ROTECH HEALTHCARE INC – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements, related notes and other financial information appearing elsewhere in this report. In addition, see "Part I-Item 1A-Risk Factors" and Exhibit 99.1-Forward-Looking Statements, which is incorporated herein by reference.

Introduction

Background

 We are one of the largest providers of home medical equipment and related products and services in the United States, with a comprehensive offering of respiratory therapy and durable home medical equipment and related services. We provide home medical equipment and related products and services principally to older patients with breathing disorders, such as chronic obstructive pulmonary diseases (COPD), which include chronic bronchitis, emphysema, obstructive sleep apnea and other cardiopulmonary disorders. We provide equipment and services in 48 states through approximately 425 operating locations located primarily in non-urban markets. Our revenues are principally derived from respiratory equipment rental and related services, which accounted for 87.5%, 86.5% and 87.7% of net revenues for the years ended December 31, 2011, 2010 and 2009, respectively. Revenues from respiratory equipment rental and related services include rental of oxygen concentrators, liquid oxygen systems, portable oxygen systems, ventilator therapy systems, nebulizer equipment and sleep disorder breathing therapy systems, and the sale of nebulizer medications. We also generate revenues through the rental and sale of durable medical equipment, which accounted for 10.6%, 11.1% and 11.3% of net revenues for the years ended December 31, 2011, 2010 and 2009, respectively. Revenues from rental and sale of durable medical equipment include hospital beds, wheelchairs, walkers, patient aids and ancillary supplies. We derive our revenues principally from reimbursement by third-party payors, including Medicare, Medicaid, the Veterans Administration (VA) and private insurers. We are focused on specific initiatives to continue the growth in patient and product counts experienced over the past three years. Executive Summary We face significant financial and Medicare reimbursement related challenges that continue to negatively affect our financial position (the risks and uncertainties related to the Deficit Reduction Act of 2005's (DRA) 36-month rental cap, as well as the impact of recent reimbursement changes, are discussed in more detail under "Business-Government Regulation" and "Risk Factors"). We anticipate that we will continue to face such challenges in the near and long-term future. Most of these difficulties result from our highly leveraged capital structure, while others are the result of significant Medicare reimbursement reductions applicable to our industry, as well as current conditions in the capital markets. In particular: •      Beginning in 2009, our net revenues were negatively impacted by 

approximately $45.1 million on an ongoing, annual basis as a result of the

       36-month rental cap on oxygen equipment provided to Medicare        beneficiaries, mandated as part of the DRA and the 9.5% reduction in        reimbursement for oxygen and certain other durable medical equipment as        part of the Medicare Improvement for Patients and Providers Act of 2008        (MIPPA), both of which went into effect on January 1, 2009.  

• Recent and potential future changes in Medicare policies, including

freezes and reductions in reimbursement rates for home medical equipment

and dispensing fee reductions, competitive bidding requirements, new

clinical conditions for reimbursements, accreditation requirements and

quality standards, could have a material adverse effect on our financial

       condition, revenues, profit margins, profitability, operating cash flows        and results of operations.   In light of these challenges, our operational focus has been on reducing our cost structure while maintaining internal growth and seeking opportunities to gain market share through selective equipment and asset purchases from competitors exiting the home medical equipment market. In particular: •      During 2008, we completed a series of operational restructuring 

initiatives, which included restructuring of our field operations,

clinical programs and pharmacy operations and were primarily comprised of

staffing reductions. These reductions, in addition to other cost saving

initiatives, decreased our annual selling, general and administrative

expenses and operating costs by approximately $52.9 million beginning in

2009. During 2010, we implemented several new initiatives intended to

streamline our workflows and further leverage new internally developed

systems and system enhancements. These reductions, in addition to other

cost saving initiatives over the past three years, decreased our annual

       selling, general and administrative expenses and operating costs as a        percentage of net revenue to 54.1% for the year ended December 31, 2011        compared to 58.5% for 2008.                                           35

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• During 2011, we completed implementation of our new order intake system.

In conjunction with our new electronic medical record system implemented

in 2009, we have redesigned our front-end order intake processes. As a

result, we have been able to automate and consolidate many of our

historically paper-based processes. We believe that this new intake system

       will result in significant improvements in our operating efficiency.   •      Since 2009, we have purchased $31.9 million of new and used rental

equipment, inventory and identifiable intangible assets from competitors

exiting the home medical equipment market. Some of the equipment purchased

in these transactions is currently on rent and located in a patient's

home. We have been successful, and we expect that we will continue to be

successful, in transitioning and retaining a high percentage of the

associated patients onto service with our Company. We believe that we will

be successful in identifying additional equipment and asset purchase

opportunities during 2012, however the degree to which we pursue such

opportunities during 2012 will depend upon a variety of factors, including

consideration of markets that will be impacted by competitive bidding,

availability of cash and market valuation multiples. Since 2009, we have

recognized approximately $50.8 million of revenues associated with

patients transitioned onto service with our Company through equipment and

asset purchases.

   These strategic and operational initiatives were implemented in order to best position the Company to address its 2011 debt maturities. Our 2012 financial plans call for continued improvements in financial performance compared to 2011. Critical Accounting Policies The preparation of our financial statements in accordance with generally accepted accounting principles requires us to make assumptions that affect the reported amounts of assets, liabilities and disclosure of contingencies as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the most complex or subjective judgments often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Thus, to the extent that actual events differ from our estimates and assumptions, there could be a material impact to our financial statements. We believe that the critical accounting policies for our company are those we have described below. The below listing is not intended to be a comprehensive list of all our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles with limited or no need for management's judgment. There are also areas in which management's judgment in selecting available alternatives may or may not produce a materially different result. For more information, see our audited consolidated financial statements and notes thereto. Revenue Recognition Revenues are recognized when persuasive evidence of an arrangement exists; delivery has occurred; our price to the payor is fixed or determinable; and collectability is reasonably assured. Our rental arrangements generally provide for fixed monthly payments established by fee schedules for as long as the patient is using the equipment and medical necessity continues (subject to capped rentals which limit the rental payment period in some instances). Once initial delivery is made to the patient (initial setup), a monthly billing is established based on the initial setup service date. We recognize rental arrangement revenues ratably over the monthly service period and defer revenue for the portion of the monthly bill which is unearned. No separate revenue is earned from the initial setup process. We have no lease with the patient or third-party payor. During the rental period we are responsible for providing oxygen refills and for servicing the equipment based on manufacturers' recommendations. Revenues for the sale of durable medical equipment and related supplies, including oxygen equipment, ventilators, wheelchairs, hospital beds and infusion pumps, are recognized at the time of delivery. Revenues for the sale of nebulizer medications, which are generally dispensed by our pharmacies and shipped directly to the patient's home, are recognized at the time of shipment. Revenues derived from capitation arrangements are insignificant. Net Revenues Net revenues are recorded at net realizable amounts estimated to be paid by patients and third-party payors. Our billing system contains payor-specific price tables that reflect the fee schedule amounts, as available, in effect or contractually agreed upon by various government and commercial payors for each item of equipment or supply provided to a customer. Net revenues are recorded based upon the applicable fee schedule. We track collections and adjustments as a percentage of related revenues. Historical collection and adjustment percentages serve as the basis for our provisions for contractual adjustments and doubtful accounts. The provision for contractual adjustments is recorded as a reduction to net revenues and consists of: (1) Differences between non-contracted third-party payors' allowable amounts and our usual and customary billing rate. We do not have contracts or fee schedules with all third-party payors. Accordingly, for non-contracted payors where no fee schedule is available, we record revenue based upon our usual and customary billing rates. Actual adjustments that result from differences between the non-contracted third-party payors' allowable amounts and our usual                                         36

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  and customary billing rates are recorded against the allowance for contractual adjustments and are typically identified and recorded at the point of cash application. (2) Services for which payment is denied by governmental or third-party payors, or otherwise deemed non-billable by us. Final payment under governmental programs, and most third-party contracts, is subject to administrative review and audit. Furthermore, the complexity of governmental and third-party billing reimbursement arrangements, including patient qualification and medical necessity requirements, may result in adjustments to amounts originally recorded. Such adjustments may be recorded as the result of the denial of claims billed to governmental or third-party payors, or as the result of our review procedures prior to submission of the claim to the governmental or third-party payor. Actual adjustments that result from services for which payment is denied by governmental or third-party payors, or otherwise deemed non-billable by us are recorded against the allowance for contractual adjustments. The provision for contractual adjustments reduces amounts recorded through our billing system to estimated net realizable amounts. We record the provision for contractual adjustments based on a percentage of revenue using historical company-specific data. The percentage and amounts used to record the provision for contractual adjustments are supported by various methods including current and historical cash collections, as well as actual contractual adjustment experience. This percentage, which is adjusted at least on an annual basis, has proven to be the best indicator of expected realizable amounts. We closely monitor our historical contractual adjustment rates, as well as changes in applicable laws, rules and regulations and contract terms to help assure that provisions are made using the most accurate information we believe to be available. Due to the nature of the industry and the reimbursement environment in which we operate, certain estimates are required in order to record net revenues at their net realizable values. Inherent in these estimates is the risk that they may have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements, patient qualification for medical necessity of equipment and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review. Net revenues also include advertising and other non-patient service revenue. The provision for doubtful accounts is recorded as an operating expense and consists of billed charges that are ultimately deemed uncollectible due to the patient's or third-party payor's inability or refusal to pay, as described below. Provision for Doubtful Accounts Medicare and most other government and commercial payors that provide coverage to our patients include a 20% co-payment provision in addition to a nominal deductible. Co-payments are generally not collected at the time of service and are invoiced to the customer or applicable secondary payor (supplemental providers of insurance coverage) on a monthly billing cycle as products are provided. A majority of our patients maintain, or are entitled to, secondary or supplemental insurance benefits providing "gap" coverage of this co-payment amount. In the event coverage is denied by the third-party payor, the customer is ultimately responsible for payment of charges for all services rendered by us.  Collection of receivables from third-party payors and patients is our primary source of cash and is critical to our operating performance. Our primary collection risk, with regard to doubtful accounts, relates to patient accounts for which the primary insurance payor has paid, but patient responsibility amounts (generally deductibles and co-payments) remain outstanding. We record a provision for doubtful accounts based on a percentage of revenue using historical company-specific data. The percentage and amounts used to record the provision for doubtful accounts are supported by various methods including current and historical cash collections, actual write-offs, and accounts receivable agings. Accounts are written off against the allowance for doubtful accounts when all collection efforts have been exhausted. We routinely review accounts receivable balances in conjunction with our historical bad debt rates and other economic conditions which might ultimately affect the collectability of patient accounts when we consider the adequacy of the amounts we record as provision for doubtful accounts. Significant changes in payor mix, economic conditions or trends in federal and state governmental health care coverage could have a material adverse affect on our collection of accounts receivable, cash flows and results of operations. Accounts Receivable, net Accounts receivable are presented net of allowances for contractual adjustments and doubtful accounts. Allowances for contractual adjustments and doubtful accounts are initially recorded based upon historical collection experience through the provisions for contractual adjustment and doubtful accounts, as described above. If the payment amount received differs from the net realizable amount, an adjustment is made to the net realizable amount in the period that these payment differences are determined. Actual accounts receivable write-offs due to contractual adjustments or accounts deemed uncollectible are applied against these allowance accounts in the normal course of business. On a quarterly basis, we perform analyses to evaluate the                                         37

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  estimated net realizable value of accounts receivable. As a result of this quarterly review process, the allowances for contractual adjustments and doubtful accounts are adjusted, as necessary, to reflect that estimated net realizable value. Specifically, we consider historical collection data, accounts receivable aging trends, other operating trends and relevant business conditions. Due to the nature of the industry and the reimbursement environment in which we operate, certain estimates are required in order to record net revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they may have to be revised or updated as additional information becomes available. It is possible that management's estimates could change, which could have an impact on operations and cash flows. For example, a 1% decline in the overall collection rate would reduce operating income, operating cash flows and associated net accounts receivable by $6.0 million (based upon $600.0 million in annual gross patient service revenue). Additionally, the complexity of many third-party billing arrangements, patient qualification for medical necessity of equipment and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Intangible Assets Intangible assets include trade names and Medicare licenses with indefinite lives which are not subject to amortization, but instead must be reviewed annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired. Fair values for intangible assets are determined based upon discounted cash flows, market multiples or appraised values as appropriate. An impairment loss is recorded if the fair value of the intangible asset is less than the carrying value. Intangible assets also include customer/physician relationships, computer software and other identifiable intangible assets which are amortized over a period of their expected useful lives, generally 2 to 20 years. Impairment of Long-Lived Assets Periodically, when indicators of impairment are present, we evaluate the recoverability of the net carrying value of our property and equipment and our other amortizable intangible assets by comparing the carrying values to the estimated future undiscounted cash flows. A deficiency in these cash flows relative to the carrying amounts is an indication of the need for a write-down due to impairment. The amount of the impairment, if any, is recognized by the amount by which the carrying value exceeds the fair value. Among other variables, we consider factors such as the effects of external changes to our business environment, competitive pressures, market erosion, technological and regulatory changes as factors which could provide indications of impairment. Property and Equipment Property and equipment are stated at cost, adjusted for the impact of fresh start reporting. Patient service equipment represents medical equipment rented or held for rental to in-home patients. Patient service equipment is accounted for using a composite method, due to its characteristics of high unit volumes of relative low dollar unit cost items. Under the composite method, the purchase cost of monthly purchases of certain patient service equipment are capitalized and depreciated over the applicable useful life under a straight-line convention, without specific physical tracking of individual items. Each grouping of patient service equipment is assigned a useful life intended to provide proper matching of the cost of patient service equipment with the patient service revenues generated from use of the equipment, when considering the conversion of rental equipment to purchase, wear and tear, damage, loss and ultimately scrapping of patient service equipment over its life. Whenever events or circumstances occur which change the estimated useful life of an asset, we account for the change prospectively. While we believe our current estimates of useful lives are reasonable, significant differences in actual experience or significant changes in assumptions may cause additional changes to future depreciation expense. Other property and equipment is accounted for by a specific identification system. Depreciation for other property and equipment is provided on the straight-line method over the estimated useful lives of the assets, seven years for furniture and office equipment, five years for vehicles, three years for computer equipment, and the shorter of the remaining lease term or the estimated useful life for leasehold improvements. Equipment and Asset Purchases from Competitors We purchase new and used rental equipment and inventory from competitors exiting the home health care market. Some of the equipment purchased in these transactions is currently on rent and located in a patient's home. As such, we have the opportunity to transition these patients onto service with our Company, subject to patient consent, physician approval and insurance authorization. The equipment and inventory purchased from these competitors represents only a limited subset of the assets and activities used in operating their respective businesses. Accordingly, these equipment purchases ("Equipment Purchases") are recorded based upon the fair market value of the underlying equipment and inventory, and included in purchases of property and equipment in the accompanying consolidated statements of cash flows. In addition, in certain circumstances, we purchase additional assets from competitors in conjunction with the purchase of                                         38

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  their rental equipment and inventory. These additional assets may include identifiable intangible assets such as non-competition agreements, patient files and the legal entity name. In these asset purchase transactions, we are able to continue billing and servicing the associated patients without interruption. Accordingly, these asset purchases ("Asset Purchases") are accounted for as business combinations in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations (ASC 805). Pro forma results and other expanded disclosures required by ASC 805 have not been presented as these purchases individually and in the aggregate are not material. Contingencies Our business is subject to extensive laws and government regulations, including those related to the Medicare and Medicaid programs. Non-compliance with such laws and regulations could subject us to severe sanctions, including penalties and fines. ASC Topic 450, Contingencies, provides guidance on the application of generally accepted accounting principles related to these matters. We evaluate and record liabilities for contingencies based on known claims and legal actions when it is probable a liability has been incurred and the liability can be reasonably estimated. We believe that our accrued liabilities related to such contingencies are appropriate and in accordance with generally accepted accounting principles.  

Results of Operations The following tables show our results of operations for the years ended December 31, 2011, 2010 and 2009.

                                                   For the Years Ended                                                     December 31, (dollars in thousands)                    2011          2010          2009 Statements of Operations Data: Net revenues                           $ 483,791     $ 496,426     $ 479,869 Costs and expenses: Cost of net revenues: Product and supply costs                  90,253        97,698       111,498 Patient service equipment depreciation    50,454        51,541        53,667 Operating expenses                         8,506         8,615         9,707 Total cost of net revenues               149,213       157,854       174,872 Provision for doubtful accounts           26,244        23,355        

16,234

Selling, general and administrative 253,020 262,332 255,952 Depreciation and amortization

              9,573         8,674         9,780 Total costs and expenses                 438,050       452,215       456,838 Operating income                          45,741        44,211        23,031 Interest expense, net                     60,265        47,680        45,401 Other income, net                           (791 )      (3,598 )      (1,276 ) Loss on debt extinguishment                1,216         4,401             - Total other expenses                      60,690        48,483        44,125 Loss before income taxes                 (14,949 )      (4,272 )     (21,094 ) Income tax benefit                          (190 )         (69 )         (13 ) Net loss                               $ (14,759 )   $  (4,203 )   $ (21,081 )   

The following tables show our results of operations as a percentage of net revenues for the years ended December 31, 2011, 2010 and 2009:

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   Table of Contents                                                                               Percent          Percent                                           For the Years Ended                Increase         Increase                                              December 31,                   (Decrease)       (Decrease)                                    2011          2010          2009       2011 vs. 2010    2010 vs. 2009 Statements of Operations Data: Net revenues                       100.0  %      100.0  %      100.0  %          (2.5 )%           3.5  % Costs and expenses: Cost of net revenues: Product and supply costs            18.7  %       19.7  %       23.2  %          (7.6 )%         (12.4 )% Patient service equipment depreciation                        10.4  %       10.4  %       11.2  %          (2.1 )%          (4.0 )% Operating expenses                   1.8  %        1.7  %        2.0  %          (1.3 )%         (11.2 )% Total cost of net revenues          30.9  %       31.8  %       36.4  %          (5.5 )%          (9.7 )% Provision for doubtful accounts      5.4  %        4.7  %        3.4  %          12.4  %          43.9  % Selling, general and administrative                      52.3  %       52.8  %       53.3  %          (3.5 )%           2.5  % Depreciation and amortization        2.0  %        1.7  %        2.0  %          10.4  %         (11.3 )% Total costs and expenses            90.6  %       91.0  %       95.1  %          (3.1 )%          (1.0 )% Operating income                     9.4  %        9.0  %        4.9  %           3.5  %          92.0  % Interest expense, net               12.5  %        9.6  %        9.5  %          26.4  %           5.0  % Other income, net                   (0.2 )%       (0.7 )%       (0.3 )%         (78.0 )%         182.0  % Loss on debt extinguishment          0.3  %        0.9  %          -  %         (72.4 )%         100.0  % Total other expenses                12.6  %        9.8  %        9.2  %          25.2  %           9.9  % Loss before income taxes            (3.2 )%       (0.8 )%       (4.3 )%         249.9  %         (79.7 )% Income tax benefit                     -  %          -  %          -  %         175.4  %         430.8  % Net loss                            (3.2 )%       (0.8 )%       (4.3 )%         251.2  %         (80.1 )%   Year ended December 31, 2011 as compared to year ended December 31, 2010 Total net revenues for the year ended December 31, 2011 were $483.8 million as compared to $496.4 million for the comparable period in 2010, a decrease of $12.6 million, or 2.5%. This decrease is primarily attributable to: •$12.2 million in decreases in nebulizer medication reimbursement and volume; •$5.1 million in reductions from competitive bidding; and •$5.6 million in decreases in non-patient service revenue, non-core product lines and other changes in Medicare reimbursement. These decreases were partially offset by $5.7 million from organic growth in our core oxygen and CPAP product line patient counts and approximately $4.6 million increase in net revenue associated with patients transitioned onto service with us through Equipment and Asset Purchases. As of December 31, 2011 revenue generating patients (including patients from equipment and asset purchases) in the core product lines of oxygen and CPAP grew 8.8% compared to December 31, 2010. Cost of net revenues for the year ended December 31, 2011 decreased $8.6 million, or 5.5%, to $149.2 million, from the comparable period in 2010. Product and supply costs decreased $7.4 million which was primarily attributable to $9.7 million decrease in nebulizer medication expenses consistent with the volume reductions in our nebulizer medication business partially offset by a $2.3 million increase in cost of net revenues consistent with the volume increases in our CPAP product line. In addition, patient service equipment depreciation decreased $1.1 million as a result of equipment becoming fully depreciated during the last twelve months Cost of net revenues as a percentage of net revenue was 30.9% for the year ended December 31, 2011 as compared to 31.8% for the comparable period in 2010.  The provision for doubtful accounts for the year ended December 31, 2011 totaled $26.2 million, a $2.9 million increase from the comparable period in 2010. As a percentage of net revenues, the provision for doubtful accounts was 5.4% and 4.7% for the years ended December 31, 2011 and 2010, respectively. Although we have implemented more stringent collection policies and procedures, the magnitude of balances shifting to patient responsibility has increased as a result of patients losing insurance coverage and increased copayment and deductible amounts under employer-based plans. We have increased our provision rate for doubtful accounts to reflect these changes.                                         40

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  Selling, general and administrative expenses for the year ended December 31, 2011 totaled $253.0 million, a decrease of $9.3 million or 3.5% from the comparable period in 2010. The decrease in selling, general and administrative expenses was primarily attributable to: •$5.0 million in reduced salary-related costs primarily from a 2.1% reduction in average full-time equivalent employee counts compared to the comparable period in 2010; •$4.3 million in decreased insurance costs as a result of lower claims incurrence and design changes to our health insurance plans; •$3.8 million in reduced fleet costs associated with the buy-out of our vehicle leases during 2010; and •$1.2 million in decreased telecom expenses associated with an excise tax refund claims ($0.6 million, net of associated fees) and renegotiated telecom contracts. These decreases were partially offset by: • $2.2 million in increased contract labor costs as a result of transition costs associated with equipment purchases and higher utilization of respiratory therapists; and •$1.9 million in increased fuel costs as a result of higher gas prices. Selling, general and administrative expenses as a percentage of net revenues decreased to 52.3% for the year ended December 31, 2011 from 52.8% for the year ended December 31, 2010. Depreciation and amortization for the year ended December 31, 2011 totaled $9.6 million, an increase of $0.9 million from the comparable period in 2010. This increase was mainly the result of purchases vehicles, including those acquired in conjunction with certain equipment and asset purchase transactions. Depreciation and amortization as a percentage of net revenues increased to 2.0% as compared to 1.7% for the comparable period in 2010. Net interest expense for the year ended December 31, 2011 increased $12.6 million from the comparable period in 2010. This increase is primarily a result of the replacement of the payment-in-kind term loan facility (the "Senior Facility") in October 2010 with our Senior Secured Notes and the refinancing of the Senior Subordinated Notes with our Senior Second Lien Notes. The Senior Secured Notes bear interest at 10.75% and the Senior Second Lien Notes bear interest at 10.5% while the Senior Facility had an average variable interest rate of 6.3% and the Senior Subordinated Notes bore interest at 9.5%. Other income, net for the year ended December 31, 2011 totaled $0.8 million, a decrease of $2.8 million from the comparable period in 2010. During the month of April 2010, we settled a commercial arbitration proceeding related to previously unpaid claims and associated interest, fees, expenses and legal costs. The net amount received as a result of this settlement, after consideration of all legal costs and expenses incurred, was approximately $2.9 million. As a result of the redemption of the 9.5% Senior Subordinated Notes due 2012, we recorded a $1.2 million loss on extinguishment of debt related to unamortized debt issuance costs during the year ended December 31, 2011. Additionally, as a result of the termination of the Senior Facility dated March 30, 2007, we recorded a $4.4 million loss on extinguishment of debt related to unamortized debt issuance costs of $2.1 million and prepayment premiums of $2.3 million during the year ended December 31, 2010. Net loss for the year ended December 31, 2011 was $14.8 million compared to a net loss of $4.2 million for the year ended December 31, 2010. This increase in net loss is primarily attributable to the above described increase in net interest expense and the loss on extinguishment of debt. Year ended December 31, 2010 as compared to year ended December 31, 2009 Total net revenues for the year ended December 31, 2010 were $496.4 million as compared to $479.9 million for the comparable period in 2009, an increase of $16.5 million, or 3.5%. This increase is primarily attributable to $12.2 million from organic growth in our core oxygen and CPAP product line patient counts, approximately $9.5 million increase in net revenue associated with patients transitioned onto service with us through Equipment and Asset Purchases and $7.7 million associated with advertising revenue and other non-patient service revenue. These increases were partially offset by a $10.8 million impact of reductions in nebulizer medication reimbursement and volume and approximately $1.9 million impact from the 1.5% Medicare budget neutrality adjustment to stationary oxygen equipment reimbursement rates, which became effective January 1, 2010. Cost of net revenues for the year ended December 31, 2010 decreased $17.0 million, or 9.7%, to $157.9 million, from the comparable period in 2009. Product and supply costs decreased $13.8 million which was primarily attributable to $11.9 million decrease in nebulizer medication expenses consistent with the volume reductions in our nebulizer medication business. In addition, patient service equipment depreciation decreased $2.1 million as a result of equipment becoming fully depreciated                                         41

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  during the last twelve months and operating costs decreased by $1.1 million as a result of continued reductions in our pharmacy personnel costs consistent with the associated decreases in nebulizer medications discussed above. Cost of net revenues as a percentage of net revenue was 31.8% for the year ended December 31, 2010 as compared to 36.4% for the comparable period in 2009.  The provision for doubtful accounts for the year ended December 31, 2010 totaled $23.4 million, a $7.1 million increase from the comparable period in 2009. As a percentage of net revenues, the provision for doubtful accounts was 4.7% and 3.4% for the years ended December 31, 2010 and 2009, respectively. Although we have implemented more stringent collection policies and procedures, the magnitude of balances shifting to patient responsibility has increased as a result of patients losing insurance coverage and increased copayment and deductible amounts under employer-based plans. We have increased our provision rate for doubtful accounts to reflect these changes. During 2009, we transitioned all patient-related collection activities to a third-party vendor. We experienced extended delays and implementation issues associated with this transition. During the quarter ended March 31, 2010, we completed the initial collection phases associated with the early patient balances most impacted by these transition issues and determined that an additional provision for doubtful accounts in the amount of $5.0 million was required to allow for a lower percentage of collection on patient receivables resulting from these transition issues. Selling, general and administrative expenses for the year ended December 31, 2010 totaled $262.3 million</money>, an increase of $6.4 million or 2.5% from the comparable period in 2009. The increase in selling, general and administrative expenses was primarily attributable to a $2.5 million reduction in marketing reimbursements which offset salary costs, a $2.1 million increase in contract and temporary labor costs due to increased utilization of respiratory therapists and transition costs associated with Equipment and Asset Purchases, a $1.2 million increase in sales commissions as a result of the increased levels of organic growth achieved during 2010, and increased collection service fees and expenses. These increases were partially offset by decreases in occupancy and telephone costs. Selling, general and administrative expenses as a percentage of net revenues decreased to 52.8% for the year ended December 31, 2010 from 53.3% for the year ended December 31, 2009. Depreciation and amortization for the year ended December 31, 2010 totaled $8.7 million, a decrease of $1.1 million from the comparable period in 2009. This decrease is mainly the result of decreased capital expenditures on computer and other equipment, as well as certain computer and other equipment becoming fully depreciated during 2010. Depreciation and amortization as a percentage of net revenues decreased to 1.7% as compared to 2.0% for the comparable period in 2009. Net interest expense for the year ended December 31, 2010 increased $2.3 million from the comparable period in 2009. This increase is primarily as a result of the replacement of the payment-in-kind term loan facility (the "Senior Facility") in October 2010 with our Senior Secured Notes. The Senior Secured Notes bear interest at 10.75% while the Senior Facility had an average variable interest rate of 6.3%. Other income, net for the year ended December 31, 2010 totaled $3.6 million, an increase of $2.3 million from the comparable period in 2009. During the month of April 2010, we settled a commercial arbitration proceeding related to previously unpaid claims and associated interest, fees, expenses and legal costs. The net amount received as a result of this settlement, after consideration of all legal costs and expenses incurred, was approximately $2.9 million. As a result of the termination of the Senior Facility dated March 30, 2007, we recorded a $4.4 million loss on extinguishment of debt related to unamortized debt issuance costs of $2.1 million and prepayment premiums of $2.3 million. Net loss for the year ended December 31, 2010 was $4.2 million compared to a net loss of $21.1 million for the year ended December 31, 2009. This improvement is attributable to the changes in revenue, costs and expenses and other income, net described above partially offset by the loss on debt extinguishment.  Non-GAAP Financial Measure We present Adjusted EBITDA as a supplemental measure of our performance that is not required by, or presented in accordance with, generally accepted accounting principles (GAAP) in the United States of America. We define Adjusted EBITDA as net earnings (loss) adjusted for (i) income tax (benefit) expense, (ii) interest expense and (iii) depreciation and amortization, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance. These further adjustments are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. We believe Adjusted EBITDA assists investors and securities analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition we use Adjusted EBITDA to evaluate the effectiveness of our business strategies. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-                                         42

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  recurring items. The following table is a reconciliation of Adjusted EBITDA to net loss (in thousands):                                                                  Year ended                                                                December 31,                                                     2011           2010           2009 Net loss                                           (14,759 )   $   (4,203 )   $  (21,081 ) Income tax benefit                                    (190 )          (69 )          (13 ) Interest expense                                    60,450         47,761         45,608 Depreciation and amortization, including patient service equipment depreciation              60,028         60,215   

63,447

 Accounts receivable adjustment(1)                        -          5,000              - Non-cash equity-based compensation expense             516            212   

475

 Restructuring related costs(2)                          86            463              - Settlement costs(3)                                    121            103            (17 ) Loss on extinguishment of debt(4)                    1,216          4,401              - Other adjustments(5)                                     -              -            337                                                 $  107,468     $  113,883     $   88,756   

(1) Accounts receivable adjustments associated with specific collection issues

that are not considered indicative of our ongoing operation performance.

During 2009, we transitioned all patient-related collection activities to a

third-party vendor. We experienced extended delays and implementation issues

associated with this transition. During the quarter ended March 31, 2010, we

completed the initial collection phases associated with the early patient

balances most impacted by these transition issues and determined that an

additional provision for doubtful accounts in the amount of $5.0 million was

required to allow for a lower percentage of collection on patient receivables

   Adjusted EBITDA should not be considered as a measure of financial performance under GAAP, and the items excluded from EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA has limitations as an analytical tool. Some of these limitations are: •      Adjusted EBITDA does not reflect our cash expenditures, future        requirements, for capital expenditures or contractual commitments;  

       requirements necessary to service interest or principal payments on our        debts;  

       being depreciated and amortized will often have to be replaced in the        future, and Adjusted EBITDA does not reflect any cash requirements for        such replacements;  

   Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only supplementally. Liquidity and Capital Resources Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations                                         43

  on a timely basis. Our working capital requirements relate primarily to the working capital needed for general corporate purposes. Our business requires us to make significant capital expenditures relating to the purchase and maintenance of the medical equipment used in our business. In addition, we continue to monitor and evaluate our current and projected financial performance to assess whether the cash generated from our operations in future years will continue to meet our working capital, capital expenditure and other cash needs going forward. We believe based upon our current cash projections that current cash balances together with cash generated from our operations and available credit under our revolving credit facility will be sufficient to meet our working capital, capital expenditure and other cash needs through 2012. Cash flows and cash on hand were sufficient to fund operations, capital expenditures and required repayments of debt during the years ended December 31, 2011 and 2010. Net cash provided by operating activities was $35.4 million and $67.0 million for the years ended December 31, 2011 and 2010, respectively. Accounts receivable before allowance for doubtful accounts increased to $90.5 million at December 31, 2011 from $78.5 million at December 31, 2010. Days sales outstanding (DSO) (calculated as of each period end by dividing accounts receivable, less allowance for doubtful accounts, by the 90-day rolling average of net revenue) were 58.5 days at December 31, 2011 and 49.5 days at December 31, 2010. There are several factors that continue to impact our DSO, including, but not limited to: •      Significant increases in the number of claims subject to prepayment 

  •      Temporary delays in obtaining certain required payor-specific        documentation required to release claims. Such delays were caused by        unanticipated operational backlogs associated with our conversion to a new        order intake system, as further described below.  

       finding it difficult to pay their out-of-pocket charges due to loss of        insurance coverage, increases in deductibles and co-payment amounts or        reductions in their investment or employment income.   •      Lengthened initial collection cycles for patients transitioned onto

       period.   •      More stringent patient collection standards. We have implemented more

   During 2009, we transitioned all patient-related collection activities to a third-party vendor. We experienced extended delays and implementation issues associated with this transition. During the quarter ended March 31, 2010, we completed the initial collection phases associated with the early patient balances most impacted by these transition issues and determined that an additional provision for doubtful accounts in the amount of $5.0 million was required to allow for a lower percentage of collection on patient receivables resulting from these transition issues. The following table sets forth the percentage breakdown of our accounts receivable by payor and aging category as of December 31, 2011 and 2010: December 31, 2011 Accounts receivable by payor and                Managed Care        Patient aging category:                   Government      and Other      Responsibility    Total Aged 0-90 days                        37 %            20 %               8 %         65 % Aged 91-180 days                       7 %             5 %               7 %         19 % Aged 181-360 days                      5 %             3 %               7 %         15 % Aged over 360 days                     - %             - %               1 %          1 % Total                                 49 %            28 %              23 %        100 %   December 31, 2010                                          44

  Accounts receivable by payor and                Managed Care        Patient aging category:                   Government      and Other      Responsibility    Total Aged 0-90 days                        38 %            21 %               8 %         67 % Aged 91-180 days                       5 %             5 %               7 %         17 % Aged 181-360 days                      4 %             4 %               7 %         15 % Aged over 360 days                     - %             1 %               - %          1 % Total                                 47 %            31 %              22 %        100 %   Included in accounts receivable are earned but unbilled receivables of $28.1 million, and $18.9 million at December 31, 2011 and 2010, respectively. These amounts include $7.0 million at December 31, 2011 and $3.6 million at December 31, 2010 of receivables for which a prior authorization is required but has not yet been received. Delays, ranging from a day to several weeks, between the date of service and billing can occur due to delays in obtaining certain required payor-specific documentation from internal and external sources. During 2011, we completed implementation of our new order intake system. As a result of this implementation, we experienced unanticipated operational backlogs which led to an increase of $9.2 million in earned but unbilled accounts receivable. Subsequent to December 31, 2011, we have implemented numerous operational initiatives designed to eliminate this backlog and as of February 29, 2012, we have reduced the total earned but unbilled receivables to $24.4 million. In addition to the aforementioned delays, we are required to obtain revised documentation for patients transitioned onto service with us through Equipment Purchases which results in increased initial billing cycles for these patients. Earned but unbilled receivables are aged from the date of service and are considered in our analysis of historical performance and collectability. Due to the nature of the industry and the reimbursement environment in which we operate, certain estimates are required to record net revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review. Management performs analyses to evaluate the net realizable value of accounts receivable. Specifically, management considers historical realization data, accounts receivable aging trends, other operating trends and relevant business conditions. Because of continuing changes in the health care industry and third-party reimbursement, it is possible that management's estimates could change, which could have an impact on operations and cash flows. We derive a significant portion of our revenues from the Medicare and Medicaid programs and from managed care health plans. Payments for services rendered to patients covered by these programs may be less than billed charges. Revenue is recognized at net realizable amounts estimated to be paid by patients and third-party payors. Our billing system contains payor-specific price tables that reflect the fee schedule amounts in effect or contractually agreed upon by various government and commercial payors for each item of the equipment or supply provided to a customer. For Medicare and Medicaid revenues, as well as most other managed care and private payors, final payment is subject to administrative review and audit. Management makes estimated provisions for adjustments, which may result from administrative review and audit, based upon historical experience. Management closely monitors its historical collection rates as well as changes in applicable laws, rules and regulations and contract terms to help assure that provisions are made using the most accurate information management believes to be available. However, due to the complexities involved in these estimations, actual payments we receive could be different from the amounts we estimate and record. Collection of receivables from third-party payors and patients is our primary source of cash and is critical to our operating performance. We manage billing and collection of accounts receivable through our own billing and collection centers. In addition, we utilize, third-party collection resources to manage collection of amounts due from patients. Our primary collection risks relate to patient accounts for which the primary insurance payor has paid, but patient responsibility amounts (generally deductibles and co-payments) remain outstanding. We record bad debt expense based on a percentage of revenue using historical company-specific data. The percentage and amounts used to record bad debt expense and the allowance for doubtful accounts are supported by various methods including current and historical cash collections, bad debt write-offs, and aging of accounts receivable. Accounts are written off against the allowance when all collection efforts (including payor appeals processes) have been exhausted. We routinely review accounts receivable balances in conjunction with our historical contractual adjustment and bad debt rates and other economic conditions which might ultimately affect the collectability of patient accounts when we consider the adequacy of the amounts we record as provision for doubtful accounts. Significant changes in payor mix, business office operations, economic conditions or trends in federal and state governmental health care coverage could affect our collection of accounts receivable and management's associated estimates, which could have an                                         45

  impact on cash flows and results of operations. Further, even if our billing procedures comply with all third-party payor requirements, some of our payors may experience financial difficulties, may delay payments or may otherwise not pay accounts receivable when due, which would result in increased write-offs or provisions for doubtful accounts. In addition, we periodically experience inconsistent payment patterns from CMS and its contractors and other third-party payors. As such, we may not be able to maintain our current levels of collectability. If we are unable to collect our accounts receivable on a timely basis, our revenues, profitability and cash flow likely will significantly decline. Net cash used in investing activities was $53.3 million and $48.0 million for the years ended December 31, 2011 and 2010, respectively. We currently have no contractual commitments for capital expenditures over the next twelve months other than to acquire equipment as needed to supply our patients. Our business requires us to make significant capital expenditures relating to the purchase and maintenance of the medical equipment used in our business. Cash used for capital expenditures totaled approximately $48.9 million (10.1% of our net revenues) for the year ended December 31, 2011 as compared to $53.3 million (10.7% of our net revenues) for the same period in 2010. In addition, cash used for capital expenditures for the years ended December 31, 2011 and 2010 includes $6.1 million and $4.6 million paid for new and used rental equipment from competitors exiting the home health care market, respectively. Most of the equipment purchased in these transactions is currently on rent and located in a patient's home. As such, we have the opportunity to transition such patients onto service with our Company. In addition, we paid $9.5 million for the year ended December 31, 2011 for asset purchases from competitors. On March 17, 2011, we issued $290.0 million in aggregate principal amount of Senior Second Lien Notes. The Senior Second Lien Notes were offered and sold in a private placement to Credit Suisse Securities (USA) LLC and Jefferies & Company, Inc. (the "Initial Purchasers") in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), and resold by the Initial Purchasers to qualified buyers pursuant to exemptions from registration provided by Rule 144A and Regulation S of the Securities Act. The Senior Second Lien Notes were also offered and sold to certain directors of the Company who are accredited investors as defined in Rule 501(a) under the Securities Act. The Senior Second Lien Notes were issued at a discount of $5.2 million and we incurred transaction costs of approximately $8.9 million. The discount and transaction costs associated with the Senior Second Lien Notes are being amortized as interest expense over the term of these notes. Interest will be payable semi-annually on March 15 and September 15 commencing on September 15, 2011. We used the proceeds from the offering of the Senior Second Lien Notes, together with $24.5 million of cash on hand, to repay all of our outstanding Senior Subordinated Notes and pay associated fees and expenses. In conjunction with the closing of the Senior Second Lien Notes on March 17, 2011, we deposited $301.9 million with Bank of New York Mellon N.A., as trustee (the "Trustee"), to satisfy our obligation with respect to the Senior Subordinated Notes including the principal amount of $287.0 million and accrued interest through April 18, 2011 of $14.9 million. We were legally released of our liability effective March 17, 2011. Upon completion of the 30-day notice period required under the indenture governing our Senior Subordinated Notes, on April 18, 2011, the Trustee redeemed and canceled the Senior Subordinated Notes. As a result of the termination of the Senior Subordinated Notes we recorded a $1.2 million loss on extinguishment of debt related to unamortized debt issuance costs. The Senior Second Lien Notes will mature on March 15, 2018. In connection with the issuance of the Senior Second Lien Notes, we entered into a registration rights agreement with the Initial Purchasers of the Senior Second Lien Notes, dated March 17, 2011 (the "Senior Second Lien Notes Registration Rights Agreement"). Pursuant to the Senior Second Lien Notes Registration Rights Agreement, we agreed to exchange the Senior Second Lien Notes for freely tradable notes with terms that are substantially identical to the Senior Second Lien Notes. We also agreed, in limited circumstances, to file a shelf registration statement with respect to the Senior Second Lien Notes. On July 12, 2011, we completed the registered exchange offer with respect to the Senior Second Lien Notes. The indenture governing the Senior Second Lien Notes contains covenants that limit our ability and the ability of our restricted subsidiaries to, among other things: sell assets; pay dividends or make other distributions or repurchase or redeem our stock; incur or guarantee additional indebtedness; incur certain liens; make loans and investments; enter into agreements restricting our subsidiaries' ability to pay dividends; consolidate, merge or sell all or substantially all of or our assets, and enter into transactions with affiliates. The Senior Second Lien Notes are collateralized by a second priority security interest in substantially all of the Company's assets. The Senior Second Lien Notes are guaranteed by all of our wholly owned subsidiaries. Each guarantee is full and unconditional and joint and several. We hold all of our assets and conduct all of our operations through our wholly owned subsidiaries and we do not have independent assets and operations. Additionally, on March 17, 2011 we entered into a credit agreement with Credit Suisse AG, as administrative agent, Credit Suisse Securities (USA) LLC and Jefferies Finance LLC, as joint bookrunners and joint lead arrangers, and Jefferies Finance LLC, as documentation agent (the "Original Credit Agreement"). On March 7, 2012, we entered into an amendment to the Original Credit Agreement that extended the final maturity date from March 17, 2012 to March 17, 2014 (the Original Credit Agreement, as amended, the "Credit Agreement"). The Credit Agreement provides for a revolving credit facility                                         46

  commitment of up to $10.0 million provided that the maximum outstanding aggregate principal balance at any one time does not exceed $10.0 million (the "Revolving Credit Facility"). There was no debt outstanding under the Revolving Credit Facility as of December 31, 2011. The Revolving Credit Facility contains customary covenants similar to those in our indentures governing our Senior Secured Notes and Senior Second Lien Notes. The Revolving Credit Facility also includes a maximum leverage ratio above which level we would be precluded from making any additional draws. As of December 31, 2011, we were below the maximum leverage ratio threshold (as defined within the Credit Agreement). All borrowings under the Revolving Credit Facility are secured by a first priority security interest in substantially all of the Company's assets. The interest rate per annum applicable to the Revolving Credit Facility is adjusted LIBOR or, at our option, the alternate base rate, which is the higher of (a) the prime rate, (b) the federal funds effective rate plus 0.50%, and (c) the adjusted LIBOR plus 1.0% in each case, plus the applicable margin (as defined below). The applicable margin in the case of LIBOR advances is 5.0% and in the case of alternate base rate advances is 4.0%. The default rate on the Revolving Credit Facility is 2.0% above the otherwise applicable interest rate. We are also obligated to pay a commitment fee of 0.75% on the unused portion of our Revolving Credit Facility. On October 6, 2010, we issued $230.0 million in aggregate principal amount of 10.75% Senior Secured Notes due 2015 (the "Senior Secured Notes") pursuant to an indenture (the "Indenture") among ourselves, the Subsidiary Guarantors and The Bank of New York Mellon Trust Company, N.A., as trustee (in such capacity, the "Trustee"). The Senior Secured Notes were offered and sold in a private placement to Credit Suisse Securities (USA) LLC (the "Initial Purchaser") in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), and resold by the Initial Purchaser to qualified buyers pursuant to exemptions from registration provided by Rule 144A and Regulation S of the Securities Act. The Senior Secured Notes were issued at a discount of $6.5 million and we incurred transaction costs of approximately $8.0 million. The discount and transaction costs associated with the Senior Secured Notes will be amortized as interest expense over the term of those notes. Interest will be payable semi-annually on April 15 and October 15 commencing on April 15, 2011. We used the proceeds from the offering of the Senior Secured Notes, together with $13.7 million of cash on hand, to repay all of the outstanding indebtedness under our existing Senior Facility and pay associated fees and expenses. As a result of the termination in 2010, of the Senior Facility dated March 30, 2007, we recorded a $4.4 million loss on extinguishment of debt related to unamortized debt issuance costs of $2.1 million and prepayment premiums of $2.3 million. The Senior Secured Notes will mature on October 15, 2015. In connection with the issuance of the Senior Secured Notes, we entered into a registration rights agreement with the Initial Purchaser of the Senior Secured Notes, dated October 6, 2010 (the "Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, we agreed to register the exchange of the Senior Secured Notes for freely tradable notes with terms that are substantially identical to the Senior Secured Notes. We also agreed, in limited circumstances, to file a shelf registration statement with respect to the Senior Secured Notes. On January 14, 2011, we completed the registered exchange offer with respect to the Senior Secured Notes. The indenture governing the Senior Secured Notes contains covenants that limit our ability and the ability of our restricted subsidiaries to, among other things: sell assets; pay dividends or make other distributions or repurchase or redeem our stock; incur or guarantee additional indebtedness; incur certain liens; make loans and investments; enter into agreements restricting our subsidiaries' ability to pay dividends; consolidate, merge or sell all or substantially all or our assets, and enter into transactions with affiliates. We have outstanding letters of credit totaling $7.5 million and $8.8 million as of December 31, 2011 and 2010, respectively, which are cash collateralized at 100% of their face amount at December 31, 2011 and 105% of their face amount at December 31, 2010. The cash collateral for these outstanding letters of credit is included in restricted cash on our consolidated balance sheet as of December 31, 2011 and 2010. Cash flows used in financing activities primarily relate to repayment of our Senior Subordinated Notes due 2012. As of December 31, 2011, we had the following outstanding debt: •      $224.8 million in aggregate principal amount of Senior Secured Notes, the 

        Accrued interest on the Senior Second Lien Notes totaled $9.0 million at        December 31, 2011.                                           47

  The Company, either directly or through a subsidiary, may from time to time seek to purchase or retire our outstanding indebtedness through cash purchases, in the open market, privately negotiated transactions or otherwise. We will evaluate any such transactions in light of then-existing market conditions, taking into account contractual restrictions, our current liquidity and prospects for future access to capital. The amounts involved may be material.  

  Contractual Obligations(1)(5)                      Payments due by period (in thousands)                                                 Less than 1                                   More than 5                                     Total          year         1-3 years      3-5 years         years Long-term debt obligations(2)    $ 841,550     $    55,175     $  110,350     $  340,350     $   335,675 Capital lease obligations            2,684           1,660          1,024              -               - 

       6,777             438 Other liabilities reflected under GAAP(4)                          500             250            250              -               -                                  $ 888,399     $    74,563     $  131,096     $  347,127     $   336,113   (1) We do not have any purchase obligations other than standard purchase orders in the ordinary course of business. (2) Our debt is comprised of our 10.75% Senior Secured Notes due 2015, our 10.5% Senior Second Lien Notes due 2018 and related interest charges. See Note 10 to the consolidated financial statements included in this report for a discussion of our long-term debt. (3) Our operating lease obligations are primarily comprised of building and vehicle lease commitments. See Note 11 to the consolidated financial statements included in this report for further discussion of our lease commitments. (4) Our other liabilities reflected primarily relate to required future payments for contingent consideration related to asset purchases. (5) We are unable to estimate the timing of payments that might be due related to our $0.3 million liability for uncertain tax positions. See Note 13 to the consolidated financial statements included in this report for further discussion of our tax liabilities.   Selected Quarterly Financial Data (unaudited) The following tables present our unaudited quarterly results of operations for 2011 and 2010. The following table should be read in conjunction with the consolidated financial statements appearing elsewhere in this report. This unaudited information has been prepared on a basis consistent with the audited consolidated financial statements and includes all adjustments, consisting only of normal recurring adjustments, that are considered necessary for a fair presentation of our financial position and operating results for the quarters presented. No conclusions should be drawn about our future results from the results of operations for any quarter. The following is a summary of quarterly financial results for the years ended December 31, 2011 and 2010:                                         48

   Table of Contents                                                                                Three Months Ended                        December 31,         September 30,      June 30,      March 31,     December 31,       September 30,      June 30,      March 31,                            2011                  2011            2011          2011            2010               2010             2010          2010                                                                      (in thousands, except per share data) Summary Statement of Operations Information: Net Revenue           $     117,042        $      122,806     $ 122,437     

                37,825        35,931        39,098            38,401              38,605        40,005        40,843 

    (2,693 )          (3,605 )             2,517         3,393        (6,508 ) Net (loss) earnings per common share - basic                         (0.33 )               (0.06 )       (0.08 )       (0.11 )           (0.15 )              0.09          0.13         (0.26 ) Net (loss) earnings per common share - diluted                       (0.33 )               (0.06 )       (0.08 )       (0.11 )           (0.15 )              0.09          0.12         (0.26 ) Market Prices: High                           2.10                  4.65          4.93          4.55              1.99                2.00          3.65          0.66 Low                            1.11                  2.02          3.50          1.87              1.20                0.68          0.57          0.35    (1) Net loss for the quarter ended December 31, 2011 was negatively impacted by reduced CPAP sales attributable to a temporary slow down in order processing caused by implementation of our new order intake system and increased levels of contractual and bad debt adjustments. Off-balance Sheet Arrangements We do not have off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) that have or are reasonably likely to have a current or future effect on our financial condition, revenues, profit margins, profitability, operating cash flows and results of operations.  Inflation and Seasonality Management believes that there has been no material effect on our operations or financial condition as a result of inflation during the past three fiscal years. However, we are impacted by rising costs for certain inflation-sensitive operating expenses, such as labor and employee benefits, facility and equipment leases, and vehicle fuel. 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. Management also believes that the seasonal impact on our business is not material.