<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CHECK ONE FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 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 62-14746800
------------------------------ ------------ ------------------
(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 AUGUST 10, 1998)
TOTAL NUMBER OF SEQUENTIALLY
NUMBERED PAGES IS 26
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1997 1998
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 12,050,000 $ 13,538,000
Restricted cash 50,000 50,000
Accounts receivable, less allowance for doubtful accounts of
$43,862,000 and $36,938,000 respectively 114,386,000 116,505,000
Inventories 25,824,000 23,454,000
Prepaid expenses and other assets 1,423,000 2,555,000
Income tax receivable 8,099,000 3,169,000
Deferred tax asset 8,998,000 8,998,000
------------- -------------
Total current assets 170,830,000 168,269,000
------------- -------------
PROPERTY AND EQUIPMENT, at cost 146,803,000 157,478,000
Less accumulated depreciation and amortization (66,729,000) (77,692,000)
------------- -------------
Net property and equipment 80,074,000 79,786,000
------------- -------------
OTHER ASSETS
Excess of cost over fair value of net assets acquired, net 262,294,000 276,592,000
Investment in unconsolidated joint ventures 14,974,000 19,550,000
Deferred costs, net 3,967,000 3,701,000
Other assets 26,227,000 25,961,000
------------- -------------
Total other assets 307,462,000 325,804,000
------------- -------------
$ 558,366,000 $ 573,859,000
============= =============
</TABLE>
(Continued)
2
<PAGE> 3
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1997 1998
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and capital leases $ 9,361,000 $ 8,591,000
Trade accounts payable 13,484,000 15,155,000
Income taxes payable -- --
Other payables 1,343,000 1,025,000
Accrued expenses:
Payroll and related benefits 9,553,000 6,970,000
Restructuring accruals 13,604,000 7,249,000
Other 10,764,000 15,317,000
------------- -------------
Total current liabilities 58,109,000 54,307,000
------------- -------------
NONCURRENT LIABILITIES
Long-term debt and capital leases, less current portion 291,963,000 303,704,000
Deferred income taxes 2,046,000 1,798,000
Other noncurrent liabilities 12,159,000 11,796,000
------------- -------------
Total noncurrent liabilities 306,168,000 317,298,000
------------- -------------
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 14,967,000
shares, respectively 149,000 150,000
Paid-in capital 171,133,000 172,379,000
Retained earnings 22,807,000 29,725,000
------------- -------------
Total stockholders' equity 194,089,000 202,254,000
------------- -------------
$ 558,366,000 $ 573,859,000
============= =============
</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 June 30 Six Months Ended June 30
----------------------------- -----------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Sales and related service revenues $ 43,628,000 $ 50,286,000 $ 82,652,000 $ 98,455,000
Rentals and other revenues 49,433,000 51,790,000 93,249,000 104,990,000
Earnings from joint ventures 1,727,000 1,524,000 3,474,000 2,948,000
------------ ------------ ------------ ------------
Total revenues 94,788,000 103,600,000 179,375,000 206,393,000
------------ ------------ ------------ ------------
EXPENSES
Cost of sales and related services, excluding
depreciation and amortization 22,353,000 24,545,000 41,357,000 49,070,000
Operating 48,217,000 53,983,000 92,182,000 108,331,000
General and administrative 3,778,000 3,547,000 7,631,000 7,050,000
Depreciation and amortization 8,284,000 9,410,000 15,513,000 19,448,000
Interest 3,989,000 5,566,000 6,897,000 10,964,000
------------ ------------ ------------ ------------
Total expenses 86,621,000 97,051,000 163,580,000 194,863,000
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS BEFORE INCOME TAXES 8,167,000 6,549,000 15,795,000 11,530,000
PROVISION FOR INCOME TAXES 3,265,000 2,620,000 6,255,000 4,612,000
------------ ------------ ------------ ------------
NET INCOME $ 4,902,000 $ 3,929,000 $ 9,540,000 $ 6,918,000
============ ============ ============ ============
NET INCOME PER COMMON SHARE
- Basic $ 0.33 $ 0.26 $ 0.65 $ 0.46
============ ============ ============ ============
- Diluted $ 0.33 $ 0.26 $ 0.64 $ 0.46
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
- Basic 14,805,000 14,974,000 14,771,000 14,965,000
============ ============ ============ ============
- Diluted 14,965,000 15,059,000 15,023,000 15,123,000
============ ============ ============ ============
</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 Six Months Ended June 30
--------------------------------
1997 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,540,000 $ 6,918,000
Adjustments to reconcile net income from operations
to net cash provided from (used in) operating activities:
Depreciation and amortization 15,513,000 19,448,000
Equity in earnings of unconsolidated joint ventures (1,830,000) (682,000)
Minority interest 49,000 184,000
Change in assets and liabilities, net of effects from acquisitions:
Receivables, net (15,163,000) (1,680,000)
Restricted cash 375,000 --
Inventories (3,044,000) 2,579,000
Prepaid expenses and other (1,113,000) (1,119,000)
Income taxes receivable 3,724,000 5,060,000
Trade accounts payable, accrued expenses
and other current liabilities (1,415,000) 560,000
Restructuring accruals -- (6,355,000)
Other long term liabilities -- 19,000
Other assets (1,560,000) (1,439,000)
------------- -------------
Net cash provided from operating activities 5,076,000 23,493,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (56,054,000) (45,649,000)
Additions to property and equipment, net (16,004,000) (16,178,000)
Distributions from (advances to) unconsolidated joint
ventures, net (289,000) (3,684,000)
Distributions to minority interest owners (18,000) --
------------- -------------
Net cash used in investing activities (72,365,000) (65,511,000)
------------- -------------
</TABLE>
(Continued)
5
<PAGE> 6
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Continued)
<TABLE>
<CAPTION>
For the Six Months Ended June 30
--------------------------------
1997 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and capital leases (4,757,000) (3,278,000)
Proceeds from issuance of debt 71,000,000 46,477,000
Proceeds from exercise of stock options 1,617,000 430,000
Deferred financing costs (135,000) (123,000)
------------- -------------
Net cash provided from financing activities 67,725,000 43,506,000
------------- -------------
INCREASE IN CASH AND CASH
EQUIVALENTS 436,000 1,488,000
CASH AND CASH EQUIVALENTS, beginning of period 7,299,000 12,050,000
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 7,735,000 $ 13,538,000
============= =============
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 6,640,000 $ 8,802,000
============= =============
Cash payments of income taxes $ 2,703,000 $ 1,834,000
============= =============
</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
JUNE 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, and the rental and
sale of home medical equipment and home health care supplies. For the
six months ended June 30, 1998, such services represented 47%, 21% and
32%, respectively, of net revenues. As of June 30, 1998, the Company
provided these services to patients primarily in the home through 332
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 and Wisconsin.
2. 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 percent and drugs and biologicals
by five percent on January 1, 1998, and will reduce the Medicare
reimbursement rate for oxygen related services by another five percent
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 percent
of the Company's revenues.
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 total 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 percent
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 in the affected
locations. These activities were substantially completed as of June 30,
1998.
7
<PAGE> 8
The following actions have occurred related to the restructuring:
<TABLE>
<CAPTION>
For the Quarters Ended
----------------------------------------------
June 30, March 31, December 31, Total
1998 1998 1997 -----
---- ---- ----
<S> <C> <C> <C> <C>
Employees terminated 36 47 323 406
Operating centers closed 1 4 47 52
Billing locations closed 0 4 5 9
Operating centers consolidated, scaled
back or had marginal products and
services eliminated 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 $6.4 million were
charged against the related restructuring accruals during the fourth
quarter of 1997 and first six months of 1998, respectively. In addition,
$9.3 million in the fourth quarter of 1997 and $9.9 million in the first
six months of 1998 were charged against other reserves established in
connection with the Company's restructuring which included the write
down of accounts receivable, inventory, and rental equipment to their
estimated realizable values. The remaining restructuring accruals at
June 30, 1998 primarily represent estimated employee severance and
related exit costs ($0.9 million), estimated facility exit costs ($3.2
million), termination of management contracts ($3.0 million) and other
exit costs ($0.1 million).
For the six months ended June 30, 1998, the Company estimates the
Medicare oxygen reimbursement reductions decreased net revenue and
pre-tax income by approximately $12.3 million.
3. ACQUISITIONS
During 1998 and effective through June 30, 1998, the Company acquired 3
home health care businesses with combined annualized revenue of
approximately $19 million for total consideration of approximately $18.4
million, including cash, satisfaction of certain liabilities, and notes
payable issued to sellers.
Since January 1, 1997 and effective through June 30, 1998, American
HomePatient has acquired 31 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).
8
<PAGE> 9
4. BANK CREDIT FACILITY
On December 19, 1997, the Company entered into a Fourth Amended and
Restated Credit Agreement ("Bank Credit Facility") to increase
commitments thereunder to $400.0 million. This Bank Credit Facility
includes a $75.0 million five-year term loan and a $325.0 million
five-year revolving line of credit. The various financial and operating
covenants are substantially similar to those under the first amended and
restated Bank Credit Facility. Borrowings under the Bank Credit Facility
may be used for acquisitions and other general corporate purposes,
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 shareholders'
equity, leverage ratios, debt to equity ratios and interest coverage
ratios.
5. 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 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 June 30, Six Months ended June 30,
--------------------------- ---------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 4,902,000 $ 3,929,000 $ 9,540,000 $ 6,918,000
=========== =========== =========== ===========
Weighted average common shares
outstanding 14,805,000 14,974,000 14,771,000 14,965,000
Effect of dilutive options and warrants 160,000 85,000 252,000 158,000
----------- ----------- ----------- -----------
Adjusted diluted common shares
outstanding 14,965,000 15,059,000 15,023,000 15,123,000
=========== =========== =========== ===========
Net income per common share
- Basic $ 0.33 $ 0.26 0.65 $ 0.46
=========== =========== =========== ===========
- Diluted $ 0.33 $ 0.26 $ 0.64 $ 0.46
=========== =========== =========== ===========
</TABLE>
9
<PAGE> 10
6. BASIS OF FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of the Company
for the three and six months ended June 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 June 30, 1998 and
the results of operations and the cash flows for the three and six
months ended June 30, 1998 and 1997.
The results of operations for the three and six months ended June 30,
1998 and 1997 are not necessarily indicative of the operating results
for the entire respective years. These 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.
7. 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. 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.
8. 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. The Company
has retained experienced health care counsel to represent it in this
matter and intends to cooperate in the investigation. Although the
Company's counsel has conducted initial meetings with governmental
officials and governmental officials have interviewed certain Company
officers and employees, this matter is still in its preliminary stages.
Although this has not been confirmed, management believes that the
investigation was initiated as a result of a qui tam complaint filed by
a former employee of the Company under the False Claims Act. In
addition, the Company from time to time receives notices and subpoenas
from various governmental
10
<PAGE> 11
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 these 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 BUSINESS STRATEGY, ACQUISITION STRATEGY,
OPERATIONS, COST SAVINGS INITIATIVES, INDUSTRY, ECONOMIC PERFORMANCE,
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES, EXISTING
GOVERNMENT REGULATIONS AND CHANGES IN, OR THE FAILURE TO COMPLY WITH,
GOVERNMENTAL REGULATIONS, 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,
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>
Six Months Ended June 30,
-------------------------
1997 1998
---- ----
<S> <C> <C>
Home respiratory therapy services 47% 47%
Home infusion therapy services 18 21
Home medical equipment and medical supplies 35 32
--- ---
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 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
12
<PAGE> 13
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 for 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 332 home health care centers in 37 states
as of June 30, 1998. The Company acquired 28 home health care companies
during 1997 and 3 companies during the six months ended June 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
expects to acquire fewer companies in 1998 than in recent years.
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. The Company
has retained experienced health care counsel to represent it in this
matter and intends to cooperate in the investigation. Although the
Company's counsel has conducted initial meetings with governmental
officials and governmental officials have interviewed certain Company
officers and employees, this matter is still in its preliminary stages.
Although this has not been confirmed, management believes that the
investigation was initiated as a result of a qui tam complaint filed by
a former employee of the Company under the False Claims Act. In
addition, 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 these
investigations.
13
<PAGE> 14
MEDICARE REIMBURSEMENT FOR OXYGEN THERAPY SERVICES
The Balanced Budget Act of 1997 reduced Medicare oxygen reimbursement
rates by 25 percent and drugs and biologicals by five percent beginning
January 1, 1998, and will reduce Medicare oxygen reimbursement rates by
another five percent 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 affected by this legislation.
Medicare oxygen reimbursements accounted for approximately 23.5 percent
of the Company's revenues.
For the quarter ended June 30, 1998, the Company estimates the Medicare
oxygen reimbursement reductions decreased net revenue and pre-tax income
by approximately $6.2 million.
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 percent 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.
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<PAGE> 15
RESULTS OF OPERATIONS
The following table and discussion set forth, for the periods indicated,
the percentage of net revenues represented by the respective financial
items:
PERCENTAGE OF NET REVENUES
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 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 23.6 23.7 23.1 23.8
Operating expenses 50.9 52.1 51.4 52.5
General and administrative 4.0 3.4 4.3 3.4
Depreciation and amortization 8.7 9.1 8.6 9.4
Interest 4.2 5.4 3.8 5.3
------ ------ ------ ------
Total costs and expenses 91.4% 93.7% 91.2% 94.4%
------ ------ ------ ------
Income from operations before income taxes 8.6% 6.3% 8.8% 5.6%
====== ====== ====== ======
</TABLE>
Historically, the Company reported same-store growth. Due to the
restructuring activity that occurred during the fourth quarter of 1997,
the Company determined that 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.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30,
1997
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 materially impacted by the
operations of these acquired businesses. Also, the comparison of the
results of operations between 1998 and 1997 is materially impacted by
the Medicare oxygen reimbursement reductions.
NET REVENUES. Net revenues increased from $94.8 million for the quarter
ended June 30, 1997 to $103.6 million for the same period in 1998, an
increase of $8.8 million, or 9%. For the quarter ended June 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 increased from
$94.8 million to $109.8 million for the quarters ended June 30, 1997 and
1998, respectively, an increase of $15.0 million, or 16%. The Company
estimates that $8.2 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 Medicare oxygen reimbursement reductions,
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<PAGE> 16
was 8% for the quarter ended June 30, 1998. Following is a discussion of
the components of net revenues:
Sales and Related Services Revenues. Sales and related services
revenues increased from $43.6 million for the quarter ended June
30, 1997 to $50.3 million for the same period in 1998, an increase
of $6.7 million, or 15%. This increase is primarily attributable to
the acquisition of home health care businesses and internal revenue
growth.
Rentals and Other Revenue. Rentals and other revenues increased
from $49.4 million for the quarter ended June 30, 1997 to $51.8
million for the same period in 1998, an increase of $2.4 million,
or 5%. 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 $1.7 million for the quarter ended June 30,
1997 to $1.5 million for the same period in 1998, a decrease of
$200,000, or 12%, which was largely due to the impact of the
Medicare oxygen reimbursement reductions. Internal revenue growth
of joint ventures, excluding the Medicare oxygen reimbursement
reductions, was 7% for the quarter ended June 30, 1998 compared to
the same period in 1997.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services
increased from $22.4 million for the quarter ended June 30, 1997 to
$24.5 million for the same period in 1998, an increase of $2.1 million,
or 9%. As a percentage of sales and related services revenues, cost of
sales and related services decreased from 51% to 49%. This decrease is
attributable to the changes in the mix of sales and related service
revenues resulting from the Company's focus on eliminating or scaling
back marginal products and favorable results of physical inventories at
several operating centers. During the three months ended June 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. Management believes
the remaining balance in these special inventory reserves is adequate.
To the extent the balance in these reserves is not adequate, future
operating results could be negatively affected.
OPERATING EXPENSES. Operating expenses increased from $48.2 million for
the quarter ended June 30, 1997 to $54.0 million for the same period in
1998, an increase of $5.8 million, or 12%. This increase was primarily
attributable to increased costs associated with the Company's increased
revenues. As a percentage of net revenues, operating expenses increased
from 51% to 52%. Excluding the estimated $6.2 million impact of the
Medicare oxygen reimbursement reductions, operating expenses as a
percentage of net revenues decreased from 51% to 49%. This decrease is
primarily attributable to an overall reduction in operating expense
levels due to cost saving initiatives which include, among other things,
tighter controls over salaries and wages and changes in vacation
policies and other employee benefits. During the three months ended June
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. Management believes the remaining balance in these
special accounts receivable reserves is adequate. To the extent the
balance in these reserves is not adequate, future operating results
could be negatively affected.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased from $3.8 million for the quarter ended June 30, 1997 to $3.5
million for the same period in 1998, a decrease of $300,000 or 8%. As a
percentage of net revenues, general and administrative expenses have
decreased from 4.0% to 3.4%. Excluding the estimated $6.2 million impact
of the Medicare oxygen reimbursement reductions, general and
administrative expenses as a percentage of net revenue decreased from
4.0% to 3.2%. This decrease is primarily attributable to lower personnel
expenses resulting from the Company's restructuring activities and other
cost savings initiatives.
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<PAGE> 17
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased from $8.3 million for the quarter ended June 30, 1997 to $9.4
million for the same period in 1998, an increase of $1.1 million, or
13%. This increase is primarily attributable to depreciation expense and
the amortization of goodwill recorded in connection with acquisitions.
INTEREST. Interest expense increased from $4.0 million for the quarter
ended June 30, 1997 to $5.6 million for the same period in 1998, an
increase of $1.6 million, or 40%. The increase was attributable to
additional interest expense on increased borrowings under the Bank
Credit Facility to fund acquisitions of home healthcare businesses.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30,
1997
NET REVENUES. Net revenues increased from $179.4 million for the six
months ended June 30, 1997 to $206.4 million for the same period in
1998, an increase of $27.0 million, or 15%. For the six months ended
June 30, 1998, the Company estimates the Medicare oxygen reimbursement
reductions decreased net revenue by approximately $12.3 million.
Excluding the Medicare oxygen reimbursement reductions, net revenues
increased from $179.4 million to $218.7 million for the six months ended
June 30, 1997 and 1998, respectively, an increase of $39.3 million, or
22%. The Company estimates that $25.8 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 Medicare oxygen reimbursement
reductions, was 9% for the six months ended June 30, 1998. Following is
a discussion of the components of net revenues:
Sales and Related Services Revenues. Sales and related services
revenues increased from $82.7 million for the six months ended June
30, 1997 to $98.5 million for the same period in 1998, an increase
of $15.8 million, or 19%. This increase is primarily attributable
to the acquisition of home health care businesses and internal
revenue growth.
Rentals and Other Revenue. Rentals and other revenues increased
from $93.2 million for the six months ended June 30, 1997 to $105.0
million for the same period in 1998, an increase of $11.8 million,
or 13%. 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 $3.5 million for the six months ended June
30, 1997 to $2.9 million for the same period in 1998, a decrease of
$600,000, or 17%, which was largely due to the impact of the
Medicare oxygen reimbursement reductions. Internal revenue growth
of joint ventures, excluding the Medicare oxygen reimbursement
reductions, was 14% for the six months ended June 30, 1998 compared
to the same period in 1997, increasing the Company's total internal
revenue growth by 1%.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services
increased from $41.4 million for the six months ended June 30, 1997 to
$49.1 million for the same period in 1998, an increase of $7.7 million,
or 19%. As a percentage of sales and related services revenues, cost of
sales and related services remained constant at 50% for both periods.
During the six months ended June 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. Management believes the remaining balance in these
special inventory reserves is adequate. To the extent the balance in
these reserves is not adequate, future operating results could be
negatively affected.
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<PAGE> 18
OPERATING EXPENSES. Operating expenses increased from $92.2 million for
the six months ended June 30, 1997 to $108.3 million for the same period
in 1998, an increase of $16.1 million, or 17%. This increase was
primarily attributable to increased costs associated with the Company's
increased revenues. As a percentage of net revenues, operating expenses
increased from 51% to 52%. Excluding the estimated $12.3 million impact
of the Medicare oxygen reimbursement reductions, operating expenses as a
percentage of net revenues decreased from 51% to 50%. This decrease is
primarily attributable to an overall reduction in operating expense
levels due to cost saving initiatives which included, among other
things, tighter controls over salaries and wages and changes in vacation
policies and other employee benefits. During the six months ended June
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. Management believes the remaining balance in these
special accounts receivable reserves is adequate. To the extent the
balance in these reserves is not adequate, future operating results
could be negatively affected.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased from $7.6 million for the six months ended June 30, 1997 to
$7.1 million for the same period in 1998, a decrease of $500,000, or 7%.
As a percentage of net revenues, general and administrative expenses
have decreased from 4.3% to 3.4%. Excluding the estimated $12.3 million
impact of the Medicare oxygen reimbursement reductions, general and
administrative expenses as a percentage of net revenue decreased from
4.3% to 3.2%. This decrease is primarily attributable to lower personnel
expenses resulting from the Company's restructuring activities and other
cost savings initiatives.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased from $15.5 million for the six months ended June 30, 1997 to
$19.4 million for the same period in 1998, an increase of $3.9 million,
or 25%. This increase is primarily attributable to depreciation expense
and the amortization of goodwill recorded in connection with
acquisitions.
INTEREST. Interest expense increased from $6.9 million for the six
months ended June 30, 1997 to $11.0 million for the same period in 1998,
an increase of $4.1 million, or 59%. The increase was attributable to
additional interest expense on increased borrowings under the Bank
Credit Facility to fund acquisitions of home healthcare businesses.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's working capital was $114.2 million and
the current ratio was 3.1x 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 $8.6 million at June 30, 1998.
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 third party payors with additional information
subsequent to billing and the time required by such payors to process
claims. Certain accounts receivable frequently are outstanding for more
than 90 days, particularly where the account receivable relates to
services for a patient (i) receiving a new medical therapy or (ii)
covered by Medicare or Medicaid. Net patient accounts receivable were
$102.4 million and $106.2
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<PAGE> 19
million at December 31, 1997 and June 30, 1998, respectively. This
increase was primarily attributable to the acquisition of home health
care businesses in the first six months of 1998 and internal revenue
growth. These receivables represented an average of approximately 88 and
96 days' sales in accounts receivable at December 31, 1997 and June 30,
1998, respectively.
Net cash provided from operating activities was $5.1 million and $23.5
million for the six months ended June 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 $72.4 million and $65.5 million for the six months ended
June 30, 1997 and 1998, respectively. Acquisition expenditures decreased
from $56.1 million for the six months ended June 30, 1997 to $45.6
million for the same period in 1998, a decrease of $10.5 million.
Capital expenditures increased from $16.0 million for the six months
ended June 30, 1997 to $16.2 million for the same period in 1998, an
increase of $200,000. Net cash provided from financing activities was
$67.7 million and $43.5 million for the six months ended June 30, 1997
and 1998, respectively. The cash provided from financing activities for
the six months ended June 30, 1997 and 1998 primarily related to
proceeds from the Bank Credit Facility.
The Company's principal capital requirements are for acquisitions of
additional home health care companies and expansion of the services
provided through its existing home health care centers. 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
December 19, 1997 the Company amended and restated the Bank Credit
Facility to increase commitments thereunder to $400.0 million. The Bank
Credit Facility includes a $75.0 million five-year term loan and a
$325.0 million five-year revolving line of credit. Borrowings under the
Bank Credit Facility may be used to finance acquisitions and for other
general corporate purposes, 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. 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 0% to 0.625% and from 0.375%
to 1.375%, 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 June 30, 1998 the weighted average borrowing
rate was 7.01%. A commitment fee of up to .375% per annum (.375% as of
June 30, 1998) is payable by the Company on the undrawn balance. The
interest rate and commitment fee vary 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 stockholders' equity,
leverage ratios, debt to equity ratios and interest coverage ratios. 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
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<PAGE> 20
sales of Company assets. The Company must generally obtain bank consent
for any single acquisition with an aggregate purchase price of $30.0
million or more, and any acquisition which, when combined with all
acquisitions completed in the prior 12 months, exceeds $100.0 million
and certain other transactions. The Company was in compliance with these
covenants at June 30, 1998.
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 has developed corrective plans for a majority of its remaining
software, including its operational software which addresses order
entry, billing, reimbursement and many other functions. Implementation
of some of the corrective plans has begun. The timetable for completion
of all plans is planned for June 30, 1999. If additional corrective
actions are needed, those actions and their completion schedule are
unknown at this time. 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. It is also 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.
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
"Medicare Oxygen Reimbursement Reductions and Related Restructuring" and
"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 June 30, 1998, the percentage of the Company's net revenues
derived from Medicare, Medicaid and private pay was 43%, 9% and 48%,
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.
Role of Managed Care. As managed care assumes an increasingly
significant role in markets in which the Company operates, the Company's
success will, in part, depend on
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<PAGE> 21
retaining and obtaining profitable managed care contracts. There can be
no assurance that the Company will retain or continue to obtain such
managed care contracts. 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 will experience declining profit margins.
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 Successful Integration of Acquisitions or
Continued Growth. The Company intends to expand its business through
internal growth, formation of additional hospital joint ventures and
selective acquisitions of home health care companies. Although the
Company intends to expand its business through hospital joint ventures,
there can be no assurance that the Company will be able to maintain such
relationships. In addition, there can be no assurance that the Company
can increase or maintain growth in net revenues, enter into additional
hospital joint ventures or increase net revenues at existing hospital
joint ventures. There can also be no assurance that suitable
acquisitions will be identified, that consent from the Company's
lenders, where required, will be obtained or that acquisitions will be
consummated on acceptable terms. In addition, there can be no assurance
that these companies, once acquired, will be integrated successfully
into the Company's operations or that any 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
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<PAGE> 22
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."
Management of Growth. As the Company's business develops and
expands, 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 significantly 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. As the
industry consolidates, the Company also faces competition for
acquisitions from current and new market participants that could
increase acquisition prices or inhibit the Company's acquisition
strategy.
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.
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
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<PAGE> 23
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.
Influence of Executive Officers, Directors and Principal
Stockholder. On August 10, 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.
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PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
The 1998 annual meeting of shareholders was held on May 28, 1998. At the
meeting, the reelection of each individual nominated as a Class 1
director of the Company's Board of Directors was approved. The directors
so elected are Henry T. Blackstock, Thomas A. Dattilo and Mark Manner.
No director-nominee received less than 13,000,000 votes which
constituted more than the required number of votes to elect each
director. Continuing directors are as follows: Class 2 directors whose
terms expire in 1999 are Morris A. Perlis and Joseph F. Furlong, III;
and Class 3 directors whose terms expire in 2000 are Allan C. Silber,
Edward Sonshine and Edward K. Wissing. No other matters were voted upon
at the annual meeting.
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.
(B) Reports on Form 8-K. A report on Form 8-K/A was filed on April 15,
1998 with respect to the acquisition of National Medical Systems,
Inc. and contained financial statements related to such
transaction. The report related to a report on Form 8-K filed on
February 17, 1998.
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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.
August 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
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INDEX TO EXHIBITS
<TABLE>
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
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10.1 Separation Agreement dated July 6, 1998 between American
HomePatient, Inc. and Edward K. Wissing.
27 Financial Data Schedule (for SEC use only)
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<PAGE> 1
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT(the "Agreement"), dated as of July 6, 1998,
is by and between Edward K. Wissing ("Wissing") and American HomePatient, Inc.,
a Delaware corporation (the "Company").
RECITALS
A. Wissing entered into an Employment Agreement, dated as of October 1,
1991 (the "Employment Agreement"), with Diversicare, Inc., a Delaware
Corporation ("Diversicare"). The Company is the successor to Diversicare.
B. The Employment Agreement is subject to amendments dated as of June
10, 1994 ("Amendment No. 1 to Employment Agreement"), December 1, 1995
("Amendment No. 2 to Employment Agreement"), and December 23, 1997 ("Amendment
No. 3 to Employment Agreement") (collectively, the "Amendments"). Defined terms
used herein but not defined herein shall have the meanings set for in the
Employment Agreement and the Amendments.
C. The term of the Employment Agreement currently extends until October
1, 2000.
D. Wissing and the Company desire to document their agreement regarding
Wissing's separation from employment with the Company.
E. The Company has entered into Nonqualified Stock Option Agreements
(the "Option Agreements"), pursuant to which Wissing received options to
purchase an aggregate of 396,500 shares of the Company's common stock, which
options shall be deemed to be fully vested pursuant to the Employment Agreement
and this Agreement and shall not lapse or terminate as a result of this
Agreement or the transactions contemplated hereby.
F. The parties acknowledge the costs, hazards, and risks of leaving any
uncertainty as to their relationships and, in part, desire to provide for an
orderly termination of the employment relationship between the Company and
Wissing and to settle in the manner set forth in this Agreement any claims or
controversies which might arise between Wissing and the Company with respect to
Wissing's employment with the Company, Wissing's separation from employment with
the Company, and any claims pursuant to the Employment Agreement or the Option
Agreements.
<PAGE> 2
NOW, THEREFORE, FOR GOOD AND ADEQUATE CONSIDERATION, THE RECEIPT AND
ADEQUACY OF WHICH IS HEREBY EXPRESSLY ACKNOWLEDGED, THE PARTIES AGREE AS
FOLLOWS:
1. RESIGNATION. Wissing hereby resigns effective July 6,1998 from his
positions as President and Chief Executive Officer of the Company and from all
positions that he holds as a director, officer or employee of any subsidiaries
or affiliates of the Company. Wissing's Period of Employment by the Company
shall cease as of September 30, 1998 (the "Effective Date"). Wissing shall
remain in his capacity as a director of the Company.
2. COMPENSATION DUE. In full satisfaction of the Company's obligations
to Wissing under the Employment Agreement, as amended by Section 1 of Amendment
No. 3 to Employment Agreement, and in consideration of the noncompetition
provisions contained herein, the Company hereby agrees to pay to Wissing his
regular salary through the Effective Date plus the total sum of $1,087,917,
comprised of the following components: (i) $975,000 (representing 300% of the
base salary of Wissing currently in effect); (ii) $16,667 (representing deferred
compensation through August, 1998 due to Wissing); (iii) $65,000 (representing
8/12 of Wissing's incentive compensation received in fiscal year 1997) and (iv)
$31,250 (representing accrued vacation pay). The compensation due Wissing shall
be paid as follows: $837,917 shall be paid on or before July 6,1998, and
$250,000 shall be paid on or before July 6,1999, subject to required withholding
amounts.
3. OPTIONS. Notwithstanding any terms in the Option Agreements or in
the Plan to the contrary, all options issued to Wissing under the Option
Agreements shall be fully vested as of the Effective Date and shall remain
exercisable for the term set forth in each grant, which term shall not be
shortened as a result of Wissing's termination of employment.
4. BENEFITS. The Company shall continue in force or pay in lump sum the
benefits and perquisites currently received by Wissing for a period of
thirty-six (36) months from the Effective Date. The benefits and perquisites to
which Wissing shall be entitled include, but are not limited to, the following:
(i) health insurance, (ii) supplementary health plan payments, (iii) auto and
related expenses, and (iv) participation in the Company SERP. Wissing shall not
be entitled to continued participation in the ESPP or 401(k).
5. INDEMNIFICATION. The Company and Wissing acknowledge that the
Indemnification Agreement dated July 29,1994 shall remain in effect according to
its terms.
6. CONTINUING OBLIGATIONS OF WISSlNG. Wissing hereby acknowledges and
agrees as follows:
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<PAGE> 3
A. Wissing will, upon reasonable notice, furnish information
as may be in his possession and cooperate with the Company as may reasonably be
requested in connection with any claims, issues or legal actions in which the
Company is or may become a party that relate in any way to events occurring
during the Period of Employment.
B. Wissing recognizes and acknowledges that all information
pertaining to the affairs, business, clients, customers or other relationships
of the Company, as hereinafter defined, is confidential and is a unique and
valuable asset of the Company. Wissing will not give to any person, firm,
association, corporation or governmental agency any confidential information
concerning the affairs, business, clients, customers or other relationships of
the Company except as required by law. Wissing will not make use of any
confidential information for his own purposes or for the benefit of any person
or organization other than the Company. Wissing will also use his best efforts
to prevent the disclosure of this information by others. All records, memoranda,
etc. relating to the business of the Company whether made by Wissing or
otherwise coming into his possession are confidential and will remain the
property of the Company.
C. For a twenty-four (24) month period after the Effective
Date,
(i) Wissing will not, directly or indirectly, engage
or invest in, own, manage, operate, finance, control, or participate in
the ownership, management, operation, financing, or control of, be
employed by, associated with, or in any manner connected with, lend his
name or any similar name to, lend his credit to, or render services or
advice to, any business whose products or activities compete in whole
or in part with the products or activities of the Company; provided,
however, that Wissing may purchase or otherwise acquire up to (but not
more than) five percent of any class of securities of any enterprise
(but without otherwise participating in the activities of such
enterprise) if such securities are listed on any national or regional
securities exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934. Wissing agrees that this covenant is
reasonable with respect to its duration and scope and that no
geographical limitations are appropriate because the Company does
business in many areas of the United States;
(ii) Wissing will not, directly or indirectly, either
for himself or any other Person, (A) induce or attempt to induce any
employee of the Company to leave the employ of the Company, (B) in any
way interfere with the relationship between the Company and any
employee of the Company, (C) employ, or otherwise engage as an
employee, independent contractor, or otherwise, any employee of the
Company, or (D) induce or attempt to induce any customer, supplier,
licensee, or business relation of the Company to cease doing business
with the Company, or
3
<PAGE> 4
in any way interfere with the relationship between any customer,
supplier, licensee, or business relation of the Company;
(iii) Wissing will not, directly or indirectly,
either for himself or any other Person, solicit the business of any
Person known to him to be a customer of the Company as of the Effective
Date, whether or not he had personal contact with such Person, with
respect to products or activities which compete in whole or in part
with the products or activities of the Company; and
(iv) Wissing will not make any statements or perform
any acts intended to advance the interest of any existing or
prospective competitors of the Company, and, except for truthful
statements required to be made by law, Wissing will not disparage in
any way the Company, or any of its shareholders, directors, officers,
employees, or agents. Likewise, except for truthful statements required
to be made by law, neither the Company, nor its affiliates, directors,
officers, employees or agents will disparage Wissing in any way.
D. Wissing acknowledges that his breach or threatened or
attempted breach of any provision of this section of the Separation Agreement
would cause irreparable harm to the Company not compensable in monetary damages
and that the Company shall be entitled, in addition to all other applicable
remedies, to a temporary and permanent injunction and a decree for specific
performance of the terms of this section without being required to prove damages
or furnish any bond or other security.
E. Wissing shall not be bound by the provisions of this
section in the event of the default by the Company in its obligations under this
Agreement.
7. WAIVERS AND AMENDMENTS. This Agreement may be amended, superseded,
canceled, renewed, or modified, and the terms hereof may be waived, only by a
written instrument signed by the parties, or in the case of a waiver, by the
party waiving compliance. No delay on the part of any party in exercising the
right, power or privilege hereunder shall authorize a waiver thereof. The rights
and remedies of the parties to this Agreement are cumulative and not
alternative. Neither the failure nor any delay by any party in exercising any
right, power, or privilege under this Agreement will operate as a waiver of such
right, power, or privilege, and no single or partial exercise of any such right,
power, or privilege will preclude any other or further exercise of such right,
power, or privilege or the exercise of any other right, power, or privilege.
8. SEVERABILITY. In the event that any provision of this Agreement
shall be held invalid or illegal for any reason, any illegality or invalidity
shall not affect the remaining parts of this Agreement, but this Agreement shall
be construed and enforced as if the illegal or invalid provision had never been
inserted.
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9. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Tennessee.
10. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement
among the parties with respect to the transactions contemplated in this
Agreement and there are no understandings or agreements relating to this
Agreement that are not fully expressed in this Agreement.
11. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the parties and the respective successors and
permitted assigns and legal representatives. The Company may assign this
Agreement as a part of any transaction involving a sale, merger or
reorganization of the Company. Neither the Company nor Wissing shall have any
other right to assign this Agreement without the prior written consent of the
other party.
12. ATTORNEYS' FEES. In the event of any litigation arising out of this
Agreement, the prevailing party in such arbitration or litigation shall be
entitled to recover reasonable costs and expenses incurred in connection with
such arbitration or litigation, including, but not limited to, attorneys' fees.
13. COUNTERPARTS. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument.
14. HEADINGS. The headings in this Agreement are for reference only,
and shall not effect the interpretation of this Agreement.
In witness whereof, the parties have signed this Agreement as of July
6, 1998.
/s/ EDWARD K. WISSING
---------------------------------------
Edward K. Wissing
AMERICAN HOMEPATIENT, INC.
By: /s/ ALLAN SILBER
-----------------------------------
Name: Allan Silber
---------------------------------
Its:
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<PAGE> 6
Confidential
Ed Wissing -- Summary of Separation Agreement
Updated 7/23/98
I. Normal Payroll through 8/31/98
- Base at $300,000
- Stopped PAC, UW and ESPP 7/1/98
- Normal Medical Insurance Continues $53.27/mo
- Car allowance $700/mo continues
a) ESPP will cease and 1998 monies returned to EKW at time of departure
estimated $9,000
b) Supplemental Health for calendar 1998. Paid 7/1/98
c) SERP EKW contributed 6% of $325,000 ($19,500) and company matched in Q1
1998. Full year contribution and match already made.
II. Separation Terms -- Paid via payroll with appropriate tax deduction and
withholding.
a) 3 years @ $325,000/year $ 975,000
b) 8/12 of 1997 bonus of $97,500 $ 65,000
c) 8/12 of $25,000 (difference between
98 base and 98 contractual) $ 16,667
d) Accrued vacation -- 200 hours $ 31,250
e) Executive Medical (cash in lieu of continuing benefit in force -- 1998
calendar year payment made 7/1/98) 4/12 of 1998 already paid.
$3,000 for 1999
$3,000 for 2000 $ 8,000
8/12 of $3,000 = $2,000 for 2001
f) 36 months auto allowance @ $700/mo $ 25,200
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$1,121,117
III. SERP -- Separate payment EKW to SERP
AHOM to SERP
a) 1998 EKW contribution and company 6% match already done
b) 3 year 6% match on $325,000
EKW contributes at least $52,000 of $1,121,117 to preserve plan and
tax status.
Company to match:
9/1--12/31/98 already matched
1999 6% of $325,000 $19,500
2000 6% of $325,000 $19,500
8/12 of 2001 6% of $325,000 $13,000
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$52,000
<PAGE> 7
IV. Other Benefits and perks -- Cash in Lump Sum
Automobile Expenses check to be sent from Accounts Payable $ 3,000
V. Other -- Deduction
a) $53.27/month medical insurance x 36 months (to 8/31/98) = $1,917.72
EKW to pay in one lump sum
(Any increase in insurance to be paid for by Company)
b) Payroll advance from 1992 to be deducted $2,558.00
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$4,475.72
VI. Payment Plan
a) Section II $1,121,117.00*
Less VI $ 4,475.72
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$1,116,641.30*
*$250,000 of the amount before withholding will be a deferred payment
until 7/7/99
b) $52,000 AHOM pays to SERP as contribution
c) $ 3,000 to EKW from Accounts Payable System
VII. Ed will continue as a Non-employee board member after 8/31/98 and will
receive Non-Employee Directors compensation.
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICAN HOMEPATIENT, INC. FOR THE SIX MONTHS ENDED JUNE
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13,588,000
<SECURITIES> 0
<RECEIVABLES> 153,443,000
<ALLOWANCES> 36,938,000
<INVENTORY> 23,454,000
<CURRENT-ASSETS> 168,269,000
<PP&E> 157,478,000
<DEPRECIATION> 77,692,000
<TOTAL-ASSETS> 573,859,000
<CURRENT-LIABILITIES> 54,307,000
<BONDS> 312,295,000
0
0
<COMMON> 150,000
<OTHER-SE> 202,104,000
<TOTAL-LIABILITY-AND-EQUITY> 573,859,000
<SALES> 98,455,000
<TOTAL-REVENUES> 206,393,000
<CGS> 49,070,000
<TOTAL-COSTS> 49,070,000
<OTHER-EXPENSES> 134,829,000
<LOSS-PROVISION> 7,072,000
<INTEREST-EXPENSE> 10,964,000
<INCOME-PRETAX> 11,530,000
<INCOME-TAX> 4,612,000
<INCOME-CONTINUING> 6,918,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,918,000
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
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