<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CHECK ONE FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2000
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
---------- ----------
AMERICAN HOMEPATIENT, INC.
--------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-19532 62-1474680
-------- ------- ----------
(STATE OR OTHER JURISDICTION OF (COMMISSION (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) FILE NUMBER) IDENTIFICATION NO.)
5200 MARYLAND WAY, SUITE 400, BRENTWOOD, TENNESSEE 37027
--------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(615) 221-8884
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
-----------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF
CHANGES 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 [ ]
15,471,087
--------------------------------------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF AUGUST 7, 2000)
TOTAL NUMBER OF SEQUENTIALLY
NUMBERED PAGES IS 29
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 28,123,000 $ 12,228,000
Accounts receivable, less allowance for doubtful accounts
of $56,876,000 and $53,689,000 respectively 75,956,000 77,431,000
Inventories 16,499,000 13,925,000
Prepaid expenses and other assets 982,000 1,334,000
-------------- --------------
Total current assets 121,560,000 104,918,000
-------------- --------------
PROPERTY AND EQUIPMENT, at cost 174,558,000 186,011,000
Less accumulated depreciation and amortization (113,465,000) (127,603,000)
-------------- --------------
Net property and equipment 61,093,000 58,408,000
-------------- --------------
OTHER ASSETS
Excess of cost over fair value of net assets acquired, net 202,622,000 200,100,000
Investment in unconsolidated joint ventures 17,473,000 12,052,000
Deferred financing costs, net 3,703,000 3,830,000
Other assets, net 17,549,000 14,585,000
-------------- --------------
Total other assets 241,347,000 230,567,000
-------------- --------------
$ 424,000,000 $ 393,893,000
============== ==============
</TABLE>
(Continued)
2
<PAGE> 3
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and capital leases $ 16,644,000 $ 16,376,000
Trade accounts payable 23,327,000 14,447,000
Other payables 1,854,000 3,215,000
Accrued expenses:
Payroll and related benefits 7,472,000 6,039,000
Interest 596,000 1,962,000
Insurance 3,979,000 4,927,000
Restructuring accruals 1,234,000 297,000
Other 5,924,000 8,740,000
-------------- --------------
Total current liabilities 61,030,000 56,003,000
-------------- --------------
NONCURRENT LIABILITIES
Long-term debt and capital leases, less current portion 298,778,000 289,642,000
Other noncurrent liabilities 7,204,000 5,499,000
-------------- --------------
Total noncurrent liabilities 305,982,000 295,141,000
-------------- --------------
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, 15,160,000 and
15,471,000 shares, respectively 152,000 155,000
Paid-in capital 172,867,000 173,029,000
Accumulated deficit (116,031,000) (130,435,000)
-------------- --------------
Total stockholders' equity 56,988,000 42,749,000
-------------- --------------
$ 424,000,000 $ 393,893,000
============== ==============
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
3
<PAGE> 4
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------------- --------------------------------
1999 2000 1999 2000
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES
Sales and related service revenues $ 42,719,000 $ 42,956,000 $ 85,579,000 $ 85,458,000
Rentals and other revenues 46,820,000 47,048,000 94,601,000 91,284,000
Earnings from joint ventures 884,000 1,131,000 1,481,000 2,283,000
-------------- -------------- -------------- --------------
Total revenues 90,423,000 91,135,000 181,661,000 179,025,000
-------------- -------------- -------------- --------------
EXPENSES
Cost of sales and related services, excluding
depreciation and amortization 22,557,000 21,179,000 45,276,000 43,005,000
Operating 51,724,000 54,491,000 104,751,000 107,955,000
General and administrative 3,536,000 3,681,000 7,423,000 7,031,000
Depreciation and amortization 10,165,000 9,882,000 19,984,000 20,094,000
Interest 7,170,000 7,582,000 14,382,000 15,044,000
-------------- -------------- -------------- --------------
Total expenses 95,152,000 96,815,000 191,816,000 193,129,000
-------------- -------------- -------------- --------------
LOSS FROM OPERATIONS BEFORE INCOME
TAXES (4,729,000) (5,680,000) (10,155,000) (14,104,000)
PROVISION FOR INCOME TAXES 148,000 150,000 298,000 300,000
-------------- -------------- -------------- --------------
NET LOSS $ (4,877,000) $ (5,830,000) $ (10,453,000) $ (14,404,000)
============== ============== ============== ==============
NET LOSS PER COMMON SHARE
- Basic $ (0.32) $ (0.37) $ (0.69) $ (0.93)
============== ============== ============== ==============
- Diluted $ (0.32) $ (0.37) $ (0.69) $ (0.93)
============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
- Basic 15,216,000 15,600,000 15,194,000 15,558,000
============== ============== ============== ==============
- Diluted 15,216,000 15,600,000 15,194,000 15,558,000
============== ============== ============== ==============
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements
4
<PAGE> 5
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,453,000) $(14,404,000)
Adjustments to reconcile net loss from operations
to net cash provided from (used in) operating activities:
Depreciation and amortization 19,984,000 20,094,000
Equity in (earnings) losses of unconsolidated joint
ventures 508,000 (698,000)
Minority interest 125,000 98,000
Change in assets and liabilities:
Accounts receivable, net 4,390,000 1,219,000
Inventories 5,195,000 2,898,000
Prepaid expenses and other assets 883,000 (357,000)
Income tax receivable 52,000 247,000
Trade accounts payable, accrued expenses
and other current liabilities 57,000 (6,261,000)
Restructuring accruals (313,000) (937,000)
Other noncurrent liabilities 45,000 54,000
Other assets 536,000 173,000
------------ ------------
Net cash provided from operating activities 21,009,000 2,126,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (used in) joint venture dissolutions (50,000) 917,000
Additions to property and equipment, net (6,843,000) (9,514,000)
Distributions from unconsolidated joint
ventures, net 2,797,000 230,000
Distributions to minority interest owners (49,000) (95,000)
------------ ------------
Net cash used in investing activities (4,145,000) (8,463,000)
------------ ------------
</TABLE>
(Continued)
5
<PAGE> 6
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Continued)
<TABLE>
<CAPTION>
Six Months Ended June 30
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and capital leases (1,561,000) (8,966,000)
Proceeds from issuance of debt 4,500,000 377,000
Proceeds from Employee Stock Purchase Plan -- 168,000
Deferred financing costs (1,398,000) (1,137,000)
------------ ------------
Net cash provided from (used in) financing activities 1,541,000 (9,558,000)
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS 18,405,000 (15,895,000)
CASH AND CASH EQUIVALENTS, beginning of period 4,276,000 28,123,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 22,681,000 $ 12,228,000
============ ============
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 16,792,000 $ 13,678,000
============ ============
Cash payments of income taxes $ 357,000 $ 298,000
============ ============
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
6
<PAGE> 7
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
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 and infusion therapies
and the rental and sale of home medical equipment and home health care supplies.
For the six months ended June 30, 2000, such services represented 55%, 20% and
25%, respectively of net revenues. These services and products are paid for
primarily by Medicare, Medicaid and other third-party payors. As of June 30,
2000, the Company provided these services to patients primarily in the home
through 306 centers in 39 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, South
Dakota, Tennessee, Texas, Virginia, Washington, West Virginia and Wisconsin.
From its inception through 1997 the Company experienced substantial growth
primarily as a result of its strategy of acquiring and operating home health
care businesses. Beginning in 1998, the Company's strategy shifted from
acquiring new businesses to focus more on internal growth, the integration of
its acquired operations and achieving operating efficiencies.
2. MEDICARE OXYGEN REIMBURSEMENT REDUCTIONS
The Medicare reimbursement rate for oxygen related services was reduced by 25%
beginning January 1, 1998 as a result of the Balanced Budget Act of 1997 (the
"Medicare Oxygen Reimbursement Reduction") and an additional reduction of 5%
beginning January 1, 1999. The reimbursement rate for certain drugs and
biologicals covered under Medicare was also reduced by 5% beginning January 1,
1998. In addition, Consumer Price Index increases in Medicare reimbursement
rates for home medical equipment, including oxygen, will not resume until the
year 2003. The Company is one of the nation's largest providers of home oxygen
services to patients, many of whom are Medicare recipients, and is therefore
significantly affected by this legislation. Medicare oxygen reimbursements
account for approximately 27% of the Company's revenues.
3. BANK CREDIT FACILITY
The Company is the borrower under a $306.0 million credit facility (the "Bank
Credit Facility") between the Company and Bankers Trust Company, as agent for a
syndicate of banks (the "Banks"). At December 31, 1999, the Company was in
default under several of the financial covenants in the Fourth Amended and
Restated Credit Agreement, as amended, between the Company and Bankers Trust
Company, as agent for the Banks (the Credit Agreement as amended from time to
time is hereinafter referred to as the "Credit Agreement") as a result of the
Company's financial results for fiscal year 1999 and the fourth quarter of 1999.
The Credit Agreement was amended on April 6, 2000. The Company, on that date,
entered into a Third
7
<PAGE> 8
Amendment and Limited Waiver to the Fourth Amended and Restated Credit Agreement
(the "Third Amendment"). The Third Amendment waived then existing events of
default, required a $5.0 million principal repayment, modified financial
covenants, limited availability under the Bank Credit Facility to the amounts
outstanding under the Bank Credit Facility at the time of the Third Amendment
and made a number of other changes to the Credit Agreement. The Company is
required to employ a bank financial advisor to review and evaluate the Company's
finances. Substantially all of the Company's assets have been pledged as
security for borrowings under the Bank Credit Facility. Indebtedness under the
Bank Credit Facility, as of August 7, 2000, totals $306.0 million.
The modified financial covenants are structured such that the Company would
remain in compliance with the covenants if management's operating projections
and related cash flow projections for 2000 are achieved; however, as the
covenants become much more restrictive at January 31, 2001, management's
projections indicate it is likely that the Company will not be in compliance
with respect to such covenants at January 31, 2001.
In addition, the amended Credit Agreement states that any liability that results
from the government investigation discussed in Note 7, which the lenders
determine could reasonably be expected to have a material adverse effect on the
Company, constitutes an event of default.
In any event of noncompliance or default under the amended Credit Agreement, the
lenders have the ability to demand payment of all outstanding amounts, and there
is currently no commitment as to how any such demand would be satisfied by the
Company.
The Credit Agreement was previously amended on April 14, 1999. The Company, on
that date, entered into a Second Amendment to the Fourth Amended and Restated
Credit Agreement (the "Second Amendment"). The Second Amendment waived then
existing events of default, modified financial covenants and made a number of
other changes to the Credit Agreement.
As part of the Second Amendment, the Company's credit availability was reduced
from $360.0 million to $328.6 million, including a $75.0 million term loan and
$253.6 million revolving line of credit. As of December 31, 1999, the Company's
credit availability was reduced to $318.4 million, including a $64.8 million
term loan and a $253.6 revolving line of credit. As of June 30, 2000, $306.0
million was outstanding under the Credit Facility, including $249.2 million
under the revolving line of credit and $56.8 million under the term loan.
As part of the Second Amendment, the Company 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
8
<PAGE> 9
4. 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 anti-dilutive using the treasury stock
method. The following information is necessary to calculate earnings per share
for the periods presented:
<TABLE>
<CAPTION>
(unaudited)
--------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
1999 2000 1999 2000
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss $ (4,877,000) $ (5,830,000) $ (10,453,000) $ (14,404,000)
============== ============== ============== ==============
Weighted average common
shares outstanding 15,216,000 15,600,000 15,194,000 15,558,000
Effect of dilutive options and warrants -- -- -- --
-------------- -------------- -------------- --------------
Adjusted diluted commons shares
outstanding 15,216,000 15,600,000 15,194,000 15,558,000
============== ============== ============== ==============
Net loss per common share
- Basic $ (0.32) $ (0.37) $ (0.69) $ (0.93)
============== ============== ============== ==============
- Diluted $ (0.32) $ (0.37) $ (0.69) $ (0.93)
============== ============== ============== ==============
</TABLE>
5. BASIS OF FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of the Company for the
six months ended June 30, 2000 and 1999 herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management of the Company, the accompanying
unaudited interim consolidated financial statements reflect all adjustments
(consisting of only normally recurring accruals) necessary to present fairly the
financial position at June 30, 2000 and the results of operations and the cash
flows for the six months ended June 30, 2000 and 1999.
The results of operations for the six months ended June 30, 2000 and 1999 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,
1999.
Certain reclassifications have been made to the 1999 consolidated financial
statements to conform to the 2000 presentation.
9
<PAGE> 10
6. IMPLEMENTATION OF FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") has been issued effective
for fiscal years beginning after June 15, 2000. SFAS No. 133 requires companies
to record derivatives on the balance sheet as assets or liabilities, measured at
fair value. The Company is required to adopt the provisions of SFAS No. 133
beginning in 2001; however, the Company does not expect the adoption to have a
material effect on the Company's financial position or results of operations.
7. 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 examined 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 also responded to government
requests for information and documents. The Company has been engaged in
discussions with the government concerning the investigation and settlement of
these matters. To date, no settlement or resolution has been reached; however,
management believes that the final outcome of the government's investigation
will likely have a material adverse impact on the Company's operating results
and financial condition and will also likely result in a default under the Bank
Credit Facility. The potential timing and dollar amount of any settlement cannot
be estimated, therefore no provision for the resolution of the investigation has
been reflected in the Company's financial statements. The final outcome of the
investigation could include, among other things, the repayment of reimbursements
previously received by the Company related to improperly billed claims, the
imposition of fines or penalties, or the suspension or exclusion of the Company
from participation in the Medicare, Medicaid and other government reimbursement
programs. 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 any such investigations and
inquiries cannot be predicted. The Company expects to incur additional legal
expenses in the future 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
10
<PAGE> 11
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 - Government
Regulation."
11
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 INCLUDING,
WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES," "ANTICIPATES,"
"INTENDS," "EXPECTS," "ESTIMATES," "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.
GENERAL
The Company provides home health care services and products to patients through
its 306 centers in 39 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.
12
<PAGE> 13
The following table sets forth the percentage of the Company's net revenues
represented by each line of business for the periods presented:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 2000
---- ----
<S> <C> <C>
Home respiratory therapy services 53% 55%
Home infusion therapy services 20 20
Home medical equipment and medical supplies 27 25
--- ---
Total 100% 100%
=== ===
</TABLE>
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 did not acquire any home health care businesses or
develop any new joint ventures in 1999 and does not expect to do so in 2000.
Effective in the second quarter of 2000, the Company converted four of its 50%
owned joint ventures to wholly-owned businesses. See "Results of Operations" for
additional discussion.
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 examined 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 also responded to government
requests for information and documents. The Company has been engaged in
discussions with the government concerning the investigation and settlement of
these matters. To date, no settlement or resolution has been reached; however,
management believes that the final outcome of the government's investigation
will likely have a material adverse impact on the Company's operating results
and financial condition and will also likely result in a default under the Bank
Credit Facility. The potential timing and dollar amount of any settlement cannot
be estimated, therefore no provision for the resolution of the investigation has
been reflected in the Company's financial statements. The final outcome of the
investigation could include, among other things, the repayment of reimbursements
previously received by the Company related to improperly billed claims, the
imposition of fines or penalties, or the suspension or exclusion of the Company
from participation in the Medicare,
13
<PAGE> 14
Medicaid and other government reimbursement programs. 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 any such investigations and
inquiries cannot be predicted. The Company expects to incur additional legal
expenses in the future in connection with all investigations.
Health care law is an area of extensive and dynamic regulatory oversight.
Changes in laws or regulations or new interpretations of existing laws or
regulations can have a dramatic effect on permissible activities, the relative
costs associated with doing business, and the amount and availability of
reimbursement from government and other third-party payors. There can be no
assurance that federal, state or local governments will not impose additional
regulations upon the Company's activities. Such regulatory changes could
adversely affect the Company's business, making the Company unable to comply
with all regulations in the geographic areas in which it presently conducts, or
wishes to commence business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors - Government
Regulation."
MEDICARE REIMBURSEMENT FOR OXYGEN THERAPY SERVICES
The Medicare reimbursement rate for oxygen related services was reduced by 25%
beginning January 1, 1998 as a result of the Balanced Budget Act of 1997 (the
"Medicare Oxygen Reimbursement Reduction") and an additional reduction of 5%
beginning January 1, 1999. The reimbursement rate for certain drugs and
biologicals covered under Medicare was also reduced by 5% beginning January 1,
1998. In addition, Consumer Price Index increases in Medicare reimbursement
rates for home medical equipment, including oxygen, will not resume until the
year 2003. The Company is one of the nation's largest providers of home oxygen
services to patients, many of whom are Medicare recipients, and is therefore
significantly affected by this legislation. Medicare oxygen reimbursements
account for approximately 27 percent of the Company's revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Risk Factors - Medicare Reimbursement for Oxygen Therapy and Other
Services."
RESULTS OF OPERATIONS
The Company reports its net revenues as follows: (i) sales and related services;
(ii) rentals and other income; 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
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<PAGE> 15
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.
The following table and discussion sets forth items from the statements of
operations as a percentage of net revenues:
PERCENTAGE OF NET REVENUES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales and related services 24.9 23.2 24.9 24.0
Operating expenses 57.2 59.8 57.7 60.3
General and administrative 3.9 4.0 4.1 3.9
Depreciation and amortization 11.3 10.8 11.0 11.2
Interest 7.9 8.3 7.9 8.4
------ ------ ------ ------
Total costs and expenses 105.2% 106.2% 105.6% 107.9%
------ ------ ------ ------
Loss from operations
before income taxes (5.2)% (6.2)% (5.6)% (7.9)%
====== ====== ====== ======
</TABLE>
The Company's operating results for the prior two years and continuing into the
first six months of 2000 are significantly lower than periods prior to 1998 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 have been reduced by approximately $14.5 million in the first six months
of 2000 as a result of the 25% and the additional 5% reductions. Second,
beginning in the latter half of 1998, 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 (with
continued effect into 1999 and 2000). Third, the Company has halted the
acquisition of home health care businesses and its joint venture development
program. Fourth, accounts receivable has 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.
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. It also exited certain contracts and businesses
perceived to be lower margin during the third and fourth quarters of 1998 and
first half
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<PAGE> 16
of 1999. The result was a substantial decrease in revenues beginning during the
latter half of 1998.
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 by mid-December of 1998. A new strategy 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, the Company broadened
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 has also re-directed its efforts
to increase revenues for certain managed care contracts - both new and
existing. The Company is actively pursuing, and has entered into, new
managed care contracts that it considers an opportunity for profitable
revenue.
2. Decrease and control operating expenses - the Company took aggressive
steps in 1999 to decrease operating and general and administrative
expenses. The Company continues to monitor and closely manage its field
and overhead expenses.
3. Decrease DSO and bad debt - the Company has four key initiatives in
place to improve accounts receivable performance: (i) proper staffing
and training; (ii) process redesign and standardization; (iii)
consolidation of billing center activities; and (iv) billing center
specific goals geared toward improved cash collections and reduced
accounts receivable.
Concurrent with these activities, an enhanced program to ensure compliance with
all government requirements has been rolled out and is being followed throughout
the Company. This program seeks to ensure that American HomePatient acts at all
times in a diligent and ethical fashion.
Effective in the second quarter of 2000, the Company converted four of its 50%
owned joint ventures to wholly-owned operations as a result of the withdrawal of
the hospital partners from the partnerships. As a result of these transactions,
the results of operations of these four ventures have been consolidated into the
financial results of the Company beginning in the second quarter. Previously,
these four joint ventures were accounted for under the equity method.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
NET REVENUES. Net revenues increased from $90.4 million for the quarter ended
June 30, 1999 to $91.1 million for the same period in 2000, an increase of $0.7
million, or 1%. The accounting consolidation of four of the Company's joint
ventures, as described above, added approximately $3.5 million to net revenue in
the current quarter. Without this additional revenue, net revenue in the current
quarter would have decreased by $2.8 million compared to the same quarter last
year. This decrease is primarily attributable to lower sales of non-core low
margin products and the exiting of lower margin contracts due to the continuing
impact of the late 1998 decision to scale back or eliminate marginal products
and services at numerous locations. Following is a discussion of the components
of net revenues:
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<PAGE> 17
Sales and Related Services Revenues. Sales and related services
revenues increased from $42.7 million for the quarter ended June 30,
1999 to $43.0 million for the same period in 2000, an increase of $0.3
million. This increase is primarily attributable to the accounting
consolidation of four of the Company's joint ventures offset somewhat
by lower sales of non-core low margin products and the exiting of lower
margin contracts.
Rentals and Other Revenues. Rentals and other revenues increased from
$46.8 million for the quarter ended June 30, 1999 to $47.0 million for
the same period in 2000, an increase of $0.2 million. This increase is
also attributable to the accounting consolidation of four of the
Company's joint ventures, offset by the exiting of lower margin
contracts, many of which did not terminate until the end of the first
quarter of 1999 or later.
Earnings from Hospital Joint Ventures. Earnings from hospital joint
ventures increased from $0.9 million for the quarter ended June 30,
1999 to $1.1 million for the same period in 2000, an increase of $0.2
million, or 22%, which is primarily attributable to revenue growth and
decreased bad debt expense at certain joint venture locations.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services decreased
from $22.6 million for the quarter ended June 30, 1999 to $21.2 million for the
same period in 2000, a decrease of $1.4 million, or 6%. As a percentage of sales
and related services revenues, cost of sales and related services decreased from
53% to 49%. This decrease is primarily attributable to a higher level of
favorable book-to-physical inventory adjustments recorded in the quarter ended
June 30, 2000 compared to the same period in 1999 and the Company recording a
provision in 1999 for inventory related to exiting certain contracts and the
de-emphasis of soft goods.
OPERATING EXPENSES. Operating expenses increased from $51.7 million for the
quarter ended June 30, 1999 to $54.5 million for the same period in 2000, an
increase of $2.8 million, or 5%. This increase is primarily attributable to
higher bad debt expense. Bad debt expense was 7.6% of net revenue for the
quarter ended June 30, 2000 compared to 5.0% of net revenue for the same period
in 1999. The higher bad debt expense in the second quarter of 2000 was in large
part due to process problems at four of the Company's billing centers. The
Company's increased bad debt expense reflects continued changes in the
receivables portfolio due to the extended time required to obtain necessary
billing documentation, the ongoing efforts to implement a standardized model for
reimbursement and the consolidation of billing activities. The Company continues
to evaluate the impact of additional compliance efforts, the current payor
environment and other factors to determine the level of bad debt expense which
should be recorded.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $3.5 million for the quarter ended June 30, 1999 to $3.7 million
for the same period in 2000, an increase of $0.2 million, or 6%. This increase
is attributable to slightly higher personnel expenses, offset by lower legal
fees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses decreased
from $10.2 million for the quarter ended June 30, 1999 to $9.9 million for the
same period in 2000, a decrease of $0.3 million, or 3%. This decrease is
primarily attributable to a lower level of unfavorable book-to-physical
adjustments of rental equipment in the quarter ended June 30, 2000 compared to
the same period in 1999.
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<PAGE> 18
INTEREST. Interest expense increased from $7.2 million for the quarter ended
June 30, 1999, to $7.6 million for the same period in 2000, an increase of $0.4
million, or 6%, which is attributable to higher interest rates on borrowings.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
NET REVENUES. Net revenues decreased from $181.7 million for the six months
ended June 30, 1999 to $179.0 million for the same period in 2000, a decrease of
$2.7 million, or 1%. This decrease is primarily attributable to lower sales of
non-core low margin products, the exiting of lower margin contracts due to the
continuing impact of late 1998 decision to scale back or eliminate marginal
products and services at numerous locations, offset somewhat by additional
revenue from the accounting consolidation of four joint ventures in the second
quarter of 2000. Following is a discussion of the components of net revenues:
Sales and Related Services Revenues. Sales and related services
revenues decreased from $85.6 million for the six months ended June 30,
1999 to $85.5 million for the same period in 2000, a decrease of $0.1
million. 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 revenue from the accounting consolidation
of four joint ventures in the second quarter of 2000.
Rentals and Other Revenue. Rentals and other revenues decreased from
$94.6 million for the six months ended June 30, 1999 to $91.3 million
for the same period in 2000, a decrease of $3.3 million, or 3%. This
decrease is primarily attributable to the exiting of lower margin
contracts, offset somewhat by the additional revenue from the
accounting consolidation of four joint ventures in the second quarter
of 2000.
Earnings from Hospital Joint Ventures. Earnings from hospital joint
ventures increased from $1.5 million for the six months ended June 30,
1999 to $2.3 million for the same period in 2000, an increase of $0.8
million, or 53%, which was due primarily to revenue growth and
decreased bad debt expense at certain joint venture locations.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services decreased
from $45.3 million for the six months ended June 30, 1999 to $43.0 million for
the same period in 2000, a decrease of $2.3 million, or 5%. As a percentage of
sales and related services revenues, cost of sales and related services
decreased from 53% to 50%. This decrease is primarily attributable to a higher
level of favorable book-to-physical inventory adjustments recorded in the six
months ended June 30, 2000 compared to the same period in 1999 and the Company
recording a provision in 1999 for inventory related to exiting certain contracts
and the de-emphasis of soft goods.
OPERATING EXPENSES. Operating expenses increased from $104.8 million for the six
months ended June 30, 1999 to $108.0 million for the same period in 2000, an
increase of $3.2 million, or 3%. This increase is primarily attributable to
higher bad debt expense. Bad debt expense was 7.7% of net revenue for the six
months ended June 30, 2000 compared to 4.9% of net revenue for the same period
in 1999. The higher bad debt expense in the first six months of 2000 was in
large part due to process problems at four of the Company's billing centers. The
Company's increased bad debt expense reflects continued changes in the
receivables portfolio due to the extended time required to obtain necessary
billing documentation, the ongoing efforts to implement a standardized model for
reimbursement and the consolidation of billing activities. The Company
18
<PAGE> 19
continues to evaluate the impact of additional compliance efforts, the current
payor environment and other factors to determine the level of bad debt expense
which should be recorded.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased from $7.4 million for the six months ended June 30, 1999 to $7.0
million for the same period in 2000, a decrease of $0.4 million or 5%. The
decrease is primarily attributable to lower legal fees in the six months ended
June 30, 2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses remained
constant at $20.0 million for the six months ended June 30, 1999 and for the
same period in 2000.
INTEREST. Interest expense increased from $14.4 million for the six months ended
June 30, 1999, to $15.0 million for the same period in 2000, an increase of $0.6
million, or 4%. The increase was attributable to higher interest rates on
borrowings.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000 the Company's working capital was $48.9 million and the current
ratio was 1.9x as compared to working capital of $60.5 million and a current
ratio of 2.0x at December 31, 1999.
The Company is the borrower under a $306.0 million credit facility (the "Bank
Credit Facility") between the Company and Bankers Trust Company, as agent for a
syndicate of banks (the "Banks"). At December 31, 1999, the Company was in
default under several of the financial covenants in the Fourth Amended and
Restated Credit Agreement, as amended, between the Company and Bankers Trust
Company, as agent for the Banks (the Credit Agreement as amended from time to
time is hereinafter referred to as the "Credit Agreement") as a result of the
Company's financial results for fiscal year 1999 and the fourth quarter of 1999.
On April 6, 2000, management and the lenders agreed to amend the Credit
Agreement with terms which waived then existing 1999 events of default, required
a $5.0 million principal repayment upon the effectiveness of the amendment,
modified existing financial covenants, and limited the borrowing availability
under the Credit Agreement to the amounts outstanding at the time of the
amendment. Management's cash flow projections and related operating plans
indicate the Company can remain in compliance with the new financial covenants
and meet its expected obligations throughout 2000. However, as with all
projections, there is uncertainty as to whether management's projections can be
achieved.
The modified financial covenants are structured such that the Company would
remain in compliance with the covenants during 2000 if management's operating
projections and related cash flow projections are achieved; however, as the
covenants become much more restrictive at January 31, 2001, management's
projections indicate it is likely that the Company will not be in compliance
with respect to such covenants at January 31, 2001.
In addition, the amended Credit Agreement states that any liability that results
from the government investigation discussed in Note 7 to the interim financial
statements, which the lenders determine could reasonably be expected to have a
material adverse effect on the Company, constitutes an event of default.
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<PAGE> 20
In any event of noncompliance or default under the amended Credit Agreement, the
lenders have the ability to demand payment of all outstanding amounts, and there
is currently no commitment as to how any such demand would be satisfied by the
Company.
There can be no assurance that future cash flow from operations will be
sufficient to cover debt obligations. Such indebtedness, as of August 7, 2000,
totals $306.0 million.
The Credit Agreement was previously amended on April 14, 1999. The Company, on
that date, entered into a Second Amendment to the Fourth Amended and Restated
Credit Agreement (the "Second Amendment"). The Second Amendment waived then
existing events of default, modified financial covenants and made a number of
other changes to the Credit Agreement. As part of the Second Amendment, the
Company's credit availability was reduced from $360 million to $328.6 million,
including a $75 million term loan and $253.6 million revolving line of credit.
As of December 31, 1999, the Company's credit availability was reduced to $318.4
million, including a $64.8 million term loan and a $253.6 revolving line of
credit. As of June 30, 2000, $306.0 million was outstanding under the Credit
Facility, including $249.2 million under the revolving line of credit and $56.8
million under the term loan.
As part of the Second Amendment, the Company 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.
Interest is currently 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 Credit Agreement) plus an applicable
margin. The margin associated with the Adjusted Eurodollar Rate is fixed at
3.25%. The margin associated with the Base Lending Rate is fixed at 2.50%. The
applicable margins increase on September 30, 2000 to 3.50% as to the Adjusted
Eurodollar Rate and to 2.75% as to the Base Lending Rate. In addition, from and
after September 30, 2000, additional interest of 4.50% will accrue on that
portion of the Bank Credit Facility that is in excess of four times Adjusted
EBITDA. As of June 30, 2000 the weighted average borrowing rate was 9.62%.
The Credit Agreement, as amended, contains various financial covenants, the most
restrictive of which relate to measurements of EBITDA, shareholder's equity,
leverage, debt-to-equity ratios, 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.
The Bank Credit Facility also contains covenants which, among other things,
impose certain limitations or prohibitions on the Company with respect to the
incurrence of indebtedness, the creation of liens, the payment of dividends, the
redemption or repurchase of securities, investments, acquisitions, capital
expenditures, sales of assets and transactions with affiliates. The Company is
no longer permitted to make acquisitions or investments in joint ventures
without the consent of Banks holding a majority of the lending commitments under
the Bank Credit Facility.
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<PAGE> 21
In addition to maintaining compliance with its debt covenants, the Company's
future liquidity will continue to be dependent upon the relative amounts of
current assets (principally cash, accounts receivable and inventories) and
current liabilities (principally accounts payable and accrued expenses). In that
regard, accounts receivable can have a significant impact on the Company's
liquidity. The Company has various types of accounts receivable, such as
receivables from patients, contracts, and former owners of acquisitions. The
majority of the Company's accounts receivables 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
$75.2 million and $76.4 million at December 31, 1999 and June 30, 2000,
respectively. Average days' sales in accounts receivable was approximately 81
and 82 days' at December 31, 1999, and June 30, 2000, respectively. The increase
in DSO and net patient receivables in 2000 is due to the extended time required
to obtain necessary billing documentation, the ongoing efforts to implement a
standardized model for reimbursement and the consolidation of billing
activities.
Net cash provided from operating activities was $21.0 million and $2.1 million
for the six months ended June 30, 1999 and 2000, respectively. These amounts
primarily represent net loss plus depreciation and amortization and provisions
for doubtful accounts and changes in the various components of working capital.
Net cash used in investing activities was $4.1 million and $8.5 million for the
six months ended June 30, 1999 and 2000, respectively. Capital expenditures
increased from $6.8 million for the six months ended June 30, 1999 to $9.5
million for the same period in 2000, an increase of $2.7 million. Net cash
provided from (used in) financing activities was $1.5 million and ($9.6) million
for the six months ended June 30, 1999 and 2000, respectively. The cash provided
from (used in) financing activities for the six months ended June 30, 1999 and
2000 primarily relates to proceeds from the Bank Credit Facility net of
principal payments and deferred financing costs.
The Company's principal capital requirements are for working capital, capital
expenditures and debt maturities. The Company has financed and intends to
continue to finance these requirements with existing cash balances, net cash
provided by operations and other available capital expenditure financing
vehicles. Management believes that these sources will support the Company's
current level of operations as long as the Company maintains compliance with its
debt covenants and there is no adverse settlement related to the government's
investigation of the Company's billing practices. However, based on the
Company's current projections, these activities are expected to reduce the
Company's available cash during 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 pursuant to the Bank Credit Facility. As of August 7, 2000, the
Company's consolidated indebtedness under the Bank Credit Facility was $306.0
million.
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<PAGE> 22
Interest is currently 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 Credit Agreement) 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 increase in interest expense and the freezing of the Bank's lending
commitments 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 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 health
care providers. Final Stark law regulations governing referrals and financial
arrangements with physicians are currently scheduled for publication in the last
quarter of 2000. Although the Company intends to comply with all applicable
fraud and abuse laws, these laws are not always clear and may be subject to a
range of potential interpretations. There can be no assurance that
administrative or judicial clarification or interpretation of existing laws or
regulations, or legislative enactments of new laws or regulations, will not have
a material adverse effect on the Company's business.
The Company is subject to state laws governing Medicaid, professional training,
certificates of need, licensure, financial relationships with physicians and the
dispensing and storage of pharmaceuticals. The facilities operated by the
Company must comply with all applicable laws, regulations and licensing
standards and many of the Company's employees must maintain licenses to provide
some of the services offered by the Company. In addition, the Balanced Budget
Act of 1997 introduced several government initiatives which are either in the
planning or 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 PPS for
home health agencies, which do not affect the Company directly but could affect
the Company's contractual relationships with such entities. The Consolidated
Billing requirement was subsequently reversed by the Omnibus Budget bill, signed
into law by President Clinton on November 23, 1999; (ii) a pilot project in Polk
County, Florida which began on October 1, 1999 in which the Company is
participating,
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<PAGE> 23
to determine the efficacy of competitive bidding for certain durable medical
equipment ("DME"), under which pilot project Medicare reimbursement for certain
items is reduced between 18% and 31% from the current fee schedule; and (iii)
deadlines (as yet determined) for obtaining Medicare and Medicaid surety bonds
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Government Regulation."
Government Investigation. In addition to the regulatory initiatives
mentioned above, the OIG has received funding to expand and intensify 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
is currently under investigation by the OIG relating to possible improper claims
for payment from Medicare. The final outcome of the current OIG investigation,
as well as any other investigations, could have a material adverse impact on the
Company's results of operations, financial condition or prospects and could
include, among other things, the repayment of reimbursements previously received
by the Company related to improperly billed claims, the imposition of fines or
penalties, or the suspension or exclusion of the Company from participation in
the Medicare, Medicaid and other government reimbursement programs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Government Regulation."
Collectibility of Accounts Receivable. The Company has substantial
accounts receivable, as well as days sales outstanding in excess of 80 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 future bad debt expense will not increase above current operating
levels 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. Furthermore, Counsel Corporation ("Counsel") has distributed
its holdings of the Company's common stock to its shareholders, which resulted
in additional shares becoming available in the public market and may have an
adverse impact on the price of the Company's common stock.
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
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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. Oxygen
therapy reimbursements from Medicare account for approximately 27% 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
1997 levels beginning January 1, 1998 and to 70% of 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 include 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 and qualifying
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.
Following promulgation of a final rule, HCFA will also have "inherent
reasonableness" authority to modify payment rates for all Medicare Part B items
and services by as much as 15% without industry consultation, publication or
public comment if the rates are "grossly excessive" or "grossly deficient." On
May 31, 2000, President Clinton announced possible future changes in the basis
for Medicare's reimbursement of Albuterol and possibly other respiratory
medications. These changes could result in a reimbursement reduction, the timing
and extent of which are not known at this time. The Company cannot be certain
that additional reimbursement reductions for oxygen therapy services or other
services and products provided by the Company will not occur. Reimbursement
reductions already implemented have materially adversely affected the Company's
net revenues and net income, and any such future reductions could have a similar
material adverse effect.
Dependence on Reimbursement by Third-Party Payors. For the six months
ended June 30, 2000, the percentage of the Company's net revenues derived from
Medicare, Medicaid and private pay was 47%, 10% and 43%, 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.
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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 $14.4
million for the six months ended June 30, 2000. 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 achieve 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.
Ability to Attract and Retain Management. The Company is highly
dependent upon its senior management, and competition 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
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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 June 30, 2000, the Company had
outstanding borrowings of approximately $306.0 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 $2.0 million. Interest expense
associated with other debts would not materially impact the Company as most
interest rates are fixed.
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PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
The 2000 annual meeting of shareholders was held on May 31, 2000. At the
meeting, the shareholders voted in favor of approving Arthur Andersen LLP as the
Company's Independent Public Accountants for the 2000 fiscal year. No other
matters were voted upon at the annual meeting. The following table sets forth
the voting tabulation for the matter voted upon at the meeting.
<TABLE>
<CAPTION>
Votes Votes Votes Broker
For Against Withheld Abstentions Non-Votes
---------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Approval of
Arthur Andersen LLP
as the Company's
Independent Public
Accountants 13,835,028 24,245 -0- 12,162 -0-
</TABLE>
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HOMEPATIENT, INC.
August 11, 2000 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
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
<S> <C>
27 Financial Data Schedule (for SEC use only)
</TABLE>
29
