<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
CHECK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSACTION 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
INCORPORATION OR ORGANIZATION) FILE NUMBER) IDENTIFICATION NO.)
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
CHANGED 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 X NO
----- -----
14,985,960
- --------------------------------------------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF NOVEMBER 9, 1998)
TOTAL NUMBER OF SEQUENTIALLY
NUMBERED PAGES IS 29
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 12,050,000 $ 7,861,000
Restricted cash 50,000 51,000
Patient accounts receivable, less allowance for doubtful
accounts of $43,862,000 and $53,959,000 respectively 102,353,000 95,644,000
Other accounts receivable 12,033,000 5,990,000
Inventories 25,824,000 25,545,000
Prepaid expenses and other assets 1,423,000 1,986,000
Income tax receivable 8,099,000 9,803,000
Deferred tax asset 8,998,000 8,998,000
------------- -------------
Total current assets 170,830,000 155,878,000
------------- -------------
PROPERTY AND EQUIPMENT, at cost 146,803,000 164,284,000
Less accumulated depreciation and amortization (66,729,000) (81,290,000)
------------- -------------
Net property and equipment 80,074,000 82,994,000
------------- -------------
OTHER ASSETS
Excess of cost over fair value of net assets acquired, net 262,294,000 287,596,000
Investment in unconsolidated joint ventures 14,974,000 24,719,000
Deferred costs, net 3,967,000 3,483,000
Other assets 26,227,000 24,212,000
------------- -------------
Total other assets 307,462,000 340,010,000
------------- -------------
$ 558,366,000 $ 578,882,000
============= =============
</TABLE>
(Continued)
2
<PAGE> 3
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and capital leases $ 9,361,000 $ 4,794,000
Trade accounts payable 13,484,000 16,655,000
Other payables 1,343,000 1,299,000
Accrued expenses:
Payroll and related benefits 9,553,000 6,120,000
Restructuring accruals 13,604,000 4,287,000
Other 10,764,000 19,771,000
------------- -------------
Total current liabilities 58,109,000 52,926,000
------------- -------------
NONCURRENT LIABILITIES
Long-term debt and capital leases, less current portion 291,963,000 321,619,000
Deferred income taxes 2,046,000 1,798,000
Other noncurrent liabilities 12,159,000 10,009,000
------------- -------------
Total noncurrent liabilities 306,168,000 333,426,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 5,000,000
shares; none issued and outstanding -- --
Common stock, $.01 par value; authorized 35,000,000
shares; issued and outstanding, 14,901,000 and 14,986,000
shares, respectively 149,000 150,000
Paid-in capital 171,133,000 172,520,000
Retained earnings 22,807,000 19,860,000
------------- -------------
Total stockholders' equity 194,089,000 192,530,000
------------- -------------
$ 558,366,000 $ 578,882,000
============= =============
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
3
<PAGE> 4
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
-------------------------------- --------------------------------
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES
Sales and related service revenues $ 48,074,000 $ 48,393,000 $ 130,726,000 $ 146,868,000
Rentals and other revenues 52,706,000 51,755,000 145,955,000 156,727,000
Earnings from joint ventures 1,871,000 1,197,000 5,345,000 4,144,000
------------- ------------- ------------- -------------
Total net revenues 102,651,000 101,345,000 282,026,000 307,739,000
------------- ------------- ------------- -------------
EXPENSES
Cost of sales and related services, excluding
depreciation and amortization 31,085,000 23,917,000 72,442,000 72,986,000
Operating 70,163,000 72,251,000 162,345,000 180,583,000
General and administrative 4,130,000 9,219,000 11,761,000 16,269,000
Depreciation and amortization 9,013,000 10,084,000 24,526,000 29,532,000
Interest 4,553,000 5,931,000 11,450,000 16,895,000
Restructuring 33,829,000 (3,614,000) 33,829,000 (3,614,000)
Goodwill impairment 8,165,000 -0- 8,165,000 -0-
------------- ------------- ------------- -------------
Total expenses 160,938,000 117,788,000 324,518,000 312,651,000
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS BEFORE
INCOME TAXES (58,287,000) (16,443,000) (42,492,000) (4,912,000)
BENEFIT FOR INCOME TAXES (18,091,000) (6,578,000) (11,836,000) (1,965,000)
------------- ------------- ------------- -------------
NET LOSS $ (40,196,000) $ (9,865,000) $ (30,656,000) $ (2,947,000)
============= ------------- ============= -------------
NET LOSS PER COMMON SHARE
- Basic $ (2.70) $ (0.66) $ (2.07) $ (0.20)
============= ============= ============= =============
- Diluted $ (2.70) $ (0.66) $ (2.07) $ (0.20)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
- Basic 14,870,000 14,981,000 14,810,000 15,002,000
============= ============= ============= =============
- Diluted 14,870,000 14,981,000 14,810,000 15,002,000
============= ============= ============= =============
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
4
<PAGE> 5
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30
-------------------------------------
1997 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (30,656,000) $ (2,947,000)
Adjustments to reconcile net income from operations
to net cash provided from (used in) operating activities:
Depreciation and amortization 24,526,000 29,532,000
Equity in earnings of unconsolidated joint ventures (2,806,000) (618,000)
Minority interest 147,000 257,000
Goodwill impairment and write-off 20,305,000 --
Other non-cash charges 26,877,000 10,500,000
Change in assets and liabilities, net of effects from acquisitions:
Receivables, net (20,298,000) (3,139,000)
Restricted cash 375,000 --
Inventories 631,000 1,095,000
Prepaid expenses and other (1,922,000) (556,000)
Income taxes receivable (14,538,000) (1,570,000)
Trade accounts payable, accrued expenses
and other current liabilities (6,108,000) 4,608,000
Restructuring accruals 17,320,000 (7,728,000)
Other long term liabilities -- 56,000
Other assets (1,772,000) (1,983,000)
------------- -------------
Net cash provided from operating activities 12,081,000 27,507,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (99,326,000) (58,420,000)
Additions to property and equipment, net (24,801,000) (24,151,000)
Distributions from (advances to) unconsolidated joint
ventures, net (322,000) (7,155,000)
Distributions to minority interest owners (109,000) (10,000)
------------- -------------
Net cash used in investing activities (124,558,000) (89,736,000)
------------- -------------
</TABLE>
(Continued)
5
<PAGE> 6
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Continued)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30
-------------------------------------
1997 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and capital leases (9,509,000) (13,679,000)
Proceeds from issuance of debt 119,345,000 71,277,000
Proceeds from exercise of stock options 2,258,000 571,000
Deferred financing costs (372,000) (129,000)
------------- -------------
Net cash provided from financing activities 111,722,000 58,040,000
------------- -------------
DECREASE IN CASH AND CASH
EQUIVALENTS (755,000) (4,189,000)
CASH AND CASH EQUIVALENTS, beginning of period 7,299,000 12,050,000
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 6,544,000 $ 7,861,000
============= =============
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 11,418,000 $ 14,472,000
============= =============
Cash payments of income taxes $ 2,493,000 $ 2,034,000
============= =============
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
6
<PAGE> 7
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
1. ORGANIZATION AND BACKGROUND
The registrant is a health care services company engaged in the provision of
home health care services. The Company's home health care services consist
primarily of the provision of home respiratory therapies, the provision of home
infusion therapies including the provision of parenteral and enteral nutrition,
and the rental and sale of home medical equipment and home health care supplies.
For the nine months ended September 30, 1998, such services represented 48%, 22%
and 30%, respectively, of net revenues. As of September 30, 1998, the Company
provided these services to patients primarily in the home through 319 centers in
Alabama, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia,
Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts,
Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New
Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode
Island, South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia
and Wisconsin.
2. NON-RECURRING CHARGES AND ADDITIONAL ACCOUNTS RECEIVABLE RESERVES
In the quarter ended September 30, 1998, the Company recorded a net pre-tax
accounting charge of $15.2 million related to (a) certain non-recurring events
in the third quarter ($3.2 million), (b) the recording of additional reserves
related to accounts receivable ($16.0 million), and (c) the reversal of excess
restructuring accruals and related reserves ($4.0 million credit). A description
of these charges follows:
The non-recurring charge of $3.2 million relates to certain one-time expenses
associated with the retirement package of the former CEO, CEO transition
expenses, deal costs of abandoned mergers and acquisitions, and a provision for
adverse settlements related to accounting disputes with certain sellers of
acquired businesses.
The accounts receivable charge of $16.0 million relates primarily to disruptions
in collections as a result of the consolidation of billing centers and changes
in certain billing procedures continuing from the 1997 restructuring. Billing
center efficiencies have been affected because of personnel turnover and other
adverse impacts of previous cost reduction plans. The termination of
unprofitable contracts with certain healthcare institutions has also adversely
affected collections on existing receivables. Included in the total accounts
receivable charge is $1.5 million related to certain accounts receivable
consulting and management services provided to the Company.
The Company adjusted its original estimates of restructuring costs related to
the 1997 restructuring activities. This resulted in a $4.0 million reversal of
certain restructuring accruals and other reserves recorded in connection with
the restructuring.
7
<PAGE> 8
3. MEDICARE OXYGEN REIMBURSEMENT REDUCTIONS AND RELATED RESTRUCTURING
In August 1997, Congress enacted and President Clinton signed the Balanced
Budget Act of 1997 which reduced the Medicare reimbursement rate for oxygen
related services by 25% and drugs and biologicals by 5% on January 1, 1998, and
will reduce the Medicare reimbursement rate for oxygen related services by
another 5% in 1999. In addition, Consumer Price Index increases in oxygen
reimbursement rates will not resume until the year 2003. American HomePatient is
one of the nation's largest providers of home oxygen services to patients, many
of whom are Medicare recipients, and is therefore significantly and adversely
affected by this legislation. Medicare oxygen reimbursements accounted for
approximately 23.5% of the Company's revenues for the year ended December 31,
1997.
On September 25, 1997, the Company announced initiatives to aggressively respond
to planned Medicare oxygen reimbursement reductions by fundamentally reshaping
the Company for long-term growth. More than 100 of the Company's operating and
billing locations were affected by the planned activities. The specific actions
resulted in pre-tax accounting charges in the third quarter of 1997 of $65.0
million due to the closure, consolidation, or scaling back of approximately 20%
of the Company's operating centers, the closure or scaling back of nine billing
centers, the consolidation of operating regions, the scaling back or elimination
of marginal products and services at numerous locations, and the related
termination of approximately 400 employees in the affected locations. These
activities were substantially completed as of June 30, 1998.
The following actions have occurred related to the restructuring:
<TABLE>
<CAPTION>
For the Quarters Ended
--------------------------------------------------
Sep. 30, Jun. 30, Mar. 31, Dec. 31,
1998 1998 1998 1997 Total
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Employees terminated 0 36 47 323 406
Operating centers closed 0 1 4 47 52
Billing locations closed 0 0 4 5 9
Operating centers consolidated, scaled
back or had marginal products and
services eliminated 0 8 3 44 55
</TABLE>
The expected cash payments related to the restructuring charge accrued on
September 25, 1997 were approximately $17.7 million. As costs were incurred and
payments were made, $4.1 million and $7.7 million were charged against the
related restructuring accruals during the fourth quarter of 1997 and first nine
months of 1998, respectively. In addition, $9.3 million in the fourth quarter of
1997 and $12.3 million in the first nine months of 1998 were charged against
other reserves established in connection with the Company's restructuring
related to the write down of accounts receivable, inventory, and rental
equipment to their estimated realizable values.
In the third quarter ended September 30, 1998, the Company adjusted its original
estimates of restructuring costs resulting in the reversal of $3.6 million of
excess restructuring accruals and $0.4 million of other reserves established in
connection with the restructuring. The
8
<PAGE> 9
restructuring accruals at September 30, 1998 represent remaining estimated
severance costs to be paid to terminated employees ($0.2 million), remaining
facility exit costs ($1.4 million), and termination costs of certain management
contracts ($2.7 million).
The Company estimates the Medicare oxygen reimbursement reductions decreased net
revenue and pre-tax income by approximately $6.2 million for the third quarter
and $18.5 million for the nine months ended September 30, 1998.
4. ACQUISITIONS
During 1998 and effective through September 30, 1998, the Company acquired four
home health care businesses with combined annualized revenue of approximately
$25 million for total consideration of approximately $31 million, including
cash, satisfaction of certain liabilities, and notes payable issued to sellers.
Since January 1, 1997 and effective through September 30, 1998, American
HomePatient has acquired 32 home health care companies.
The terms of the 1997 and 1998 acquisitions, including the consideration paid,
were the result of arm's-length negotiations. The acquisitions were funded via a
combination of cash from Company reserves, seller-financed notes, and draws on
the Company's Bank Credit Facility (see below).
5. BANK CREDIT FACILITY
On October 30, 1998 the Company entered into a First Amendment to the Fourth
Amended and Restated Credit Agreement ("Bank Credit Facility") in order to
remain in compliance with certain financial covenants. As part of the amendment,
the Company's credit availability under the facility has been reduced from
$400.0 million to $360.0 million (and temporarily to $340.0 million until April
1, 1999). This Bank Credit Facility includes a $75.0 million term loan with a
final maturity of December 16, 2002 and a $285.0 million revolving line of
credit with a final maturity of December 16, 2002. Borrowing under the Bank
Credit Facility may be used for general corporate purposes and acquisitions,
subject to the terms and conditions of the respective credit and security
agreements. Substantially all of the Company's operating assets have been
pledged as security for borrowings under the Bank Credit Facility.
The Bank Credit Facility contains various financial covenants, the most
restrictive of which relate to measurements of earnings before interest, taxes,
depreciation and amortization ("EBITDA"), shareholder's equity, leverage
ratios, and interest coverage ratios in addition to provisions for periodic
reporting and the recapture of excess cash flow.
6. EARNINGS PER SHARE
In the fourth quarter of 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 establishes standards for computing and presenting earnings per share.
Under the standards established by SFAS 128, earnings per share is measured at
two levels: basic earnings per share and diluted earnings per share. Basic
earnings per share is computed by dividing net income by
9
<PAGE> 10
the weighted average number of common shares outstanding during the year.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares after considering the additional dilution
related to convertible preferred stock, convertible debt, options and warrants.
Net income per common share for prior periods have been restated to comply with
SFAS 128. In computing diluted earnings per share, the outstanding stock
warrants and stock options are considered dilutive using the treasury stock
method. The following table information is necessary to calculate earnings per
share for the periods presented:
<TABLE>
<CAPTION>
(unaudited)
---------------------------------------------------------------
Three Months ended Sept. 30, Nine Months ended Sept. 30,
------------------------------ ---------------------------
1997 1998 1997 1998
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Net (loss) $ (40,196) $ (9,865) $ (30,656) $ (2,947)
============ ============ ============ ========
Weighted average common shares 14,870 14,981 14,810 15,002
outstanding
Effect of dilutive options and warrants -0- -0- -0- -0-
------------ ------------ ------------ --------
Adjusted diluted common shares
outstanding 14,870 14,981 14,810 15,002
============ ============ ============ ========
Net (loss) per common share
- Basic $ (2.70) $ (0.66) $ (2.07) $ (0.20)
============ ============ ============ ========
- Diluted $ (2.70) $ (0.66) $ (2.07) $ (0.20)
============ ============ ============ ========
</TABLE>
7. BASIS OF FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of the Company for the
three and nine months ended September 30, 1998 and 1997 included herein have
been prepared by the Company, without audit, 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 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 consolidated financial
statements reflect all adjustments (consisting of only normally recurring
accruals) necessary to present fairly the financial position at September 30,
1998 and the results of operations and the cash flows for the three and nine
months ended September 30, 1998 and 1997.
The results of operations for the three and nine months ended September 30, 1998
and 1997 are not necessarily indicative of the operating results for the entire
respective years. These unaudited interim consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
8. IMPLEMENTATION OF FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") has been issued effective for fiscal years beginning after
December 15, 1997.
10
<PAGE> 11
SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. In the first quarter of 1998 the Company adopted the
provisions of SFAS 130 which resulted in no material effect on the Company's
financial position or results of operations.
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131") has been issued effective
for fiscal years beginning after December 15, 1997. SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and require that these
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. The Company is required to adopt the
provisions of SFAS 131 in the fourth quarter of 1998 and does not expect
adoption thereof to have a material effect on the Company's financial position
or results of operations.
9. GOVERNMENT REGULATION
The Office of the Inspector General of the Department of Health and Human
Services ("OIG") has expanded its auditing of the healthcare industry in an
effort to better detect and remedy fraud and abuse and irregularities in
Medicare and Medicaid billing. On February 12, 1998, a subpoena from the OIG was
served on the Company at its Pineville, Kentucky center in connection with an
investigation of the Company relating to possible improper claims for Medicare
payment. Since that time, the Department of Justice has begun examining issues
of certificates of medical necessity and certain loaning of equipment by the
Company nationwide. The Company has retained experienced health care counsel to
represent it in these matters and is cooperating in the investigation. The
Company's counsel has conducted meetings with governmental officials and
governmental officials have interviewed certain company officers and employees.
This matter is still in a preliminary stage. The Company is responding to
requests for information and is working with the government investigators to
move forward with the investigation. Based upon information provided by the
investigating authorities, management believes that the OIG investigation was
initiated as a result of a qui tam complaint filed under the False Claims Act by
a former employee of the Company.
In addition to the above referenced investigation, the Company from time to time
receives notices and subpoenas from various governmental agencies concerning
their plans to audit the Company or requesting information regarding certain
aspects of the Company's business, and the Company cooperates with the various
agencies in responding to such requests. The government has broad authority and
discretion in enforcing applicable laws and regulations, and therefore the scope
and outcome of these investigations and inquiries cannot be predicted with
certainty. The Company expects to incur additional costs in the future, such as
legal expenses in connection with all investigations.
11
<PAGE> 12
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," "MAY," "WILL" AND WORDS OF SIMILAR IMPORT.
SUCH STATEMENTS INCLUDE STATEMENTS CONCERNING THE COMPANY'S YEAR 2000 EFFORTS,
BUSINESS STRATEGY, ACQUISITION STRATEGY, OPERATIONS, COST SAVINGS INITIATIVES,
FUTURE COMPLIANCE WITH ACCOUNTING STANDARDS, INDUSTRY, ECONOMIC PERFORMANCE,
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES, OUTCOME OF PENDING
LITIGATION OR INVESTIGATIONS, EXISTING GOVERNMENT REGULATIONS AND CHANGES IN, OR
THE FAILURE TO COMPLY WITH, GOVERNMENTAL REGULATIONS, FUTURE COMPLIANCE WITH THE
BANK CREDIT FACILITY COVENANTS, LEGISLATIVE PROPOSALS FOR HEALTHCARE REFORM, THE
ABILITY TO ENTER INTO JOINT VENTURES, STRATEGIC ALLIANCES AND ARRANGEMENTS WITH
MANAGED CARE PROVIDERS ON AN ACCEPTABLE BASIS AND CHANGES IN REIMBURSEMENT
POLICIES. SUCH STATEMENTS 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.
GENERAL
The Company has three principal services or product lines: home respiratory
services, home infusion services, and home medical equipment and supplies. Home
respiratory services include oxygen systems, aerosol medications, nebulizers and
home ventilators and are provided primarily to patients with severe and chronic
pulmonary diseases. Home infusion services are used to administer nutrients,
antibiotics and other medications to patients with medical conditions such as
neurological impairments, infectious diseases or cancer. The Company also sells
and rents a variety of home medical equipment and supplies, including
wheelchairs, hospital beds and ambulatory aids. The following table sets forth
the percentage of the Company's net revenues represented by each line of
business for the periods presented:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1998
---- ----
<S> <C> <C>
Home respiratory therapy services 46% 48%
Home infusion therapy services 18 22
Home medical equipment and medical supplies 36 30
--- ---
Total 100% 100%
=== ===
</TABLE>
The Company reports its net revenues as follows: (i) sales and related services;
(ii) rentals and other; and (iii) earnings from hospital joint ventures. Sales
and related services revenues
12
<PAGE> 13
are derived from the provision of infusion therapies, the sale of home medical
equipment and supplies, the sale of aerosol and respiratory therapy equipment
and supplies and services related to the delivery of these products. Rentals and
other revenues are derived from the rental of home health care equipment,
enteral pumps and equipment related to the provision of respiratory therapies.
The majority of the Company's hospital joint ventures are not consolidated for
financial statement reporting purposes. Earnings from hospital joint ventures
represent the Company's equity in earnings from unconsolidated hospital joint
ventures and management and administrative fees from unconsolidated hospital
joint ventures. Cost of sales and related services includes the cost of
equipment, drugs and related supplies sold to patients. Operating expenses
include center labor costs, delivery expenses, selling costs, occupancy costs,
costs related to rentals other than depreciation, billing center costs,
provision for doubtful accounts, area management and other operating costs.
General and administrative expenses include corporate and senior management
expenses and costs.
Since its inception, the Company has experienced substantial growth. This growth
is primarily attributable to the Company's pursuit of an acquisition strategy
targeting successful, operating home health care businesses and forming joint
venture partnerships with hospitals and hospital systems. Since the Company's
initial public offering in November 1991, the Company has expanded operations
from 24 home health care centers in four states to 319 home health care centers
in 38 states as of September 30, 1998. The Company acquired 28 home health care
companies during 1997 and four companies during the nine months ended September
30, 1998. During 1998, the Company has become more selective in its approach
toward acquisitions by defining clearer standards and new criteria for the
selection of acquisition candidates. As a result, the Company has acquired fewer
companies in 1998 than in recent years and intends to grow primarily from
internal operations in the foreseeable future.
The Company continues its integration of recently acquired home health care
centers. The Company's experience and management expertise is applied wherever
possible to improve the operating efficiency of the new centers. Quality methods
and ideas from the acquired centers may be integrated into the systems and
procedures of the Company as a whole. As the Company grows, it strives to
achieve economies of scale in purchasing goods and services used in its business
and, to some extent, its management of overhead expenses.
The Office of the Inspector General of the Department of Health and Human
Services ("OIG") has expanded its auditing of the healthcare industry in an
effort to better detect and remedy fraud and abuse and irregularities in
Medicare and Medicaid billing. On February 12, 1998, a subpoena from the OIG was
served on the Company at its Pineville, Kentucky center in connection with an
investigation of the Company relating to possible improper claims for Medicare
payment. Since that time, the Department of Justice has begun examining issues
of certificates of medical necessity and certain loaning of equipment by the
Company nationwide. The Company has retained experienced health care counsel to
represent it in these matters and is cooperating in the investigation. The
Company's counsel has conducted meetings with governmental officials and
governmental officials have interviewed certain company officers and employees.
This matter is still in a preliminary stage. The Company is responding to
requests for information and is working with the government investigators to
move forward with the investigation. Based upon information provided by the
investigating authorities, management believes that the OIG investigation was
13
<PAGE> 14
initiated as a result of a qui tam complaint filed under the False Claims Act by
a former employee of the Company.
In addition to the above referenced investigation, the Company from time to time
receives notices and subpoenas from various governmental agencies concerning
their plans to audit the Company or requesting information regarding certain
aspects of the Company's business, and the Company cooperates with the various
agencies in responding to such requests. The government has broad authority and
discretion in enforcing applicable laws and regulations, and therefore the scope
and outcome of these investigations and inquiries cannot be predicted with
certainty. The Company expects to incur additional costs in the future, such as
legal expenses in connection with all investigations.
MEDICARE REIMBURSEMENT FOR OXYGEN THERAPY SERVICES
The Balanced Budget Act of 1997 reduced Medicare oxygen reimbursement rates by
25% and drugs and biologicals by 5% beginning January 1, 1998, and will reduce
Medicare oxygen reimbursement rates by another 5% beginning January 1, 1999. In
addition, Consumer Price Index increases in Medicare oxygen reimbursement rates
will not resume until the year 2003. The Company is one of the nation's largest
providers of home oxygen services to patients, many of whom are Medicare
recipients, and is therefore significantly and adversely affected by this
legislation. Medicare oxygen reimbursements accounted for approximately 23.5% of
the Company's revenues for the year ended December 31, 1997.
The Company estimates the Medicare oxygen reimbursement reductions decreased net
revenue and pre-tax income by approximately $6.2 million in the third quarter of
1998 and $18.5 million in the nine months ended September 30, 1998.
On September 25, 1997, the Company announced initiatives to respond to the
Medicare oxygen reimbursement reductions by fundamentally reshaping the Company
for long-term growth. The restructuring affected more than 100 of the Company's
operating and billing centers. Specific actions resulted in pre-tax accounting
charges of $65.0 million in the third quarter of 1997 due to the closure,
consolidation, or scaling down of approximately 20% of the Company's operating
centers, the closure or scaling back of nine billing centers, the reduction of
operating regions, the scaling back or elimination of marginal products and
services at numerous locations, and the related termination of approximately 400
employees. These activities were substantially completed as of June 30, 1998.
RESULTS OF OPERATIONS
As discussed in Notes 2 and 3 of the September 30, 1998 interim financial
statements, in the quarter ended September 30, 1998, the Company recorded a net
pre-tax accounting charge of $15.2 million related to (a) certain non-recurring
events in the third quarter ($3.2 million), (b) the recording of additional
reserves related to accounts receivable ($16.0 million), and (c) the reversal of
excess restructuring accruals and related reserves ($4.0 million credit). A
description of these charges follows:
The non-recurring charge of $3.2 million relates to certain one-time expenses
associated with the retirement package of the former CEO, CEO transition
expenses, deal costs of abandoned
14
<PAGE> 15
mergers and acquisitions, and a provision for adverse settlements related to
accounting disputes with certain sellers of acquired businesses.
The accounts receivable charge of $16.0 million relates primarily to disruptions
in collections as a result of the consolidation of billing centers and changes
in certain billing procedures continuing from the 1997 restructuring. Billing
center efficiencies have been affected because of personnel turnover and other
adverse impacts of previous cost reduction plans. The termination of
unprofitable contracts with certain healthcare institutions has also adversely
affected collections on existing receivables. Included in the total accounts
receivable charge is $1.5 million related to certain accounts receivable
consulting and management services provided to the Company.
The Company adjusted its original estimates of restructuring costs related to
the 1997 restructuring activities. This resulted in a $4.0 million reversal of
certain restructuring accruals and other reserves recorded in connection with
the restructuring.
As discussed in Note 3 of the September 30, 1998 interim financial statements,
the Company recorded $65.0 million of accounting charges in the quarter ended
September 30, 1997 related to the oxygen reimbursement cut and related
restructuring. In addition to the $65.0 million charge, the Company also
recorded $2.0 million in certain unusual non-recurring charges in the third
quarter of 1997 related to physical inventory adjustments and the recording of
additional franchise taxes.
The impact of these non-recurring charges on various classifications within the
interim condensed statements of operations for the third quarter and nine months
for 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Cost of Sales $ 6,255,000 $ (386,000)
Operating Expenses 18,751,000 14,500,000
General & Administrative Expenses -- 4,741,000
Restructuring 33,829,000 (3,614,000)
Goodwill Impairment 8,165,000 --
----------- ------------
$67,000,000 $ 15,241,000
=========== ============
</TABLE>
15
<PAGE> 16
The following table and discussion set forth items from the statements of
operations as a percentage of net revenues before the non-recurring charges for
the periods indicated:
PERCENTAGE OF NET REVENUES
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
---------------------- ----------------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales and related services 24.2 24.0 23.4 23.8
Operating expenses 50.1 56.9 50.9 54.0
General and administrative 4.0 4.4 4.2 3.7
Depreciation and amortization 8.8 10.0 8.7 9.6
Interest 4.4 5.9 4.1 5.5
------ ------ ------ ------
Total costs and expenses 91.5% 101.2% 91.3% 96.6%
------ ------ ------ ------
Income (loss) from operations before income
taxes 8.5% (1.2%) 8.7% 3.4%
====== ====== ====== ======
</TABLE>
The Company's operating results for the third quarter and nine months ended
September 30, 1998, excluding the impact of the non-recurring charges, are
significantly lower than historical trends due to three factors. First, the
Company is experiencing lower than expected revenue attributable to a slower
improvement in sales force effectiveness particularly from the account
executives hired since January 1998; a de-emphasis of non-core, low margin
products in favor of more profitable business lines; and a more stringent
criteria for acquisition candidates which continues to slow the Company's growth
through acquisition. Second, the Company's operating and general and
administrative expenses are higher than previously anticipated due primarily to
increased wages, labor and payroll costs. Third, accounts receivable are being
adversely affected by process problems at the operating and billing center
levels and a tougher payor environment resulting in higher than anticipated bad
debt expense. Further, the Company's implementation of process improvements has
been slower than anticipated.
The Company's current financial situation is defined by two pivotal events:
significant reductions in Medicare oxygen reimbursement which began January 1,
1998 and the Company's ongoing restructuring and fundamental reshaping
activities which began in the latter part of 1997. In response to reimbursement
reductions, the Company announced in September 1997 its intent to reshape its
business model. The necessary changes to achieve this business model were not
accomplished as rapidly as the Company had hoped. In addition, the Company
believes the disruption of these changes has had more of an adverse impact on
the organization as a whole than was originally anticipated.
The Company is continuing the process of changing its business model by applying
resources in an effort to drive internal growth from the placement of higher
margin products, and to improve accounts receivable management. The additional
expenditures resulting from
16
<PAGE> 17
investing in and strengthening these core functions
may reduce short term earnings, but the Company believes they are necessary.
Historically, the Company reported same-store growth. Due to the restructuring
activity that began during the fourth quarter of 1997, the Company determined
that aggregate internal growth is a more meaningful representation of revenue
growth than same-store growth. The Company has moved to an internal growth
calculation which still reflects the strength of operations excluding acquired
revenues. The internal growth calculation includes the net revenues of hospital
joint ventures managed by the Company and accounted for under the equity method.
The operations of acquired centers are included in the operations of the Company
from the effective date of each acquisition. Because of the substantial
acquisition activity, the comparison of the results of operations between 1998
and 1997 is impacted by the operations of these acquired businesses. Also, the
comparison of the results of operations between 1998 and 1997 is materially
affected by the Medicare oxygen reimbursement reductions and the unanticipated
negative impact of the restructuring activities on the Company's ongoing
operations.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997 (EXCLUDING NON-RECURRING CHARGES)
NET REVENUES. Net revenues decreased from $102.7 million for the quarter ended
September 30, 1997 to $101.3 million for the same period in 1998, a decrease of
$1.4 million, or 1%. For the quarter ended September 30, 1998, the Company
estimates the Medicare oxygen reimbursement reductions decreased net revenue by
approximately $6.2 million. Excluding the Medicare oxygen reimbursement
reductions, net revenues would have increased from $102.7 million to
approximately $107.5 million for the quarters ended September 30, 1997 and 1998,
respectively, an increase of approximately $4.8 million, or 5%. The Company
estimates that $10.3 million of this change is attributable to the acquired
businesses net of dissolutions, offset by lower sales of non-core, low margin
products. Due to lower sales of low margin products and less than expected sales
force effectiveness in the third quarter of 1998, internal revenue growth,
excluding Medicare oxygen reductions, was a negative 1% for the quarter ended
September 30, 1998. Following is a discussion of the components of net revenues:
Sales and Related Services Revenues. Sales and related services revenues
increased from $48.1 million for the quarter ended September 30, 1997 to
$48.4 million for the same period in 1998, an increase of $0.3 million, or
1%. This increase is primarily attributable to the acquisition of home
health care businesses and internal revenue growth, offset by lower sales
of non-core, low margin products and lost revenue of branches closed or
scaled back in the restructuring.
Rentals and Other Revenue. Rentals and other revenues decreased from $52.7
million for the quarter ended September 30, 1997 to $51.8 million for the
same period in 1998, a decrease of $0.9 million, or 2%. This change is
primarily attributable to the acquisition of home health care businesses
and internal revenue growth offset by the impact of the Medicare oxygen
reimbursement reductions.
17
<PAGE> 18
Earnings from Hospital Joint Ventures. Earnings from hospital joint
ventures decreased from $1.9 million for the quarter ended September 30,
1997 to $1.2 million for the same period in 1998, a decrease of $0.7
million, or 37%, which was due primarily to the impact of the Medicare
oxygen reimbursement reductions and, secondarily, to higher bad debt
expense associated with certain joint venture locations.
Internal revenue growth of joint ventures, excluding the Medicare oxygen
reimbursement reductions, was 28% for the quarter ended September 30, 1998
compared to the same period in 1997.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services decreased
from $24.8 million for the quarter ended September 30, 1997 to $24.3 million for
the same period in 1998, a decrease of $0.5 million, or 2%. As a percentage of
sales and related services revenues, cost of sales and related services
decreased from 52% to 50%. This decrease is primarily attributable to the
changes in the mix of sales and related service revenues resulting from the
Company's de-emphasizing non-core, low margin products.
OPERATING EXPENSES. Operating expenses increased from $51.4 million for the
quarter ended September 30, 1997 to $57.8 million for the same period in 1998,
an increase of $6.4 million, or 12%. As a percentage of net revenues, operating
expenses increased from 50% to 57%. Excluding the estimated $6.2 million impact
of the Medicare oxygen reimbursement reductions, operating expenses as a
percentage of net revenues would have increased from 50% to 54%. This increase
is primarily attributable to two main factors. The first is an overall increase
in personnel expenses resulting from additional personnel investments primarily
in the areas of sales (to drive internal growth from the placement of higher
margin products) and accounts receivable management (to drive improvements in
billing and collection effectiveness). Also affecting personnel expenses was the
impact of Company-wide annual merit and cost-of-living increases effective July
1998. The second factor is an increase in the overall level of bad debt expense.
Bad debt expense was 3.1% of net revenue for the quarter ended September 30,
1997 compared to 4.3% of net revenue for the same period in 1998. Bad debt
expense will remain at this current level of 4.3% or higher in the foreseeable
future, if current collection trends are not improved. During the three months
ended September 30, 1998, the Company utilized certain accounts receivable
reserves (established in connection with the restructuring) to write down
accounts receivable affected by the restructuring to its estimated realizable
value. To the extent the remaining balance in these and other reserves is not
adequate, future operating results could be negatively affected.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased from
$4.1 million for the quarter ended September 30, 1997 to $4.5 million for the
same period in 1998, an increase of $0.4 million or 10%. The increase is
attributable to slightly higher legal and consulting fees. As a percentage of
net revenues, general and administrative expenses have remained flat at
approximately 4% for both years.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
from $9.0 million for the quarter ended September 30, 1997 to $10.1 million for
the same period in 1998, an increase of $1.1 million, or 12%. This increase is
primarily attributable to depreciation expense and the amortization of goodwill
recorded in connection with acquisitions.
18
<PAGE> 19
INTEREST. Interest expense increased from $4.6 million for the quarter ended
September 30, 1997 to $5.9 million for the same period in 1998, an increase of
$1.3 million, or 28%. The increase was attributable to higher interest rates on
borrowings, and to additional interest expense on increased borrowings under the
Bank Credit Facility to fund acquisitions of home healthcare businesses.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997 (EXCLUDING NON-RECURRING CHARGES)
NET REVENUES. Net revenues increased from $282.0 million for the nine months
ended September 30, 1997 to $307.7 million for the same period in 1998, an
increase of $25.7 million, or 9.1%. For the nine months ended September 30,
1998, the Company estimates the Medicare oxygen reimbursement reductions
decreased net revenue by approximately $18.5 million. Excluding the impact of
the Medicare oxygen reimbursement reductions, net revenues would have increased
from $282.0 million to approximately $326.2 million for the nine months ended
September 30, 1997 and 1998, respectively, an increase of approximately $44.2
million, or 16%. The Company estimates that $36.1 million of this increase is
attributable to the acquired businesses net of dissolutions. The remainder of
the increase is primarily attributable to internal revenue growth generated
through the Company's sales and marketing efforts. Internal revenue growth,
excluding the impact of the Medicare oxygen reimbursement reductions, was 5% for
the nine months ended September 30, 1998. Following is a discussion of the
components of net revenues:
Sales and Related Services Revenues. Sales and related services revenues
increased from $130.7 million for the nine months ended September 30, 1997
to $146.9 million for the same period in 1998, an increase of $16.2
million, or 12%. This increase is primarily attributable to the acquisition
of home health care businesses and internal revenue growth, offset by lower
sales of non-core, low margin products and lost revenue of branches closed
or scaled back in the restructuring.
Rentals and Other Revenue. Rentals and other revenues increased from $146.0
million for the nine months ended September 30, 1997 to $156.7 million for
the same period in 1998, an increase of $10.7 million, or 7%. This increase
is primarily attributable to the acquisition of home health care businesses
and internal revenue growth net of the impact of the Medicare oxygen
reimbursement reductions.
Earnings from Hospital Joint Ventures. Earnings from hospital joint
ventures decreased from $5.3 million for the nine months ended September
30, 1997 to $4.1 million for the same period in 1998, a decrease of $1.2
million, or 23%. This decrease was due primarily to the impact of the
Medicare oxygen reimbursement reductions and, secondarily, to higher bad
debt expense associated with certain joint venture locations.
Internal revenue growth of joint ventures, excluding the Medicare oxygen
reimbursement reductions, was 19% for the nine months ended September 30,
1998 compared to the same period in 1997, increasing the Company's total
internal revenue growth by 2%.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services increased
from $66.2 million for the nine months ended September 30, 1997 to $73.4 million
for the same period
19
<PAGE> 20
in 1998, an increase of $7.2 million, or 11%. As a percentage of sales and
related services revenues, cost of sales and related services decreased from 51%
to 50%. This decrease is primarily attributable to the changes in the mix of
sales and related services revenues resulting from the Company's de-emphasizing
non-core, low margin products. During the nine months ended September 30, 1998,
the Company utilized certain inventory reserves (established in connection with
the restructuring) to write down inventory affected by the restructuring to its
estimated realizable value. To the extent the balance in these reserves is not
adequate, future operating results could be negatively affected.
OPERATING EXPENSES. Operating expenses increased from $143.6 million for the
nine months ended September 30, 1997 to $166.1 million for the same period in
1998, an increase of $22.5 million, or 16%. As a percentage of net revenues,
operating expenses increased from 51% to 54%. Excluding the estimated $18.5
million impact of the Medicare oxygen reimbursement reductions, operating
expenses as a percentage of net revenues would have remained flat at 51%. The
higher operating expenses in the third quarter of 1998 (as addressed in the
preceding discussion of the three months results), were offset by lower
operating expenses in the first six months of 1998. The lower expenses in the
first six months of 1998 were attributable to cost savings initiatives
associated with the restructuring activities. During the nine months ended
September 30, 1998, the Company utilized certain accounts receivable reserves
(established in connection with the restructuring) to write down accounts
receivable affected by the restructuring to its estimated realizable value. To
the extent the remaining balance in these and other reserves is not adequate,
future operating results could be negatively affected.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased from
$11.8 million for the nine months ended September 30, 1997 to $11.5 million for
the same period in 1998, a decrease of $0.3 million, or 3%. As a percentage of
net revenues, general and administrative expenses have remained flat at 4% for
both years.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
from $24.5 million for the nine months ended September 30, 1997 to $29.5 million
for the same period in 1998, an increase of $5.0 million, or 20%. This increase
is primarily attributable to depreciation expense and the amortization of
goodwill recorded in connection with acquisitions.
INTEREST. Interest expense increased from $11.5 million for the nine months
ended September 30, 1997 to $16.9 million for the same period in 1998, an
increase of $5.4 million, or 47%. The increase was attributable to higher
interest rates on borrowings and to additional interest expense on increased
borrowings under the Bank Credit Facility to fund acquisitions of home
healthcare businesses.
LIQUIDITY AND CAPITAL RESOURCES
At September, 1998, the Company's working capital was $103.0 million and the
current ratio was 2.9x as compared to working capital of $112.7 million and a
current ratio of 2.9x at December 31, 1997. The Company had current maturities
of long-term debt and capital leases of approximately $4.8 million at September
30, 1998.
20
<PAGE> 21
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. Accounts receivable are generally outstanding for
longer periods of time in the health care industry than many other industries
because of requirements to provide 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 (i)
receiving a new medical therapy or (ii) covered by Medicare or Medicaid. Net
patient accounts receivable were $102.4 million and $95.6 million at December
31, 1997 and September 30, 1998, respectively. This decrease was primarily
attributable to the additional $14.5 million in accounts receivable reserves
recorded in the current quarter, offset by the acquisition of home health care
businesses in the first nine months of 1998. These receivables represented an
average of approximately 88 and 89 days' sales in accounts receivable at
December 31, 1997 and September 30, 1998, respectively. Excluding the additional
accounts receivable reserves recorded in the third quarter ended September 30,
1998 (see Note 2 of the September 30, 1998 interim financial statements), the
days' sales outstanding would have been 103 days at September 30, 1998.
Net cash provided from operating activities was $12.1 million and $27.5 million
for the nine months ended September 30, 1997 and 1998, respectively. These
amounts primarily represent net income plus depreciation and amortization and
provisions for doubtful accounts and changes in the various components of
working capital. Net cash used in investing activities was $124.6 million and
$89.7 million for the nine months ended September 30, 1997 and 1998,
respectively. Acquisition expenditures decreased from $99.3 million for the nine
months ended September 30, 1997 to $58.4 million for the same period in 1998, a
decrease of $40.9 million. Capital expenditures decreased from $24.8 million for
the nine months ended September 30, 1997 to $24.2 million for the same period in
1998, a decrease of $0.6 million. Net cash provided from financing activities
was $111.7 million and $58.0 million for the nine months ended September 30,
1997 and 1998, respectively. The cash provided from financing activities for the
nine months ended September 30, 1997 and 1998 primarily related to proceeds from
the Bank Credit Facility.
The Company's principal capital requirements are for expansion of the services
provided through its existing home health care centers and, to a lesser extent,
acquisitions of additional home health care companies. The Company has financed
and intends to continue to finance these requirements, its net revenue growth,
and working capital needs with net cash provided by operations and with
borrowings under the Bank Credit Facility. On October 30, 1998 the Company
entered into a First Amendment to the Fourth Amended and Restated Credit
Amendment (the "Bank Credit Facility") in order to remain in compliance with
certain financial covenants. As part of the amendment, the Company's credit
availability under the facility has been reduced from $400 million to $360
million (said availability has been temporarily reduced to $340 million through
April 1, 1999). The Bank Credit Facility includes a $75.0 million five-year term
loan and a $285.0 million five-year revolving line of credit each with a
maturity of December 16, 2002. Borrowings under the Bank Credit Facility may be
used for general corporate purposes and, to a lesser extent, to fund
acquisitions subject to the terms and conditions of the credit and security
agreements. Substantially all of the Company's operating assets have been
pledged as security for borrowings under the Bank Credit Facility. Mandatory
prepayments are due if
21
<PAGE> 22
excess cash flow targets are met or the Company issues debt securities. Interest
is payable on borrowings under the Bank Credit Facility, at the election of the
Company, at either a "Base Lending Rate" or an "Adjusted Eurodollar Rate" (each
as defined in the Bank Credit Facility), plus a margin from 1% to 2.5% and from
1.75% to 3.25%, respectively. The Company's ability to borrow under the Bank
Credit Facility terminates on December 16, 2002, subject to exceptions set forth
therein. As of September 30, 1998 the weighted average borrowing rate was 7.00%.
A commitment fee of up to .50% per annum is payable by the Company on the
undrawn balance. The margin associated with the Base Lending Rate is fixed at
2.50% to July 1, 1999. The margin associated with the Adjusted Eurodollar Rate
is fixed at 3.25% to July 1, 1999. Beginning July 1, 1999 the interest rate
varies depending on the Company's ratio of total debt to adjusted pro forma
earnings before interest, taxes, depreciation and amortization, as such ratio is
defined in the Bank Credit Facility.
The Bank Credit Facility contains various financial covenants, the most
restrictive of which relate to measurements of earnings before interest, taxes,
depreciation and amoritization ("EBITDA"), shareholder's equity, leverage
ratios, and interest coverage ratios in addition to provisions for periodic
reporting and the recapture of excess cash flow. The Bank Credit Facility also
contains certain covenants which, among other things, impose certain limitations
or prohibitions on the Company with respect to the incurrence of certain
indebtedness, the creation of security interest on the assets of the Company,
the payment of dividends on and the redemption or repurchase of securities of
the Company, investments, acquisitions, investments in joint ventures, capital
expenditures and sales of Company assets. The Company must generally obtain bank
consent for any acquisition which, when combined with all acquisitions completed
in the prior 12 months, exceeds $7.0 million and certain other transactions. The
Company was in compliance with these covenants at November 2, 1998.
YEAR 2000 COMPLIANCE
The Company has completed an assessment of its internal computer software
systems with respect to potential Year 2000 problems. The Company's financial
data software is Year 2000 compliant, and the Company is in the process of
implementing corrective plans for a majority of its remaining software,
including its operational software which addresses order entry, billing,
reimbursement and many other functions.
Although the process of implementing corrective plans for a majority of its
remaining software has begun, and the Company currently expects the majority of
its operational software to be Year 2000 compliant by the second or third
quarter of 1999, neither the timetable for development of remaining or
additional corrective plans nor completion of implementation of such plans is
known. Costs incurred to date have not been material, and management does not
believe that costs associated with implementation of corrective plans will be
material.
The Company has initiated correspondence with its most significant vendors and
joint venture partners regarding the status of such third parties' Year 2000
compliance efforts. To date, third party responses have not indicated any
potential material Year 2000 problems; however, not all vendors and partners
have responded to the Company regarding this issue. The Company is initiating
correspondence with its most significant third party payors regarding the status
of their Year 2000 compliance efforts. To date, it is currently unknown whether
22
<PAGE> 23
the Company's third party payors have potential Year 2000 problems which could
adversely affect future collection efforts and financial results of the Company.
RISK FACTORS
This section summarizes certain risks, among others, that should be considered
by stockholders and prospective investors in the Company.
Medicare Reimbursement for Oxygen Therapy Services. In 1997 oxygen therapy
services reimbursement from Medicare accounted for approximately 23.5% of the
Company's revenues. The Balanced Budget Act of 1997, as amended, reduced
Medicare reimbursement rates for oxygen and certain oxygen equipment to 75% of
their 1997 levels beginning January 1, 1998 and to 70% of their 1997 levels
beginning January 1, 1999. Reimbursement for drugs and biologicals was reduced
by 5% beginning January 1, 1998. In addition, Consumer Price Index increases in
Medicare oxygen reimbursement rates will not resume until the year 2003. The
Company cannot be certain that additional reimbursement reductions for oxygen
therapy services or other services and products provided by the Company will not
occur. Any such reductions could have a material adverse effect on the Company's
net revenues and net income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Medicare Reimbursement for
Oxygen Therapy Services."
Dependence on Reimbursement by Third-Party Payors. For the quarter ending
September 30, 1998, the percentage of the Company's net revenues derived from
Medicare, Medicaid and private pay was 45%, 10% and 45%, respectively. The net
revenues and profitability of the Company are affected by the continuing efforts
of all payors to contain or reduce the costs of health care by lowering
reimbursement rates, narrowing the scope of covered services, increasing case
management review of services and negotiating reduced contract pricing. Any
changes 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 net revenues. 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 net
revenues and profitability. There can be no assurance that the Company will
continue to maintain its current payor or revenue mix. Also, many payors are
dependent upon their computer systems for determining and paying reimbursements
to the Company. If such payors' computer systems are adversely affected by Year
2000 problems, this could have a material adverse impact on the Company's
revenues and results of operations.
Role of Managed Care. As managed care continues to play a significant role
in markets in which the Company operates, the Company recognizes it must select,
obtain and retain profitable managed care contracts. There can be no assurance
that the Company will retain or continue to obtain such managed care contracts.
The Company may terminate low reimbursement managed care agreements and there
can be no assurance they will be replaced. In addition, reimbursement rates
under managed care contracts are likely to continue experiencing downward
pressure as a result of payors' efforts to contain or reduce the costs of health
care by increasing case management review of services and negotiating reduced
contract pricing. Therefore, even if the Company is successful in retaining and
obtaining managed care contracts, unless the Company also decreases its costs
for providing services and increases higher margin services, it could experience
declining profit margins.
23
<PAGE> 24
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 new and existing 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. Federal laws governing the Company's activities
include regulation of the repackaging and dispensing of drugs, Medicare
reimbursement and certification and certain financial relationships with
physicians and other health care providers. Although the Company intends to
comply with all applicable fraud and abuse laws, there can be no assurance that
administrative or judicial interpretation of existing laws or regulations or
enactments of new laws or regulations will not have a material adverse effect on
the Company's business. In addition, the OIG has expanded its auditing of the
healthcare industry in an effort to better detect and remedy fraud and abuse and
irregularities in Medicare and Medicaid billing. The Company and many other
healthcare providers have received subpoenas and other requests for information
in connection with such activities, and the Company is currently the subject of
an investigation concerning its marketing and billing practices and its
relationships with potential referral sources. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - General." There can
be no assurance such activities will not have a material adverse effect on the
Company's results of operations, financial condition or prospects. The Company
is subject to state laws governing Medicaid, professional training, certificates
of need, 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. In
addition, many of the Company's employees must maintain licenses to provide some
of the services offered by the Company. There can be no assurance that federal,
state or local governments will not change existing standards or impose
additional standards. Any failure to comply with existing or future standards
could have a material adverse effect on the Company's results of operations,
financial condition or prospects.
No Assurance of Continued Growth or Successful Integration of Acquisitions.
The Company intends to expand its business primarily through internal growth of
existing operations. The Company also intends to expand its business through
existing hospital joint ventures. There can be no assurance that the Company can
increase or maintain growth in net revenues or increase net revenues at existing
hospital joint ventures. There can be no assurance that previously acquired
companies will be integrated successfully into the Company's operations or that
any past acquisition will not have a material adverse effect upon the Company's
results of operations, financial condition or prospects, especially in the
fiscal quarters immediately following such transactions. The price of the
Company's common stock may fluctuate substantially in response to quarterly
variations in the Company's operating and financial results, announcements by
the Company or other developments affecting the Company, as well as general
economic and other external factors. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
24
<PAGE> 25
Management of Growth. As the Company's business develops and expands and
the Company continues to refine its business model, the Company may need to
implement enhanced operational and financial systems and may require additional
employees and management, operational and financial resources. There can be no
assurance that the Company will successfully (i) implement and maintain any such
operational and financial systems, or (ii) apply the human, operational and
financial resources needed to manage a developing and expanding business.
Failure to implement such systems successfully and use such resources
effectively could have a material adverse effect on the Company's results of
operations, financial condition or prospects.
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. 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 larger
than the Company and have, or may obtain, greater financial and marketing
resources than the Company. In addition, there are relatively few barriers to
entry in the local markets served by the Company, and it may encounter
substantial competition from new market entrants.
Impact of Health Care Reform. The health care industry continues to undergo
dramatic changes, with an emphasis on cost cutting. There can be no assurance
that additional federal health care legislation to impose greater control on
health care spending will not be adopted in the future. Some states are adopting
health care programs and initiatives as a replacement for Medicaid. It is also
possible that proposed federal legislation will include language which provides
incentives to further encourage Medicare recipients to shift to Medicare at-risk
managed care programs. There can be no assurance that the adoption of such
legislation or other changes in the administration or interpretation of
governmental health care programs or initiatives will not have a material
adverse effect on the Company.
"Year 2000". The Company has completed an assessment of its internal
computer software systems with respect to potential Year 2000 problems. The
Company's financial data software is Year 2000 compliant, and the Company is in
the process of implementing corrective plans for a majority of its remaining
software, including its operational software which addresses order entry,
billing, reimbursement and many other functions.
Although the process of implementing corrective plans for a majority of its
remaining software has begun, and the Company currently expects the majority of
its operational software to be Year 2000 compliant by the second or third
quarter 1999, neither the timetable for development of remaining or additional
corrective plans nor completion of implementation of such plans is known. Costs
incurred to date have not been material, and management does not believe that
costs associated with implementation of corrective plans will be material.
The Company has initiated correspondence with its most significant vendors
and joint venture partners regarding the status of such third parties' Year 2000
compliance efforts. To date, third party responses have not indicated any
potential material Year 2000 problems; however,
25
<PAGE> 26
not all vendors and partners have responded to the Company regarding this issue.
The Company is initiating correspondence with its most significant third party
payors regarding the status of their Year 2000 compliance efforts. To date, it
is currently unknown whether the Company's third party payors have potential
Year 2000 problems which could adversely affect future collection efforts and
financial results of the Company.
The Company can give no assurance that it will not encounter unanticipated Year
2000 problems or that third parties it does business with will adequately
address their Year 2000 problems. The failure of third parties to adequately
address their Year 2000 issues could have a material adverse effect on the
Company's business, results of operations or financial condition.
Liability and Adequacy of Insurance. The provision of health care services
entails an inherent risk of liability. Certain participants in the home health
care industry may be subject to lawsuits which 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 or claims not covered by 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 results of
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.
Management Stability and Recruiting. Recent changes in senior management
may limit the Company's ability to attract and retain qualified personnel which
in turn could adversely affect profitability.
Influence of Executive Officers, Directors and Principal Stockholder. On
November 9, 1998, the Company's executive officers, directors and principal
stockholder, Counsel Corporation ("Counsel"), in the aggregate, beneficially
owned approximately 36% of the outstanding shares of the common stock of the
Company. As a result of such equity ownership and their positions in the
Company, if the executive officers, directors and principal stockholder were to
vote all or substantially all of their shares in the same manner, they could
significantly influence the management and policies of the Company, including
the election of the Company's directors and the outcome of matters submitted to
stockholders of the Company for approval. The Company is highly dependent upon
its senior management, and competition for qualified management personnel is
intense. The inability to attract and retain qualified personnel could adversely
affect the Company's business.
26
<PAGE> 27
PART II. OTHER INFORMATION
ITEM 5 - AMENDMENT TO CREDIT AGREEMENT; OFFICER CHANGES
(A) Amendment to Credit Agreement. On October 30, 1998, the Company entered into
a First Amendment to its Fourth Amended and Restated Credit Agreement in order
to remain in compliance with certain financial covenants. For a description of
such amendment see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources".
(B) Officer Changes. Joseph F. Furlong, a member of the Company's Board of
Directors since 1994, assumed the positions of president and chief executive
officer of the Company on November 6, 1998. Mr. Furlong was named to these
positions when the Company was unable to reach agreement with Malcolm MacKenzie,
former president and chief executive officer, on the terms of an employment
agreement. In addition, Rita Hill, formerly a Senior Vice President of the
Company, is no longer employed by the Company. The Company is currently
negotiating a severance agreement with Ms. Hill, although no agreement has been
reached yet.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits. The exhibits filed as part of this Report are listed on the Index
to Exhibits immediately following the signature page.
27
<PAGE> 28
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.
November 13, 1998 By: /s/Mary Ellen Rodgers
----------------------------------------
Mary Ellen Rodgers
Chief Financial Officer and An Officer
Duly Authorized to Sign on Behalf of
the registrant
28
<PAGE> 29
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
10.1 First Amendment to Fourth Amended and Restated Credit Agreement among
American HomePatient, Inc., Banker's Trust Company as Agent and the
Banks Named Therein.
27 Financial Data Schedule (for SEC use only)
<PAGE> 1
EXHIBIT 10.1
EXECUTION
AMERICAN HOMEPATIENT, INC.
FIRST AMENDMENT TO FOURTH
AMENDED AND RESTATED CREDIT AGREEMENT
This FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT
AGREEMENT (this "AMENDMENT") is dated as of October 29, 1998 and entered into by
and among American HomePatient, Inc., a Delaware corporation (the "BORROWER"),
the financial institutions listed on the signature pages hereof (each a "BANK"
and collectively, the "BANKS"), and Bankers Trust Company, as agent for the
Banks (in such capacity, the "AGENT"), and is made with reference to that
certain Fourth Amended and Restated Credit Agreement dated as of December 19,
1997 (the "CREDIT AGREEMENT"). Capitalized terms used herein without definition
shall have the same meanings herein as set forth in the Credit Agreement.
RECITALS
WHEREAS, the Borrower and the Banks desire to amend certain of
the terms and provisions of the Credit Agreement as set forth below;
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT
1.1 AMENDMENTS TO SECTION 1: DEFINITIONS AND PRINCIPLES OF
CONSTRUCTION.
A. Section 1.01 of the Credit Agreement is hereby amended by adding
thereto the following definitions, which shall be inserted in proper
alphabetical order:
"CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the
aggregate of all expenditures by the Borrower and its Subsidiaries
during that period for fixed or capital assets (including, without
limitation, expenditures for product development and maintenance and
repairs that should be capitalized in accordance with generally
accepted accounting principles consistently applied and including
capitalized lease obligations).
1
<PAGE> 2
"CONSOLIDATED EXCESS CASH FLOW" means, for any period, an
amount (if positive) equal to (i) the sum, without duplication, of the
amounts for such period of (a) Consolidated EBITDA, (b) any repayments
of principal received by the Borrower or any of its Subsidiaries in
respect of any loans and advances made by the Borrower or any of its
Subsidiaries under Section 8.05(iii), and (c) the decrease, if any, in
Consolidated Working Capital from the first day to the last day of such
period (excluding, however, any such decrease to the extent
attributable to asset write-downs and/or write-offs referred to in
clause (iv) of the definition of Consolidated EBIT) minus (ii) the sum,
without duplication, of the amounts for such period of (a) voluntary
and scheduled repayments of Total Debt (excluding repayments of
Revolving Loans except to the extent the Revolving Loan Commitments are
permanently reduced in connection with such repayments), (b)
Consolidated Capital Expenditures, including any Consolidated Capital
Expenditures made by the Borrower and its Subsidiaries during such
period to acquire assets in Acquisitions permitted under Section
8.02(v) (in each case net of any proceeds of any related financings
with respect thereto), (c) equity investments made by the Borrower and
its Subsidiaries during such period under Section 8.05(vii), (d) loans
and advances made by the Borrower and its Subsidiaries to Joint
Ventures during such period under Section 8.05(iii), (e) Consolidated
Interest Expense (excluding, however, any interest expense not payable
in Cash (including amortization of discount and amortization of debt
issuance costs)), (f) the provision for current taxes based on income
of the Borrower and its Subsidiaries and payable in cash with respect
to such period, and (g) the increase, if any, in Consolidated Working
Capital from the first day to the last day of such period.
"CONSOLIDATED WORKING CAPITAL" means, as at any date of
determination, the excess (or deficit) of (i) the total assets of the
Borrower and its Subsidiaries on a consolidated basis which may
properly be classified as current assets in accordance with generally
accepted accounting principles consistently applied (excluding Cash and
Cash Equivalents) over (ii) the total liabilities of the Borrower and
its Subsidiaries on a consolidated basis which may properly be
classified as current liabilities in accordance with generally accepted
accounting principles consistently applied (excluding the current
portions of long-term Indebtedness and capital leases).
"FIRST AMENDMENT" means that certain to Fourth Amended and
Restated Credit Agreement dated as of October 29, 1998 by and among the
Borrower, the Banks and the Agent.
"FIRST AMENDMENT EFFECTIVE DATE" has the meaning assigned to
that term in the First Amendment.
B. Section 1.01 of the Credit Agreement is hereby further amended by
restating the definition of "Applicable Base Margin" in its entirety as follows:
2
<PAGE> 3
"APPLICABLE BASE MARGIN" means (i) as of any date of
determination prior to July 1, 1999, a percentage per annum equal to
2.50%, and (ii) as of any date of determination on or after July 1,
1999, a percentage per annum as shown in the table set forth below, in
each case determined with reference to the Leverage Ratio then in
effect; provided that, for purposes of this clause (ii) if the Borrower
has failed to provide a Margin Rate Determination Certificate within
the most recent period set forth in Section 7.01(j), the Leverage Ratio
for purposes of determining the Applicable Base Margin shall be deemed
to be 5.00:1.00 until such time as the Borrower next delivers a Margin
Rate Determination Certificate establishing a Leverage Ratio of less
than 5.00:1.00.
Applicable Base Margin Commencing July 1, 1999:
-----------------------------------------
LEVERAGE RATIO APPLICABLE
(X) BASE MARGIN
-----------------------------------------
x < 3.00 1.00%
-----------------------------------------
3.00 <= x < 3.50 1.25%
-----------------------------------------
3.50 <= x < 4.00 1.50%
-----------------------------------------
4.00 <= x < 5.00 1.75%
-----------------------------------------
5.00 <= x 2.50%
-----------------------------------------
C. Section 1.01 of the Credit Agreement is hereby further amended by
restating the definition of "Applicable Eurodollar Margin" in its entirety as
follows:
"APPLICABLE EURODOLLAR MARGIN" means (i) as of any date of
determination prior to July 1, 1999, a percentage per annum equal to
3.25%, and (ii) as of any date of determination on or after July 1,
1999, a percentage per annum as shown in the table set forth below, in
each case determined with reference to the Leverage Ratio then in
effect; provided that, for purposes of this clause (ii) if the Borrower
has failed to provide a Margin Rate Determination Certificate within
the most recent period set forth in Section 7.01(j), the Leverage Ratio
for purposes of determining the Applicable Eurodollar Margin shall be
deemed to be 5.00:1.00 until such time as the Borrower next delivers a
Margin Rate Determination Certificate establishing a Leverage Ratio of
less than 5.00:1.00.
Applicable Eurodollar Margin Commencing July 1, 1999:
3
<PAGE> 4
-----------------------------------------
LEVERAGE RATIO APPLICABLE
(X) EURODOLLAR
MARGIN
-----------------------------------------
x < 3.00 1.75%
-----------------------------------------
3.00 <= x < 3.50 2.00%
-----------------------------------------
3.50 <= x < 4.00 2.25%
-----------------------------------------
4.00 <= x < 5.00 2.50%
-----------------------------------------
5.00 <= x 3.25%
-----------------------------------------
D. Section 1.01 of the Credit Agreement is hereby further amended by
restating the definition of "Commitment Fee Percentage" in its entirety as
follows:
"COMMITMENT FEE PERCENTAGE" means, as of any date of determination, a
percentage per annum equal to 0.50%.
E. Section 1.01 of the Credit Agreement is hereby further amended by
deleting the word "and" immediately before clause (iii) of the definition of
"Consolidated EBIT" and by adding a new clause (iv) at the end of such
definition as follows:
", and (iv) certain one-time restructuring or similar charges
and related asset write-downs and/or write-offs, in each case taken or
recorded during the fiscal quarter of the Borrower ending September 30,
1998, in an aggregate amount not to exceed $15,250,000 (after giving
effect to the reversal into income of $4,000,000 of excess
restructuring charges referred to in the immediately preceding clause
(iii))."
F. Section 1.01 of the Credit Agreement is hereby further amended by
restating the definition of "Margin Rate Determination Certificate" in its
entirety as follows:
"MARGIN RATE DETERMINATION CERTIFICATE" means an Officers'
Certificate of the Borrower setting forth in reasonable detail the
Total Debt and the Consolidated Adjusted EBITDA as of the date on which
such Officers' Certificate is delivered pursuant to Section 7.01(j)
with the financial statements required pursuant to Section 7.01(a) or
7.01(b).
G. Section 1.01 of the Credit Agreement is hereby further amended by
deleting the definition of "Qualified High-Yield Debt" in its entirety.
H. Section 1.01 of the Credit Agreement is hereby further amended by
deleting the definition of "Qualified High-Yield Offering" in its entirety.
4
<PAGE> 5
1.2 AMENDMENTS TO SECTION 2: AMOUNT AND TERMS OF CREDIT.
A. THE REVOLVING LOANS. Section 2.01(a) of the Credit Agreement is
hereby amended by (i) deleting the reference therein to "$325,000,000" and
replacing it with "$285,000,000" and (ii) deleting subparagraph (ii) of the
second paragraph thereof in its entirety and substituting the following
therefor:
"(ii) In no event shall the Total Utilization of Revolving Loan
Commitments exceed (A) at any time prior to April 1, 1999, the lesser
of (1) $265,000,000 or (2) the Total Revolving Loan Commitments then in
effect, and (B) at any time from and after April 1, 1999, the Total
Revolving Loan Commitments then in effect."
B. THE SWING LINE LOANS. Section 2.02(a) of the Credit Agreement is
hereby amended by deleting subparagraph (i) of the second paragraph thereof in
its entirety and substituting the following therefor:
"(i) in no event shall the Total Utilization of Revolving Loan
Commitments exceed (A) at any time prior to April 1, 1999, the lesser
of (1) $265,000,000 or (2) the Total Revolving Loan Commitments then in
effect, and (B) at any time from and after April 1, 1999, the Total
Revolving Loan Commitments then in effect; and".
C. INTEREST ON THE LOANS. The last paragraph of Section 2.06(a)(ii) of
the Credit Agreement is hereby amended by deleting said paragraph in its
entirety and substituting the following therefor:
"From and after July 1, 1999, upon delivery of any Margin Rate
Determination Certificate by the Borrower to the Agent pursuant to
Section 7.01(j), the Applicable Base Margin and the Applicable
Eurodollar Margin shall automatically be adjusted in accordance with
the Leverage Ratio set forth therein, such adjustment to become
effective on the Business Day next succeeding the Business Day on which
the Agent received such Margin Rate Determination Certificate.
Anything contained in this Agreement or any of the other Credit
Documents to the contrary notwithstanding, to the extent that the
Applicable Base Margin and/or the Applicable Eurodollar Margin used in
calculating the amount of interest paid or accrued in respect of any
outstanding Loans during the period (the "RETROACTIVE PRICING PERIOD")
from and including September 30, 1998 to and including the First
Amendment Effective Date would have been greater if the
Effective Date had been September 30, 1998, (A) such increase in the
Applicable Base Margin and/or the Applicable Eurodollar Margin shall be
applied retroactively so as to give effect to such increase commencing
on September 30, 1998 with respect to all Loans outstanding at
5
<PAGE> 6
any time during the Retroactive Pricing Period, and (B) to the extent
that the Borrower has made any interest payments during the Retroactive
Pricing Period in respect of any outstanding Loans, the Borrower shall
pay to the Agent on the Effective Date, for
distribution in accordance with the first paragraph of Section 4.04(c)
to the Banks to which such interest payments were so made, an aggregate
amount equal to the additional interest payable in respect of such
Loans as a result of the application of the immediately preceding
clause (A)."
D. LETTERS OF CREDIT. Section 2.10(a) of the Credit Agreement is hereby
amended by deleting subparagraph (i) of the first paragraph thereof in its
entirety and substituting the following therefor:
"(i) any Letter of Credit if, after giving effect to such issuance, the
Total Utilization of Revolving Loan Commitments would exceed (A) at any
time prior to April 1, 1999, the lesser of (1) $265,000,000 or (2) the
Total Revolving Loan Commitments then in effect, and (B) at any time
from and after April 1, 1999, the Total Revolving Loan Commitments then
in effect; or"
1.3 AMENDMENTS TO SECTION 4: PREPAYMENTS AND REDUCTIONS IN COMMITMENTS;
PAYMENTS.
A. MANDATORY PREPAYMENTS AND MANDATORY REDUCTIONS OF REVOLVING LOAN
COMMITMENTS.
(i) Section 4.02(c)(i) of the Credit Agreement is hereby amended by
deleting it in its entirety and substituting therefor the following:
" (I) Prepayments and Reductions Due to Consolidated Excess
Cash Flow. In the event that there shall be Consolidated Excess
Cash Flow in excess of $500,000 for any Fiscal Year (commencing
with Fiscal Year 1998), the Borrower shall, no later than 90
days after the end of such Fiscal Year, prepay the Loans and/or
the Revolving Loan Commitments shall be permanently reduced in
an aggregate amount equal to 75% of the entire amount of such
Consolidated Excess Cash Flow. Concurrently with any prepayment
of the Loans and/or reduction of the Revolving Loan Commitments
pursuant to this Section 4.02(c)(i), the Borrower shall deliver
to Agent an Officers' Certificate demonstrating the calculation
of the Consolidated Excess Cash Flow that gave rise to such
prepayment and/or reduction. In the event that the Borrower
shall subsequently determine that the actual Consolidated
Excess Cash Flow was greater than the amount set forth in such
Officers' Certificate, the Borrower shall promptly make an
additional prepayment of the Loans (and/or, if applicable, the
Revolving Loan Commitments shall be permanently reduced) in
6
<PAGE> 7
an amount equal to the amount of such excess, and the Borrower
shall concurrently therewith deliver to Agent an Officers'
Certificate demonstrating the derivation of the additional
Consolidated Excess Cash Flow resulting in such excess."
(ii) Section 4.02(c)(ii) of the Credit Agreement is hereby amended by
deleting the phrases "Other Than in Connection With a Qualified High-Yield
Offering" and "(other than pursuant to a Qualified High-Yield Offering)"
contained therein.
(iii) Section 4.03(b) of the Credit Agreement is hereby amended by
deleting the phrase "pursuant to Section 4.02(c)(ii)" contained in such Section
and substituting therefor the phrase "pursuant to Section 4.02(c)(i) or Section
4.02(c)(ii)".
(iv) Section 4.03(c) of the Credit Agreement is hereby amended by
restating said Section in its entirety as follows:
"(C) APPLICATION OF CERTAIN MANDATORY PREPAYMENTS OF TERM
LOANS. Any mandatory prepayments of the Term Loans pursuant to Section
4.02(c)(i) shall be applied to reduce the scheduled installments of
principal of the Term Loans set forth in Section 4.01 in forward order
of maturity. Any mandatory prepayments of the Term Loans pursuant to
Section 4.02(c)(ii) shall be applied to reduce the scheduled
installments of principal of the Term Loans in Section 4.01 on a pro
rata basis in accordance with the respective outstanding principal
amounts thereof."
7
<PAGE> 8
1.4 AMENDMENTS TO SECTION 7: AFFIRMATIVE COVENANTS.
A. INFORMATION COVENANTS.
(i) Section 7.01 of the Credit Agreement is hereby amended by deleting
the reference to "February 15, 1998" contained in paragraph (d) thereof and
substituting a reference to "February 15, 2000" therefor.
(ii) Section 7.01 of the Credit Agreement is hereby further amended by
restating paragraph (j) thereof in its entirety as follows:
"(J) MARGIN RATE DETERMINATION CERTIFICATE. From and after
July 1, 1999, concurrently with the delivery of the financial
statements required under Sections 7.01(a) and (b), the Borrower shall
deliver a Margin Rate Determination Certificate."
(iii) Section 7.01 of the Credit Agreement is hereby further amended by
(a) relettering existing paragraph "(l)" as paragraph "(m)" and (b) adding the
following new paragraph (l) thereto:
"(L) MONTHLY FINANCIAL STATEMENTS AND ACCOUNTS RECEIVABLE INFORMATION.
Within 45 days after the end of each calendar month, (i) the
consolidated balance sheets of the Borrower and its Subsidiaries as at
the end of such month and the related consolidated statements of
operations and statements of cash flows for such month and for the
elapsed portion of the Fiscal Year ended with the last day of such
month, all of which shall be certified by the Chief Executive Officer
or the Chief Financial Officer of the Borrower, subject to normal
year-end audit adjustments, (ii) a performance report, in a form
reasonably satisfactory to the Banks, comparing the actual results of
operations, financial position and cash flows for such month and for
the elapsed portion of the Fiscal Year ended with the last day of such
month to those forecasted in the Performance Plan and stating the
reasons for any variance between such actual and forecasted results of
operations, financial position and cash flows and explanations for any
such variances that are adverse to the Borrower or any of its
Subsidiaries, (iii) a narrative report, in the form prepared for
presentation to senior management, describing the operations of the
Borrower and its Subsidiaries (including placements of oxygen
concentrators) for such month and for the period from the beginning of
the then current Fiscal Year to the end of such month, and (iv) an
Accounts Receivable report consisting of (a) detailed Accounts
Receivable agings and (b) bad debt expense analysis."
B. FURTHER ASSURANCES; NEW SUBSIDIARIES.
(i) Section 7.11 of the Credit Agreement is hereby amended by adding
the following sentence at the end of paragraph (a) thereof:
8
<PAGE> 9
"Without limiting the generality of the foregoing, from and after the
Effective Date, the Borrower shall promptly take all
such actions, and shall promptly provide the Agent with all such
information, as the Agent may reasonably request in order to (i) enable
the Agent to perform an audit of the Collateral for the purpose of
confirming that the Agent has a valid and perfected security interest
in all personal and mixed property of the Borrower and its Subsidiaries
and (ii) create, perfect and/or continue the Agent's security interest
in any such property to the extent necessary to effect fully the
purposes of this Agreement and the other Credit Documents."
(ii) Section 7.11(b) of the Credit Agreement is hereby amended by
restating it in its entirety as follows:
"(B) In the event a Person becomes a Subsidiary of the Borrower
(other than as a Joint Venture) after the Effective Date, the Borrower
shall, within 10 Business Days of such event, cause such Subsidiary to
execute and deliver the Subsidiary Guaranty, the Subsidiary Pledge
Agreement, a Subsidiary Partnership Security Agreement, the Subsidiary
Security Agreement, Collection Bank Agreements and the Subsidiary
Trademark Security Agreement, in each case together with such other
agreements, pledges, assignments, documents and certificates
(including, without limitation, any amendments to the Credit Documents)
as may be necessary or desirable or as the Agent may request and do
such other acts and things as the Agent reasonably may request in order
to have such domestic Subsidiary guaranty and/or secure the Obligations
and effect fully the purposes of this Agreement and the other Credit
Documents and to provide for payment of the Obligations in accordance
with the terms of this Agreement and the other Credit Documents."
C. MANAGEMENT CONSULTANT. Section 7 of the Credit Agreement is hereby
amended by adding the following new Section 7.13 at the end thereof:
"7.13 MANAGEMENT CONSULTANT. Promptly upon the request of the
Required Banks, which may be delivered to the Borrower at any time
during the period from and including January 1, 1999 through and
including June 30, 1999, the Borrower shall engage a management
consultant selected by the Borrower and approved by the Required Banks;
provided that (i) the scope, duration and other terms of such
engagement (including terms relating to the free and timely sharing of
information by such management consultant with the Borrower and the
Banks) shall be mutually agreeable to the Borrower and the Required
Banks and (ii) the Borrower and such management consultant shall enter
into a confidentiality and exclusivity agreement on terms mutually
agreeable to the Borrower and the Required Banks."
9
<PAGE> 10
1.5 AMENDMENTS TO SECTION 8: NEGATIVE COVENANTS.
A. CONSOLIDATION, MERGER, SALE OF ASSETS, ETC. Section 8.02(v) of the
Credit Agreement is hereby amended by restating it in its entirety as follows:
"(v) the Borrower and its Wholly-Owned Subsidiaries may
(without regard to the limitations set forth in Section 8.07) acquire
property and assets of other Persons (including any assets or property
acquired in any Acquisition) provided that the aggregate consideration
paid by the Borrower or such Subsidiaries consisting of cash or any
assets of the Borrower or such Subsidiaries (excluding any common stock
of the Borrower and the proceeds of any Divestiture but including the
principal amount of any Indebtedness described in Section 8.04(xii)
incurred in connection with such Acquisition and the principal amount
of any loans made to the applicable seller in connection with such
Acquisition in accordance with Section 8.05(xi)) shall not, without the
prior written consent of the Required Banks, exceed (if valued at fair
market value at the time of such Acquisition, as reasonably determined
by the board of directors of the Person making such Acquisition)
$7,000,000 in the aggregate over any twelve-month period commencing
with the Effective Date (including in such calculation
any consideration paid by the Borrower to acquire any Joint Venture)
when added to the aggregate amount of all investments made pursuant to
Section 8.05(vii) in such twelve-month period; provided further that
the ratio of Total Debt to Consolidated Adjusted EBITDA shall be in
compliance with the requirement of Section 8.08, in each case
calculated on a pro forma basis to give effect to such Acquisition;
provided further, that if such acquisition of property and assets is an
acquisition of stock, then such acquisition shall, except with respect
to Joint Ventures, result in the ownership by the Borrower or a
Wholly-Owned Subsidiary of a majority interest in the capital stock of
the entity whose stock is being acquired;"
B. INDEBTEDNESS. Section 8.04 of the Credit Agreement is hereby amended
by deleting clause (xviii) thereof in its entirety.
C. ADVANCES, INVESTMENTS AND LOANS. Section 8.05 of the Credit
Agreement is hereby amended by deleting the reference to "$10,000,000" in clause
(iii) therein and substituting "$15,000,000" therefor.
D. CAPITAL EXPENDITURES. Section 8.07 of the Credit Agreement is hereby
amended by restating it in its entirety as follows:
"8.07 CAPITAL EXPENDITURES. Except for Consolidated
Capital Expenditures made by the Borrower and its Subsidiaries
during any Fiscal Year to acquire assets in Acquisitions
permitted under Section 8.02(v), the Borrower will not, and
will not permit any of its Subsidiaries to, make Consolidated
Capital Expenditures during any Fiscal Year set forth below in
an aggregate
10
<PAGE> 11
amount in excess of the correlative amount set forth below
opposite such Fiscal Year:
FISCAL YEAR AMOUNT
1998 $35,000,000
-----------------------------------------------
1999 $35,000,000
-----------------------------------------------
2000 $35,000,000
-----------------------------------------------
2001 $35,000,000
-----------------------------------------------
2002 $35,000,000 "
-----------------------------------------------
E. LEVERAGE RATIO. Section 8.08 of the Credit Agreement is hereby
amended by restating it in its entirety as follows:
"LEVERAGE RATIO. The Borrower shall not permit the ratio of (i) Total
Debt to (ii) Consolidated Adjusted EBITDA for any consecutive
four-fiscal quarter period ending as of the last day of any fiscal
quarter of the Borrower set forth below to be more than the correlative
amount set forth below:
FISCAL QUARTER LEVERAGE RATIO
----------------------------------------------------------
1998 FQ3 4.25:1.00
----------------------------------------------------------
1998 FQ4 4.75:1.00
----------------------------------------------------------
1999 FQ1 5.30:1.00
----------------------------------------------------------
1999 FQ2 5.85:1.00
----------------------------------------------------------
1999 FQ3 5.80:1.00
----------------------------------------------------------
1999 FQ4 5.70:1.00
----------------------------------------------------------
2000 FQ1 5.60:1.00
----------------------------------------------------------
2000 FQ2 5.45:1.00
----------------------------------------------------------
2000 FQ3 5.25:1.00
----------------------------------------------------------
2000 FQ4 4.80:1.00
----------------------------------------------------------
2001 FQ1 4.60:1.00
----------------------------------------------------------
11
<PAGE> 12
FISCAL QUARTER LEVERAGE RATIO
----------------------------------------------------------
2001 FQ2 4.50:1.00
----------------------------------------------------------
2001 FQ3 4.40:1.00
----------------------------------------------------------
2001 FQ4 4.20:1.00
----------------------------------------------------------
2002 FQ1 4.20:1.00
----------------------------------------------------------
2002 FQ2 4.10:1.00
----------------------------------------------------------
2002 FQ3 4.10:1.00
----------------------------------------------------------
2002 FQ4 4.00:1.00
----------------------------------------------------------
F. MINIMUM INTEREST COVERAGE RATIO. Section 8.10 of the Credit
Agreement is hereby amended by restating it in its entirety as follows:
"MINIMUM INTEREST COVERAGE RATIO. The Borrower shall not permit the
ratio of (i) Consolidated EBITDA of the Borrower and its Subsidiaries
to (ii) Consolidated Interest Expense for any consecutive four-fiscal
quarter period ending as of the last day of any fiscal quarter of the
Borrower set forth below to be less than the correlative amount set
forth below:
FISCAL QUARTER MINIMUM INTEREST
COVERAGE RATIO
----------------------------------------------------------
1998 FQ3 3.45:1.00
----------------------------------------------------------
1998 FQ4 2.75:1.00
----------------------------------------------------------
1999 FQ1 2.30:1.00
----------------------------------------------------------
1999 FQ2 1.90:1.00
----------------------------------------------------------
1999 FQ3 1.85:1.00
----------------------------------------------------------
1999 FQ4 1.85:1.00
----------------------------------------------------------
2000 FQ1 1.90:1.00
----------------------------------------------------------
2000 FQ2 2.10:1.00
----------------------------------------------------------
2000 FQ3 2.20:1.00
----------------------------------------------------------
2000 FQ4 2.40:1.00
----------------------------------------------------------
2001 FQ1 2.40:1.00
----------------------------------------------------------
12
<PAGE> 13
FISCAL QUARTER MINIMUM INTEREST
COVERAGE RATIO
----------------------------------------------------------
2001 FQ2 2.40:1.00
----------------------------------------------------------
2001 FQ3 2.60:1.00
----------------------------------------------------------
2001 FQ4 2.80:1.00
----------------------------------------------------------
2002 FQ1 2.80:1.00
----------------------------------------------------------
2002 FQ2 2.90:1.00
----------------------------------------------------------
2002 FQ3 3.00:1.00
----------------------------------------------------------
2002 FQ4 3.15:1.00
----------------------------------------------------------
G. LIMITATION ON VOLUNTARY PAYMENTS AND MODIFICATIONS OF INDEBTEDNESS;
MODIFICATIONS OF CERTIFICATE OF INCORPORATION, BY-LAWS AND CERTAIN
OTHER AGREEMENTS; ETC.
(i) Section 8.11 of the Credit Agreement is hereby amended by deleting
the phrase "(x) any Qualified High-Yield Debt or (y) any other" from clause (i)
contained therein and substituting therefor the word "any".
(ii) Section 8.11 of the Credit Agreement is hereby further amended by
(a) deleting clause (iii) contained therein in its entirety and (b) renumbering
existing clause (iv) thereof as clause (iii).
H. COLLECTION BANK AGREEMENTS. Section 8.16 of the Credit Agreement is
hereby amended by deleting the phrase "Prior to the consummation of a Qualified
High-Yield Offering, the" contained therein and substituting therefor the word
"The".
I. MINIMUM CONSOLIDATED EBITDA. Section 8 of the Credit Agreement is
hereby further amended by adding a new Section 8.17 at the end thereof as
follows:
"8.17 MINIMUM CONSOLIDATED EBITDA. The Borrower shall not permit
Consolidated EBITDA for any fiscal quarter of the Borrower set forth
below to be less than the correlative amount indicated:
FISCAL QUARTER MINIMUM CONSOLIDATED
EBITDA
----------------------------------------------------------
1998 FQ3 $13,400,000
----------------------------------------------------------
13
<PAGE> 14
FISCAL QUARTER MINIMUM CONSOLIDATED
EBITDA
----------------------------------------------------------
1998 FQ4 $14,000,000
----------------------------------------------------------
1999 FQ1 $12,750,000
----------------------------------------------------------
1999 FQ2 $14,000,000
----------------------------------------------------------
1999 FQ3 $14,250,000
----------------------------------------------------------
1999 FQ4 $15,500,000
----------------------------------------------------------
2000 FQ1 $15,500,000
----------------------------------------------------------
2000 FQ2 $16,000,000
----------------------------------------------------------
2000 FQ3 $17,000,000
----------------------------------------------------------
2000 FQ4 $18,000,000
----------------------------------------------------------
2001 FQ1 $18,000,000
----------------------------------------------------------
2001 FQ2 $18,500,000
----------------------------------------------------------
2001 FQ3 $18,500,000
----------------------------------------------------------
2001 FQ4 $19,500,000
----------------------------------------------------------
2002 FQ1 $19,500,000
----------------------------------------------------------
2002 FQ2 $19,500,000
----------------------------------------------------------
2002 FQ3 $20,000,000
----------------------------------------------------------
2002 FQ4 $21,000,000
----------------------------------------------------------
1.6 AMENDMENTS TO SECTION 10: THE AGENT.
A. RELEASE OF COLLATERAL. Section 10.10 of the Credit Agreement is
hereby amended by deleting paragraph (b) contained therein in its entirety.
1.7 AMENDMENTS TO SECTION 11: MISCELLANEOUS.
A. CALCULATIONS; COMPUTATIONS. Section 11.08 of the Credit Agreement is
hereby amended by adding the following proviso at the end thereof:
"; provided, further that, without limiting the generality of the
foregoing proviso, in no event shall the Borrower change the Accounts
Receivable reserve policies applied by
14
<PAGE> 15
the Borrower for purposes of such computations without the consent of
the Required Banks."
1.8 SUBSTITUTION OF SCHEDULE 1.01(A): PRO RATA SHARES, REVOLVING
COMMITMENTS. Schedule 1.01(a) to the Credit Agreement is hereby amended by
deleting said Schedule 1.01(a) in its entirety and substituting in place thereof
a new Schedule 1.01(a) in the form of Annex I to this Amendment.
SECTION 2. CONDITIONS TO EFFECTIVENESS
Section 1 of this Amendment shall become effective only upon
the satisfaction of all of the following conditions precedent (the date of
satisfaction of such conditions being referred to herein as the "First Amendment
EFFECTIVE DATE"):
A. On or before the First Amendment Effective Date, the Borrower shall
deliver to the Banks (or to Agent for the Banks with sufficient originally
executed copies, where appropriate, for each Bank and its counsel) the
following, each, unless otherwise noted, dated the First Amendment Effective
Date:
1. A certificate, dated the First Amendment Effective Date,
signed by the President or Vice President of the Borrower and attested
to by the Secretary or any Assistant Secretary of the Borrower, in form
and substance satisfactory to the Agent, certifying that the
Certificate of Incorporation and the By-Laws of the Borrower were
delivered to the Agent pursuant to the Credit Agreement and that there
has been no change in such Certificate of Incorporation or such By-laws
since the date of such delivery;
2. A good standing certificate for the Borrower from the
Secretary of State of the State of Delaware, dated a recent date prior
to the First Amendment Effective Date;
3. Resolutions of the Board of Directors of the Borrower
approving and authorizing the execution, delivery, and performance of
this Amendment, signed by the President or Vice President of the
Borrower and attested to by the Secretary or any Assistant Secretary of
the Borrower; and
4. Signature and incumbency certificates of the officers of
the Borrower executing this Amendment.
B. The Banks and their respective counsel shall have received
originally executed copies of one or more favorable written opinions of Harwell
Howard Hyne Gabbert & Manner, P.C., counsel for the Borrower, in form and
substance reasonably satisfactory to
15
<PAGE> 16
Agent and its counsel, dated as of the Effective Date, with respect to the
enforceability of the Amended Agreement (as hereinafter defined) and as to such
other matters as Agent acting on behalf of the Banks may reasonably request.
C. The Borrower shall have delivered to the Agent an Officers'
Certificate, dated as of the First Amendment Effective Date, to the effect that
the Borrower and each of its Subsidiaries have executed and delivered to the
Agent (or will so execute and deliver within 15 days after the First Amendment
Effective Date) substantially all of the applicable Credit Documents required to
be executed and delivered by the Borrower or such Subsidiary pursuant to Section
7.11 of the Credit Agreement or any comparable provision of the Prior Credit
Agreement.
D. On or before the First Amendment Effective Date, the Borrower shall
have delivered to the Agent a performance plan for Fiscal Year 1999 which shall
satisfy the requirements for a Performance Plan under Section 7.01(d) of the
Credit Agreement.
E. On or before the First Amendment Effective Date, the Borrower shall
have delivered to the Agent, for distribution to each Bank which has approved
this Amendment on or before October 30, 1998, a non-refundable amendment fee
equal to 1/4 of 1% of the sum of the outstanding Term Loan of such Bank plus the
Revolving Loan Commitment of such Bank as set forth on Annex I hereto.
SECTION 3. BORROWER'S REPRESENTATIONS AND WARRANTIES
In order to induce the Banks to enter into this Amendment and
to amend the Credit Agreement in the manner provided herein, the Borrower
represents and warrants to each Bank that the following statements are true,
correct and complete:
A. CORPORATE POWER AND AUTHORITY. The Borrower has all requisite
corporate power and authority to enter into this Amendment and to carry out the
transactions contemplated by, and perform its obligations under, the Credit
Agreement as amended by this Amendment (the "AMENDED AGREEMENT").
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this
Amendment, the performance of the Amended Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Borrower.
C. NO CONFLICT. The execution and delivery by the Borrower of this
Amendment, the performance by the Borrower of the Amended Agreement and the
consummation of the transactions contemplated hereby do not and will not (i)
violate any provision of any law or
16
<PAGE> 17
any governmental rule or regulation applicable to the Borrower or any of its
Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of the
Borrower or any of its Subsidiaries, or any order, judgment or decree of any
court or other agency of government binding on the Borrower or any of its
Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any Contractual Obligation of
the Borrower or any of its Subsidiaries, (iii) result in or require the creation
or imposition of any Lien upon any of the properties or assets of the Borrower
or any of its Subsidiaries, or (iv) require any approval of stockholders or any
approval or consent of any Person under any Contractual Obligation of the
Borrower or any of its Subsidiaries except for such approvals or consents which
will be obtained on or before the First Amendment Effective Date (as hereinafter
defined).
D. GOVERNMENTAL CONSENTS. The execution and delivery by the Borrower of
this Amendment, the performance by the Borrower of the Amended Agreement and the
consummation of the transactions contemplated hereby do not and will not require
any registration with, consent or approval of, or notice to, or other action to,
with or by, any federal, state or other governmental authority or regulatory
body.
E. BINDING OBLIGATION. This Amendment and the Amended Agreement have
been duly executed and delivered by the Borrower and are the legally valid and
binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or limiting
creditors' rights generally or by equitable principles relating to
enforceability.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT
DOCUMENTS. All representations and warranties of the Borrower or any of its
Subsidiaries contained in the Credit Documents are and will be true, correct and
complete in all material respects on and as of the First Amendment Effective
Date to the same extent as though made on and as of that date, except to the
extent such representations and warranties specifically relate to an earlier
date, in which case they were true, correct and complete in all material
respects on and as of such earlier date.
G. ABSENCE OF DEFAULT. No event has occurred and is continuing or will
result from the consummation of the transactions contemplated by this Amendment
that would constitute an Event of Default or a Potential Event of Default.
17
<PAGE> 18
SECTION 4. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER CREDIT
DOCUMENTS.
(i) The Borrower hereby agrees and confirms that on and after
the First Amendment Effective Date each Credit Document and all
collateral encumbered thereby shall continue to secure to the fullest
extent possible the payment and performance of all "Secured
Obligations" (as defined in each applicable Credit Document), including
without limitation the payment and performance of all such "Secured
Obligations" in respect of the Obligations of the Borrower now or
hereafter existing under or in respect of the Amended Agreement and the
Notes.
(ii) On and after the First Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the Credit
Agreement, and each reference in the other Credit Documents to the
"Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement shall mean and be a reference to the
Amended Agreement.
(iii) The Borrower acknowledges and agrees that any of the
Credit Documents to which it is a party or otherwise bound shall
continue in full force and effect, and are hereby ratified and
confirmed, and that all of its respective obligations thereunder shall
be valid and enforceable and shall not be impaired, limited or
otherwise affected by the execution, delivery or effectiveness of this
Amendment or any future amendment or modification of the Amended
Agreement.
(iv) The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein or therein, constitute a
waiver of any provision of, or operate as a waiver of any right, power
or remedy of the Agent or any Bank under, the Credit Agreement or any
of the other Credit Documents.
B. FEES AND EXPENSES. The Borrower acknowledges that all reasonable
costs, fees and expenses incurred by the Agent and its counsel with respect to
this Amendment and the documents and transactions contemplated hereby shall be
for the account of the Borrower.
C. HEADINGS. Section and subsection headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
D. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
18
<PAGE> 19
E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed an original, but
all such counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and attached
to a single counterpart so that all signature pages are physically attached to
the same document. This Amendment (other than the provisions of Section 1
hereof, the effectiveness of which is governed by Section 2 hereof) shall become
effective upon the execution of a counterpart hereof by the Borrower, the Agent
and the Required Banks and receipt by the Borrower and the Agent of written or
telephonic notification of such execution and authorization of delivery thereof.
[Remainder of page intentionally left blank]
19
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
AMERICAN HOMEPATIENT, INC.,
a Delaware corporation
By: /s/
----------------------------------------
Name: Mary Ellen Rodgers
Title: Sr. Vice Pres., CFO, CAO
S-1
<PAGE> 21
BANKERS TRUST COMPANY,
Individually and as the Agent
By: /s/
----------------------------------------
Name: Mary Jo Jolly
Title: Assistant Vice President
S-2
<PAGE> 22
ABN AMRO BANK, N.V.
By:
----------------------------------------
Name:
Title:
By:
----------------------------------------
Name:
Title:
S-3
<PAGE> 23
AMSOUTH BANK
By: /s/
----------------------------------------
Name: Cathy M. Wind
Title: V.P.
S-4
<PAGE> 24
BANK OF AMERICA, N.T. & S.A.
By: /s/
----------------------------------------
Name: J. Gregory Seibly
Title: Vice President
S-5
<PAGE> 25
BANK OF MONTREAL
By:
----------------------------------------
Name:
Title:
S-6
<PAGE> 26
FIRST UNION NATIONAL BANK
(formerly Corestates Bank, N.A.)
By: /s/
----------------------------------------
Name: Elizabeth D. Morris
Title: Vice President
S-7
<PAGE> 27
FIRST AMERICAN NATIONAL BANK
By: /s/
----------------------------------------
Name: Samuel M. Ballesteros
Title: Senior Vice-President
S-8
<PAGE> 28
THE FIRST NATIONAL BANK OF CHICAGO
By:
----------------------------------------
Name:
Title:
S-9
<PAGE> 29
THE FUJI BANK, LIMITED, NEW YORK BRANCH
By:
----------------------------------------
Name:
Title:
S-10
<PAGE> 30
PNC BANK NATIONAL ASSOCIATION
By:
----------------------------------------
Name:
Title:
S-11
<PAGE> 31
COOPERATIEVE CENTRALE RAIFFESEN -
BOERENLEENBANK, B.A., "RABOBANK
NEDERLAND", NEW YORK BRANCH
By: /s/
----------------------------------------
Name: W. Jeffrey Vollack
Title: SVP
By: /s/
----------------------------------------
Name: Alistair Turnbull
Title: VP
S-12
<PAGE> 32
THE SAKURA BANK, LIMITED
By: /s/
----------------------------------------
Name: Yoshikazu Nagura
Title: Vice President
S-13
<PAGE> 33
SUNTRUST BANK, NASHVILLE, N.A.
By:
----------------------------------------
Name:
Title:
S-14
<PAGE> 34
UNION BANK OF CALIFORNIA, N.A.
By: /s/
----------------------------------------
Name: Lynn E. Vine
Title: Vice President
S-15
<PAGE> 35
UBS AG, NEW YORK BRANCH
By: /s/
----------------------------------------
Name: Leo L. Baltz
Title: Director
/s/
----------------------------------------
Name: Eduardo Salazar
Title: Executive Director
S-16
<PAGE> 36
NATIONSBANK, N.A.
By: /s/
----------------------------------------
Name: J. Gregory Seibly
Title: Vice President
S-17
<PAGE> 37
ANNEX
BANKS' COMMITMENTS AND PRO RATA SHARES
<TABLE>
<CAPTION>
PRO RATA
(FOR PURPOSES OF
SHARE (RE: CLAUSE (III) OF THE
REVOLVING PRO RATA SHARE DEFINITION OF THE
REVOLVING LOAN LOAN TERM LOAN (RE: TERM LOAN TOTAL TERM "PRO RATA
COMMITMENT COMMITMENT) COMMITMENT COMMITMENT) COMMITMENT SHARE")
------------ -------------- ----------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
BANKERS TRUST COMPANY $ 26,362,500 9.250000000% $ 6,937,500 9.250000000% $ 33,300,000 9.250000000%
ABN AMRO BANK, N.V. $ 19,237,500 6.750000000% $ 5,062,500 6.750000000% 24,300,000 6.750000000%
AMSOUTH BANK OF ALABAMA $ 24,937,500 8.750000000% $ 6,562,500 8.750000000% 31,500,000 8.750000000%
BANK OF AMERICA/NATIONSBANK, N.A. $ 49,875,000 17.500000000% $13,125,000 17.500000000% 63,000,000 17.500000000%
BANK OF MONTREAL $ 17,812,500 6.250000000% $ 4,687,500 6.250000000% 22,500,000 6.250000000%
THE FIRST NATIONAL BANK OF CHICAGO $ 10,687,500 3.750000000% $ 2,812,500 3.750000000% 13,500,000 3.750000000%
FIRST AMERICAN NATIONAL BANK $ 10,687,500 3.750000000% $ 2,812,500 3.750000000% 13,500,000 3.750000000%
FIRST UNION NATIONAL BANK $ 17,812,500 6.250000000% $ 4,687,500 6.250000000% 22,500,000 6.250000000%
THE FUJI BANK, LIMITED $ 10,687,500 3.750000000% $ 2,812,500 3.750000000% 13,500,000 3.750000000%
PNC BANK, KENTUCKY, INC. $ 23,512,500 8.250000000% $ 6,187,500 8.250000000% 29,700,000 8.250000000%
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK, B.A."RABOBANK
NEDERLAND", NEW YORK $ 23,512,500 8.250000000% $ 6,187,500 8.250000000% 29,700,000 8.250000000%
THE SAKURA BANK, LIMITED $ 3,562,500 1.250000000% $ 937,500 1.250000000% 4,500,000 1.250000000%
SUNTRUST BANK, NASHVILLE, N.A. $ 24,937,500 8.750000000% $ 6,562,500 8.750000000% 31,500,000 8.750000000%
UNION BANK OF SWITZERLAND $ 10,687,500 3.750000000% $ 2,812,500 3.750000000% 13,500,000 3.750000000%
UNION BANK OF CALIFORNIA, N.A. $ 10,687,500 3.750000000% $ 2,812,500 3.750000000% 13,500,000 3.750000000%
------------ -------------- ----------- -------------- ------------ --------------
$285,000,000 100.000000000% $75,000,000 100.000000000% $360,000,000 100.000000000%
============ ============== =========== ============== ============ ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICAN HOMEPATIENT, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,912,000
<SECURITIES> 0
<RECEIVABLES> 155,593,000
<ALLOWANCES> 53,959,000
<INVENTORY> 25,545,000
<CURRENT-ASSETS> 155,878,000
<PP&E> 164,284,000
<DEPRECIATION> 81,290,000
<TOTAL-ASSETS> 578,882,000
<CURRENT-LIABILITIES> 52,926,000
<BONDS> 326,413,000
0
0
<COMMON> 150,000
<OTHER-SE> 192,380,000
<TOTAL-LIABILITY-AND-EQUITY> 578,882,000
<SALES> 146,868,000
<TOTAL-REVENUES> 307,739,000
<CGS> 72,986,000
<TOTAL-COSTS> 72,986,000
<OTHER-EXPENSES> 222,770,000
<LOSS-PROVISION> 25,930,000
<INTEREST-EXPENSE> 16,895,000
<INCOME-PRETAX> (4,912,000)
<INCOME-TAX> (1,965,000)
<INCOME-CONTINUING> (2,947,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,947,000)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
