<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CHECK ONE FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 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)
DELAWARE 0-19532 62-1474680
- ------------------------------- ------------ ---------------------------------
(STATE OR OTHER JURISDICTION OF (COMMISSION (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) FILE NUMBER)
5200 MARYLAND WAY, SUITE 400, BRENTWOOD, TENNESSEE 37027
--------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(615) 221-8884
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF 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
----- -----
15,149,633
- --------------------------------------------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF MAY 7, 1999)
TOTAL NUMBER OF SEQUENTIALLY
NUMBERED PAGES IS 31
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, March 31,
1998 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,276,000 $ 13,153,000
Restricted cash 51,000 51,000
Accounts receivable, less allowance for doubtful accounts
of $41,147,000 and $41,494,000, respectively 99,574,000 99,134,000
Inventories 20,776,000 18,007,000
Prepaid expenses and other assets 3,135,000 2,146,000
Income tax receivable 13,090,000 13,222,000
Deferred tax asset 7,174,000 7,174,000
------------- -------------
Total current assets 148,076,000 152,887,000
------------- -------------
PROPERTY AND EQUIPMENT, at cost 165,642,000 170,416,000
Less accumulated depreciation and amortization (87,864,000) (96,547,000)
------------- -------------
Net property and equipment 77,778,000 73,869,000
------------- -------------
OTHER ASSETS
Excess of cost over fair value of net assets acquired, net 249,173,000 247,605,000
Investment in unconsolidated joint ventures 23,325,000 21,800,000
Deferred financing costs, net 4,119,000 3,944,000
Deferred tax asset 6,048,000 6,048,000
Other assets, net 23,373,000 20,700,000
------------- -------------
Total other assets 306,038,000 300,097,000
------------- -------------
$ 531,892,000 $ 526,853,000
============= =============
</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, March 31,
1998 1999
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and capital leases $ 7,024,000 $ 8,477,000
Trade accounts payable 10,629,000 14,528,000
Other payables 1,446,000 1,324,000
Accrued expenses:
Payroll and related benefits 9,074,000 6,239,000
Interest 3,327,000 3,824,000
Insurance 3,776,000 3,393,000
Restructuring accruals 3,413,000 3,312,000
Other 10,272,000 8,507,000
------------- -------------
Total current liabilities 48,961,000 49,604,000
------------- -------------
NONCURRENT LIABILITIES
Long-term debt and capital leases, less current portion 316,918,000 318,718,000
Other noncurrent liabilities 9,514,000 7,270,000
------------- -------------
Total noncurrent liabilities 326,432,000 325,988,000
------------- -------------
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) (21,747,000)
------------- -------------
Total stockholders' equity 156,499,000 151,261,000
------------- -------------
$ 531,892,000 $ 526,853,000
============= =============
</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 March 31
-------------------------------
1998 1999
------------- -------------
<S> <C> <C>
NET REVENUES
Sales and related service revenues $ 48,180,000 $ 42,860,000
Rentals and other revenues 53,190,000 47,780,000
Earnings from joint ventures 1,423,000 598,000
------------- -------------
Total net revenues 102,793,000 91,238,000
------------- -------------
EXPENSES
Cost of sales and related services, excluding depreciation
and amortization 24,523,000 22,719,000
Operating 54,348,000 53,028,000
General and administrative 3,504,000 3,888,000
Depreciation and amortization 10,038,000 9,818,000
Interest 5,398,000 7,211,000
------------- -------------
Total expenses 97,811,000 96,664,000
------------- -------------
INCOME (LOSS) FROM OPERATIONS BEFORE
INCOME TAXES 4,982,000 (5,426,000)
PROVISION FOR INCOME TAXES 1,993,000 150,000
------------- -------------
NET INCOME (LOSS) $ 2,989,000 $ (5,576,000)
============= =============
NET INCOME (LOSS) PER COMMON SHARE
- Basic $ 0.20 $ (0.37)
============= =============
- Diluted $ 0.20 $ (0.37)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
- Basic 14,953,000 15,205,000
============= =============
- Diluted 15,181,000 15,205,000
============= =============
</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>
Three Months Ended March 31
--------------------------------
1998 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,989,000 $ (5,576,000)
Adjustments to reconcile net income from operations
to net cash provided from (used in) operating activities:
Depreciation and amortization 10,038,000 9,818,000
Equity in (earnings) losses of unconsolidated joint
ventures (326,000) 418,000
Minority interest 43,000 67,000
Change in assets and liabilities, net of effects from
acquisitions:
Accounts Receivable, net (2,689,000) 631,000
Inventories 2,146,000 2,739,000
Prepaid expenses and other assets (1,241,000) 988,000
Income tax receivable 3,050,000 (132,000)
Trade accounts payable, accrued expenses
and other current liabilities (6,063,000) (554,000)
Restructuring accruals (3,619,000) (100,000)
Other non current liabilities -- 2,000
Other assets (792,000) 206,000
------------- -------------
Net cash provided from operating activities 3,536,000 8,507,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (43,729,000) (50,000)
Additions to property and equipment, net (7,263,000) (3,800,000)
Distributions from (advances to) unconsolidated joint
ventures, net (507,000) 1,106,000
Distributions to minority interest owners -- (49,000)
------------- -------------
Net cash used in investing activities (51,499,000) (2,793,000)
------------- -------------
</TABLE>
(Continued)
5
<PAGE> 6
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Continued)
<TABLE>
<CAPTION>
Three Months Ended March 31
------------------------------------
1998 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and capital leases (1,537,000) (1,173,000)
Proceeds from issuance of debt 43,500,000 4,500,000
Proceeds from exercise of stock options 385,000 --
Deferred financing costs (24,000) (164,000)
------------- -------------
Net cash provided from financing activities 42,324,000 3,163,000
------------- -------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (5,639,000) 8,877,000
CASH AND CASH EQUIVALENTS, beginning of period 12,050,000 4,276,000
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 6,411,000 $ 13,153,000
============= =============
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 5,119,000 $ 6,672,000
============= =============
Cash payments of income taxes $ 619,000 $ 335,000
============= =============
</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
MARCH 31, 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 three months ended March 31, 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 March 31, 1999, the Company provided
these services to patients primarily in the home through 313 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. Medicare oxygen reimbursements account for approximately
23.5 percent of the Company's revenues.
The Company estimates the Medicare oxygen reimbursement reductions
decreased net revenue and pre-tax income by approximately $6.1 million
for the three months ended March 31, 1998. The Company estimates that
the additional 5% reduction which began January 1, 1999, further
decreased net revenue and pre-tax income by an additional $1.3 million
for the three months ended March 31, 1999 for a total reduction of
approximately $7.4 million for the three months ended March 31, 1999.
7
<PAGE> 8
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.
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 March 31, 1999 represent remaining estimated severance
costs to be paid to terminated employees ($0.1 million), remaining
facility exit costs ($0.9 million), and termination costs of certain
management contracts ($2.3 million). As costs were incurred and
payments were made, $3.6 million and $100,000 were charged against the
restructuring accruals in the first quarters 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 quarter 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
8
<PAGE> 9
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 May 7, 1999, approximately $248.5 million was outstanding under
the revolving line of credit. Availability is frozen until May 19, 1999
(30 days after the retention of the manager referenced above).
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 18
months after the date of the Second Amendment to 3.50% as to the
Adjusted Eurodollar Rate and to 2.75% as to the Base Lending Rate. In
addition, 18 months after the date of the Second Amendment, 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 are still
outstanding). 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 acquisitions or investments in joint
ventures 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 amended Credit Agreement, 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 SFAS 128, earnings per share is
measured at two levels: basic earnings per share and diluted earnings
per share. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the
year. Diluted earnings per share is computed by dividing net income by
the weighted average number of common shares after considering the
additional dilution related to convertible preferred stock,
convertible debt, options and warrants. In computing diluted earnings
per share, the outstanding stock warrants and stock options are
considered dilutive using the treasury stock method. The following
table information is necessary to calculate earnings per share for the
periods presented:
<TABLE>
<CAPTION>
(unaudited)
--------------------------------
Three Months Ended March 31,
--------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net income (loss) $ 2,989,000 $ (5,576,000)
============ ============
Weighted average common shares outstanding 14,953,000 15,205,000
Effect of dilutive options and warrants 228,000 --
------------ ------------
Adjusted diluted commons shares outstanding 15,181,000 15,205,000
============ ============
Net income (loss) per common share
- Basic $ 0.20 $ (0.37)
============ ============
- Diluted $ 0.20 $ (0.37)
============ ============
</TABLE>
6. BASIS OF FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of the Company
for the three months ended March 31, 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 March
31, 1999 and the results of operations and the cash flows for the
three months ended March 31, 1999 and 1998.
The results of operations for the three months ended March 31, 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.
10
<PAGE> 11
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 ultimate
outcome of these matters is currently uncertain. 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.
11
<PAGE> 12
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."
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 313 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>
Three Months Ended March 31,
----------------------------
1998 1999
-------- ------
<S> <C> <C>
Home respiratory therapy services 48% 53%
Home infusion therapy services 20 20
Home medical equipment and medical supplies 32 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 180 positions in the field during the
first quarter 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
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<PAGE> 15
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.
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 ultimate
outcome of these matters is currently uncertain. 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.
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<PAGE> 16
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. Medicare oxygen reimbursements account for approximately
23.5 percent of the Company's revenues.
The Company estimates the Medicare oxygen reimbursement reductions
decreased net revenue and pre-tax income by approximately $6.1 million
for the three months ended March 31, 1998. The Company estimates that
the additional five percent reduction which began January 1, 1999,
further decreased net revenue and pre-tax income by an additional $1.3
million for the three months ended March 31, 1999 for a total
reduction of approximately $7.4 million for the three months ended
March 31, 1999.
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 center, 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 March 31,
----------------------------
1998 1999
--------- -------
<S> <C> <C>
Net Revenues 100.0% 100.0%
Costs and expenses:
Cost of sales and related services 23.9 24.9
Operating expenses 52.9 58.1
General and administrative 3.4 4.3
Depreciation and amortization 9.8 10.8
Interest 5.2 7.9
----- -----
Total costs and expenses 95.2% 105.9%
----- -----
Income (loss) from operations before income taxes 4.8% (5.9%)
===== =====
</TABLE>
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<PAGE> 17
The Company's operating results for the first quarter ended March 31,
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 $7.4 million in the first quarter 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 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 quarter 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 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.
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<PAGE> 18
2. Decrease and control operating expenses - the Company has
already taken aggressive steps to decrease operating and
general and administrative expenses. Through the first
quarter of 1999, the Company has eliminated 41 positions from
its corporate Support Center in Brentwood, Tennessee and
approximately 180 positions in the field.
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 first
quarter of 1999 were reduced by $1.7 million compared to the fourth
quarter of 1998. Also, general and administrative expenses in the
first quarter of 1999 were reduced by $800,000 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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH
31, 1998
NET REVENUES. Net revenues decreased from $102.8 million for the
quarter ended March 31, 1998 to $91.2 million for the same period in
1999, a decrease of $11.6 million, or 11%. For the quarter ended March
31, 1999, the Company estimates the additional 5% Medicare oxygen
reimbursement reductions decreased net revenue by approximately $1.3
million. Excluding the additional Medicare oxygen reimbursement
reductions, net revenues would have decreased from $102.8 million to
approximately $92.5 million for the quarters ended March 31, 1998 and
1999, respectively, a decrease of approximately $10.3 million, or 10%.
This decrease is primarily attributable to lower sales of non-core low
margin products, the exiting of lower margin contracts, and less than
expected sales force effectiveness, 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 $48.2 million for the
quarter ended March 31, 1998 to $42.9 million for the same
period in 1999, a decrease of $5.3 million, or 11%. 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 $53.2 million for the quarter ended March 31,
1998 to $47.8 million for the same period in 1999, a decrease
of $5.4 million, or 10%. This decrease is primarily
attributable to the exiting of lower margin contracts, the
additional 5% Medicare oxygen reimbursement reduction
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<PAGE> 19
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 $1.4 million for the quarter
ended March 31, 1998 to $0.6 million for the same period in
1999, a decrease of $0.8 million, or 57%, 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 March 31, 1998 to
$22.8 million for the same period in 1999, a decrease of $1.7 million,
or 7%. As a percentage of sales and related services revenues, cost of
sales and related services increased from 51% to 53%. This increase is
primarily attributable to lower vendor rebates in the quarter ended
March 31, 1999 and a higher level of favorable book-to-physical
inventory adjustments in the quarter ended March 31, 1998 compared to
the same period in 1999.
OPERATING EXPENSES. Operating expenses decreased from $54.3 million
for the quarter ended March 31, 1998 to $53.0 million for the same
period in 1999, a decrease of $1.3 million, or 2%. This decrease is
primarily attributable to lower salary expense in the quarter ended
March 31, 1999 as a result of the Company's aggressive steps to
control expenses which included the elimination of 180 positions in
the field. The lower salary expense was partially offset by higher bad
debt expense. Bad debt expense was 4.8% of net revenue for the quarter
ended March 31, 1999 compared to 3.4% of net revenue for the same
period in 1998. Bad debt expense will remain at this current level or
higher in the foreseeable future, if current collection trends are not
improved. Even though the dollar level of operating expenses
decreased, operating expenses as a percentage of net revenue increased
from 53% for the first quarter of 1998 to 58% for the first quarter of
1999 as a result of decreased revenue.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased from $3.5 million for the quarter ended March 31,
1998 to $3.9 million for the same period in 1999, an increase of $0.4
million or 11%. The increase is attributable to higher legal and other
professional fees in the quarter ended March 31, 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
decreased from $10.0 million for the quarter ended March 31, 1998 to
$9.8 million for the same period in 1999, a decrease of $0.2 million,
or 2%. This decrease is primarily attributable to the reduction in the
amortization of goodwill as a result of the $37.8 million of impaired
goodwill written off in the fourth quarter of 1998.
INTEREST. Interest expense increased from $5.4 million for the quarter
ended March 31, 1998, to $7.2 million for the same period in 1999, an
increase of $1.8 million, or 33%. The increase was attributable to
higher interest rates on borrowings, and to additional interest
expense on increased borrowings under the Bank Credit Facility.
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<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company's working capital was $103.3 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
May 7, 1999, approximately $248.5 million was outstanding under the
revolving line of credit. Availability is frozen for 30 days after the
retention of the manager referenced above. 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 18
months after the date of the Second Amendment to 3.50% as to the
Adjusted Eurodollar Rate and to 2.75% as to the Base Lending Rate. In
addition, 18 months after the date of the Second Amendment, 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 March
31, 1999, the weighted average borrowing rate was 8.85%.
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
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<PAGE> 21
of credit or commitments are still outstanding). 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 acquisitions or investments in joint
ventures 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. The Company is no longer permitted to
make acquisitions or investments in joint ventures without the consent
of Banks holding a majority of the lending commitments under the Bank
Credit Facility.
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 amended Credit Agreement, 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
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<PAGE> 22
$95.6 million at December 31, 1998 and March 31, 1999, respectively.
These receivables represented an average of approximately 92 and 99
days sales in accounts receivable at December 31, 1998 and March 31,
1999. This increase is primarily the result of disruptions in
collections associated with the consolidation of billing 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 $3.5 million and $8.5
million for the three months ended March 31, 1998 and 1999,
respectively. These amounts primarily represent net income plus
depreciation and amortization and provisions for doubtful accounts and
changes in the various components of working capital. Net cash used in
investing activities was $51.5 million and $2.8 million for the three
months ended March 31, 1998 and 1999, respectively. Acquisition
expenditures decreased from $43.7 million for the three months ended
March 31, 1998 to $50,000 for the same period in 1999. Capital
expenditures decreased from $7.3 million for the three months ended
March 31, 1998 to $3.8 million for the same period in 1999, a decrease
of $3.5 million. Net cash provided from financing activities was $42.3
million and $3.1 million for the three months ended March 31, 1998 and
1999, respectively. The cash provided from financing activities for
the three months ended March 31, 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.
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 certification must be performed by these
vendors, and the Company has been informed
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<PAGE> 23
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 75%
of these are fully Year 2000 compliant as of March 31, 1999.
All customer service, billing, and clinical systems have a
target date of June 30, 1999 to be on Year 2000 compliant
software.
- 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. All other
corporate support systems are targeted to be Year 2000
compliant by June 30, 1999.
- 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.
Any non-compliant equipment will be identified and plans put
in place to upgrade or dispose of them by July 31, 1999. An
insubstantial amount of the patient equipment supplied by the
Company is expected to have a Year 2000 issue, and the
Company does not believe this risk is material.
- The Company has multiple telephone systems in place throughout
its 313 centers. These are targeted to be evaluated and
upgraded as necessary 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.
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<PAGE> 24
- 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 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 March 31, 1999, the Company's
consolidated indebtedness was $327,195,000. 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 and freezes the credit availability until May 19, 1999 (30 days
after the hiring of a manager mandated by the Banks). 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 to which the Company is
leveraged and the terms contained in the Bank Credit Facility will
impair the Company's ability to
24
<PAGE> 25
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 Prospective Payment 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; a pilot project set to begin soon to
determine the efficacy of competitive billing for certain durable
medical equipment (DME); and 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
25
<PAGE> 26
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.
Possible NASDAQ De-listing. On November 11, 1998, NASDAQ sent
the Company a letter noting that the Common Stock had failed to
maintain a closing bid price greater than or equal to $5.00 for the
last thirty (30) consecutive trading dates. The letter further noted
that the Company's securities would be subject to de-listing from the
NASDAQ National Market System if the Company was unable to demonstrate
compliance with the minimum bid price requirement or any other listing
criteria by February 8, 1999. In response to such letter, the Company
requested a hearing before the NASDAQ Listing Qualifications Hearing
Panel (the "Panel"). The Panel stayed de-listing and granted the
Company a hearing, which took place on April 9, 1999. At such hearing,
the Company requested a temporary waiver of the bid price requirement
and the public float market value requirement in order to facilitate
either continued listing on the NASDAQ National Market System or
proposed initial listing on the American Stock Exchange. There can be
no assurance, however, that NASDAQ will not de-list the Company from
the NASDAQ National Market System or that the Company will be accepted
for listing on AMEX. Under such circumstances the Company could not be
admitted for listing on the NASDAQ Small Cap Market without a waiver
of certain listing requirements. If the Company is not listed on any
such market, it would instead be traded on the NASDAQ over-the-counter
market. If the Company is de-listed from the NASDAQ National Market,
is not permitted to be listed on AMEX and/or is not permitted to be
listed on the NASDAQ Small Cap Market, the liquidity of the Company's
Common Stock will likely be adversely affected and the Company's
ability to raise any necessary 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
26
<PAGE> 27
equipment, including oxygen, 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.
Therefore, 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
three months ended March 31, 1999, the percentage of the Company's net
revenues derived from Medicare, Medicaid and private pay was 45%, 10%
and 45%, respectively. The net revenues and profitability of the
Company are affected by the continuing efforts of all payors to
contain or reduce the costs of health care by lowering reimbursement
rates, narrowing the scope of covered services, increasing case
management review of services and negotiating reduced contract
pricing. Any changes in reimbursement levels under Medicare, Medicaid
or private pay programs and any changes in applicable government
regulations could have a material adverse effect on the Company's net
revenues 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.
27
<PAGE> 28
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 $5.6 million for the
three months ended March 31, 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 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 March 31, 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
28
<PAGE> 29
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.
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 March 31,
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.
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.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMERICAN HOMEPATIENT, INC.
May 14, 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
30
<PAGE> 31
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C>
27 Financial Data Schedule (for SEC use only)
</TABLE>
31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICAN HOMEPATIENT, INC. FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 13,204,000
<SECURITIES> 0
<RECEIVABLES> 140,628,000
<ALLOWANCES> 41,494,000
<INVENTORY> 18,007,000
<CURRENT-ASSETS> 152,887,000
<PP&E> 170,416,000
<DEPRECIATION> 96,547,000
<TOTAL-ASSETS> 526,853,000
<CURRENT-LIABILITIES> 49,604,000
<BONDS> 326,413,000
0
0
<COMMON> 151,000
<OTHER-SE> 151,110,000
<TOTAL-LIABILITY-AND-EQUITY> 526,853,000
<SALES> 42,860,000
<TOTAL-REVENUES> 91,238,000
<CGS> 22,719,000
<TOTAL-COSTS> 22,719,000
<OTHER-EXPENSES> 73,945,000
<LOSS-PROVISION> 4,410,000
<INTEREST-EXPENSE> 7,211,000
<INCOME-PRETAX> (5,426,000)
<INCOME-TAX> 150,000
<INCOME-CONTINUING> (5,576,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,576,000)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
