<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CHECK ONE FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 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)
<TABLE>
<S> <C> <C>
DELAWARE 0-19532 62-1474680
-------- ------- ----------
(STATE OR OTHER JURISDICTION OF (COMMISSION (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) FILE NUMBER)
</TABLE>
5200 MARYLAND WAY, SUITE 400, BRENTWOOD, TENNESSEE 37027
--------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(615) 221-8884
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
----------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF 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 MAY 10, 2000)
TOTAL NUMBER OF SEQUENTIALLY
NUMBERED PAGES IS 28
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, March 31,
1999 2000
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 28,123,000 $ 12,753,000
Accounts receivable, less allowance for doubtful accounts
of $56,876,000 and $59,534,000 respectively 75,956,000 77,823,000
Inventories 16,499,000 14,720,000
Prepaid expenses and other assets 982,000 987,000
------------- -------------
Total current assets 121,560,000 106,283,000
------------- -------------
PROPERTY AND EQUIPMENT, at cost 174,558,000 184,749,000
Less accumulated depreciation and amortization (113,465,000) (123,921,000)
------------- -------------
Net property and equipment 61,093,000 60,828,000
------------- -------------
OTHER ASSETS
Excess of cost over fair value of net assets acquired, net 202,622,000 201,279,000
Investment in unconsolidated joint ventures 17,473,000 13,555,000
Deferred financing costs, net 3,703,000 4,306,000
Other assets, net 17,549,000 15,493,000
------------- -------------
Total other assets 241,347,000 234,633,000
------------- -------------
$ 424,000,000 $ 401,744,000
============= =============
</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, March 31,
1999 2000
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt and capital leases $ 16,644,000 $ 12,150,000
Trade accounts payable 23,327,000 14,802,000
Other payables 1,854,000 2,872,000
Accrued expenses:
Payroll and related benefits 7,472,000 7,627,000
Interest 596,000 536,000
Insurance 3,979,000 4,513,000
Restructuring accruals 1,234,000 377,000
Other 5,924,000 8,345,000
------------- -------------
Total current liabilities 61,030,000 51,222,000
------------- -------------
NONCURRENT LIABILITIES
Long-term debt and capital leases, less current portion 298,778,000 295,717,000
Other noncurrent liabilities 7,204,000 6,226,000
------------- -------------
Total noncurrent liabilities 305,982,000 301,943,000
------------- -------------
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) (124,605,000)
------------- -------------
Total stockholders' equity 56,988,000 48,579,000
------------- -------------
$ 424,000,000 $ 401,744,000
============= =============
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
3
<PAGE> 4
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1999 2000
---- ----
<S> <C> <C>
NET REVENUES
Sales and related service revenues $ 42,860,000 $ 42,502,000
Rentals and other revenues 47,780,000 44,236,000
Earnings from joint ventures 598,000 1,152,000
------------- -------------
Total net revenues 91,238,000 87,890,000
------------- -------------
EXPENSES
Cost of sales and related services, excluding depreciation
and amortization 22,719,000 21,826,000
Operating 53,028,000 53,464,000
General and administrative 3,888,000 3,350,000
Depreciation and amortization 9,818,000 10,211,000
Interest 7,211,000 7,463,000
------------- -------------
Total expenses 96,664,000 96,314,000
------------- -------------
LOSS FROM OPERATIONS BEFORE INCOME TAXES (5,426,000) (8,424,000)
PROVISION FOR INCOME TAXES 150,000 150,000
------------- -------------
NET LOSS $ (5,576,000) $ (8,574,000)
============= =============
NET LOSS PER COMMON SHARE
- Basic $ (0.37) $ (0.55)
============= =============
- Diluted $ (0.37) $ (0.55)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
- Basic 15,205,000 15,480,000
============= =============
- Diluted 15,205,000 15,480,000
============= =============
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
4
<PAGE> 5
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1999 2000
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,576,000) $ (8,574,000)
Adjustments to reconcile net loss from operations
to net cash provided from (used in) operating activities:
Depreciation and amortization 9,818,000 10,211,000
Equity in (earnings) losses of unconsolidated joint
ventures 418,000 (216,000)
Minority interest 67,000 41,000
Change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable, net 292,000 416,000
Inventories 2,739,000 2,012,000
Prepaid expenses and other assets 988,000 (11,000)
Income tax receivable (132,000) 209,000
Trade accounts payable, accrued expenses
and other current liabilities (554,000) (6,822,000)
Restructuring accruals (100,000) (857,000)
Other non current liabilities 2,000 53,000
Other assets 206,000 77,000
----------- ------------
Net cash provided from (used in) operating activities 8,168,000 (3,461,000)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (used in) joint venture dissolutions (50,000) 737,000
Additions to property and equipment, net (3,800,000) (4,651,000)
Distributions from (advances to) unconsolidated joint
ventures, net 1,106,000 (387,000)
Distributions to minority interest owners (49,000) (20,000)
----------- ------------
Net cash used in investing activities (2,793,000) (4,321,000)
----------- ------------
</TABLE>
(Continued)
5
<PAGE> 6
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Continued)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1999 2000
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and capital leases (1,173,000) (7,092,000)
Proceeds from issuance of debt 4,500,000 377,000
Proceeds from Employee Stock Purchase Plan 339,000 168,000
Deferred financing costs (164,000) (1,041,000)
------------ ------------
Net cash provided from (used in) financing activities 3,502,000 (7,588,000)
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS 8,877,000 (15,370,000)
CASH AND CASH EQUIVALENTS, beginning of period 4,276,000 28,123,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 13,153,000 $ 12,753,000
============ ============
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 6,672,000 $ 7,418,000
============ ============
Cash payments of income taxes $ 335,000 $ 185,000
============ ============
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
6
<PAGE> 7
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 three months ended March 31, 2000, such services
represented 55%, 21% and 24%, respectively of net revenues. These
services and products are paid for primarily by Medicare, Medicaid and
other third-party payors. As of March 31, 2000, the Company provided
these services to patients primarily in the home through 304 centers
in 38 states: Alabama, Arizona, Arkansas, Colorado, Connecticut,
Delaware, Florida, Georgia, Illinois, Iowa, Kansas, Kentucky,
Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New
York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode
Island, South Carolina, Tennessee, Texas, Virginia, Washington, West
Virginia and Wisconsin. From its inception through 1997 the Company
experienced substantial growth primarily as a result of its strategy
of acquiring and operating home health care businesses. Beginning in
1998, the Company's strategy shifted from acquiring new businesses to
focus more on internal growth, the integration of its acquired
operations and achieving operating efficiencies.
2. MEDICARE OXYGEN REIMBURSEMENT REDUCTIONS
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 $307.5 million credit facility
(the "Bank Credit Facility") between the Company and Bankers Trust
Company, as agent for a syndicate of banks (the "Banks"). 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 Amendment and Limited Waiver to the
7
<PAGE> 8
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 May 10, 2000, totals $307.5 million.
The modified financial covenants are structured such that the Company
would remain in compliance with the covenants if the 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 development
in 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 March 31, 2000, $307.5 million was
outstanding under the Credit Facility, including $249.2 million under
the revolving line of credit and $58.3 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 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 March 31,
----------------------------
1999 2000
---- ----
<S> <C> <C>
Net loss $ (5,576,000) $ (8,574,000)
============ ============
Weighted average common shares outstanding 15,205,000 15,480,000
Effect of dilutive options and warrants -- --
============ ============
Adjusted diluted commons shares outstanding 15,205,000 15,480,000
============ ============
Net loss per common share
- Basic $ (0.37) $ (0.55)
============ ============
- Diluted $ (0.37) $ (0.55)
============ ============
</TABLE>
5. BASIS OF FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of the Company
for the three months ended March 31, 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 March
31, 2000 and the results of operations and the cash flows for the
three months ended March 31, 2000 and 1999.
The results of operations for the three months ended March 31, 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 304 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.
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>
Three Months Ended March 31,
----------------------------
1999 2000
---- ----
<S> <C> <C>
Home respiratory therapy services 53% 55%
Home infusion therapy services 20 21
Home medical equipment and medical supplies 27 24
--- ---
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.
The Company dissolved two joint venture partnerships in the first
quarter of 2000 and will operate these businesses as wholly-owned
operations. The Company has also received formal notice from three of
its other joint venture partners indicating a desire to dissolve their
respective partnerships. After the dissolutions, the Company intends
to operate these businesses as wholly-owned operations.
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
13
<PAGE> 14
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 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.
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
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<PAGE> 15
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.
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 March 31,
----------------------------
1999 2000
---- ----
<S> <C> <C>
Net Revenues 100.0% 100.0%
Costs and expenses:
Cost of sales and related services 24.9 24.9
Operating expenses 58.1 60.8
General and administrative 4.3 3.8
Depreciation and amortization 10.8 11.6
Interest 7.9 8.5
----- -----
Total costs and expenses 105.9% 109.6
----- -----
Loss from operations before income taxes (5.9)% (9.6)%
===== =====
</TABLE>
The Company's operating results for the prior two years and continuing
into the first quarter of 2000 are significantly lower than historical
trends and have been significantly impacted by the following factors.
First, the Company has been greatly impacted by the 30% reduction in
Medicare oxygen reimbursement rates (25% reduction effective January
1, 1998 with an additional 5% reduction effective January 1, 1999).
The Company estimates that net revenue and pre-tax income has been
reduced by approximately $7.1 million in the three 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. 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
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<PAGE> 16
margin during the third and fourth quarters of 1998. 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 and contracts 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 continually monitors
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.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1999
NET REVENUES. Net revenues decreased from $91.2 million for the
quarter ended March 31, 1999 to $87.9 million for the same period in
2000, a decrease of $3.3 million, or 3.6%. 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:
Sales and Related Services Revenues. Sales and related
services revenues decreased from $42.9 million for the
quarter ended March 31, 1999 to $42.5 million for the same
period in 2000, a decrease of $0.4 million. 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 $47.8 million for the quarter ended March 31,
1999 to $44.2 million for the same period in 2000, a decrease
of $3.6 million, or 7.5%. This decrease is primarily
attributable to the exiting of lower margin contracts, many
of which did not terminate until the end of the first quarter
of 1999 or later.
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<PAGE> 17
Earnings from Hospital Joint Ventures. Earnings from hospital
joint ventures increased from $0.6 million for the quarter
ended March 31, 1999 to $1.2 million for the same period in
2000, an increase of $0.6 million, or 100%, 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 $22.7 million for the quarter ended March 31, 1999 to
$21.8 million for the same period in 2000, a decrease of $0.9 million,
or 4%. As a percentage of sales and related services revenues, cost of
sales and related services decreased from 53% to 51%. This decrease is
primarily attributable to a higher level of unfavorable
book-to-physical inventory adjustments recorded in the quarter ended
March 31, 1999 compared to the same period in 2000 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 increased from $53.0 million
for the quarter ended March 31, 1999 to $53.5 million for the same
period in 2000, an increase of $0.5 million. This increase is
primarily attributable to higher bad debt expense offset somewhat by
lower salary expense. Bad debt expense was 4.8% of net revenue for the
quarter ended March 31, 1999 compared to 7.8% of net revenue for the
same period in 2000. The higher bad debt expense in the first 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 decreased from $3.9 million for the quarter ended March 31,
1999 to $3.4 million for the same period in 2000, a decrease of $0.5
million, or 13%. This decrease is attributable to lower salary expense
as a result of the 41 positions eliminated at the Corporate Support
Center over 1999 and reduced consulting expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased from $9.8 million for the quarter ended March 31, 1999 to
$10.2 million for the same period in 2000, an increase of $0.4
million, or 4%. This increase is primarily attributable to a lower
level of unfavorable book-to-physical adjustments of rental equipment
in the quarter ended March 31, 1999 compared to the same period in
2000.
INTEREST. Interest expense increased from $7.2 million for the quarter
ended March 31, 1999, to $7.5 million for the same period in 2000, an
increase of $0.3 million, or 4%, which is attributable to higher
interest rates on borrowings.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000 the Company's working capital was $55.1 million and
the current ratio was 2.1x 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 $307.5 million credit facility
(the "Bank Credit Facility") between the Company and Bankers Trust
Company, as agent for a syndicate of banks
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<PAGE> 18
(the"Banks"). 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 the
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 development
in 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.
There can be no assurance that future cash flow from operations will
be sufficient to cover debt obligations. Such indebtedness, as of May
10, 2000, totals $307.5 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 March 31, 2000, $307.5 million was outstanding
under the Credit Facility, including $249.2 million under the
revolving line of credit and $58.3 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
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<PAGE> 19
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 as 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 March 31, 2000 the weighted average
borrowing rate was 9.43%. A commitment fee of up to .50% per annum is
payable by the Company on the undrawn balance.
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.
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 $77.3 million at December
31, 1999 and March 31, 2000, respectively. Average days' sales in
accounts receivable was approximately 81 and 86 days' at December 31,
1999, and March 31, 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 (used in) operating activities was $8.2 million
and ($3.5) million for the three months ended March 31, 1999 and 2000,
respectively. These amounts primarily represent net loss plus
depreciation and amortization and provisions for doubtful accounts and
changes in
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<PAGE> 20
the various components of working capital. Net cash used in investing
activities was $2.8 million and $4.3 million for the three months
ended March 31, 1999 and 2000, respectively. Capital expenditures
increased from $3.8 million for the three months ended March 31, 1999
to $4.7 million for the same period in 2000, an increase of $0.9
million. Net cash provided from (used in) financing activities was
$3.5 million and ($7.6) million for the three months ended March 31,
1999 and 2000, respectively. The cash provided from (used in)
financing activities for the three months ended March 31, 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
May 10, 2000, the Company's consolidated indebtedness under the Bank
Credit Facility was $307.5 million.
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."
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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 mid-year 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, 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
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<PAGE> 22
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 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
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<PAGE> 23
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."
The Company cannot be certain that additional reimbursement reductions
for oxygen therapy services or other services and products provided by
the Company will not occur. Reimbursement reductions already
implemented have materially adversely affected the Company's net
revenues and net income, and any such future reductions could have a
similar material adverse effect.
Dependence on Reimbursement by Third-Party Payors. For the
three months ended March 31, 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.
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
23
<PAGE> 24
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
$8.6 million for the three months ended March 31, 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 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 March 31, 2000, the Company's executive officers,
directors and principal stockholder, Counsel, in the aggregate,
beneficially owned approximately 33% of the outstanding shares of the
common stock of the Company. Counsel, however, has distributed its
holdings of the Company's common stock to its shareholders. If, as a
result of such equity ownership and their positions in the Company,
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 Company stockholders for approval. 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 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
24
<PAGE> 25
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
March 31, 2000, the Company had outstanding borrowings of
approximately $304.7 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 $1.9 million. Interest
expense associated with other debts would not materially impact the
Company as most interest rates are fixed.
25
<PAGE> 26
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.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMERICAN HOMEPATIENT, INC.
May 15, 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
27
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
<S> <C>
27 Financial Data Schedule (for SEC use only)
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICAN HOMEPATIENT, INC. FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 12,753,000
<SECURITIES> 0
<RECEIVABLES> 137,357,000
<ALLOWANCES> 59,534,000
<INVENTORY> 14,720,000
<CURRENT-ASSETS> 106,283,000
<PP&E> 184,749,000
<DEPRECIATION> 123,921,000
<TOTAL-ASSETS> 401,744,000
<CURRENT-LIABILITIES> 51,222,000
<BONDS> 307,867,000
0
0
<COMMON> 155,000
<OTHER-SE> 48,424,000
<TOTAL-LIABILITY-AND-EQUITY> 401,744,000
<SALES> 42,502,000
<TOTAL-REVENUES> 87,890,000
<CGS> 21,826,000
<TOTAL-COSTS> 21,826,000
<OTHER-EXPENSES> 74,488,000
<LOSS-PROVISION> 6,890,000
<INTEREST-EXPENSE> 7,463,000
<INCOME-PRETAX> (8,424,000)
<INCOME-TAX> 150,000
<INCOME-CONTINUING> (8,574,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,574,000)
<EPS-BASIC> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
