of SFAS No. 123R, the Company expects to use the
modified prospective application transition method without restatement of prior periods in the year
of adoption. This will result in the Company recognizing compensation cost based on the
requirements of SFAS No. 123R for all equity-based compensation awards issued after January 1,
2006. For all equity-based compensation awards that are unvested as of January 1, 2006,
compensation cost will be recognized. The Company is currently evaluating the impact that adoption
of the SFAS No. 123R will have on its results of operations and financial position. 15




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ITEM 2   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 including, without limitation, statements
containing the words believes, anticipates, intends, expects, estimates, projects,
may, plan, will, likely, could and words of similar import. Such statements include
statements concerning the Companys Approved Plan (as defined in Note 2 to the interim condensed
consolidated financial statements), other effects and consequences of the Bankruptcy Filing (as
defined in Note 2 to the interim condensed consolidated financial statements), forecasts upon which
the Approved Plan is based, business strategy, the ability to satisfy interest expense and
principal repayment obligations, operations, cost savings initiatives, industry, economic
performance, financial condition, liquidity and capital resources, adoption of, or changes in,
accounting policies and practices, existing government regulations and changes in, or the failure
to comply with, governmental regulations, legislative proposals for healthcare reform, the ability
to enter into strategic alliances and arrangements with managed care providers on an acceptable
basis, and changes in reimbursement policies. Such statements are not guarantees of future
performance and are subject to various risks and uncertainties. The Companys actual results may
differ materially from the results discussed in such forward-looking statements because of a number
of factors, including those identified in the Risk Factors section and elsewhere in this
Quarterly Report on Form 10-Q. The forward-looking statements are made as of the date of this
Quarterly Report on Form 10-Q and the Company does not undertake to update the forward-looking
statements or to update the reasons that actual results could differ from those projected in the
forward-looking statements. 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 March
31, 2005, the Company provided these services to patients primarily in the home through 274 centers
in 35 states. American HomePatient, Inc. was incorporated in Delaware in September 1991. From its inception
through 1997, the Company experienced substantial growth primarily as a result of its strategy of
acquiring and operating home health care businesses. Beginning in 1998, the Companys strategy
shifted from acquiring new businesses to focusing more on internal growth, integrating its acquired
operations and achieving operating efficiencies. On July 31, 2002, American HomePatient, Inc. and 24 of its subsidiaries filed voluntary
petitions for relief to reorganize under Chapter 11 of the U.S. Bankruptcy Code (the Bankruptcy
Filing) in the United States Bankruptcy Court for the Middle District of Tennessee (the
Bankruptcy Court). On July 1, 2003, American HomePatient, Inc. emerged from bankruptcy pursuant
to a 100% pay plan (the Approved Plan) whereby the Companys shareholders 16




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##### Table of Contents



retained their equity interest and all of the Companys creditors and vendors will be paid 100% of
all amounts they are owed, either immediately or over time with interest. See Managements
Discussion and Analysis of Financial Conditions and Results of Operations  Liquidity and Capital
Resources. 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. General The Company provides home health care services and products to patients through its 274
centers in 35 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 set by
the payors and not by the Company. Since the Company cannot affect pricing, it can improve
operating results primarily by increasing the number of units sold and rented and controlling
expenses. It can 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. Operating in an industry with pre-set prices subject to reimbursement
reductions makes it crucial to increase revenues by increasing the volume of sales and rentals.
Over the past three years the Company has increased its focus on sales and marketing efforts in an
effort to improve revenues with mixed results. Improving these 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. For the three months ended March 31, 2004 and March 31, 2005 bad debt expense
as a percentage of net revenue was 3.3%. Cash Flow.The Companys funding of day-to-day operations and all payments required under the
Approved Plan will rely on cash flow and cash on hand. The Company currently does not have access
to a revolving line of credit. The Approved Plan also obligates the Company to pay Excess Cash
Flow (defined in the Approved Plan as cash and equivalents in excess of $7.0 million at the end of
the Companys fiscal year) to creditors to reduce the Companys debt. The nature of the Companys
business requires substantial capital expenditures in order to buy the equipment used to generate
revenues. As a result, management views cash flow as particularly critical to the Companys
operations. The Companys future liquidity will continue to be dependent upon the relative amounts
of current assets (principally cash, accounts receivable, and inventories) and current liabilities
(principally accounts payable and accrued expenses).
Management attempts to monitor and improve cash flow in a number of ways, including inventory
utilization analysis, cash 17




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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. DSO is a tool used by management to assess collections and the
consequent impact on cash flow. The Company calculates DSO by dividing the previous 90 days of
revenue (excluding dispositions and acquisitions), net of bad debt expense into net patient
accounts receivable and multiplying the ratio by 90 days. 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 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 indicates a breakdown in processes at the
billing centers resulting in a disruption in cash collections. A decline in DSO usually results
from process improvements and improved cash collections. Management uses DSO trends to monitor,
evaluate and improve the performance of the billing centers. The decrease in DSO in the past three
years from 61 in 2002 to 55 in 2004 is due to improved collection results on current billings and
improved timeliness in obtaining necessary billing documentation. The Companys DSO of 61 at March
31, 2005 was impacted negatively in the first quarter of 2005 by annual patient deductibles and
temporary delays in obtaining supporting documentation needed for billing as a result of changes in
procedures being implemented during the first quarter of 2005. See Managements Discussion and
Analysis of Financial Condition and Results of Operations  Trends, Events, and Uncertainties 
HIPAA and -Medicaid. Unbilled Revenue.Another key indicator of the Companys receivable collection efforts is the
amount of unbilled revenue, which reports the amount of sales and rental revenues that have not yet
been billed to the payors due to incomplete documentation or the receipt of the Certificate of
Medical Necessity (CMN) from the providers. At March 31, 2005 and December 31, 2004, the amount
of unbilled revenue net of allowances was $13.5 million and $10.8 million, respectively. The
increase in unbilled revenue is the result of temporary delays in obtaining supporting
documentation needed for billing as a result of changes in procedures being implemented during the
first quarter of 2005. Productivity and Profitability. As discussed above, the fixed price reimbursement
in the Companys industry makes it particularly important to control expenses. 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 productivity analysis and profitability analysis. For instance,
management analyzes billing center productivity using measures such as monthly revenue processed
per full time equivalent (FTE) and monthly claims processed per FTE, with the goal of increasing
productivity and eliminating the resulting excess capacity. Additionally, the Company monitors
productivity of its operating centers by measuring each centers personnel costs against a
predetermined productivity standard. This measurement highlights opportunities for improved
productivity and reductions in personnel expenses on a branch and area basis. These analyses have
enabled the Company to consolidate billing centers, improve productivity at operating centers and
reduce expenses. Moreover, they help identify and standardize best practices and identify and
correct deficiencies. Similarly, the Company monitors its business on an operating
center and product basis to identify opportunities to target growth or contraction. These analyses
have led to the closure or consolidation of locations and to the emphasis on products and new sales
initiatives. 18




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##### Table of Contents



During the first quarter of 2005, the Company closed or consolidated three operating
centers and opened one operating centers. Management anticipates that further productivity
improvements and cost reductions will occur in light of the Medicare reimbursement reductions
recently implemented. See Trends, Events, and Uncertainties  Reimbursement Changes and the
Companys Response. 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 matters have not occurred, but their existence
is sufficient to raise doubt regarding the likelihood that historical operating results are an
accurate gauge of future performance. The Company attempts to identify and describe these trends,
events, and uncertainties to assist investors in assessing the likely future performance of the
Company. Investors should understand that these matters typically are new, sometimes unforeseen,
and often are fluid in nature. Moreover, the matters described below are not the only issues that
can result in variances between past and future performance nor are they necessarily the only
material trends, events, and uncertainties that will affect the Company. As a result, investors
are encouraged to use this and other information to ascertain for themselves the likelihood that
past performance is indicative of future performance. The trends, events, and uncertainties set out in the remainder of this section have been
identified by the Company as reasonably likely to materially affect the comparison of historical
operating results reported herein to either other past period results or to future operating
results. Reimbursement Changes and the Companys Response. The reimbursement changes contained in the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the MMA) have and will
continue to negatively impact the Companys operating results, liquidity and capital resources.
The MMA contained provisions to reduce revenue reimbursements for inhalation drugs, 16 durable
medical equipment items and home oxygen. The impact of the reimbursement changes to the Companys
revenues and net income for these items for the first quarter of 2005 was $3.3 million and $4.1
million, respectively. A provision in the MMA required that, effective January 1, 2004, the reimbursement rate for
inhalation drugs used with a nebulizer be reduced from 95% of the average wholesale price (AWP)
to 80% of AWP. Revenues for 2004 were reduced by approximately $7.4 million as result of the
reduced reimbursement rates for inhalation drugs that became effective January 1, 2004. Effective
January 1, 2005, the MMA specifies that the reimbursement for inhalation drugs will be further
changed to the average manufacturers sales price plus six percent (ASP + 6%). In the fourth
quarter of 2004, the Centers for Medicare and Medicaid Services (CMS) set a monthly dispensing
fee of $57 for a 30 day supply and $80 for a 90 day supply of these drugs for the 2005 calendar
year. The reimbursement changes that went into effect on January 1, 2005 with respect to the
Companys inhalation drug business (which constituted approximately 12% of the Companys 2004
revenues) will have a greater negative impact on the Companys revenues than the inhalation drug
reductions that went into effect in 2004. Net income in the first quarter of 2005 was reduced by
approximately $3.2 million as a result of the 2005 inhalation drug changes.
This net income decrease is comprised of a revenue reduction of approximately $2.4 million and an
increase in cost of sales of approximately $0.8 million. As a result of the dispensing fees set by
CMS for 2005, the Company intends to continue to provide inhalation 19




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drugs to Medicare beneficiaries
in 2005. The ability of the Company to continue to provide inhalation drugs after 2005 will depend
on the reimbursement schedule to be determined by CMS for 2006 and beyond. Any further reductions
in the reimbursement schedule could force providers to exit the inhalation drug business. The MMA also 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
start of a competitive bidding process which is scheduled to begin in 2007. At this time, the
Company does not know which of its locations will be included in the competitive bidding process. In addition, the MMA specified that effective January 1, 2005, the reimbursement for 16
durable medical equipment items and home oxygen would be reduced to the median Federal Employee
Health Benefit Plan (FEHBP) rates. The reimbursement reductions for the 16 DME items went into
effect as scheduled on January 1, 2005 and reduced first quarter revenue and net income by
approximately $0.6 million. The reimbursement reductions for home oxygen did not go into effect on January 1, 2005. As
mandated by the MMA, the Office of Inspector General of the Department of Health and Human Services
(OIG) conducted a study, which was published on March 30, 2005, to determine the median FEHBP
rates for home oxygen. Also on March 30, 2005 the 2005 fee schedule for home oxygen was issued by
CMS. These fee schedule amounts were implemented by the Medicare contractors on or about April 2,
2005. All claims for home oxygen furnished on or after January 1, 2005, that are received after
the fees are implemented will be paid using the 2005 fee schedule amounts. Claims with dates of
service on or after January 1, 2005, that were previously paid using the 2004 fee schedule amounts
will not be retroactively adjusted. Approximately 23% of the Companys 2004 revenues represented
home oxygen reimbursed by Medicare. The Company estimates that the 2005 fee schedule for home
oxygen will reduce the Companys Medicare oxygen revenues by approximately 8.9% beginning in the
second quarter of 2005. This represents a quarterly decrease in revenues and net income of
approximately $1.9 million. The Companys revenues and net income for the first quarter of 2005
were reduced by approximately $0.3 million to reflect first quarter oxygen claims that were
received or will be received by the Medicare contractors after the implementation date. Management
is working to counter the impact of the 2005 reimbursement reductions contained in the MMA,
including initiatives to grow revenues, improve productivity, and reduce costs. The magnitude of the adverse impact that the MMAs 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 as well as the final oxygen reimbursement
rates; nevertheless, the adverse impact will be material in 2005 and beyond. To improve revenue
growth, management took a number of actions in the fourth quarter of 2004 including revisions to
the sales commission plans for account executives and a restructuring of the sales organization.
Additionally, a senior vice president of sales and marketing was hired in February 2005.
Management also took a number of actions during 2004 to improve productivity and reduce costs in
the Companys operating centers and billing centers. Management estimates
that as a result of these cost reduction initiatives, operating expenses were reduced on an
annualized run rate basis by approximately $16.4 million as of December 31, 2004 compared to the
annualized run rate in effect one year earlier. Management intends to continue 20




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to improve
productivity and reduce costs during 2005 through a number of initiatives including centralization
of certain customer service functions currently residing at the operating center level,
consolidation of certain billing center functions, and continued productivity improvements in
operating centers and billing centers. HIPAA. HIPAA has mandated an extensive set of regulations to protect the privacy of
individually identifiable health information. The regulations consist of three sets of standards,
each with a different date for required compliance:  
    Privacy Standards had a compliance date of April 14, 2003  the Company was materially
compliant by this date;
    Transactions and Code Sets Standards required compliance by October 16, 2002, except as
extended by one year to October 16, 2003 for providers that filed a compliance extension
form by October 15, 2002  the Company was materially compliant by the final compliance
date; and
    Security Standards which were published in final form on February 2, 2003 and have a
compliance date of April 20, 2005  the Company was materially compliant by this date. The Companys implementation of mandated HIPAA Transaction and Code Sets has previously
resulted in temporary disruptions to cash collections, and additional disruptions may occur in the
future. Further, the Company cannot predict when all payors and clearinghouses will be fully HIPAA
Transaction-compliant and able to process electronic claims. Alternative methods of claims
submission may be required, possibly resulting in delay in payment, which could have a material
adverse effect on the Companys result of operations, cash flow, and financial condition. Medicaid.The Company has experienced delays in reimbursement from several state Medicaid
programs. These delays are primarily the result of the state budgetary concerns and state programs
becoming compliant with the HIPAA Transaction and Code Sets and/or changing the intermediary
contracted by the state to process claims submitted by the providers. Some states have renewed
processing claims, however, there has been a delay in cash collections by the Company as these
states address the processing of backlog claims. There can be no assurance that these delays will
not continue. Approved Plan. On July 1, 2003, American HomePatient, Inc. and 24 of its subsidiaries

(collectively, the Debtors) emerged from bankruptcy pursuant to a 100% pay plan (the Approved
Plan) whereby shareholders retained their equity interest and the Companys creditors and vendors
will be paid 100% of amounts they are owed, either immediately or over time with interest. The
Approved Plan fixed the interest on the Companys debt at 6.785% for the secured debt and 8.3675%
for the unsecured debt thus eliminating all material interest rate risk for the Company. The
Approved Plan set terms for repayment of the Companys outstanding debt and other terms, all as
described in more detail in Managements Discussion and Analysis of Financial Condition and
Results of Operations  Liquidity and Capital Resources. 21




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The Lenders have filed an appeal of the order confirming the Approved Plan with the United
States Court of Appeals for the Sixth Circuit appealing both the Bankruptcy Courts determination
of the amount of their secured claim and the interest rates on both the secured and unsecured
portions of their claims. The case number for this appeal, which is still pending, is 03-6500.
The Company intends to vigorously defend the Confirmation Order entered by the Bankruptcy Court and
upheld by the District Court, and the Company anticipates additional professional and other fees
will be incurred in 2005 in connection with the appeal process. The outcome of the appeal cannot
be predicted, and an adverse ruling could have a material adverse effect on the Company. These
adverse effects could include, without limitation, adverse changes in the interest rate related to
its secured and unsecured debt, a change in the proportion of debt treated as secured debt,
issuance of equity securities or an adverse change in the capitalization of the Company to the
detriment of equity holders. There can be no assurance as to the extent or nature of the adverse
effects of a successful Lenders appeal. See Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Capital Resources. Pursuant to a motion filed by the Company, the Bankruptcy Court issued an opinion ruling in
favor of the Companys request to reject warrants held by the Lenders that represented
approximately 20% of the Companys outstanding common stock. The Lenders now are entitled to an
additional unsecured claim of approximately $846,000, which is the judicially determined damages
stemming from rejection of the warrants as of July 30, 2002, the date immediately prior to the
Companys bankruptcy filing. The warrant holders have appealed the damages determination in this
ruling in the United States Court of Appeals for the Sixth Circuit, Case Number 04-5771. The Court
of Appeals has issued a notification that this appeal will be submitted for decision, without oral
argument, on June 9, 2005. If the appeal is successful, the amount owed to the warrant holders
could substantially increase which could materially adversely affect the Companys cash flow and
results from operations. Product Mix. The Companys strategy for 2004 was to maintain a diversified offering of home
health care services reflective of its current business mix. For 2005, respiratory services will
remain a primary focus along with home medical equipment rental and enteral nutrition products and
services. 22




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##### Table of Contents



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: Three Months Ended March 31,2005
    
    
    2004Home respiratory therapy services
    
    
    72
    %
    
    
    70
    %Home infusion therapy services
    
    
    12
    
    
    
    13Home medical equipment and medical supplies
    
    
    16
    
    
    
    17Total
    
    
    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 center 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 respiratory therapist or
technician 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 rental patients, 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 respiratory services that the Company provides include the following:  
    Oxygen systemsto 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
portable, 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.
    Nebulizersto deliver inhalation drugsto patients. Nebulizer compressors are used
to administer aerosolized medications (such as albuterol) to patients with asthma,
bronchitis, chronic obstructive pulmonary disease, and cystic fibrosis. AerMeds is
the Companys registered marketing name for its aerosol medications program.
    Home ventilatorsto 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. 23




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This therapy enables patients to receive positive pressure ventilation without
the invasive procedure of intubation.
    Continuous positive airway pressure (CPAP) and bi-level positive airway pressure
therapiesto force air through respiratory passage-ways during sleep. These treatments
are used on adults with obstructive sleep apnea (OSA), a condition in which a
patients normal breathing patterns are disturbed during sleep.
    Apnea monitorsto monitor and to warn parents of apnea episodes in newborn infants
as a preventive measure against sudden infant death syndrome.
    Home respiratory evaluations and related diagnostic equipmentto assist physicians
in identifying, monitoring and managing their respiratory patients. Oxygen systems comprised approximately 37% and 35% of the Companys first quarter 2005 and
2004 revenues, respectively. Inhalation drugs and nebulizers comprised approximately 10% and 2%,
respectively, of the Companys first quarter 2005 revenues and 12% and 3% of the Companys first
quarter 2004 revenues. Respiratory assist devices comprised approximately 18% and 15% of the
Companys first quarter 2005 and 2004 revenues, respectively. All other respiratory products and
services comprised approximately 5% of the Companys first quarter 2005 and 2004 revenues. The
Company provides respiratory therapy services at all but six of its 274 centers. Home Infusion Therapy Services. The Company provides a wide range of home infusion therapy
services. Patients are referred to a Company center 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 rental patients, 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 nutritionis 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).
    Anti-infective therapyis 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. 24




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
    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 managementinvolves the infusion of certain drugs into the bloodstream of
patients, primarily terminally or chronically ill patients, suffering from acute or
chronic pain.
    Other infusion therapiesinclude chemotherapy, hydration, growth hormone and immune
globulin therapies. Enteral nutrition services comprised approximately 6% of the Companys first quarter 2005 and
2004 revenues. Antibiotic therapy, TPN, and pain management and other infusion revenues comprised
approximately 6% and 7% of the Companys first quarter 2005 and 2004 revenues, respectively.
Enteral nutrition services are provided at most of the Companys centers, and the Company currently
provides other infusion therapies in 45 of its 274 centers. Home Medical Equipment and Medical Supplies. The Company provides a comprehensive line of
equipment and supplies to serve the needs of home care patients. Revenues from home 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 and rentals of home
medical equipment and sales of medical supplies comprised approximately 16% and 17% of the
Companys 2005 and 2004 revenues, respectively. 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 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 Companys operations are also subject to a series of laws and regulations dating back to
1987 that apply to the Companys operations. Changes have occurred from time to time since 1987,
including reimbursement reductions and changes to payment rules. 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. 25




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##### Table of Contents



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 also to
claims submitted to any third-party payor, and carry penalties including fines and imprisonment.
HIPAA has mandated an extensive set of regulations to protect the privacy of individually
identifiable health information. See Managements Discussion and Analysis of Financial Condition
and Results of Operations  Trends, Events, and Uncertainties  HIPAA. 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 CMN 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 26




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##### Table of Contents



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. 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 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. Legal Proceedings The following is a summary of the Companys material legal proceedings: On July 1, 2003, the Approved Plan became effective and the Company successfully emerged from
bankruptcy protection. The holders of the Companys senior debt (the Lenders) filed an appeal of
the order confirming the Approved Plan to the United States District Court. That court affirmed
the order confirming the Approved Plan on September 12, 2003. On October 14, 2003, the Lenders
filed a notice of appeal to the United States Court of Appeals for the Sixth Circuit under Case
Number 03-6500. That appeal is pending. If the appeal is successful, it could have a material
adverse effect on the Company. These adverse effects could include, without limitation, adverse
changes in the interest rate related to its secured and unsecured debt, a change in the proportion
of debt treated as secured debt, issuance of equity securities or an adverse change in the
capitalization of the Company to the detriment of equity holders. There can be no assurance as to
the extent or nature of the adverse effects of a successful Lenders appeal. See
also Managements Discussion and Analysis of Financial Condition and Results of Operations 
Liquidity and Capital Resources. 27




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The Bankruptcy Court issued an opinion ruling in favor of the Companys request to reject
warrants originally issued to the Companys Lenders to purchase 3,265,315 shares of the Companys
common stock for $.01 per share. As a result of the ruling, the warrants, which represented
approximately 20% of the Companys outstanding common stock, were rejected by the Company. The
Bankruptcy Court determined the damages stemming from rejection of the warrants were $846,000,
which is payable by the Company to the warrant holders as an unsecured debt. The warrant holders
have appealed the damages determination in this ruling in the United States Court of Appeals for
the Sixth Circuit, Case Number 04-5771. The Court of Appeals has issued a notification that this
appeal will be submitted for decision, without oral argument, on June 9, 2005. The outcome of the
appeal cannot be predicted, and an adverse ruling could have a material adverse effect on the
Company. In 2001, the Company entered into a settlement agreement (the Government Settlement) with
the United States of America, acting through the United States Department of Justice (DOJ) and on
behalf of the Office of Inspector General of the Department of Health and Human Services (OIG)
and the TRICARE Management Activity, which resolved a false claims action alleging improprieties by
the Company during the period from January 1, 1995 through December 31, 1998. Pursuant to the
Approved Plan, amounts owed pursuant to the Government Settlement will be paid in full in
accordance with the Government Settlement, and the Company has made all payments due to date under
the Government Settlement. A payment of $1.0 million is due in July 2005 and a final payment of
$2.0 million is due under the Government Settlement in March 2006. During the three month period
ended March 31, 2005, the Company paid $529,000 including interest of $29,000, pursuant to the
Government Settlement. At March 31, 2005, the Company had an accrual of $3,008,000 for its
remaining obligations pursuant to the Government Settlement, which is classified as a current
liability. The accrual related to the Government Settlement is included in other accrued expenses
on the accompanying interim condensed consolidated balance sheet at March 31, 2005. See also
Managements Discussion and Analysis of Financial Condition and Results of Operations  Trends,
Events, and Uncertainties  Approved Plan. 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: 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 28




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the creditworthiness and collectibility of amounts due from its patients. Approximately 61% of the
Companys 2005 revenues are 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 adjustments for billing errors 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 year finalized. Sales and related services revenues include all product sales to patients and are derived from
the provision of infusion therapies, the sale of home health care equipment and supplies, the sale
of aerosol medications and respiratory therapy equipment and supplies, and services related to the
delivery of these products. Sales revenues are recognized at the time of delivery using fixed fee
schedules based upon the type of product and the payor and are billed when the Company has obtained
the properly completed CMN from the healthcare provider, where applicable. Rentals and other
patient revenues are derived from the rental of home health care equipment, enteral pumps, and
equipment related to the provision of respiratory therapy. All rentals of equipment are provided
by the Company on a month-to-month basis and are billed using fixed monthly fee schedules based
upon the type of product and the payor when the Company has obtained the properly completed CMN
from the healthcare provider, where applicable. The fixed monthly fee encompasses the rental of
the product, delivery, set-up, instruction, maintenance, repairs, providing backup systems when
needed, and providing periodic home visits. 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. All
billed receivables over one year old and all unbilled receivables over 180 days old are fully
reserved. Management believes that the recorded allowance for doubtful accounts is adequate, 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 $17.3 million and $16.9
million as of March 31, 2005 and December 31, 2004, respectively. 29




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Inventory Valuation and Cost of Sales Recognition. Inventories represent equipment
and supplies and 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 at a standard rate,
based upon the type of product sold and payor mix, and performs physical counts of inventory at
each center on an annual basis. The Company records a valuation allowance for its estimated count
adjustments and the difference between inventory actual costs and standard costs. The Company is
subject to loss for inventory adjustments in excess of the recorded inventory valuation
allowance. The inventory valuation allowance was $0.4 and $0.5 million at March 31, 2005
and December 31, 2004, respectively. Rental Equipment Valuation. Rental 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 at each center 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 historical adjustment amounts and believes the recorded rental allowance is adequate. The
Company is subject to loss for adjustments in excess of its recorded rental equipment valuation
allowance. The Companys rental equipment valuation allowance totaled $1.0 million at March 31,
2005 and December 31, 2004. 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. When this analysis indicates an impairment exists, the amount of loss is
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 and Other Intangible Assets.Goodwill represents the excess of cost
over the fair value of net assets acquired. Goodwill and intangible assets with indefinite lives
are required to be tested for impairment on an annual basis and when an event occurs or
circumstances change such that it is reasonably possible that an impairment may exist. The Company
selected September 30 as its annual testing date. Goodwill is tested for impairment by comparing
the fair value of goodwill to the carrying value of goodwill. The fair value is determined using a
combination of analyses which include discounted cash flow calculations, market multiples, and
other market information. Key assumptions used in these estimates include projected operating
results, discount rates, and peer market multiples. There was no impairment recognized as a result of the Companys annual impairment testing in
September 2004. Self Insurance.Self-insurance accruals primarily represent managements loss estimate for
self-insurance or large deductible risks associated with workers compensation insurance. The
Company is insured for workers compensation, but retains the first $250,000 of risk 30




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exposure for
each claim. The Company is not maintaining annual aggregate stop loss coverage for claims made in
2005 and 2004, as such coverage was not available. Judgments used in determining the accruals
related to workers compensation include loss development factors, frequency of claims, and
severity of claims. The Companys liability includes known claims and an estimate of claims
incurred but not yet reported. The liability for estimated workers compensation claims totaled
approximately $3.7 million and $3.6 million as of March 31, 2005 and December 31, 2004,
respectively. The Company utilizes analyses prepared by a third-party administrator based on
historical claims information to support the required liability and related expense associated with
workers compensation. 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. The Company maintained annual aggregate stop loss
coverage of $14.4 million for 2004. The health insurance policies are limited to maximum lifetime
reimbursements of $2.0 million per person for 2005 and 2004. The estimated liability for health
insurance claims totaled approximately $2.1 million and $2.6 million as of March 31, 2005 and
December 31, 2004, 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 the lag time in reporting and paying claims.
Judgments 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 $3.8
million and $4.1 million at March 31, 2005 and December 31, 2004, respectively, 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. 31




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Results of Operations The Company reports its revenues as follows: (i) sales and related services revenues; and
(ii) rentals and other revenues. Sales and related services revenues are derived from the
provision of infusion therapies, the sale of home health care equipment and medical supplies, the
sale of aerosol medications and respiratory therapy equipment, and supplies and services related to
the delivery of these products. Rental revenues are derived from the rental of home health care
equipment, enteral pumps, and equipment related to the provision of respiratory therapies. Cost of
sales and related services includes the cost of equipment and drugs and related supplies sold to
patients. Cost of rental revenues includes the costs of oxygen and rental supplies, demurrage for
leased oxygen cylinders, rent expense for leased equipment, and rental equipment depreciation
expense and excludes delivery expenses and salaries associated with the rental set-up. Operating
expenses include operating center labor costs, delivery expenses, division and 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 joint ventures with hospitals represent the Companys equity in earnings from unconsolidated
joint ventures and management and administrative fees from unconsolidated joint ventures. The following table and discussion sets forth items from the Companys interim condensed
consolidated statements of income as a percentage of revenues for the periods indicated: Percentage of RevenuesThree Months Ended March 31,2005
    
    
    2004Revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales and related services
    
    
    24.3
    
    
    
    22.0Cost of rental revenues, including rental
equipment depreciation
    
    
    11.7
    
    
    
    11.0Operating expenses
    
    
    49.1
    
    
    
    52.2Bad debt expense
    
    
    3.3
    
    
    
    3.3General and administrative expense
    
    
    5.2
    
    
    
    5.1Depreciation, excluding rental equipment, and
amortization
    
    
    1.0
    
    
    
    1.0Interest expense, net
    
    
    5.3
    
    
    
    5.5Other income, net
    
    
    
    
    
    
    Total expenses
    
    
    99.9
    
    
    
    100.1Earnings from unconsolidated joint ventures
    
    
    1.5
    
    
    
    1.2Income from operations before reorganization
items and income taxes
    
    
    1.6
    
    
    
    1.1Reorganization items
    
    
    0.1
    
    
    
    Provision for income taxes
    
    
    0.1
    
    
    
    0.1Net income
    
    
    1.4
    %
    
    
    1.0
    %
 32




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Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 Revenues.Revenues decreased from $84.7 million for the quarter ended March 31, 2004 to $81.5
million for the same period in 2005, a decrease of $3.2 million, or 3.8%. The 2005 Medicare
reimbursement rate changes for inhalation drugs, DME and oxygen reduced revenues by approximately
$3.3 million in the first quarter of 2005. Following is a discussion of the components of
revenues: Sales and Related Services Revenues.Sales and related services revenues decreased from
$36.9 million for the quarter ended March 31, 2004 to $34.2 million for the same period of
2005, a decrease of $2.7 million, or 7.3%. The 2005 Medicare reimbursement changes reduced
sales and related services revenues by approximately $2.5 million in the first quarter of
2005. Rental Revenues. Rental revenues decreased from $47.9 million for the quarter ended March
31, 2004 to $47.3 million for the same period in 2005, a decrease of $0.6 million, or 1.3%.
The 2005 Medicare reimbursement changes reduced rental revenues by approximately $0.8
million in the first quarter of 2005. Cost of Sales and Related Services. Cost of sales and related services increased from $18.6
million for the quarter ended March 31, 2004 to $19.8 million for the same period in 2005, an
increase of $1.2 million, or 6.5%. As a percentage of revenues, cost of sales and related services
increased from 22.0% for the quarter ended March 31, 2004 to 24.3% for the same period in 2005. As
a percentage of sales and related services revenues, cost of sales and related services increased
from 50.5% for the quarter ended March 31, 2004 to 57.9% for the same period in 2005. This
increase is primarily attributable to lower gross margins on the Companys inhalation drug sales in
the current quarter, due to lower reimbursements as a result of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003. Cost of Rental Revenues. Cost of rental revenues increased from $9.3 million for the quarter ended
March 31, 2004 to $9.5 million for the same period in 2005, an increase of $0.2 million, or 2.2%.
This increase is primarily the result of a higher level of rental equipment depreciation associated
with the Companys growth in rentals of oxygen equipment and respiratory assist devices. As a
percentage of revenues, cost of rental revenues increased from 11.0% for the quarter ended March
31, 2004 to 11.7% for the same period in 2005. As a percentage of rental revenues, cost of rental
revenue increased from 19.5% for the quarter ended March 31, 2004 to 20.0% for the same period in
2005. Operating Expenses. Operating expenses decreased from $44.2 million for the quarter ended March
31, 2004 to $40.0 million for the same period in 2005, a decrease of $4.2 million or 9.5%. As a
percentage of revenues, operating expenses decreased from 52.2% to 49.1% for the quarters ended
March 31, 2004 and 2005, respectively. This decrease is the result of the Companys initiatives to
improve productivity and reduce costs in its billing centers and branches. Bad Debt Expense.Bad debt expense decreased from $2.8 million for the quarter ended March 31,
2004 to $2.7 million for the same period in 2005, a decrease of $0.1 million, or 3.6%. As a
percentage of revenues, bad debt expense was 3.3% for the three months ended March 31, 2004 and
2005. 33




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General and Administrative Expenses. General and administrative expenses decreased from $4.3
million for the quarter ended March 31, 2004 to $4.2 million for the same period in 2005, a
decrease of $0.1 million, or 2.3%. This decrease is primarily the result of decreased salary
expense. As a percentage of revenues, general and administrative expenses were 5.1% and 5.2% for
the quarters ended March 31, 2004 and 2005, respectively. Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization expenses
remained unchanged at $0.8 million for the quarters ended March 31, 2004 and 2005. Interest Expense, Net. Interest expense, net, decreased from $4.7 million for the quarter ended
March 31, 2004 to $4.3 million for the same period in 2005, a decrease of $0.4 million, or 8.5%.
The decrease in interest expense, net, is the result of an increase in interest income earned in
the three months ended March 31, 2005 and the Companys decreased long-term debt and capital leases
balance. Other Income, Net. Other income, net, remained unchanged at less than $0.1 million for the
quarters ended March 31, 2004 and 2005. Other income, net, primarily relates to investment losses
or gains associated with collateral interest in split dollar life insurance policies. Earnings from Unconsolidated Joint Ventures. Earnings from unconsolidated joint ventures increased
from $1.1 million for the quarter ended March 31, 2004 to $1.2 million for the same period in 2005,
an increase of $0.1 million, or 9.1%. Provision for Income Taxes. The provision for income taxes was $0.1 million for the quarters ended
March 31, 2004 and 2005. Liquidity and Capital Resources On July 31, 2002, the Company and 24 of its subsidiaries (collectively, the Debtors) filed
for bankruptcy due to its inability to meet significant debt maturities due in December 2002. On
July 1, 2003, the Debtors emerged from bankruptcy pursuant to a 100% pay plan (the Approved Plan)
whereby shareholders retained their equity interest and creditors and vendors will be paid 100% of
all amounts they are owed, either immediately or over time with interest. The Approved Plan allows the Company to continue its business operations uninterrupted, led by
its current management team, and accomplishes the Companys primary goal of restructuring its
long-term debt obligations to its Lenders. The Approved Plan provides for the treatment of all of
the claims subject to compromise in the bankruptcy filing. The Approved Plan provides for the
extension of the maturity on the debt to the Lenders, a reduction of the related interest cost on
such debt, and the payment of all of the Companys reported liabilities. The Lenders retained
their liens on substantially all of the assets of the Company. Pursuant to the Approved Plan, the Companys secured debt to the Lenders is $250.0 million and
is evidenced by a promissory note in that amount and is secured by various security agreements. To
the Companys knowledge, the Lenders have not executed the agreements as of the date of this
filing. The Company is no longer a party to a credit agreement. The remainder of 34




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the amounts due to the Lenders at July 1, 2003 over and above the $250 million and amounts that
were due to other creditors is treated as unsecured. The Approved Plan provides that the $250.0 million secured debt matures on July 1, 2009. The
Approved Plan provides that interest is payable monthly on the $250.0 million secured debt at a
rate of 6.785% per annum. Payments of principal are payable annually on March 31 of each year,
beginning March 31, 2005, in the amount of one-third of the Companys Excess Cash Flow (defined in
the Approved Plan as cash and equivalents in excess of $7.0 million at the end of the Companys
fiscal year) for the previous fiscal year end. No payment was due on March 31, 2005 based on the
Companys Excess Cash Flow as of December 31, 2004. After the unsecured debt of the Lenders and
the general unsecured debt is paid in full, 100% of the Companys Excess Cash Flow is paid as a
principal payment on the $250.0 million secured debt on March 31 of each year, with an estimated
prepayment due on each previous September 30 in an amount equal to one-half of the anticipated
March payment. The Approved Plan provides that the general unsecured debt and the unsecured debt of the
Lenders matures on June 30, 2006. The Approved Plan provides that interest is payable monthly on
the general unsecured debt and the unsecured debt of the Lenders at a rate of 8.3675% per annum.
Principal is payable in six equal semi-annual installments on June 30 and December 31 of each year
beginning December 31, 2003. The Approved Plan also provides that principal was payable effective
on the general unsecured debt and the unsecured debt of the Lenders on March 31, 2004 in the amount
of 100% of the Companys Excess Cash Flow for fiscal 2003 and on March 31 of each year thereafter
in the amount of two-thirds of the Companys Excess Cash Flow for the previous fiscal year end. An
estimated prepayment of the Companys Excess Cash Flow payment is due on September 30 of each year
in an amount equal to one-half of the anticipated March payment. The Approved Plan allows the Company to make prepayments to holders of unsecured debt, either
in whole or in part, at any time without penalty, which prepayments reduce and are a credit against
any subsequent mandatory payments. The Company has made all payments due under the Approved Plan as of March 31, 2005, and has
also prepaid some of its obligations thereunder. As of March 31, 2005, the Lenders were owed
approximately $251.0 million, comprised of $250.0 million of secured debt and $1.0 million of
unsecured debt. The remaining general unsecured claims (excluding the Government Settlement and
the amounts due to the warrant holders) as of March 31, 2005 were approximately $0.5 million. The Lenders have filed an appeal of the order confirming the Approved Plan with the United
States Court of Appeals for the Sixth Circuit appealing both the Bankruptcy Courts determination
of the amount of their secured claim and the interest rates on both the secured and unsecured
portions of their claims. The Case Number for this appeal, which is still pending, is 03-6500.
The Company intends to vigorously defend the Confirmation Order entered by the Bankruptcy Court and
upheld by the District Court, and the Company anticipates additional professional and other fees
will be incurred in 2005 in connection with the appeal process. The outcome of the appeal cannot
be predicted, and an adverse ruling could have a material adverse effect on the Company. These
adverse effects could include, without limitation, adverse changes in the interest rate related to
its secured and unsecured debt, a change in the proportion of debt 35




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treated as secured debt, issuance of equity securities or an adverse change in the
capitalization of the Company to the detriment of equity holders. There can be no assurance as to
the extent or nature of the adverse effects of a successful Lenders appeal. The Bankruptcy Court issued an opinion ruling in favor of the Companys request to reject
warrants originally issued to the Lenders to purchase 3,265,315 shares of the Companys common
stock for $.01 per share. As a result of the ruling, the warrants, which represented approximately
20% of the Companys outstanding common stock, were rejected by the Company. The Bankruptcy Court
determined the damages stemming from rejection of the warrants were $846,000, which is payable by
the Company to the warrant holders as an unsecured claim and is recorded as a component of other
accrued expenses on the consolidated balance sheets. The warrant holders have appealed the damages
determination in this ruling in the United States Court of Appeals for the Sixth Circuit, Case
Number 04-5771. If the Lenders are unsuccessful in their appeal, they will be entitled to receive
payment from the Company for damages in the amount of $846,000, which will be treated as a general
unsecured claim. If the Lenders appeal is successful, the amount owed to the warrant holders
could substantially increase, which could materially adversely affect the Companys cash flow and
results from operations. The Company intends to vigorously defend the damages calculation
determined by the Bankruptcy Court, but no assurances can be given as to the outcome of the
Lenders appeal. The Companys funding of day-to-day operations going forward and all payments required under
the Approved Plan will rely on cash flow and cash on hand as it has since the Company currently
does not have access to a revolving line of credit. At March 31, 2005 the Company had unrestricted
cash and cash equivalents of approximately $9.3 million. The Companys principal cash requirements are for working capital, capital expenditures,
leases and debt service. The Company has met and intends to continue to meet these requirements
with existing cash balances, net cash provided by operations, and other available capital
expenditure financing vehicles. Managements goal is to generate sufficient cash to meet these
requirements by increasing profitable revenues, decreasing and controlling expenses, increasing
productivity, and improving accounts receivable collections. Managements cash flow projections and related operating plans indicate that the Company can
operate on its existing cash and cash flow and make all payments provided for in the Approved Plan
for the twelve months ending March 31, 2006. 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. As with all projections, there can be no
guarantee that existing cash and cash flow will be sufficient. There can be no assurance that in
such event 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 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 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
many other 36




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##### Table of Contents



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 $53.4 million and $50.9
million at March 31, 2005 and December 31, 2004, respectively. Average days sales in accounts
receivable (DSO) was approximately 61 and 55 days at March 31, 2005 and December 31, 2004,
respectively. The Company calculates DSO by dividing the previous 90 days of revenue (excluding
dispositions and acquisitions), net of bad debt expense into net patient accounts receivable and
multiplying the ratio by 90 days. The Companys level of DSO and net patient receivables is
affected by the extended time required to obtain necessary billing documentation. The Companys future liquidity and capital resources will be materially adversely impacted by
the Medicare reimbursement reductions contained in the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. See Trends, Events, and Uncertainties  Reimbursement changes and the
Companys Response. Net cash provided by operating activities was $10.9 million and $10.4 million for the three
months ended March 31, 2005 and 2004. Net income increased from $1.0 million for the three months
ended March 31, 2004 to $1.2 million for the three months ended March 31, 2005. This increase of
$0.2 million is primarily the result of cost reduction efforts. Additions to property and equipment, net were $6.3 million
for the three months
ended March 31, 2005 compared to $7.3 million for the same period in 2004. Net cash used in
financing activities was $1.1 million and $1.0 million for the three months ended March 31, 2005
and 2004, respectively. The cash used in financing activities for the three months ended March 31,
2005 primarily relates to payments on the Companys short term note payable of $1.2 million. 37




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##### Table of Contents



Contractual Obligations and Commercial Commitments The following is a tabular disclosure of all contractual obligations and commitments, including all
off-balance sheet arrangements of the Company as of March 31, 2005: Year 5 &Total
    
    
    Year 1
    
    
    Year 2
    
    
    Year 3
    
    
    Year 4
    
    
    thereafterLong-term debt and
capital leases
    
    $
    251,913,000
    
    
    $
    880,000
    
    
    $
    1,033,000
    
    
    $
    
    
    
    $
    
    
    
    $
    250,000,000Accrued interest on
long-term debt
    
    
    1,461,000
    
    
    
    1,461,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pre-petition
accounts payable
    
    
    477,000
    
    
    
    
    
    
    
    477,000
    
    
    
    
    
    
    
    
    
    
    
    Accrued interest on
pre-petition
accounts payable
    
    
    10,000
    
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    OIG settlement
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accrued interest on
OIG settlement
    
    
    8,000
    
    
    
    8,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating lease
obligations
    
    
    25,481,000
    
    
    
    10,153,000
    
    
    
    7,104,000
    
    
    
    4,824,000
    
    
    
    2,476,000
    
    
    
    924,000Total contractual
cash obligations
    
    $
    282,350,000
    
    
    $
    15,502,000
    
    
    $
    8,624,000
    
    
    $
    4,824,000
    
    
    $
    2,476,000
    
    
    $
    250,924,000
 In addition to the scheduled cash payments above, the Company is obligated to make Excess Cash
Flow payments on the Lenders secured and unsecured debt as well as the pre-petition accounts
payable as defined by the Approved Plan. As these payments will be based on excess cash at future
dates, the Company is not able to project the amounts of these payments. As such, the $250.0
million secured debt, which is all classified in the Year 5 and thereafter column per the table
above, could require principal payments in Years 1, 2, 3 and 4. At this time the Company is unable to determine how much, if any, excess cash it will have on hand
at December 31, 2005. In addition, the Approved Plan allows the Company to use prepayments to reduce and be a
credit against any subsequent mandatory payments. The operating lease obligations presented is
based on information available as of March 31, 2005. Long-term debt is comprised primarily of amounts owed to the Lenders. 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 equipment. Operating leases are noncancelable leases on certain vehicles, buildings and equipment. The OIG Settlement represents the settlement regarding the alleged billing improprieties by the
Company during the period from January 1, 1995 through December 31, 1998. See 38




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##### Table of Contents



Managements
Discussion and Analysis of Financial Condition and Results of Operations  Government Regulation 
Enforcement Activities.

At March 31, 2005, the Company has no off-balance sheet commitments or guarantees outstanding. At March 31, 2005, the Company had two letters of credit totaling $650,000, of which $400,000 and
$250,000 expire in May 2005 and January 2006, respectively, in place securing its obligations with
respect to the Companys professional liability insurance. The letters of credit are secured by a
certificate of deposit, which is included in restricted cash. 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. Medicare Reimbursement Reductions.In the last quarter of 2003, Congress enacted the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the MMA). The MMA reduces Medicare
reimbursement levels for a variety of the Companys products and services, with some reductions
beginning in 2004 and others beginning in 2005. See Managements Discussion and Analysis of
Financial Condition and Results of Operations  Revenues. These reductions will 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. Dependence on Reimbursement by Third-Party Payors.For the three months ended March 31, 2005,
the percentage of the Companys revenues derived from Medicare, Medicaid and private pay was 52%,
9% and 39%, 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. 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 or revenue mix. See
Managements Discussion and Analysis of Financial Condition and Results of Operations. Substantial Leverage.The Company maintains a significant amount of debt. The secured claim
of the Lenders as of March 31, 2005 was $250.0 million. The unsecured claim of the Lenders as of
March 31, 2005 was approximately $1.0 million. The amount of general unsecured debt (excluding the
Government Settlement) due to other creditors at March 31, 2005 was $0.5 million. Required
payments to the Lenders and general unsecured creditors are detailed in Managements Discussion
and Analysis of Financial Condition and Results of Operations  Liquidity and Capital Resources.
Due to the amount of debt, a substantial portion of our cash flow from operations will be dedicated
to servicing debt. The substantial leverage could 39




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##### Table of Contents



adversely affect the Companys ability to grow
its business or to withstand adverse economic conditions,
reimbursement changes, or competitive pressures and the inability to pay debt would have a material
adverse effect on the Company. See Managements Discussion and Analysis of Financial Condition
and Results of Operations  Liquidity and Capital Resources. Bankruptcy Appeal. On July 1, 2003, the Approved Plan became effective and the Company
successfully emerged from bankruptcy protection. The Companys Lenders filed an appeal of the
order confirming the Approved Plan to the United States District Court. That court affirmed the
order confirming the Approved Plan on September 12, 2003. On October 14, 2003, the Lenders filed a
notice of appeal to the United States Court of Appeals for the Sixth Circuit. That appeal is
pending. If the appeal is successful, it could have a material adverse effect on the Company. See
Managements Discussion and Analysis of Financial Condition and Results of Operations  Legal
Proceedings. Warrant Rejection Appeal.The Bankruptcy Court issued an opinion ruling in favor of the
Companys request to reject warrants originally issued to the Companys Lenders to purchase
3,265,315 shares of the Companys common stock for $.01 per share. As a result of the ruling, the
warrants, which represented approximately 20% of the Companys outstanding common stock, were
rejected by the Company. The Bankruptcy Court determined the damages stemming from rejection of
the warrants were $846,000, which is payable by the Company to the warrant holders as an unsecured
debt. The warrant holders have appealed the damages calculation determined in this ruling. If the
appeal is successful, the amount owed to the warrant holders could substantially increase which
could materially adversely affect the Companys cash flow and results from operations. See
Managements Discussion and Analysis of Financial Condition and Results of Operations  Legal
Proceedings. Government Regulation.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. See Managements Discussion and Analysis of Financial Condition and Results of
Operations  Government Regulation. Collectibility of Accounts Receivable.The Company has substantial accounts receivable,
representing DSO of 61 and 55 days as of March 31, 2005 and December 31, 2004, respectively. 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. See Managements Discussion and Analysis of Financial 40




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##### Table of Contents



Condition and Results of Operations  Critical Accounting Policies  Revenue Recognition and Allowance for
Doubtful Accounts. Health Care Initiatives.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. 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 limit patient access to, or the Companys reimbursement for, products and
services provided by the Company. Some states are adopting health care programs and initiatives as
a replacement for Medicaid. 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. Role of Managed Care.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 may experience declining
profitability unless the Company also decreases its cost for providing services and increases
higher margin services. Liquidity.Trading of the Companys common stock under its current trading symbol, AHOM, 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. HIPAA Compliance.HIPAA has mandated an extensive set of regulations to protect the privacy
of individually identifiable health information. The regulations consist of three sets of
standards, each with a different date for required compliance:  
    Privacy Standards had a compliance date of April 14, 2003  the Company was materially
compliant by this date;
    Transactions and Code Sets Standards required compliance by October 16, 2002, except as
extended by one year to October 16, 2003 for providers that filed a compliance extension
form by October 15, 2002  the Company was materially compliant by the final compliance
date; and
    Security Standards which were published in final form on February 2, 2003 and have a
compliance date of April 20, 2005  the Company was materially compliant by this date. The Companys implementation of mandated HIPAA Transaction and Code Sets has previously resulted in
temporary disruptions to cash collections, and additional disruptions may occur in the future.
Further, the Company cannot predict whether all payors and clearinghouses will be fully HIPAA
Transaction-compliant and able to process electronic claims by the final implementation deadline.
Alternative methods of claims submission may be required, possibly resulting in delay 41




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in payment,
which could have a material adverse effect on the Companys result of operations, cash flow, and
financial condition. Ability to Attract and Retain Management.The Company is highly dependent upon its senior
management, and competition for qualified management personnel is intense. The Companys
historical financial results 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. Competition.The home health care market is highly fragmented and competition varies
significantly from market to market. In the small and mid-size markets in which the Company
primarily operates, the majority of its competition comes from local independent operators or
hospital-based facilities whose primary competitive advantage is market familiarity. There are
relatively few barriers to entry in the local markets served by the Company, and it could encounter
competition from new market entrants. In the 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. Liability and Adequacy of Insurance.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 is self-insured for its workers
compensation insurance and employee health insurance and is at risk for claims up to individual
stop loss and aggregate stop loss amounts. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
No. 123R). This statement requires that the compensation cost relating to share-based payment
transactions be recognized in the financial statements. Compensation cost is to be measured based
on the estimated fair value of the equity-based compensation awards issued as of the grant date.
The related compensation expense will be based on the estimated number of awards expected to vest
and will be recognized over the requisite service period for each grant. The statement requires
the use of assumptions and judgments about future events and input to valuation models, which will
require considerable judgment by management. SFAS No. 123R replaces SFAS No. 123, rescinds SFAS
No. 148 and supersedes APB Opinion No. 25. The provisions of SFAS No. 123R are required to be
applied by public companies as of the first annual reporting period that begins after June 15,
2005. The Company continued applying APB 42




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##### Table of Contents



Opinion No. 25 to equity-based compensation awards
through March 31, 2005. At the effective date of SFAS No. 123R, the Company expects to use the
modified prospective application transition method without restatement of prior periods in the year
of adoption. This will result in the
Company recognizing compensation cost based on the requirements of SFAS No. 123R for all
equity-based compensation awards issued after January 1, 2006. For all equity-based compensation
awards that are unvested as of January 1, 2006, compensation cost will be recognized. The Company
is currently evaluating the impact that adoption of the SFAS No. 123R will have on its results of
operations and financial position. 43




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ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is not subject to material interest rate sensitivity since the Approved Plan provides
for a fixed interest rate for both the $250 million secured debt and the Companys unsecured debt.
Interest expense associated with other debts would not materially impact the Company as most
interest rates are fixed. The Company does not own and is not a party to any material market risk
sensitive instruments. We have 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 4  CONTROLS AND PROCEDURES In an effort to ensure that the information the Company must disclose in its filings with the
Securities and Exchange Commission is recorded, processed, summarized, and reported on a timely
basis, the Companys chief executive officer and principal 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 March 31, 2005. Based on such evaluation, such officers have
concluded that, as of March 31, 2005, the Companys disclosure controls and procedures were
effective in timely alerting them to information relating to the Company required to be disclosed
in the Companys periodic reports filed with the SEC. There has been no change in the Companys
internal control over financial reporting during the three months ended March 31, 2005 that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting. 44




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders
American HomePatient, Inc.: We have reviewed the interim condensed consolidated balance sheet of American HomePatient, Inc. and
subsidiaries as of March 31, 2005, the related interim condensed consolidated statements of income
for the three-month periods ended March 31, 2005 and 2004, and the related interim condensed
consolidated statements of cash flows for the three-month periods ended March 31, 2005 and 2004.
These condensed consolidated financial statements are the responsibility of the Companys
management. We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the
interim condensed consolidated financial statements referred to above for them to be in conformity
with U.S. generally accepted accounting principles. We have previously audited, in accordance with standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet of American HomePatient, Inc. and
subsidiaries as of December 31, 2004, and the related consolidated statements of operations,
shareholders deficit and comprehensive income, and cash flows for the year then ended (not
presented herein); and in our report dated March 30, 2005, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set forth in the
accompanying interim condensed consolidated balance sheet as of December 31, 2004, is fairly
stated, in all material respects, in relation to the consolidated balance sheet from which it has
been derived. /s/ KPMG LLP Nashville, TN
May 4, 2005 45




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##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 1  LEGAL PROCEEDINGS A description of the Chapter 11 Cases is set forth in Note 2 to the Companys interim condensed
consolidated financial statements contained in this Report and is incorporated herein by reference.
All of the civil legal proceedings against the Company were stayed by the Bankruptcy Filing. A
summary of the Companys material legal proceedings that existed as of the Bankruptcy Filing is set
forth in Managements Discussion and Analysis of Financial Condition and Results of Operations
Legal Proceedings. 
 ITEM 6  EXHIBITS EXHIBITNUMBER
    
    DESCRIPTION OF EXHIBITS2.1
    
    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 July 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).15.1
    
    Awareness Letter of KPMG LLP.31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Chief Executive Officer.
 46




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION OF EXHIBITS31.2
    
    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 
Principal Financial Officer.
 47




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN HOMEPATIENT, INC.May 4, 2005
    By:
    /s/ Stephen L ClantonStephen L. ClantonChief Financial Officer and An Officer Duly
Authorized to Sign on Behalf of the registrant 48