<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: SEPTEMBER 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)
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 [ ]
15,159,720
---------------------------------------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF NOVEMBER 12, 1999)
TOTAL NUMBER OF SEQUENTIALLY
NUMBERED PAGES IS 34
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, September 30,
1998 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,276,000 $ 26,091,000
Restricted cash 51,000 --
Accounts receivable, less allowance for
doubtful accounts of $41,147,000 and
$44,745,000 respectively 99,574,000 92,482,000
Inventories 20,776,000 15,412,000
Prepaid expenses and other assets 3,135,000 1,839,000
Income tax receivable 13,090,000 3,047,000
Deferred tax asset 7,174,000 17,610,000
------------- -------------
Total current assets 148,076,000 156,481,000
------------- -------------
PROPERTY AND EQUIPMENT, at cost 165,642,000 175,819,000
Less accumulated depreciation and amortization (87,864,000) (109,688,000)
------------- -------------
Net property and equipment 77,778,000 66,131,000
------------- -------------
OTHER ASSETS
Excess of cost over fair value of net assets acquired, net 249,173,000 244,503,000
Investment in unconsolidated joint ventures 23,325,000 19,253,000
Deferred financing costs, net 4,119,000 4,079,000
Deferred tax asset 6,048,000 5,553,000
Other assets, net 23,373,000 17,163,000
------------- -------------
Total other assets 306,038,000 290,551,000
------------- -------------
$ 531,892,000 $ 513,163,000
============= =============
</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, September 30,
1998 1999
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and capital leases $ 7,024,000 $ 11,038,000
Trade accounts payable 10,629,000 16,283,000
Other payables 1,446,000 1,782,000
Accrued expenses:
Payroll and related benefits 9,074,000 7,596,000
Interest 3,327,000 840,000
Insurance 3,776,000 4,479,000
Restructuring accruals 3,413,000 2,954,000
Other 10,272,000 7,690,000
------------- -------------
Total current liabilities 48,961,000 52,662,000
------------- -------------
NONCURRENT LIABILITIES
Long-term debt and capital leases, less current portion 316,918,000 314,077,000
Other noncurrent liabilities 9,514,000 5,210,000
------------- -------------
Total noncurrent liabilities 326,432,000 319,287,000
------------- -------------
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
15,160,000 shares, respectively 150,000 152,000
Paid-in capital 172,520,000 172,868,000
Accumulated deficit (16,171,000) (31,806,000)
------------- -------------
Total stockholders' equity 156,499,000 141,214,000
------------- -------------
$ 531,892,000 $ 513,163,000
============= =============
</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 Sept. 30 Nine Months Ended Sept. 30
-------------------------------- ---------------------------------
1998 1999 1998 1999
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUES
Sales and related service revenues $ 48,393,000 $ 42,694,000 $ 146,868,000 $ 128,273,000
Rentals and other revenues 51,755,000 45,814,000 156,727,000 140,415,000
Earnings from joint ventures 1,197,000 804,000 4,144,000 2,285,000
------------- ------------ ------------- -------------
Total revenues 101,345,000 89,312,000 307,739,000 270,973,000
------------- ------------ ------------- -------------
EXPENSES
Cost of sales and related services, excluding
depreciation and amortization 23,917,000 22,286,000 72,986,000 67,562,000
Operating 72,251,000 51,326,000 180,583,000 156,077,000
General and administrative 9,219,000 3,319,000 16,269,000 10,742,000
Depreciation and amortization 10,084,000 10,224,000 29,532,000 30,208,000
Interest 5,931,000 7,189,000 16,895,000 21,571,000
Restructuring (3,614,000) -- (3,614,000) --
------------- ------------ ------------- -------------
Total expenses 117,788,000 94,344,000 312,651,000 286,160,000
------------- ------------ ------------- -------------
LOSS FROM OPERATIONS BEFORE INCOME
TAXES (16,443,000) (5,032,000) (4,912,000) (15,187,000)
PROVISION (BENEFIT) FOR INCOME TAXES (6,578,000) 150,000 (1,965,000) 448,000
------------- ------------ ------------- -------------
NET LOSS $ (9,865,000) $ (5,182,000) $ (2,947,000) $ (15,635,000)
============= ============ ============= =============
NET LOSS PER COMMON SHARE
- Basic $ (0.66) $ (0.34) $ (0.20) $ (1.03)
============= ============ ============= =============
- Diluted $ (0.66) $ (0.34) $ (0.20) $ (1.03)
============= ============ ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
- Basic 14,981,000 15,246,000 15,002,000 15,221,000
============= ============ ============= =============
- Diluted 14,981,000 15,246,000 15,002,000 15,221,000
============= ============ ============= =============
</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>
Nine Months Ended September 30
------------------------------
1998 1999
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,947,000) $(15,635,000)
Adjustments to reconcile net loss from operations
to net cash provided from (used in) operating activities:
Depreciation and amortization 29,532,000 30,208,000
Equity in (earnings) losses of unconsolidated joint
ventures (618,000) 651,000
Minority interest 257,000 157,000
Other non-cash charges 10,500,000 --
Change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable, net (3,139,000) 7,283,000
Restricted cash -- 51,000
Inventories 1,095,000 5,475,000
Prepaid expenses and other assets (556,000) 1,304,000
Income tax receivable (1,570,000) 102,000
Trade accounts payable, accrued expenses
and other current liabilities 4,608,000 301,000
Restructuring accruals (7,728,000) (458,000)
Other non current liabilities 56,000 47,000
Other assets (1,983,000) 1,005,000
------------ ------------
Net cash provided from operating activities 27,507,000 30,491,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (58,420,000) (500,000)
Additions to property and equipment, net (24,151,000) (10,527,000)
Distributions from (advances to) unconsolidated joint
ventures, net (7,155,000) 2,644,000
Distributions to minority interest owners (10,000) (49,000)
------------ ------------
Net cash used in investing activities (89,736,000) (8,432,000)
------------ ------------
</TABLE>
(Continued)
5
<PAGE> 6
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and capital leases (13,679,000) (3,349,000)
Proceeds from issuance of debt 71,277,000 4,500,000
Proceeds from exercise of stock options 571,000 11,000
Deferred financing costs (129,000) (1,406,000)
------------ ------------
Net cash provided from (used in) financing activities 58,040,000 (244,000)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,189,000) 21,815,000
CASH AND CASH EQUIVALENTS, beginning of period 12,050,000 4,276,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 7,861,000 $ 26,091,000
============ ============
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 14,472,000 $ 23,932,000
============ ============
Cash payments of income taxes $ 2,034,000 $ 416,000
============ ============
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
6
<PAGE> 7
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 nine months
ended September 30, 1999, such services represented 53%, 21% and 26%,
respectively of net revenues. These services and products are paid for
primarily by Medicare, Medicaid and other third-party payors. As of
September 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 focusing more on internal
growth, integrating 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 nine months of
1999, Medicare oxygen reimbursements accounted for approximately 27% of
the Company's revenues. The Company estimates the Medicare oxygen
reimbursement reductions decreased net revenue and pre-tax income by
approximately $18.5 million and $21.9 million for the nine months ended
September 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
September 30, 1999 represent remaining facility exit costs ($0.7
million) and termination costs of certain management contracts ($2.2
million). As costs were incurred and payments were made, $7.7 million
and $0.5 million were charged against the restructuring accruals in the
first nine months of 1998 and 1999, respectively.
3. ACQUISITIONS
In 1998, the Company acquired four home health care businesses. The
Company did not acquire any home health care businesses in the first
nine months of 1999 and does not expect to acquire any home health care
businesses during the remainder of 1999. The Company made payments of
$0.5 million in the third quarter of 1999 under the terms of an earnout
agreement related to a 1998 acquisition.
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 $1,657,000 and $3,047,000 in 1998 and the first nine months of 1999,
respectively, 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
exercise several remedies, including acceleration of the due date of all
outstanding amounts under the Facility and denying the Company access to
funding 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 November 8, 1999, approximately $246.4
million was outstanding under the revolving
8
<PAGE> 9
line of credit and approximately $66.3 million was outstanding under the
term loan. 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.
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). If exercised, the 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 its 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. For
periods subsequent to 1999, the Company is committed to achieving
financial covenants that contemplate increased levels of profitability,
due in large part to revenue growth. If this revenue growth does not
occur, the Company will likely not remain in compliance with its
financial covenants throughout 2000 and will be required to reach a
resolution with its Banks in this matter. 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 September 30, Nine Months Ended September 30,
---------------------------------------- ------------------------------------
1998 1999 1998 1999
---------------- --------------- ---------------- ------------
<S> <C> <C> <C> <C>
Net loss $ (9,865,000) $ (5,182,000) $ (2,947,000) $(15,635,000)
================ ================ ================ ============
Weighted average common
shares outstanding 14,981,000 15,246,000 15,002,000 15,221,000
Effect of dilutive options and warrants -- -- -- --
---------------- ---------------- ---------------- ------------
Adjusted diluted common shares
outstanding 14,981,000 15,246,000 15,002,000 15,221,000
================ ================ ================ ============
Net loss per common share
- Basic $ (0.66) $ (0.34) $ (0.20) $ (1.03)
================ ================ ================ ============
- Diluted $ (0.66) $ (0.34) $ (0.20) $ (1.03)
================ ================ ================ ============
</TABLE>
6. BASIS OF FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of the Company
for the three months and nine months ended September 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 September 30, 1999
and the results of operations and the cash flows for the three months
and nine months ended September 30, 1999 and 1998.
The results of operations for the three months and nine months ended
September 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.
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 of 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 and
also likely result in a breach under the Bank Credit Facility. 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 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>
Nine Months Ended Sept. 30,
---------------------------
1998 1999
-------- --------
<S> <C> <C>
Home respiratory therapy services 48% 53%
Home infusion therapy services 22 21
Home medical equipment and medical supplies 30 26
------- -------
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.
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 Bank Credit Facility 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 300 positions in the field during the
first nine 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 of 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 and
also likely result in a breach under the Bank Credit Facility. 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
15
<PAGE> 16
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 nine months of 1999, Medicare oxygen
reimbursements accounted for approximately 27 percent of the Company's
revenues. The Company estimates the Medicare oxygen reimbursement
reductions decreased net revenue and pre-tax income by approximately
$18.5 million and $21.9 million for the nine months ended September
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
In the quarter ended September 30, 1998, the Company recorded a net
pre-tax accounting charge of $15.2 million related to (a) certain
non-recurring events in the third quarter ($3.2 million), (b) the
recording of additional reserves related to accounts receivable ($16.0
million), and (c) the reversal of excess restructuring accruals and
related reserves ($4.0 million credit). A description of these charges
follows:
The non-recurring charge of $3.2 million relates to certain one-time
expenses associated with the retirement package of the former CEO, CEO
transition expenses, deal costs of abandoned mergers and acquisitions,
and a provision for adverse settlements related to accounting disputes
with certain sellers of acquired businesses.
The accounts receivable charge of $16.0 million relates primarily to
disruptions in collections as a result of the consolidation of billing
centers and changes in certain billing procedures continuing from the
1997 restructuring. Billing center efficiencies have been affected
because of personnel turnover and other adverse impacts of previous cost
reduction plans. The termination of unprofitable contracts with certain
healthcare institutions has also adversely affected collections on
existing receivables. Included in the total accounts receivable charge
is $1.5 million related to certain accounts receivable consulting and
management services provided to the Company.
The Company adjusted its original estimates of restructuring costs
related to the 1997 restructuring activities. This resulted in a $4.0
million reversal of certain restructuring accruals and other reserves
recorded in connection with the restructuring.
16
<PAGE> 17
The impact of these non-recurring charges on various classifications
within the interim condensed statements of operations for the third
quarter and nine months for 1998 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Cost of Sales $ (386,000)
Operating Expenses 14,500,000
General & Administrative Expenses 4,741,000
Restructuring (3,614,000)
------------
$ 15,241,000
============
</TABLE>
The following table and discussion sets forth items from the statements
of operations, excluding the above discussed non-recurring charges, as a
percentage of net revenues:
PERCENTAGE OF NET REVENUES
(EXCLUDING NON-RECURRING CHARGES)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 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 24.0 25.0 23.8 24.9
Operating expenses 56.9 57.5 54.0 57.6
General and administrative 4.4 3.7 3.7 4.0
Depreciation and amortization 10.0 11.4 9.6 11.1
Interest 5.9 8.0 5.5 8.0
------- ------- ------ -------
Total costs and expenses 101.2% 105.6% 96.6% 105.6%
------- ------- ------ -------
Income (loss) from operations
before income taxes (1.2)% (5.6)% 3.4% (5.6)%
======= ======= ====== =======
</TABLE>
17
<PAGE> 18
The Company's operating results for the nine months ended September 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 $21.9 million in the nine 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 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 into 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 nine months of 1999, the
Company has eliminated 41 positions from its corporate Support
Center in Brentwood, Tennessee and approximately 300 positions in
the field.
18
<PAGE> 19
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 third
quarter of 1999 were reduced by $3.4 million compared to the fourth
quarter of 1998. Also, general and administrative expenses in the third
quarter of 1999 were reduced by $1.4 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 the nine months ended 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 SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998 (EXCLUDING NON-RECURRING CHARGES)
NET REVENUES. Net revenues decreased from $101.3 million for the quarter
ended September 30, 1998 to $89.3 million for the same period in 1999, a
decrease of $12.0 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. Following is a discussion of the components of
net revenues:
Sales and Related Services Revenues. Sales and related services
revenues decreased from $48.4 million for the quarter ended
September 30, 1998 to $42.7 million for the same period in 1999, a
decrease of $5.7 million, or 12%. This decrease is primarily
attributable to lower sales of non-core low margin products and the
exiting of lower margin contracts.
Rentals and Other Revenues. Rentals and other revenues decreased
from $51.8 million for the quarter ended September 30, 1998 to
$45.8 million for the same period in 1999, a decrease of $6.0
million, or 12%. 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.
Earnings from Hospital Joint Ventures. Earnings from hospital joint
ventures decreased from $1.2 million for the quarter ended
September 30, 1998 to $0.8 million for the same period in 1999, a
decrease of $0.4 million, or 33%, 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 $24.3 million for the quarter ended September 30, 1998 to
$22.3 million for the same period in 1999, a decrease of $2.0 million,
or 8%. As a percentage of sales and related services revenues, cost of
sales and related services increased from 50% to 52%. This increase is
primarily attributable to
19
<PAGE> 20
lower vendor rebates in the quarter ended September 30, 1999, a higher
level of favorable book-to-physical inventory adjustments recorded in
the quarter ended September 30, 1998 compared to the same period in
1999 and the Company booking a 1999 provision for inventory related to
exiting certain contracts and the de-emphasis of soft goods.
OPERATING EXPENSES. Operating expenses decreased from $57.8 million for
the quarter ended September 30, 1998 to $51.3 million for the same
period in 1999, a decrease of $6.5 million, or 11%. This decrease is
primarily attributable to lower salary expense in the quarter ended
September 30, 1999 as a result of the Company's aggressive steps to
control expenses which included the elimination of 300 positions in the
field. The lower salary expense was partially offset by higher bad debt
expense. Bad debt expense was 5.6% of net revenue for the quarter ended
September 30, 1999 compared to 4.3% of net revenue for the same period
in 1998. The Company analyzes its accounts receivable portfolio for
collectibility on an ongoing basis. Negative trends in cash collections
were experienced in the fourth quarter of 1998 and in the first quarter
of 1999. However, cash collections improved in the second and third
quarters of 1999. Management is in the process of reviewing its accounts
receivable portfolio to determine whether additional bad debt reserves
will be required as of December 31, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased from $4.5 million for the quarter ended September 30, 1998 to
$3.3 million for the same period in 1999, a decrease of $1.2 million, or
27%. This decrease is attributable to lower salary expense as a result
of the positions eliminated at the Corporate Support Center and reduced
consulting expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased from $10.1 million for the quarter ended September 30, 1998 to
$10.2 million for the same period in 1999, an increase of $.1 million.
Management is in the process of evaluating its goodwill and other
intangibles for possible impairment in light of the Company's current
operating results. If management determines that the current results are
indicative of future performance, the carrying amount of some of the
Company's goodwill and other intangibles may not be recoverable. If this
conclusion is reached, some portion of these assets will be written off
in the fourth quarter of 1999.
INTEREST. Interest expense increased from $5.9 million for the quarter
ended September 30, 1998, to $7.2 million for the same period in 1999,
an increase of $1.3 million, or 22%. The increase is attributable to
higher interest rates on borrowings, and to additional interest expense
on increased borrowings under the Bank Credit Facility.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998 (EXCLUDING NON-RECURRING CHARGES)
NET REVENUES. Net revenues decreased from $307.7 million for the nine
months ended September 30, 1998 to $271.0 million for the same period in
1999, a decrease of $36.7 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:
20
<PAGE> 21
Sales and Related Services Revenues. Sales and related services
revenues decreased from $146.9 million for the nine months ended
September 30, 1998 to $128.3 million for the same period in 1999, a
decrease of $18.6 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 Revenues. Rentals and other revenues decreased
from $156.7 million for the nine months ended September 30, 1998 to
$140.4 million for the same period in 1999, a decrease of $16.3
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 $4.1 million for the nine months ended
September 30, 1998 to $2.3 million for the same period in 1999, a
decrease of $1.8 million, or 44%, 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 $73.4 million for the nine months ended September 30,
1998 to $67.6 million for the same period in 1999, a decrease of $5.8
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 nine
months ended September 30, 1999, a higher level of favorable
book-to-physical inventory adjustments recorded in the nine months ended
September 30, 1998 compared to the same period in 1999 and the Company
booking a 1999 provision for inventory related to exiting certain
contracts and the de-emphasis of soft goods.
OPERATING EXPENSES. Operating expenses decreased from $166.1 million for
the nine months ended September 30, 1998 to $156.1 million for the same
period in 1999, a decrease of $10.0 million, or 6%. This decrease is
primarily attributable to lower salary expense in the nine months ended
September 30, 1999 as a result of the Company's aggressive steps to
control expenses which included the elimination of 300 positions in the
field. The lower salary expense was partially offset by higher bad debt
expense. Bad debt expense was 5.1% of net revenue for the nine months
ended September 30, 1999 compared to 3.7% of net revenue for the same
period in 1998. The Company analyzes its accounts receivable portfolio
for collectibility on an ongoing basis. Negative trends in cash
collections were experienced in the fourth quarter of 1998 and in the
first quarter of 1999. However, cash collections improved in the second
and third quarters of 1999. Management is in the process of reviewing
its accounts receivable portfolio to determine whether additional bad
debt reserves will be required as of December 31, 1999. Even though the
dollar level of operating expenses decreased, operating expenses as a
percentage of net revenue increased from 54% for the nine months ended
September 30, 1998 to 58% for the same period in 1999 as a result of
decreased revenue.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased from $11.5 million for the nine months ended September 30,
1998 to $10.7 million for the same period in 1999, a decrease of $0.8
million or 7%. This decrease is attributable to lower salary expense as
a result of the positions eliminated at the Corporate Support Center and
reduced consulting expenses.
21
<PAGE> 22
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased from $29.5 million for the nine months ended September 30,
1998 to $30.2 million for the same period in 1999, an increase of $0.7
million, or 2%. Management is in the process of evaluating its goodwill
and other intangibles for possible impairment in light of the Company's
current operating results. If management determines that the current
results are indicative of future performance, the carrying amount of
some of the Company's goodwill and other intangibles may not be
recoverable. If this conclusion is reached, some portion of these assets
will be written off in the fourth quarter of 1999.
INTEREST. Interest expense increased from $16.9 million for the nine
months ended September 30, 1998, to $21.6 million for the same period in
1999, an increase of $4.7 million, or 28%. The increase was attributable
to higher interest rates on borrowings, and to additional interest
expense on increased borrowings under the Bank Credit Facility.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company's working capital was $103.8 million
and the current ratio was 3.0x 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 $1,657,000 and $3,047,000 in 1998 and the first nine months of 1999,
respectively, 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
exercise several remedies, including acceleration of the due date of all
outstanding amounts under the Facility and denying the Company access to
funding 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 November 8, 1999, approximately $246.4
million was outstanding under the revolving line of credit and
approximately $66.3 million was outstanding under the term loan.
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%.
22
<PAGE> 23
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 September 30, 1999, the
weighted average borrowing rate was 8.2416%.
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). If exercised, the 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 its 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. For
periods subsequent to 1999, the Company is committed to achieving
financial covenants that contemplate increased levels of profitability,
due in large part to revenue growth. If this revenue growth does not
occur, the Company will likely not remain in compliance with its
financial covenants throughout 2000 and will be required to reach a
resolution with its Banks in this matter. 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
23
<PAGE> 24
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 $90.0 million at December 31, 1998 and September 30, 1999,
respectively. These receivables represented an average of
approximately 92 and 96 days sales in accounts receivable at December
31, 1998 and September 30, 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." The Company analyzes its
accounts receivable portfolio for collectibility on an ongoing basis.
Negative trends in cash collections were experienced in the fourth
quarter of 1998 and in the first quarter of 1999. However, cash
collections improved in the second and third quarters of 1999.
Management is in the process of reviewing its accounts receivable
portfolio to determine whether additional bad debt reserves will be
required as of December 31, 1999.
Net cash provided from operating activities was $27.5 million and $30.5
million for the nine months ended September 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 $89.7 million
and $8.4 million for the nine months ended September 30, 1998 and 1999,
respectively. Acquisition expenditures decreased from $58.4 million for
the nine months ended September 30, 1998 to $0.5 million for the same
period in 1999. Capital expenditures decreased from $24.2 million for
the nine months ended September 30, 1998 to $10.5 million for the same
period in 1999, a decrease of $13.7 million. Net cash provided from
(used in) financing activities was $58.0 million and ($0.2 million) for
the nine months ended September 30, 1998 and 1999, respectively. The
cash provided from financing activities for the nine months ended
September 30, 1998 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 September 1, 1999, Nasdaq
de-listed the Company's common stock and it is no longer listed for
trading on the Nasdaq National Market. As a result, beginning September
2, 1999, trading of the Company's common stock is 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 - Liquidity."
24
<PAGE> 25
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 has been developed and
certified, and that the version has been installed when available. The
majority of testing and certification must be performed by these
vendors, and the Company has been informed that such vendors have
undertaken 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 $1,000,000 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 $200,000, 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 September 30, 1999 with a target of
100% compliance by November 30, 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
status of compliance for all patient equipment. In the few instances
where equipment has been identified with Year 2000 compliance
issues, the non-compliant equipment was either upgraded or replaced
as of July 31, 1999.
25
<PAGE> 26
- 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 were upgraded or replaced as of
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.
- Contingency plans have been established 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 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. Medicare has indicated
that it will delay processing of claims having Year 2000 dates of
service until January 17, 2000. Such action could have a short term
impact on the Company's cash flow in the first quarter of 2000.
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
26
<PAGE> 27
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 September 30, 1999, the Company's consolidated
indebtedness was $325,115,000. 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 to which the Company is
leveraged and the terms contained in the Bank Credit Facility may
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, its competitors, 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
27
<PAGE> 28
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 which began on October 1, 1999 in
which the Company is participating, 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 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.
Liquidity. Effective at the close of business on September 1,
1999, Nasdaq de-listed the Company's common stock and it is no longer
listed for trading on the Nasdaq National Market. As a result, beginning
September 2, 1999, trading of the Company's common stock is 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 and its price have been
adversely affected which may limit the Company's ability to raise
additional capital.
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
28
<PAGE> 29
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. Effective October 1, 1999, Medicare
established new guidelines for respiratory assist devices ("RAD"),
which includes continuous positive airway pressure devices, bi-level
respiratory devices (without backup) and bi-level respiratory devices
with back up. The changes require additional documentation in order to
continue coverage on existing patients as well as new coverage criteria
for new patients. In addition, the bi-level respiratory device (without
backup) was transferred from a frequently serviced item to "capped
rental". Currently, respiratory assist devices account for approximately
$8 million in annualized revenues. The above changes will likely slow
cash collections as well as negatively impact revenues. At this time,
the Company is unable to estimate the impact on cash collections and
revenues. 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% per year. 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 nine
months ended September 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 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. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Year 2000 Compliance."
"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."
29
<PAGE> 30
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 to experience
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. The Company reported a net loss of $15.6
million for the nine months ended September 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. There can be no assurance that
the Company can increase growth in net revenues. 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.
Influence of Executive Officers, Directors and Principal
Stockholder. On September 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
30
<PAGE> 31
for qualified management personnel is intense. Recent organizational
restructurings and the ongoing OIG investigation, among other factors,
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
encounters 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 provides for a floating interest rate. As of
September 30, 1999, the Company had outstanding borrowings of
approximately $319.9 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 $1.7 million. Interest expense
associated with other debts would not materially impact the Company as
most interest rates are fixed.
31
<PAGE> 32
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 September 3, 1999 the Company filed a
current report on Form 8-K reporting that the Nasdaq National Market
has de-listed the Company's common stock from the Nasdaq National
Market System effective at the close of business on September 1,
1999.
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HOMEPATIENT, INC.
November 15, 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
33
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
<S> <C>
27 Financial Data Schedule (for SEC use only)
</TABLE>
34
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICAN HOMEPATIENT, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 26,091,000
<SECURITIES> 0
<RECEIVABLES> 137,227,000
<ALLOWANCES> 44,745,000
<INVENTORY> 15,412,000
<CURRENT-ASSETS> 156,481,000
<PP&E> 175,819,000
<DEPRECIATION> 109,688,000
<TOTAL-ASSETS> 513,163,000
<CURRENT-LIABILITIES> 52,662,000
<BONDS> 325,115,000
0
0
<COMMON> 152,000
<OTHER-SE> 141,062,000
<TOTAL-LIABILITY-AND-EQUITY> 513,163,000
<SALES> 128,273,000
<TOTAL-REVENUES> 270,973,000
<CGS> 67,562,000
<TOTAL-COSTS> 67,562,000
<OTHER-EXPENSES> 218,598,000
<LOSS-PROVISION> 13,907,000
<INTEREST-EXPENSE> 21,571,000
<INCOME-PRETAX> (15,187,000)
<INCOME-TAX> 448,000
<INCOME-CONTINUING> (15,635,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,635,000)
<EPS-BASIC> (1.03)
<EPS-DILUTED> (1.03)
</TABLE>
