<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: June 30, 1999
-------------
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)
<TABLE>
<S> <C> <C>
Delaware 0-19532 62-1474680
- ------------------------------- ------------ --------------------------------
(State or other jurisdiction of (Commission (IRS Employer Identification No.)
incorporation or organization) File Number)
</TABLE>
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 [ ]
15,159,720
---------------------------------------------------------------------------
(Outstanding shares of the issuer's common stock as of August 6, 1999)
Total number of sequentially
numbered pages is 33
1
<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,
1998 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,276,000 $ 22,681,000
Restricted cash 51,000 51,000
Accounts receivable, less allowance for doubtful accounts
of $41,147,000 and $42,071,000, respectively 99,574,000 94,764,000
Inventories 20,776,000 15,558,000
Prepaid expenses and other assets 3,135,000 2,249,000
Income tax receivable 13,090,000 13,038,000
Deferred tax asset 7,174,000 7,174,000
------------- -------------
Total current assets 148,076,000 155,515,000
------------- -------------
PROPERTY AND EQUIPMENT, at cost 165,642,000 172,898,000
Less accumulated depreciation and amortization (87,864,000) (103,335,000)
------------- -------------
Net property and equipment 77,778,000 69,563,000
------------- -------------
OTHER ASSETS
Excess of cost over fair value of net assets acquired, net 249,173,000 245,629,000
Investment in unconsolidated joint ventures 23,325,000 20,330,000
Deferred financing costs, net 4,119,000 4,475,000
Deferred tax asset 6,048,000 6,048,000
Other assets, net 23,373,000 19,536,000
------------- -------------
Total other assets 306,038,000 296,018,000
------------- -------------
$ 531,892,000 $ 521,096,000
============= =============
</TABLE>
(Continued)
2
<PAGE> 3
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, June 30,
1998 1999
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and capital leases $ 7,024,000 $ 9,456,000
Trade accounts payable 10,629,000 14,844,000
Other payables 1,446,000 1,373,000
Accrued expenses:
Payroll and related benefits 9,074,000 9,144,000
Interest 3,327,000 655,000
Insurance 3,776,000 3,898,000
Restructuring accruals 3,413,000 3,099,000
Other 10,272,000 8,274,000
------------- -------------
Total current liabilities 48,961,000 50,743,000
------------- -------------
NONCURRENT LIABILITIES
Long-term debt and capital leases, less current portion 316,918,000 317,146,000
Other noncurrent liabilities 9,514,000 6,823,000
------------- -------------
Total noncurrent liabilities 326,432,000 323,969,000
------------- -------------
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, 14,986,000 and
15,150,000 shares, respectively 150,000 151,000
Paid-in capital 172,520,000 172,857,000
Accumulated deficit (16,171,000) (26,624,000)
------------- -------------
Total stockholders' equity 156,499,000 146,384,000
------------- -------------
$ 531,892,000 $ 521,096,000
============= =============
</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
------------------------------- --------------------------------
1998 1999 1998 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUES
Sales and related service revenues $ 50,286,000 $ 42,719,000 $ 98,455,000 $ 85,579,000
Rentals and other revenues 51,790,000 46,820,000 104,990,000 94,601,000
Earnings from joint ventures 1,524,000 884,000 2,948,000 1,481,000
------------ ------------ ------------ -------------
Total revenues 103,600,000 90,423,000 206,393,000 181,661,000
------------ ------------ ------------ -------------
EXPENSES
Cost of sales and related services, excluding
depreciation and amortization 24,545,000 22,557,000 49,070,000 45,276,000
Operating 53,983,000 51,724,000 108,331,000 104,751,000
General and administrative 3,547,000 3,536,000 7,050,000 7,423,000
Depreciation and amortization 9,410,000 10,165,000 19,448,000 19,984,000
Interest 5,566,000 7,170,000 10,964,000 14,382,000
------------ ------------ ------------ -------------
Total expenses 97,051,000 95,152,000 194,863,000 191,816,000
------------ ------------ ------------ -------------
INCOME FROM OPERATIONS BEFORE INCOME
TAXES 6,549,000 (4,729,000) 11,530,000 (10,155,000)
PROVISION FOR INCOME TAXES 2,620,000 148,000 4,612,000 298,000
------------ ------------ ------------ -------------
NET INCOME (LOSS) $ 3,929,000 $ (4,877,000) $ 6,918,000 $ (10,453,000)
============ ============ ============ =============
NET INCOME (LOSS) PER COMMON SHARE
- Basic $ 0.26 $ (0.32) $ 0.46 $ (0.69)
============ ============ ============ =============
- Diluted $ 0.26 $ (0.32) $ 0.46 $ (0.69)
============ ============ ============ =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
- Basic 14,974,000 15,216,000 14,965,000 15,194,000
============ ============ ============ =============
- Diluted 15,059,000 15,216,000 15,123,000 15,194,000
============ ============ ============ =============
</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>
Six Months Ended June 30
-------------------------------------
1998 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,918,000 $ (10,453,000)
Adjustments to reconcile net income (loss) from operations
to net cash provided from (used in) operating activities:
Depreciation and amortization 19,448,000 19,984,000
Equity in (earnings) losses of unconsolidated joint
ventures (682,000) 508,000
Minority interest 184,000 125,000
Change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable, net (1,680,000) 4,390,000
Inventories 2,579,000 5,195,000
Prepaid expenses and other assets (1,119,000) 883,000
Income tax receivable 5,060,000 52,000
Trade accounts payable, accrued expenses
and other current liabilities 560,000 57,000
Restructuring accruals (6,355,000) (313,000)
Other non current liabilities 19,000 45,000
Other assets (1,439,000) 536,000
------------- -------------
Net cash provided from operating activities 23,493,000 21,009,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (45,649,000) (50,000)
Additions to property and equipment, net (16,178,000) (6,843,000)
Distributions from (advances to) unconsolidated joint
ventures, net (3,684,000) 2,797,000
Distributions to minority interest owners -- (49,000)
------------- -------------
Net cash used in investing activities (65,511,000) (4,145,000)
------------- -------------
</TABLE>
(Continued)
5
<PAGE> 6
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Continued)
<TABLE>
<CAPTION>
Six Months Ended June 30
-------------------------------------
1998 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and capital leases (3,278,000) (1,561,000)
Proceeds from issuance of debt 46,477,000 4,500,000
Proceeds from exercise of stock options 430,000 --
Deferred financing costs (123,000) (1,398,000)
------------- -------------
Net cash provided from financing activities 43,506,000 1,541,000
------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 1,488,000 18,405,000
CASH AND CASH EQUIVALENTS, beginning of period 12,050,000 4,276,000
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 13,538,000 $ 22,681,000
============= =============
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 8,802,000 $ 16,792,000
============= =============
Cash payments of income taxes $ 1,834,000 $ 357,000
============= =============
</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, 1999 AND 1998
1. ORGANIZATION AND BACKGROUND
American HomePatient, Inc. (the "Company") was incorporated in Delaware in
September 1991. The Company's principal executive offices are located at 5200
Maryland Way, Suite 400, Brentwood, Tennessee 37027-5018, and its telephone
number at that address is (615) 221-8884. The Company provides home health care
services and products consisting primarily of respiratory therapies, infusion
therapies, and the rental and sale of home medical equipment and home medical
supplies. For the six months ended June 30, 1999, such services represented
53%, 20% and 27%, respectively of net revenues. These services and products are
paid for primarily by Medicare, Medicaid and other third-party payors. As of
June 30, 1999, the Company provided these services to patients primarily in the
home through 310 centers in 38 states: 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. From its inception
through 1997 the Company experienced substantial growth primarily as a result
of its strategy of acquiring and operating home health care businesses.
Beginning in 1998, the Company's strategy shifted from acquiring new businesses
to focus more on internal growth, the integration of its acquired operations
and achieving operating efficiencies.
2. MEDICARE OXYGEN REIMBURSEMENT REDUCTIONS AND RELATED RESTRUCTURING
The Medicare reimbursement rate for oxygen related services was reduced by 25%
beginning January 1, 1998 as a result of the Balanced Budget Act of 1997 (the
"Medicare Oxygen Reimbursement Reduction") and an additional reduction of 5%
beginning January 1, 1999. The reimbursement rate for certain drugs and
biologicals covered under Medicare was also reduced by 5% beginning January 1,
1998. In addition, Consumer Price Index increases in Medicare reimbursement
rates for home medical equipment, including oxygen, 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. For the first six months of 1999,
Medicare oxygen reimbursements accounted for approximately 26 percent of the
Company's revenues. The Company estimates the Medicare oxygen reimbursement
reductions decreased net revenue and pre-tax income by approximately $12.3
million and $14.2 million for the six months ended June 30, 1998 and 1999,
respectively.
On September 25, 1997, the Company announced initiatives to aggressively
respond to the Medicare oxygen reimbursement reductions. More than 100 of the
Company's total operating and billing locations were affected by these
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 nine billing centers, the closure of 52 operating centers, the
consolidation of operating regions, the scaling back or elimination of marginal
products and services at numerous
7
<PAGE> 8
locations, and the related termination of 406 employees in the affected
locations. These activities were substantially completed as of June 30, 1998.
In the quarter ended September 30, 1998, the Company adjusted its original
estimates of restructuring costs resulting in the reversal of $1.6 million of
excess restructuring accruals related to items requiring a cash payment, and
$2.4 million of other valuation reserves established in connection with the
restructuring. The restructuring accruals at June 30, 1999 represent remaining
facility exit costs ($0.8 million) and termination costs of certain management
contracts ($2.3 million). As costs were incurred and payments were made, $6.4
million and $300,000 were charged against the restructuring accruals in the
first six months of 1998 and 1999, respectively.
3. ACQUISITIONS
Since January 1, 1998 and effective through December 31, 1998, the Company
acquired four home health care businesses. The Company did not acquire any home
health care businesses in the first six months of 1999 and does not expect to
acquire any home health care businesses during the remainder of 1999.
The terms of the 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).
4. BANK CREDIT FACILITY
On October 29, 1998, the Fourth Amended and Restated Credit Agreement (the
"Credit Agreement") between the Company and Bankers Trust Company, as agent for
a syndicate of banks (the "Banks"), was amended (the "First Amendment") to
modify certain financial covenants with which the Company was not in
compliance. The Company incurred increased interest expense of $1,656,803 in
1998 as a result of the increased interest rate established by the First
Amendment. As part of the First Amendment, the Company's credit availability
was reduced from $400 million to $360 million (credit availability was
temporarily reduced to $340 million until April 1, 1999). The Credit Agreement
contained various financial covenants and other restrictions regarding
specified activities. At December 31, 1998 the Company was in violation of
certain of these covenants. Noncompliance with these covenants gave the lenders
the right to accelerate the due date of outstanding amounts under the Facility.
In addition to the possibility of accelerated due dates, the Company was unable
to access availability under the Facility. On April 14, 1999 the Company
entered into a Second Amendment to the Fourth Amended and Restated Credit
Agreement (the "Second Amendment"). (The Second Amendment together with the
Credit Agreement and the First Amendment will be referred to as the "Bank
Credit Facility"). The Second Amendment waived then existing events of default,
modified financial covenants and made a number of other changes to the Credit
Agreement. The Company is required to employ a manager, acceptable to the
Banks, with expertise in managing companies that are in workout situations with
their lenders. The Company's credit availability has been reduced from $360
million (credit availability was temporarily reduced to $340 million pursuant
to the First Amendment) to $328.6 million, including a $75 million term loan
and a $253.6 million revolving line of credit. As of August 3, 1999,
approximately $246.4 million was outstanding under the revolving line of
credit. Substantially all of the Company's operating assets have been pledged
as security for borrowings under the Bank Credit Facility.
8
<PAGE> 9
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 an applicable margin.
The margin associated with the Adjusted Eurodollar Rate is fixed at 3.25%. The
margin associated with the Base Lending Rate is fixed at 2.50%. The applicable
margins increase on September 30, 2000 to 3.50% as to the Adjusted Eurodollar
Rate and to 2.75% as to the Base Lending Rate. In addition, from and after
September 30, 2000, additional interest of 4.50% will accrue on that portion of
the Bank Credit Facility that is in excess of four times Adjusted EBITDA.
The Company has agreed to issue on March 31, 2001 (provided loans, letters of
credit or commitments are still outstanding) warrants to the Banks representing
19.99% of the fully diluted common stock of the Company issued and outstanding
as of March 31, 2001. Fifty percent of these warrants would be exercisable at
any time after issuance and the remaining fifty percent would be exercisable
from and after September 30, 2001 (provided loans, letters of credit or
commitments have not been terminated subsequent to March 31, 2001 and prior to
September 30, 2001). The exercise price of the warrants will be $0.01 per
share.
In addition to the foregoing modifications, pursuant to the Second Amendment
(i) the maturity date of the Bank Credit Facility has been changed to April 15,
2002 from December 16, 2002, (ii) the Company is no longer permitted to make
investments in joint ventures or acquisitions without the consent of Banks
holding a majority of the lending commitments under the Bank Credit Facility,
and (iii) an additional covenant has been added regarding collections of
accounts receivable.
Management has prepared operating projections, cash flow projections and
related operating plans which indicate the Company can remain in compliance
with the new financial covenants and meet its expected obligations throughout
1999. However, as with all projections, there is uncertainty as to whether
management's projections can be achieved. In an event of default under the Bank
Credit Facility, the Banks will have the ability to demand payment of all
outstanding amounts, and there is currently no commitment as to how any such
demand payment would be satisfied.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors - Substantial Leverage."
9
<PAGE> 10
5. EARNINGS PER SHARE
Under the standards established by Statement of Financial Accounting Standards
No. 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. In computing diluted earnings per share, the outstanding
stock warrants and stock options are considered dilutive using the treasury
stock method. The following 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,
-----------------------------------------------------------------------
1998 1999 1998 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 3,929,000 $ (4,877,000) $ 6,918,000 $ (10,453,000)
============ ============ ============ =============
Weighted average common
shares outstanding 14,974,000 15,216,000 14,965,000 15,194,000
Effect of dilutive options and warrants 85,000 -- 158,000 --
------------ ------------ ------------ -------------
Adjusted diluted common shares
outstanding 15,059,000 15,216,000 15,123,000 15,194,000
============ ============ ============ =============
Net income (loss) per common share
- Basic $ 0.26 $ (0.32) $ 0.46 $ (0.69)
============ ============ ============ =============
- Diluted $ 0.26 $ (0.32) $ 0.46 $ (0.69)
============ ============ ============ =============
</TABLE>
6. BASIS OF FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of the Company for the
three months and six months ended June 30, 1999 and 1998 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, 1999 and the
results of operations and the cash flows for the three months and six months
ended June 30, 1999 and 1998.
The results of operations for the three months and six months ended June 30,
1999 and 1998 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, 1998.
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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 No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. The Company adopted the provisions of SFAS No. 130 in
1998, however, there was no material effect on the Company's financial position
or results of operations, as comprehensive income was equivalent to the
Company's net income (loss).
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 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 adopted the
provisions of SFAS 131 in 1998; however, the Company operates in one industry
segment and, accordingly, the adoption of SFAS 131 had no significant effect on
the Company.
8. GOVERNMENT REGULATION
In recent years, various state and federal regulatory agencies have stepped up
investigative and enforcement activities with respect to the health care
industry, and many health care providers, including durable medical equipment
suppliers, have received subpoenas and other requests for information in
connection with such activities. On February 12, 1998, a subpoena from the
Office of the Inspector General of the Department of Health and Human Services
("OIG") was served on the Company at its Pineville, Kentucky center in
connection with an investigation relating to possible improper claims for
payment from Medicare. Since that time the U.S. Department of Justice has begun
examining issues involving Certificates for Medical Necessity and loaning of
equipment by the Company nationwide. The Company has retained experienced health
care counsel to represent it in this matter and is cooperating with the
investigation. The Company's counsel has conducted meetings with governmental
officials, and governmental officials have interviewed certain company officers
and employees. The Company has responded to government requests for information
and documents, and is cooperating with the government investigators to move
forward with the investigation. The Company has been engaged in discussions with
the government concerning the investigation and settlement of these matters. To
date there has been no resolution of these issues. An unfavorable outcome of the
investigation would likely have a material adverse impact on the Company's
future operating results and financial condition. 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.
From time to time the Company also receives notices and subpoenas from various
government agencies concerning plans to audit the Company, or requesting
information regarding certain aspects of the Company's business. The Company
cooperates with the various agencies in responding to such 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.
Health care law is an area of extensive and dynamic regulatory oversight.
Changes in laws or regulations or new interpretations of existing laws or
regulations can have a dramatic effect on permissible activities, the relative
costs associated with doing business, and the amount and
11
<PAGE> 12
availability of reimbursement from government and other third-party payors.
There can be no assurance that federal, state or local governments will not
impose additional regulations upon the Company's activities. Such regulatory
changes could adversely affect the Company's business, making the Company
unable to comply with all regulations in the geographic areas in which it
presently conducts, or wishes to commence, business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors - Government Regulation."
12
<PAGE> 13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 INCLUDING,
WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES," "ANTICIPATES,"
"INTENDS," "EXPECTS," "ESTIMATES," "PROJECTS", "MAY," "WILL", "LIKELY" AND
WORDS OF SIMILAR IMPORT. SUCH STATEMENTS INCLUDE STATEMENTS CONCERNING THE
COMPANY'S YEAR 2000 EFFORTS, BUSINESS STRATEGY, OPERATIONS, COST SAVINGS
INITIATIVES, FUTURE COMPLIANCE WITH ACCOUNTING STANDARDS, INDUSTRY, ECONOMIC
PERFORMANCE, FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES, EXISTING
GOVERNMENT REGULATIONS AND CHANGES IN, OR THE FAILURE TO COMPLY WITH,
GOVERNMENTAL REGULATIONS, PROJECTIONS, FUTURE COMPLIANCE WITH 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.
STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q INVOLVING THE
COMPANY'S YEAR 2000 EFFORTS CONSTITUTE "YEAR 2000 READINESS DISCLOSURE" UNDER
THE YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT AND ARE SUBJECT TO THE
PROTECTIONS OF SUCH ACT.
GENERAL
The Company provides home healthcare services and products to patients through
its 310 centers in 38 states. These services and products are primarily paid
for by Medicare, Medicaid and other third party payors.
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, aerosol medications
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.
13
<PAGE> 14
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,
-------------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Home respiratory therapy services 47% 53%
Home infusion therapy services 21 20
Home medical equipment and medical supplies 31 27
------------- -------------
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 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.
Prior to 1998, the Company had significantly expanded its operations through a
combination of acquisitions of home health care companies, development of joint
ventures and strategic alliances with health care delivery systems as well as
internal growth. From 1996 through 1998, the Company acquired 72 home health
care companies (40, 28 and 4 companies in 1996, 1997, and 1998 respectively).
In 1998, the Company purposefully slowed its acquisition activity compared to
prior years to focus on existing operations. As amended, the Company's Credit
Agreement now requires bank consent for acquisitions or investments in new
joint ventures. The Company does not expect to acquire any home health care
businesses or to develop any new joint ventures in 1999.
The Company's strategy for 1999 is to maintain a diversified offering of home
health care services reflective of its current business mix. Respiratory
services will remain a primary focus with increased emphasis on home medical
equipment rental, enteral nutrition products and services and select infusion
therapies.
The Company also continues to implement a variety of initiatives designed to
lower its costs. Activities completed or underway for 1999 include: (i)
elimination of 41 positions at the Company's corporate Support Center and
approximately 250 positions in the field during the first six months of 1999;
(ii) reduction of expenses related to these positions; (iii) reduction of other
general and administrative expenses and field expenses such as travel and
entertainment, marketing and advertising and consulting; (iv) greater control
of capital expenditures at all levels; and (v) reduction of the Company's bad
debt expense.
14
<PAGE> 15
GOVERNMENT REGULATION
In recent years, various state and federal regulatory agencies have stepped up
investigative and enforcement activities with respect to the health care
industry, and many health care providers, including durable medical equipment
suppliers, have received subpoenas and other requests for information in
connection with such activities. On February 12, 1998, a subpoena from the
Office of the Inspector General of the Department of Health and Human Services
("OIG") was served on the Company at its Pineville, Kentucky center in
connection with an investigation relating to possible improper claims for
payment from Medicare. Since that time the U.S. Department of Justice has begun
examining issues involving Certificates for Medical Necessity and loaning of
equipment by the Company nationwide. The Company has retained experienced health
care counsel to represent it in this matter and is cooperating with the
investigation. The Company's counsel has conducted meetings with governmental
officials, and governmental officials have interviewed certain company officers
and employees. The Company has responded to government requests for information
and documents, and is cooperating with the government investigators to move
forward with the investigation. The Company has been engaged in discussions with
the government concerning the investigation and settlement of these matters. To
date there has been no resolution of these issues. An unfavorable outcome of the
investigation would likely have a material adverse impact on the Company's
future operating results and financial condition. 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.
From time to time the Company also receives notices and subpoenas from various
government agencies concerning plans to audit the Company, or requesting
information regarding certain aspects of the Company's business. The Company
cooperates with the various agencies in responding to such 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.
Health care law is an area of extensive and dynamic regulatory oversight.
Changes in laws or regulations or new interpretations of existing laws or
regulations can have a dramatic effect on permissible activities, the relative
costs associated with doing business, and the amount and availability of
reimbursement from government and other third-party payors. There can be no
assurance that federal, state or local governments will not impose additional
regulations upon the Company's activities. Such regulatory changes could
adversely affect the Company's business, making the Company unable to comply
with all regulations in the geographic areas in which it presently conducts, or
wishes to commence, business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors - Government
Regulation."
MEDICARE REIMBURSEMENT FOR OXYGEN THERAPY SERVICES
The Medicare reimbursement rate for oxygen related services was reduced by 25%
beginning January 1, 1998 as a result of the Balanced Budget Act of 1997 (the
"Medicare Oxygen Reimbursement Reduction") and an additional reduction of 5%
beginning January 1, 1999. The reimbursement rate for certain drugs and
biologicals covered under Medicare was also reduced by 5% beginning January 1,
1998. In addition, Consumer Price Index increases in Medicare reimbursement
rates for home medical equipment, including oxygen, 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
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<PAGE> 16
legislation. For the first six months of 1999, Medicare oxygen reimbursements
accounted for approximately 26 percent of the Company's revenues. The Company
estimates the Medicare oxygen reimbursement reductions decreased net revenue
and pre-tax income by approximately $12.3 million and $14.2 million for the six
months ended June 30, 1998 and 1999, respectively.
On September 25, 1997, the Company announced initiatives to aggressively
respond to the Medicare oxygen reimbursement reductions. More than 100 of the
Company's total operating and billing locations were affected by these
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 nine billing centers, the closure of 52 operating centers, the
consolidation of operating regions, the scaling back or elimination of marginal
products and services at numerous locations, and the related termination of 406
employees in the affected locations. These activities were substantially
completed as of June 30, 1998.
RESULTS OF OPERATIONS
The following table and discussion set forth items from the statements of
operations as a percentage of net revenues:
PERCENTAGE OF NET REVENUES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------- --------------------------------
1998 1999 1998 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net Revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales and related services 23.7 24.9 23.8 24.9
Operating expenses 52.1 57.2 52.5 57.7
General and administrative 3.4 3.9 3.4 4.1
Depreciation and amortization 9.1 11.3 9.4 11.0
Interest 5.4 7.9 5.3 7.9
------------ ------------ ------------ -------------
Total costs and expenses 93.7% 105.2% 94.4% 105.6%
------------ ------------ ------------ -------------
Income (loss) from operations
before income taxes 6.3% (5.2)% 5.6% (5.6)%
============ ============ ============ =============
</TABLE>
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<PAGE> 17
The Company's operating results for the first six months ended June 30, 1999
are significantly lower than historical trends and have been significantly
impacted by the following factors: First, the Company has been greatly impacted
by the 30% reduction in Medicare oxygen reimbursement rates (25% reduction
effective January 1, 1998 with an additional 5% reduction effective January 1,
1999). The Company estimates that net revenue and pre-tax income has been
reduced by approximately $14.2 million in the six months of 1999 as a result of
the 25% and the additional 5% reductions. Second, the Company experienced a
decline in revenues attributable to the exit and de-emphasis of certain lower
margin business lines and by the termination of several managed care contracts
which began in the latter half of 1998 (with continued effect into the first
quarter of 1999). Third, the Company has halted the acquisition of home health
care businesses and its joint venture development program. Fourth, accounts
receivable have been adversely affected by a tougher payor environment and by
process problems at the operating and billing center levels (caused by the
consolidation of billing centers and employee turnover) which has resulted in
higher bad debt expense. Further, the Company's implementation of process
improvements in the billing and collection functions has been slower than
anticipated.
The Company's current financial situation stems from two pivotal events:
significant reductions in Medicare oxygen reimbursement which began January 1,
1998 and the Company's ongoing restructuring 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 caused by these
changes has had more of an adverse impact on the organization as a whole than
originally anticipated.
In order to drive internal revenue growth during the latter half of 1998, the
Company embarked on a strategy to increase market share by focusing primarily
on increasing respiratory revenues in existing centers. Concurrently, the
Company determined that certain "non-core", lower margin products and services
should be eliminated during the year. To accelerate the development of the
Company's respiratory selling efforts, it increased its sales force by 67
account executives, on a net basis, by year-end. It also exited certain
contracts and businesses perceived to be lower margin during the third and
fourth quarters of 1998. The result was a substantial decrease in revenues
during the latter half of 1998 and the first half of 1999.
A new management team joined the Company in the fourth quarter of 1998,
consisting of a new president and chief executive officer, a new chief
operating officer and a new chief financial officer. Recognizing the negative
impacts of the Company's business strategy, the new management ceased the
exiting of business lines and contracts by mid-December of 1998. A new strategy
for 1999 was developed to restore the Company's revenues and decrease expenses.
Key points of this strategy are:
1. Stabilize and increase profitable revenues - respiratory therapies will
remain a primary focus of the Company. However, it will broaden its
offering and sales focus in 1999 to include other profitable business
units such as enteral nutrition, HME rental, and select infusion therapy
services. The Company will also re-direct its efforts to increase
revenues for certain managed care contracts - both new and existing.
2. Decrease and control operating expenses - the Company has already taken
aggressive steps to decrease operating and general and administrative
expenses. Through the first six months of 1999, the Company has
eliminated 41 positions from its corporate Support Center in Brentwood,
Tennessee and approximately 250 positions in the field.
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<PAGE> 18
3. Decrease DSO and bad debt - the Company has three key initiatives in
place to improve accounts receivable performance: (i) proper staffing and
training; (ii) process redesign and standardization; and (iii) billing
center specific goals geared toward improved cash collections and reduced
accounts receivable.
As a result of this new strategy, operating expenses in the second quarter of
1999 were reduced by $3.0 million compared to the fourth quarter of 1998. Also,
general and administrative expenses in the second quarter of 1999 were reduced
by $1.2 million compared to the fourth quarter of 1998 (excluding the
non-recurring $1.3 million of executive severance expense in the fourth quarter
of 1998).
The operations of acquired centers are included in the operations of the
Company from the effective date of each acquisition. The comparison of the
results of operations between 1999 and 1998 is impacted by the operations of
these acquired businesses. Also, the comparison of the results of operations
between 1999 and 1998 is materially affected by the additional 5% Medicare
oxygen reimbursement reduction and the unanticipated negative impact of the
restructuring activities and related business strategies on the Company's
ongoing operations.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
NET REVENUES. Net revenues decreased from $103.6 million for the quarter ended
June 30, 1998 to $90.4 million for the same period in 1999, a decrease of $13.2
million, or 13%. This decrease is primarily attributable to lower sales of
non-core low margin products, the exiting of lower margin contracts, and the
additional 5% Medicare oxygen reimbursement reduction, offset somewhat by
additional revenue from the 1998 acquisitions. Following is a discussion of the
components of net revenues:
Sales and Related Services Revenues. Sales and related services revenues
decreased from $50.3 million for the quarter ended June 30, 1998 to $42.7
million for the same period in 1999, a decrease of $7.6 million, or 15%.
This decrease is primarily attributable to lower sales of non-core low
margin products and the exiting of lower margin contracts, offset
somewhat by additional sales revenue from the 1998 acquisitions.
Rentals and Other Revenue. Rentals and other revenues decreased from
$51.8 million for the quarter ended June 30, 1998 to $46.8 million for
the same period in 1999, a decrease of $5.0 million, or 10%. This
decrease is primarily attributable to the exiting of lower margin
contracts, the additional 5% Medicare oxygen reimbursement reduction and
less than expected sales force effectiveness, offset somewhat by the
additional rental revenue from the 1998 acquisitions.
Earnings from Hospital Joint Ventures. Earnings from hospital joint
ventures decreased from $1.5 million for the quarter ended June 30, 1998
to $0.9 million for the same period in 1999, a decrease of $0.6 million,
or 40%, which was due primarily to the additional 5% Medicare oxygen
reimbursement reduction and higher bad debt expense at certain joint
venture locations.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services
decreased from $24.5 million for the quarter ended June 30, 1998 to $22.6
million for the same period in 1999, a decrease of $1.9 million, or 8%. As a
percentage of sales and related services revenues, cost of
18
<PAGE> 19
sales and related services increased from 49% to 53%. This increase is
primarily attributable to lower vendor rebates in the quarter ended June 30,
1999 and a higher level of favorable book-to-physical inventory adjustments
recorded in the quarter ended June 30, 1998 compared to the same period in
1999.
OPERATING EXPENSES. Operating expenses decreased from $54.0 million for the
quarter ended June 30, 1998 to $51.7 million for the same period in 1999, a
decrease of $2.3 million, or 4%. This decrease is primarily attributable to
lower salary expense in the quarter ended June 30, 1999 as a result of the
Company's aggressive steps to control expenses which included the elimination
of 250 positions in the field. The lower salary expense was partially offset by
higher bad debt expense. Bad debt expense was 5.0% of net revenue for the
quarter ended June 30, 1999 compared to 3.4% of net revenue for the same period
in 1998. Even though the dollar level of operating expenses decreased,
operating expenses as a percentage of net revenue increased from 52% for the
second quarter of 1998 to 57% for the second quarter of 1999 as a result of
decreased revenue.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
remained constant at $3.5 million for the quarters ended June 30, 1998 and June
30, 1999. Reduced salaries expense of $0.3 million in the quarter ended June
30, 1999 compared to the same period in 1998 was offset by higher legal and
other professional fees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
from $9.4 million for the quarter ended June 30, 1998 to $10.2 million for the
same period in 1999, an increase of $0.8 million, or 9%. This increase is
primarily attributable to additional amortization of deferred loan costs in the
current year quarter necessitated by the reduction in the loan commitment from
$360.0 million to $328.6 million on April 14, 1999.
INTEREST. Interest expense increased from $5.6 million for the quarter ended
June 30, 1998, to $7.2 million for the same period in 1999, an increase of $1.6
million, or 29%. The increase was attributable to higher interest rates on
borrowings, and to additional interest expense on increased borrowings under
the Bank Credit Facility.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
NET REVENUES. Net revenues decreased from $206.4 million for the six months
ended June 30, 1998 to $181.7 million for the same period in 1999, a decrease
of $24.7 million, or 12%. This decrease is primarily attributable to lower
sales of non-core low margin products, the exiting of lower margin contracts,
and the additional 5% Medicare oxygen reimbursement reduction, offset somewhat
by additional revenue from the 1998 acquisitions. Following is a discussion of
the components of net revenues:
19
<PAGE> 20
Sales and Related Services Revenues. Sales and related services revenues
decreased from $98.5 million for the six months ended June 30, 1998 to
$85.6 million for the same period in 1999, a decrease of $12.9 million,
or 13%. This decrease is primarily attributable to lower sales of
non-core low margin products and the exiting of lower margin contracts,
offset somewhat by additional sales revenue from the 1998 acquisitions.
Rentals and Other Revenue. Rentals and other revenues decreased from
$105.0 million for the six months ended June 30, 1998 to $94.6 million
for the same period in 1999, a decrease of $10.4 million, or 10%. This
decrease is primarily attributable to the exiting of lower margin
contracts, the additional 5% Medicare oxygen reimbursement reduction and
less than expected sales force effectiveness, offset somewhat by the
additional rental revenue of the 1998 acquisitions.
Earnings from Hospital Joint Ventures. Earnings from hospital joint
ventures decreased from $2.9 million for the six months ended June 30,
1998 to $1.5 million for the same period in 1999, a decrease of $1.4
million, or 48%, which was due primarily to the additional 5% Medicare
oxygen reimbursement reduction and higher bad debt expense at certain
joint venture locations.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services
decreased from $49.1 million for the six months ended June 30, 1998 to $45.3
million for the same period in 1999, a decrease of $3.8 million, or 8%. As a
percentage of sales and related services revenues, cost of sales and related
services increased from 50% to 53%. This increase is primarily attributable to
lower vendor rebates in the six months ended June 30, 1999 and a higher level
of favorable book-to-physical inventory adjustments recorded in the six months
ended June 30, 1998 compared to the same period in 1999.
OPERATING EXPENSES. Operating expenses decreased from $108.3 million for the
six months ended June 30, 1998 to $104.8 million for the same period in 1999, a
decrease of $3.5 million, or 3%. This decrease is primarily attributable to
lower salary expense in the six months ended June 30, 1999 as a result of the
Company's aggressive steps to control expenses which included the elimination
of 250 positions in the field. The lower salary expense was partially offset by
higher bad debt expense. Bad debt expense was 4.9% of net revenue for the six
months ended June 30, 1999 compared to 3.4% of net revenue for the same period
in 1998. Even though the dollar level of operating expenses decreased,
operating expenses as a percentage of net revenue increased from 53% for the
six months ended June 30, 1998 to 58% for the same period in 1999 as a result
of decreased revenue.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $7.1 million for the six months ended June 30, 1998 to $7.4
million for the same period in 1999, an increase of $0.3 million or 4%. The
increase is attributable to higher legal and other professional fees in the six
months ended June 30, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
from $19.5 million for the six months ended June 30, 1998 to $20.0 million for
the same period in 1999, an increase of $0.5 million, or 3%. This increase is
primarily attributable to additional amortization of deferred loan costs in the
current year period necessitated by the reduction in the loan commitment from
$360.0 million to $328.6 million on April 14, 1999.
20
<PAGE> 21
INTEREST. Interest expense increased from $11.0 million for the six months
ended June 30, 1998, to $14.4 million for the same period in 1999, an increase
of $3.4 million, or 3%. The increase was attributable to higher interest rates
on borrowings, and to additional interest expense on increased borrowings under
the Bank Credit Facility.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company's working capital was $104.8 million and the
current ratio was 3.1x as compared to working capital of $99.1 million and a
current ratio of 3.0x at December 31, 1998.
On October 29, 1998, the Fourth Amended and Restated Credit Agreement (the
"Credit Agreement") between the Company and Bankers Trust Company, as agent for
a syndicate of banks (the "Banks"), was amended (the "First Amendment") to
modify certain financial covenants with which the Company was not in
compliance. The Company incurred increased interest expense of $1,656,803 in
1998 as a result of the increased interest rate established by the First
Amendment. As part of the First Amendment, the Company's credit availability
was reduced from $400 million to $360 million (credit availability was
temporarily reduced to $340 million until April 1, 1999). The Credit Agreement
contained various financial covenants and other restrictions regarding
specified activities. At December 31, 1998 the Company was in violation of
certain of these covenants. Noncompliance with these covenants gave the lenders
the right to accelerate the due date of outstanding amounts under the Facility.
In addition to the possibility of accelerated due dates, the Company was unable
to access availability under the Facility. On April 14, 1999 the Company
entered into a Second Amendment to the Fourth Amended and Restated Credit
Agreement (the "Second Amendment"). (The Second Amendment together with the
Credit Agreement and the First Amendment will be referred to as the "Bank
Credit Facility"). The Second Amendment waived then existing events of default,
modified financial covenants and made a number of other changes to the Credit
Agreement. The Company is required to employ a manager, acceptable to the
Banks, with expertise in managing companies that are in workout situations with
their lenders. The Company's credit availability has been reduced from $360
million (credit availability was temporarily reduced to $340 million pursuant
to the First Amendment) to $328.6 million, including a $75 million term loan
and a $253.6 million revolving line of credit. As of August 3, 1999,
approximately $246.4 million was outstanding under the revolving line of
credit. 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 an applicable margin.
The margin associated with the Adjusted Eurodollar Rate is fixed at 3.25%. The
margin associated with the Base Lending Rate is fixed at 2.50%. The applicable
margins increase on September 30, 2000 to 3.50% as to the Adjusted Eurodollar
Rate and to 2.75% as to the Base Lending Rate. In addition, from and after
September 30, 2000, additional interest of 4.50% will accrue on that portion of
the Bank Credit Facility that is in excess of four times adjusted EBITDA. As of
June 30, 1999, the weighted average borrowing rate was 8.6135%.
The Company has agreed to issue on March 31, 2001 (provided loans, letters of
credit or commitments are still outstanding) warrants to the Banks representing
19.99% of the fully diluted common stock of the Company issued and outstanding
as of March 31, 2001. Fifty
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<PAGE> 22
percent of these warrants would be exercisable at any time after issuance and
the remaining fifty percent would be exercisable from and after September 30,
2001 (provided loans, letters of credit or commitments have not been terminated
subsequent to March 31, 2001 and prior to September 30, 2001). The exercise
price of the warrants will be $0.01 per share.
In addition to the foregoing modifications, pursuant to the Second Amendment
(i) the maturity date of the Bank Credit Facility has been changed to April 15,
2002 from December 16, 2002, (ii) the Company is no longer permitted to make
investments in joint ventures or acquisitions without the consent of Banks
holding a majority of the lending commitments under the Bank Credit Facility,
and (iii) an additional covenant has been added regarding collections of
accounts receivable.
The Credit Agreement, as amended, contains various financial covenants, the
most restrictive of which relate to measurements of EBITDA, shareholder's
equity, leverage, interest coverage ratios, and collections of accounts
receivable. The Credit Agreement, as amended, also contains provisions for
periodic reporting and the recapture of excess cash flow. Mandatory prepayments
are due if excess cash flow targets are met or the Company issues debt
securities.
The Bank Credit Facility also contains covenants which, among other things,
impose certain limitations or prohibitions on the Company with respect to the
incurrence of indebtedness, the creation of liens, the payment of dividends,
the redemption or repurchase of securities, investments, acquisitions, capital
expenditures, sales of assets and transactions with affiliates.
Management has prepared operating projections, cash flow projections and
related operating plans which indicate the Company can remain in compliance
with the new financial covenants and meet its expected obligations throughout
1999. However, as with all projections, there is uncertainty as to whether
management's projections can be achieved. In an event of default under the Bank
Credit Facility, the Banks will have the ability to demand payment of all
outstanding amounts, and there is currently no commitment as to how any such
demand payment would be satisfied.
The Bank Credit Facility terminates and any unpaid obligations of the Company
become due on April 15, 2002.
In addition to maintaining compliance with its debt covenants, the Company's
future liquidity will continue to be dependent upon the relative amounts of
current assets (principally cash, accounts receivable and inventories) and
current liabilities (principally accounts payable and accrued expenses). In
that regard, accounts receivable can have a significant impact on the Company's
liquidity. The Company has various types of accounts receivable, such as
receivables from patients, contracts, and former owners of acquired companies.
The majority of the Company's accounts receivable are patient receivables.
Accounts receivable are generally outstanding for longer periods of time in the
health care industry than many other industries because of requirements to
provide third-party payors with additional information subsequent to billing
and the time required by such payors to process claims. Certain accounts
receivable frequently are outstanding for more than 90 days, particularly where
the account receivable relates to services for a patient receiving a new
medical therapy or covered by private insurance or Medicaid. Net patient
accounts receivable were $94.2 million and $91.6 million at December 31, 1998
and June 30, 1999, respectively. These receivables represented an average of
approximately 92 and 96 days sales in accounts receivable at December 31, 1998
and June 30, 1999. This increase is primarily the result of disruptions in
collections associated with the consolidation of billing
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<PAGE> 23
centers and changes in certain billing procedures continuing from the Company's
restructuring, described above under "Medicare Reimbursement for Oxygen Therapy
Services."
Net cash provided from operating activities was $23.5 million and $21.0 million
for the six months ended June 30, 1998 and 1999, respectively. These amounts
primarily represent net income plus depreciation and amortization and changes
in the various components of working capital. Net cash used in investing
activities was $65.5 million and $4.1 million for the six months ended June 30,
1998 and 1999, respectively. Acquisition expenditures decreased from $45.6
million for the six months ended June 30, 1998 to $50,000 for the same period
in 1999. Capital expenditures decreased from $16.2 million for the six months
ended June 30, 1998 to $6.8 million for the same period in 1999, a decrease of
$9.4 million. Net cash provided from financing activities was $43.5 million and
$1.5 million for the six months ended June 30, 1998 and 1999, respectively. The
cash provided from financing activities for the six months ended June 30, 1998
and 1999 primarily related to proceeds from the Bank Credit Facility net of
principal payments.
The Company's principal capital requirements are for working capital. The
Company has financed and intends to continue to finance these requirements with
net cash provided by operations and, if available, with borrowings under the
Bank Credit Facility.
OVER-THE-COUNTER MARKET TRADING
Effective at the close of business on August 31, 1999, Nasdaq will de-list the
Company's common stock and it will no longer be listed for trading on the
Nasdaq National Market. The Company had been pursuing the listing of its common
stock on the American Stock Exchange but has determined to abandon that
alternative. As a result, beginning September 1, 1999, trading of the Company's
common stock will be conducted on the over-the-counter market ("OTC") or, on
application by broker-dealers, in the NASD's Electronic Bulletin Board using
the Company's current trading symbol, AHOM. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors -
NASDAQ De-Listing."
YEAR 2000 COMPLIANCE
Many computer software programs were written using two digits instead of four
to define the applicable year. As a result, computer programs may interpret a
date including the digits "00" to refer to the year 1900 instead of the year
2000. Such a Year 2000 problem could result in system failures which disrupt
patient services, billing and collections, payroll and other standard business
operations.
Accordingly, the Company has formally established a Year 2000 compliance
committee under the sponsorship of senior management. The committee includes
representation from information systems, purchasing, finance, and
reimbursement. An inventory of all information technology and non-information
technology systems was conducted during 1997 and a risk assessment was
performed. Based on that assessment, plans were put in place to address the
Year 2000 readiness of each system, including remediation and testing. As part
of that process, a Year 2000 compliance plan has been prepared, and approved by
the Board of Directors.
Year 2000 remediation work is being performed by both internal and external
personnel. Most of the Company's software is supplied by external vendors. In
all cases, the Company has worked with the vendor to ensure that a Year 2000
compliant version is being developed and certified, and that the version is
being installed when available. The majority of testing and
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<PAGE> 24
certification must be performed by these vendors, and the Company has been
informed that such vendors are currently undertaking such testing and
certification. The Company has no means to assure that third party vendors'
programs will be Year 2000 compliant on a timely basis. The effect of any such
non-compliance is indeterminable.
The Company has incurred approximately $800,000 in costs associated with its
Year 2000 compliance efforts, primarily as capital expenditures. Remaining
costs to achieve Year 2000 compliance are expected to be less than $800,000,
also as capital expenditures. These costs are being funded from operating cash
flow.
In addition to computer systems, the Company is performing inventories and
assessments of other critical equipment. This includes patient care equipment,
branch telephone systems, and other embedded systems.
The status of specific systems being addressed through the Year 2000 plan is
shown below:
- - The Company uses multiple computer systems for customer service, billing,
and clinical operations. Approximately 95% of these are fully Year 2000
compliant as of June 30, 1999 with a target of 100% compliance by
mid-October, 1999.
- - The financial systems were made Year 2000 compliant in January 1998.
Payroll and Human Resources systems were also converted to Year 2000
compliant versions in October 1998.
- - Product manufacturers and suppliers of equipment/supplies used in
conjunction with patient care have been contacted to determine the state
of compliance for all patient equipment. In the few instances where
equipment has been identified with Year 2000 compliance issues, notices
have been sent to the field outlining options and procedures for
remediation. Follow-up notices and status checks continue.
- - The Company has multiple telephone systems in place throughout its 310
centers. These systems have been evaluated and a few voice mail systems
have been identified which may have Year 2000 implications. These
phone/voice mail systems are targeted for upgrades and/or replacement by
September 30, 1999.
- - The Company has contacted all business partners and payors where implicit
or implied relationships are such that a significant disruption would be
detrimental to the well-being of either entity. Responses are being
received and reviewed on an on-going basis. Although the Company cannot
require all such parties to respond, follow-up requests are being made to
those who have not responded to initial requests. The Company intends to
address in a timely manner any issues or problems that come to light as a
result of these responses. At this point, the responses have indicated
that major governmental payors (e.g., Medicare) will be Year 2000
compliant.
In addition, testing and contingency planning will occur during 1999:
- - Although almost all software is vendor supplied, the Company has begun
testing critical systems in order to ensure Year 2000 compliance and
expects it to be completed before December 31, 1999.
24
<PAGE> 25
- - Contingency plans are not yet established, but expected to be developed
during the second half of 1999 for all critical systems, as well as for
branch operations. The three main areas of concern which have been
identified are internal systems, equipment vendor support, and payor
problems. Each of these areas requires a specific set of guidelines and
action plans to successfully handle any situations which may arise due to
computer problems (internal and external), supply/distribution chain
disruption, power or communications interruption, or other, as yet
unforeseen events.
The Company is highly dependent upon certain government and private third-party
payors for reimbursement of claims for services and equipment provided by the
Company. The Company has initiated correspondence with its most significant
payors regarding their Year 2000 compliance efforts and intends to address in a
timely manner any issues or problems that arise as a result of these responses.
The Company, however, cannot be assured of the accuracy of the responses nor
the timely remediation of third party claims processing and payment systems.
Failure by third party payors to correct Year 2000 problems could have a
material impact on the Company's cash flow from operations should delays in
processing and appropriate payments occur.
The Company believes its compliance efforts will resolve all material Year 2000
issues prior to December 31, 1999; however, as noted above, the Company has not
completed all phases of its compliance efforts. If the Company does not
complete its compliance program timely, the Company may be unable to properly
service patients, generate bills, or undertake collection efforts. In addition,
although the Company has received assurances from key vendors that their
programs will be Year 2000 compliant on a timely basis, failure of the computer
programs of key or multiple vendors and/or payors could materially adversely
affect the Company's ability to provide services and/or collect revenue.
Moreover, disruptions in the economy or health care industry in general caused
by Year 2000 non-compliance could materially adversely affect the Company. Such
results would adversely affect the Company's financial results and could cause
defaults under its credit agreement. The Company could be sued for Year 2000
non-compliance. The amount of potential liability and losses in any such event
cannot be reasonably estimated at this time.
See "Risk Factors - Year 2000."
RISK FACTORS
This section summarizes certain risks, among others, that should be considered
by stockholders and prospective investors in the Company.
Substantial Leverage. The Company maintains a significant amount of
long-term debt. As of June 30, 1999, the Company's consolidated indebtedness
was $326,602,000. On April 14, 1999 the Company entered into the Second
Amendment to the Bank Credit Facility. The Second Amendment waived events of
default, modified existing financial covenants, and made a number of other
changes to the Credit Agreement. The Second Amendment reduces the Company's
credit availability from $360 million (credit availability was temporarily
reduced to $340 million pursuant to the First Amendment) to $328.6 million. The
margins associated with the Eurodollar interest rate and the Base Lending Rate
remain in place for 18 months and then increase. Additional interest rate
increases are provided for that portion of the indebtedness in excess of four
times Adjusted EBITDA. These increases could have a material adverse effect on
the Company's liquidity, business, financial condition and results of
operations. The degree
25
<PAGE> 26
to which the Company is leveraged and the terms contained in the Bank Credit
Facility will impair the Company's ability to finance, through its own cash
flow or from additional financing, its future operations or pursue its business
strategy and could make the Company more vulnerable to economic downturns,
competitive and payor pricing pressures and adverse changes in government
regulation. There can be no assurance that future cash flow from operations
will be sufficient to cover debt obligations. Additional sources of funds may
be required and there can be no assurance the Company will be able to obtain
additional funds on acceptable terms, if at all. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
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
health care industry in an effort better to detect and remedy fraud and abuse
and irregularities in Medicare and Medicaid billing. The Company and many other
health care providers have received subpoenas and other requests for information
concerning its billing practices and its relationships with potential referral
sources. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Government Regulation." 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 and many of the Company's
employees must maintain licenses to provide some of the services offered by the
Company. In addition, the Balanced Budget Act of 1997 introduced several
government initiatives which are either in the planning or early implementation
stages and which, when fully implemented, could have a material adverse impact
on reimbursement for products and services provided by the Company. These
initiatives include: (i) Prospective Payment System ("PPS") and Consolidated
Billing requirements for skilled nursing facilities and home health agencies,
which do not affect the Company directly but could affect the Company's
contractual relationships with such entities; (ii) a pilot project in Polk
County, Florida set to begin on October 1, 1999 in which the Company will
participate, to determine the efficacy of competitive bidding for certain
durable medical equipment ("DME"), under which pilot project Medicare
reimbursement for certain items will be reduced between 18% and 31% from the
current fee schedule; and (iii) deadlines for meeting Medicare and Medicaid
surety bond requirements for home health agencies and DME suppliers. 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.
Collectibility of Accounts Receivable. The Company has substantial
accounts receivable, as well as days sales outstanding in excess of 90 days.
The Company has implemented three key initiatives to improve accounts
receivable performance: (i) proper
26
<PAGE> 27
staffing and training, (ii) process redesign and standardization, and (iii)
billing center specific goals geared toward improved cash collections and
reduced accounts receivable. No assurances can be given, however, that
additional charges for uncollectible accounts receivable will not be required
as a result of continuing difficulties associated with the Company's billing
activities and meeting payor documentation requirements and claim submission
deadlines.
NASDAQ De-listing. Effective at the close of business on August 31, 1999,
Nasdaq will de-list the Company's common stock and it will no longer be listed
for trading on the Nasdaq National Market. As a result, beginning September 1,
1999, trading of the Company's common stock will be conducted on the
over-the-counter market ("OTC") or, on application by broker-dealers, in the
NASD's Electronic Bulletin Board using the Company's current trading symbol,
AHOM. As a result of the de-listing, the liquidity of the Company's common
stock will likely be adversely affected, the Company's stock price could be
adversely affected and the Company's ability to raise additional capital may be
limited.
Infrastructure. As the Company continues to refine its business model, it
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.
Medicare Reimbursement for Oxygen Therapy and Other Services. In 1998
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. Effective January 1, 1998, payments for
parenteral and enteral nutrition ("PEN") were frozen at 1995 levels, through the
year 2002. Medicare also has the option of developing fee schedules for PEN and
home dialysis supplies and equipment, although currently there is no timetable
for the development or implementation of such fee schedules. In addition,
Consumer Price Index ("CPI") increases in Medicare reimbursement rates for home
medical equipment (including oxygen, home respiratory therapy and home infusion
therapy) will not resume until the year 2003, and CPI updates for prosthetics
and orthotics are limited to 1%. In March, 1998, HCFA was granted "inherent
reasonableness" authority to reduce payments for all Medicare Part B items and
services by as much as 15% without industry consultation, publication or public
comment. 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. Reimbursement reductions already implemented have
materially adversely affected the Company's net revenues and net income, and any
such future reductions could have a similar material adverse effect.
Dependence on Reimbursement by Third-Party Payors. For the six months
ended June 30, 1999, the percentage of the Company's net revenues derived from
Medicare, Medicaid and private pay was 46%, 10% and 44%, 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
27
<PAGE> 28
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 and net income. Changes
in the mix of the Company's patients among Medicare, Medicaid and private pay
categories and among different types of private pay sources, may also affect
the Company's 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, including Medicare and Medicaid, are dependent upon their computer
systems for determining and paying reimbursements to the Company. If such
payor's computer systems are adversely affected by Year 2000 problems, this
could have a material adverse impact on the Company's revenue and results of
operations.
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 retaining and obtaining profitable managed care contracts.
There can be no assurance that the Company will retain or obtain such managed
care contracts. In addition, reimbursement rates under managed care contracts
are likely to continue 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 cost for providing
services and increases higher margin services, it will experience declining
profit margins.
Impact of Health Care Reform. The health care industry continues to
undergo dramatic changes. There can be no assurance that federal health care
legislation 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.
Acquisitions. In the past, the Company's strategic focus was on the
acquisition of small to medium sized home health care suppliers in targeted
markets. Although the Company attempted in its acquisitions to determine the
nature and extent of any pre-existing liabilities, and generally has the right
to seek indemnification from the previous owners for acts or omissions arising
prior to the date of the acquisition, resolving issues of liability between the
parties could involve a significant amount of time, manpower and expense on the
part of the Company. If the Company or its subsidiary were to be unsuccessful
in a claim for indemnity from a seller, the liability imposed on the Company or
its subsidiary could have a material adverse effect on the Company's financial
results and operations.
No Assurance of Growth or Successful Integration of Past Acquisitions.
The Company reported a net loss of $10.5 million for the six months ended June
30, 1999. No assurance can be given that the Company will achieve profitable
operations in the near term. The Company intends to expand its business
primarily through internal growth of existing operations including existing
hospital joint ventures. There can be no assurance that the Company can
increase growth in net revenues. There can also 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. The
price of the Company's common stock may fluctuate
28
<PAGE> 29
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.
"Year 2000". The Company has taken a comprehensive approach to its Year
2000 remediation work. The Company can give no assurance that it will not
encounter unanticipated Year 2000 problems or that third parties it does
business with (including payors and vendors) 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Year 2000
Compliance."
Influence of Executive Officers, Directors and Principal Stockholder. On
June 30, 1999, the Company's executive officers, directors and principal
stockholder, Counsel Corporation ("Counsel"), in the aggregate, beneficially
owned approximately 33% 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. Recent changes in senior management may limit the Company's ability to
attract and retain qualified personnel, which in turn could adversely affect
profitability.
Competition. The home health care market is highly fragmented and
competition varies significantly from market to market. In the small and
mid-size markets in which the Company primarily operates, the majority of its
competition comes from local independent operators or hospital-based
facilities, whose primary competitive advantage is market familiarity. 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.
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.
29
<PAGE> 30
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The chief market risk factor affecting the financial condition and operating
results of the Company is interest rate risk. The Company's Bank Credit
Facility uses a floating interest rate. As of June 30, 1999, the Company had
outstanding borrowings of approximately $321.4 million. In the event that
interest rates associated with this facility were to increase by 10%, the
impact on future cash flows would be approximately $1.6 million. Interest
expense associated with other debts would not materially impact the Company as
most interest rates are fixed.
ITEM 4 - SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
The 1999 annual meeting of shareholders was held on May 27, 1999. At the
meeting, the reelection of each individual nominated as a Class 2 director of
the Company's Board of Directors was approved. The directors so elected are
Morris A. Perlis and Joseph F. Furlong, III. Continuing directors are as
follows: Class 3 directors whose terms expire in 2000 are Allan C. Silber,
Edward Sonshine and Edward K. Wissing; and Class 1 directors whose terms expire
in 2001 are Henry T. Blackstock, Thomas A. Dattilo and Mark Manner. At the
meeting, the shareholders also granted to the Company's Board of Directors the
authority to, at any point prior to the annual meeting of the Company's
stockholders in 2000, effectuate a one-for-four reverse stock split whereby one
new share of the Common Stock of the Company would be exchanged for every four
shares of the Company's currently outstanding Common Stock. No other matters
were voted upon at the annual meeting.
The following table sets forth the voting tabulation for each matter voted upon
at the meeting:
<TABLE>
<CAPTION>
Votes Votes Votes Broker
For Against Withheld Abstentions Non-Votes
----- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Election of
Morris Perlis 9,350,887 N/A 543,047 N/A N/A
Election of
Joseph F. Furlong 9,426,130 N/A 467,804 N/A N/A
Approval of 4-1
Reverse Stock Split 9,000,910 785,220 N/A 107,804 N/A
</TABLE>
30
<PAGE> 31
PART II. OTHER INFORMATION
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. On July 27, 1999, the Company filed a Current Report
on Form 8-K stating that the Company had received notification that the
Nasdaq National Market will de-list the Company's Common Stock effective
at the close of business on August 31, 1999. The report also stated that
the Company is currently pursuing the listing of its Common Stock on the
American Stock Exchange (AMEX), and that unless AMEX has approved the
Company for trading, beginning September 1, 1999 trading of the Company's
Common Stock will be conducted on the over-the-counter market, also known
as the "OTC" or, on application by broker-dealers, in the NASD's
Electronic Bulletin Board using the Company's current trading symbol,
AHOM.
31
<PAGE> 32
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.
<TABLE>
<CAPTION>
AMERICAN HOMEPATIENT, INC.
<S> <C>
August 16, 1999 By: /s/Marilyn A. O'Hara
-------------------------------
Marilyn A. O'Hara
Chief Financial Officer and An Officer Duly
Authorized to Sign on Behalf of the registrant
</TABLE>
32
<PAGE> 33
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
<S> <C>
27 Financial Data Schedule (for SEC use only)
</TABLE>
33
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICAN HOMEPATIENT, INC. FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 22,732,000
<SECURITIES> 0
<RECEIVABLES> 136,832,000
<ALLOWANCES> 42,071,000
<INVENTORY> 15,558,000
<CURRENT-ASSETS> 155,515,000
<PP&E> 172,898,000
<DEPRECIATION> 103,335,000
<TOTAL-ASSETS> 521,096,000
<CURRENT-LIABILITIES> 50,743,000
<BONDS> 326,602,000
0
0
<COMMON> 151,000
<OTHER-SE> 146,233,000
<TOTAL-LIABILITY-AND-EQUITY> 521,096,000
<SALES> 85,579,000
<TOTAL-REVENUES> 181,661,000
<CGS> 45,276,000
<TOTAL-COSTS> 45,276,000
<OTHER-EXPENSES> 146,540,000
<LOSS-PROVISION> 8,931,000
<INTEREST-EXPENSE> 14,382,000
<INCOME-PRETAX> (10,155,000)
<INCOME-TAX> 298,000
<INCOME-CONTINUING> (10,453,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,453,000)
<EPS-BASIC> (0.69)
<EPS-DILUTED> (0.69)
</TABLE>
