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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
CHECK ONE:
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT
OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ______ TO
_____.
COMMISSION FILE NUMBER 0-19532
AMERICAN HOMEPATIENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1474680
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
5200 MARYLAND WAY, SUITE 400 37027-5018
BRENTWOOD TN (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 221-8884
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
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 the filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of registrant's voting stock held by non-affiliates
of the registrant, computed by reference to the price at which the stock was
sold, or average of the closing bid and asked prices, as of March 20, 2000 was
$9,947,808.
On March 20, 2000, 15,471,086 shares of the registrant's $0.01 par value Common
Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into Part III, Items 10,
11, 12 and 13 of this Form 10-K: Portions of the Registrant's definitive proxy
statement for its 2000 Annual Meeting of stockholders.
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PART I
ITEM 1. BUSINESS
INTRODUCTORY SUMMARY
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.
These services and products are paid for primarily by Medicare, Medicaid and
other third-party payors. As of December 31, 1999, the Company provided these
services to patients primarily in the home through 308 centers in 38 states.
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.
MATERIAL 1999 CORPORATE DEVELOPMENTS.
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 accounted for approximately 27% of the Company's
revenues in 1999. The Company estimates that the Medicare Oxygen Reimbursement
Reductions decreased net revenue and pre-tax income by approximately $24.5
million during 1998 and $29.2 million during 1999.
1999 Accounting Charges. The Company recorded $77.5 million in
accounting charges in the fourth quarter of 1999. These charges consisted of
$17.1 million to increase the Company's accounts receivable reserves which
resulted in increased bad debt expense above previous quarters of 1999; $41.1
million to write off impaired goodwill; $19.9 million to establish a valuation
allowance for deferred tax assets; $0.9 million to record the anticipated loss
on the dissolution of one of the Company's joint ventures; and a credit of $1.5
million for the reversal of excess restructuring reserves originally recorded in
1997.
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Bank Credit Facility. The Company is the borrower under a $312.5
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 Fourth
Amended and Restated Credit Agreement (the "Third Amendment"). The Third
Amendment waives existing events of default, provides for a $5 million principal
repayment, modifies financial covenants, freezes availability under the Bank
Credit Facility at the amounts outstanding under Bank Credit Facility at the
time of the Third Amendment and makes 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 March 28, 2000, totals $312.5
million.
There can be no assurance that future cash flow from operations will be
sufficient to cover debt obligations.
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. The Company was required to employ a
manager, acceptable to the Banks, with expertise in managing companies that are
in workout situations with their lenders. The term of such Manager's employment
has expired.
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 December 31,
1999, $313.3 million was outstanding under the Credit Facility, including $248.5
million under the revolving line of credit and $64.8 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.
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See "Business -- Risk Factors -- Substantial Leverage" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Changes to Company's Strategic Direction. 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. 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 December 31, 1998. It also exited certain contracts and businesses perceived
to be lower margin during the third and fourth quarters of 1998. The result was
a substantial decrease in revenues during the latter half of 1998 and into 1999.
A new management team joined the Company in the fourth quarter of 1998,
consisting of a new president and chief executive officer, a new chief operating
officer and a new chief financial officer. Recognizing the negative impacts of
the Company's business strategy, the new management ceased the exiting of
business lines and contracts by mid-December of 1998. A new strategy for 1999
was developed to restore the Company's revenues and decrease expenses. Key
points of this strategy are:
1. Stabilize and increase profitable revenues -- respiratory
therapies will remain a primary focus of the Company. However,
the Company has 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.
2. Decrease and control operating expenses -- the Company has
taken aggressive steps to decrease operating and general and
administrative expenses. During 1999, the Company eliminated
41 positions from its corporate Support Center in Brentwood,
Tennessee and approximately 400 positions in the field.
3. Decrease DSO and bad debt -- the Company has three key
initiatives in place to improve accounts receivable
performance: (i) proper staffing and training; (ii) process
redesign and standardization; and (iii) billing center
specific goals geared toward improved cash collections and
reduced accounts receivable.
NASDAQ De-listing. 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.
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BUSINESS
The Company provides home health care services and products consisting
primarily of respiratory therapy services, infusion therapy services and the
rental and sale of home medical equipment and home health care supplies. For the
year ended December 31, 1999, such services represented 53%, 21% and 26% of net
revenues, respectively. These services and products are paid for primarily by
Medicare, Medicaid and other third-party payors. The Company's objective is to
be a leading provider of home health care products and services in the markets
in which it operates. The Company's centers are regionally located to achieve
the market penetration necessary for the Company to be a cost-effective provider
of comprehensive home health care services to managed care and other third-party
payors.
As of December 31, 1999, the Company provided services to patients
primarily in the home through 308 centers in the following 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.
The Company had approximately 3,366 full-time employees and 239 part-time
employees at December 31, 1999.
Prior to 1998, the Company had significantly expanded its operations
through a combination of home health care acquisitions and joint ventures and
strategic alliances with integrated health care delivery systems. The Company
purposefully slowed its growth by acquisitions during 1998 compared to prior
years to focus more on existing operations. During 1999, the Company did not
acquire any businesses or develop any new joint ventures.
The Company does not anticipate renewing its acquisition or joint
venture development activities during 2000 as it focuses its efforts on internal
operational matters.
SERVICES AND PRODUCTS
The Company provides a diversified range of home health care services
and products. The following table sets forth the percentage of net revenues
represented by each line of business for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
---- ---- -----
<S> <C> <C> <C>
Home respiratory therapy services ......... 47% 48% 53%
Home infusion therapy services ............ 18 22 21
Home medical equipment and medical supplies 35 30 26
--- --- ---
Total .............................. 100% 100% 100%
=== === ===
</TABLE>
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Home Respiratory Therapy Services. The Company provides a wide variety
of home respiratory services primarily to patients with severe and chronic
pulmonary diseases. Patients are referred to a Company center most often by
primary care and pulmonary physicians as well as by hospital discharge planners
and case managers. After reviewing pertinent medical records on the patient and
confirming insurance coverage information, a Company respiratory therapist or
technician visits the patient's home to deliver and to prepare the prescribed
therapy or equipment. Company representatives coordinate the prescribed therapy
with the patient's physician, train the patient and caregiver in the correct use
of the equipment, and make periodic follow-up visits to the home to provide
additional instructions, required equipment maintenance and oxygen and other
supplies.
The respiratory services that the Company provides include the
following:
- Oxygen systems to assist patients with breathing. There are
three types of oxygen systems: (i) oxygen concentrators, which
are stationary units that filter ordinary room air to provide
a continuous flow of oxygen; (ii) liquid oxygen systems, which
are portable, thermally-insulated containers of liquid oxygen
which can be used as stationary units and/or as portable
options for patients; and (iii) high pressure oxygen
cylinders, which are used primarily for portability with
oxygen concentrators. Oxygen systems are used to treat
patients with chronic obstructive pulmonary disease, cystic
fibrosis and neurologically-related respiratory problems.
- Nebulizers to deliver aerosol medications to patients.
Nebulizer compressors are used to administer aerosol
medications (such as albuterol) to patients with asthma,
chronic obstructive pulmonary disease, cystic fibrosis and
neurologically-related respiratory problems. "AerMeds" is the
Company's branded marketing name for its aerosol medications
business.
- Home ventilators to sustain a patient's respiratory function
mechanically in cases of severe respiratory failure when a
patient can no longer breathe normally.
- Non-invasive positive pressure ventilation ("NPPV") to provide
ventilation support via a face mask for patients with chronic
respiratory failure and neuromuscular diseases. This therapy
enables patients to receive positive pressure ventilation
without the invasive procedure of intubation.
- Continuous positive airway pressure ("CPAP") and bi-level
positive airway pressure therapies to force air through
respiratory passage-ways during sleep. These treatments are
used on adults with obstructive sleep apnea (OSA), a condition
in which a patient's normal breathing patterns are disturbed
during sleep.
- Apnea monitors to monitor and to warn parents of apnea
episodes in newborn infants as a preventive measure against
sudden infant death syndrome.
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- Home sleep screenings and studies to detect sleep disorders
and the magnitude of such disorders.
Oxygen-related services and systems comprised approximately 49% of the
Company's 1999 respiratory revenues with the balance generated from nebulizers
and related aerosol medication services, home ventilators, CPAP and bi-level
therapies, home sleep studies and infant apnea monitors. The Company provides
respiratory therapy services at all but 13 of its 308 centers.
Home Infusion Therapy Services. The Company provides a wide range of
home infusion therapy services. Patients are referred to a Company center most
often by primary care and specialist physicians (such as infectious disease
physicians and oncologists) as well as by hospital discharge planners and case
managers. After confirming the patient's treatment plan with the physician, the
pharmacist mixes the medications and coordinates with the nurse the delivery of
necessary equipment, medication and supplies to the patient's home. The Company
provides the patient and caregiver with detailed instructions on the patient's
prescribed medication, therapy, pump and supplies. The Company also schedules
follow-up visits and deliveries in accordance with physicians' orders.
Home infusion therapy involves the administration of nutrients,
antibiotics and other medications intravenously (into the vein), subcutaneously
(under the skin), intramuscularly (into the muscle), intrathecally or epidurally
(via spinal routes) or through feeding tubes into the digestive tract. The
primary infusion therapy services that the Company provides include the
following:
- Enteral nutrition is the infusion of nutrients through a
feeding tube inserted directly into the functioning portion of
a patient's digestive tract. This long-term therapy is often
prescribed for patients who are unable to eat or to drink
normally as a result of a neurological impairment such as a
stroke or a neoplasm (tumor).
- Antibiotic therapy is the infusion of antibiotic medications
into a patient's bloodstream typically for 5 to 14 days to
treat a variety of serious infections and diseases.
- Total parenteral nutrition ("TPN") is the long-term provision
of nutrients through central vein catheters that are
surgically implanted into patients who cannot absorb adequate
nutrients enterally due to a chronic gastrointestinal
condition.
- Pain management involves the infusion of certain drugs into
the bloodstream of patients, primarily terminally or
chronically ill patients, suffering from acute or chronic
pain.
The Company's other infusion therapies include chemotherapy, hydration,
growth hormone and immune globulin therapies. Enteral nutrition services account
for approximately 27% of the Company's infusion revenues, while antibiotic
therapy, TPN, and pain management and other medications accounted for
approximately 27%, 6% and 1%, respectively. The Company's remaining infusion
revenues were derived from the provision of infusion nursing services,
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prescription drug sales and other miscellaneous infusion therapies. Enteral
nutrition services are provided at most of the Company's centers, and the
Company currently provides other infusion therapies in 50 of its 308 centers.
Home Medical Equipment and Supplies. The Company provides a
comprehensive line of equipment to serve the needs of home care patients.
Revenues from home equipment services are derived principally from the rental
and sale of wheelchairs, hospital beds, ambulatory aids, bathroom aids and
safety equipment, and rehabilitation equipment.
OPERATIONS
Organization. Currently, the Company's operations are divided into two
geographic divisions, each headed by a division vice president. Each division is
further divided into geographic areas, each area headed by an area vice
president. There are a total of 14 geographic areas within the Company. Each
area vice president oversees the operations of approximately 15 - 25 centers.
Management believes this field organizational structure enhances management
flexibility and facilitates communication. Specifically, it provides for a
greater focus on local market operations and control at the operating level,
while enabling the Company's management to be close to the patients and
concentrate on achieving the Company's strategic goals. Area vice presidents
focus on revenue development, cost control and accounts receivable management
and assist local management with decision making to improve responsiveness in
local markets. In addition to the two geographic divisions, the Company has also
established a third special division which is specifically dedicated to the
operations of the Company's larger rehabilitation centers (centers which
specialize in assistive technology devices and specialty wheelchairs).
The Company's centers are typically staffed with a general manager, a
business office manager, a director of patient services (normally a registered
nurse or respiratory therapist), registered nurses, clinical coordinators,
respiratory therapists, service technicians and customer service
representatives. The Company also has account executives responsible for local
market selling efforts in many of its centers. In addition, the Company employs
a licensed pharmacist in all centers that provide a significant amount of
infusion therapy.
The Company has achieved what management believes is an appropriate
balance between centralized and decentralized management. Management believes
that home care is a local business dependent in large part on personal
relationships and, therefore, provides the Company's operating managers with a
significant degree of autonomy to encourage prompt and effective responses to
local market demands. In conjunction with this local operational authority, the
Company provides, through its corporate office (the "Support Center"),
sophisticated management support, compliance oversight and training, marketing
and managed care expertise, sales training and support, product development, and
financial and information systems that typically are not readily available to
independent operators. The Company retains centralized control over those
functions necessary to monitor quality of patient care and to maximize
operational efficiency. Services performed at the support center level include
financial and accounting functions,
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corporate compliance, clinical policy and procedure development, regulatory
affairs and licensure, and system design.
The Company has moved certain functions previously performed at the
Support Center or local level to the area level, such as quality improvement
oversight, billing, and collections, in an effort to maximize efficiencies and
performance.
Commitment to Quality. The Company's quality and performance
improvement programs are designed to ensure that its service standards are
properly implemented. Management believes that the Company has developed and
implemented service and procedure standards that not only comply with, but often
exceed, the standards required by the Joint Commission on Accreditation of
Health Care Organizations ("JCAHO"). All of the Company's centers are
JCAHO-accredited or are in the process of being reviewed for accreditation from
the JCAHO. The Company has Quality Improvement Advisory Boards at many of its
centers, and center general managers conduct quarterly quality improvement
reviews. Area quality improvement ("AQI") specialists conduct quality compliance
audits at each center to ensure compliance with state and federal regulations,
JCAHO, FDA and internal standards. The AQI specialist also helps train all new
clinical personnel on the Company's policies and procedures. The Company's
corporate philosophy for service excellence is its Personal Caring Service
Promise, which characterizes the Company's standards for quality care and
customer service. The Personal Caring Service Promise is as follows: "We promise
to serve our customers with personal caring service. We do this by treating them
with dignity and respect, just like members of our own family, giving each of
them the individual attention they deserve." The Company's Governing Body, which
consists of the President and Chief Executive Officer, Chief Operating Officer,
Chief Financial Officer, Senior Vice President of Marketing, Vice President of
Clinical & Regulatory Affairs, a division vice president and two area vice
presidents, meets quarterly to review and oversee the Company's quality
assurance programs.
Training and Retention of Quality Personnel. Management recognizes that
home health care is by nature a localized business. General managers attempt to
recruit knowledgeable local talent for all positions including account
executives who are capable of gaining new business from the local medical
community. In addition, the Company provides training to all new nurses,
respiratory therapists and pharmacy personnel as well as continuing education
for existing employees.
Management Information Systems. Management believes that periodic
refinement and upgrading of its management information systems, which permit
management to monitor closely the activities of the Company's centers, is
important to the Company's success. These systems provide monthly budget
analyses, financial comparisons to prior periods and comparisons among Company
centers, thus enabling management to identify areas for improvement. Medicare
and many third-party payor claims are billed electronically, thereby
facilitating the collection of accounts receivable. In addition, the Company's
financial reporting system monitors certain key data for each center, such as
accounts receivable, payor mix, cash collections, net revenues and operating
trends.
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Corporate Compliance. The Company's commitment to providing quality
home health care services and products is matched by a commitment to maintaining
high standards of ethical and legal conduct. The Company strives to operate its
business with honesty and integrity and the Company's Corporate Compliance
Program is designed to accomplish these goals through employee training and
education, a confidential disclosure program, written policy guidelines,
periodic reviews, compliance audits, and other programs. The Company's
compliance program is monitored by its Compliance Officer, Assistant Compliance
Officer and Compliance committee, comprised of the Company's President and CEO,
Chief Operating Officer, Chief Financial Officer, Vice President of Human
Resources and Vice President of Clinical and Regulatory Affairs.
HOSPITAL JOINT VENTURES AND STRATEGIC ALLIANCES
As of December 31, 1999, the Company had 19 home health care joint
ventures with hospitals or hospital systems.
During 1999, the Company converted one of its hospital joint ventures
to a wholly owned operation through the acquisition of the hospital partner's
equity. The Company did not develop any new joint ventures during 1999.
The Company has received notice from the hospital partners of three of
the Company's joint ventures indicating a desire to dissolve their respective
partnerships. On March 16, 2000 the Company acquired the interest of one of
these joint venture partners, Baylor Health System. After dissolution, it is the
Company's intent to operate these businesses as wholly owned operations.
The Company's joint ventures with hospitals set forth below typically
are 50/50% equity partnerships with an initial term of between three and ten
years and with the following typical provisions: (i) the Company contributes
assets of an existing business in the designated market or contributes cash to
fund half of the initial working capital required for the hospital joint venture
to commence operations; (ii) the hospital partner contributes similar assets
and/or an amount of cash equal, in the aggregate, to the fair market value of
the Company's net contribution; (iii) the Company is the managing partner for
the hospital joint venture and receives a monthly management and administrative
fee; and (iv) distributions, to the extent made, are generally made on a
quarterly basis and are consistent with each partners' capital contributions.
Within the hospital joint venture's designated market, all net revenues
generated by the provision of those services for which the joint venture was
formed are deemed to be net revenues of the hospital joint venture, including
revenues from sources other than the hospital joint venture partner.
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The following table lists the Company's hospital joint venture partners
and locations as of December 31, 1999:
<TABLE>
<CAPTION>
HOSPITAL JOINT VENTURE PARTNER LOCATION
------------------------------ --------
<S> <C>
Baptist Medical Center (2 hospitals) Columbia, SC
Baptist Medical Center (5 hospitals) Montgomery, AL
Baptist Medical System (3 hospitals) Little Rock, AR
Baylor Health System (10 hospitals) Dallas, TX
Central Carolina Hospital Sanford, NC
Centura Health (6 hospitals) Denver, CO
Conway Hospital Conway, SC
East Alabama Medical Center Opelika, AL
Evergreen Community Hospital Kirkland, WA
Fort Sanders Alliance (5 hospitals) Knoxville, TN
Frye Regional Medical Center/Grace Hickory, Maiden,
Hospital/Caldwell Memorial Morganton, NC
High Plains Baptist Hospital (2 hospitals) Amarillo, TX
Mercury Health System (2 hospitals) Wilkes-Barre, Scranton, PA
Midlands Health Resources (12 hospitals) Omaha, NE
Peninsula Regional Medical Center Salisbury, MD
Piedmont Medical Center Rock Hill, SC
Spruce Pine Community Hospital Spruce Pine, NC
Tolfree Memorial Hospital West Branch, MI
Wallace Thompson Hospital Union, SC
</TABLE>
To further its strategy of aligning with hospitals and hospital
systems, the Company also has developed numerous multi-year strategic alliance
contracts. These contracts enable the Company to be a preferred provider of home
respiratory services, home infusion services and home medical equipment and
supplies for certain hospitals in selected markets.
REVENUES AND COLLECTIONS
The Company derives substantially all of its net revenues from
third-party payors, including Medicare, private insurers and Medicaid. Medicare
is a federally funded and administered health insurance program that provides
coverage for beneficiaries who require certain medical services and products.
Medicaid is a state administered reimbursement program that provides
reimbursement for certain medical services and products.
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The following table sets forth the percentage of the Company's net
revenues from each source indicated for the years presented:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Medicare ............................... 44% 42% 46%
Private pay, primarily private insurance 44 48 44
Medicaid ............................... 12 10 10
--- --- ---
Total ........................... 100% 100% 100%
=== === ===
</TABLE>
The Omnibus Budget Reconciliation Act of 1987 ("OBRA 1987") created six
categories for home medical equipment reimbursement under the Medicare Part B
program, for which the Company qualifies. OBRA 1987 also defined whether
products would be paid for on a rental or sale basis and established fixed
monthly payment rates for oxygen service regardless of the type of service (i.e.
concentrators, liquid oxygen, etc.) as well as a 15-month rental ceiling on
certain medical equipment such as hospital beds. After 15 months of rental,
rental payments cease for HME and the Company receives a "maintenance fee" each
six months equivalent to one-month's rental. The Omnibus Budget Reconciliation
Act of 1990 ("OBRA 1990") made new changes to Medicare Part B reimbursement. The
substantive changes relating to OBRA 1990 included a national standardization of
Medicare rates for certain equipment categories, which vary slightly state by
state and further reductions in amounts paid for HME rentals.
In August 1993, Congress passed the Omnibus Budget Reconciliation Act
of 1993 ("OBRA 1993"), which included approximately $56 billion in reimbursement
reductions to the Medicare program over the following five years. The specific
reimbursement changes that became effective for fiscal 1994 related to the
recategorization of certain respiratory products to the capped rental program,
coupled with a reduction in reimbursement rates for these same products.
In August 1997, President Clinton signed a Balanced Budget Act that
reduced the Medicare reimbursement rate for oxygen by 25% beginning January 1,
1998 and by another 5% beginning January 1, 1999. Medicare oxygen reimbursement
rates will be held steady thereafter as Consumer Price Index increases for
oxygen and durable medical equipment will not resume until the year 2003. The
reimbursement rate for certain drugs and biologicals covered under Medicare was
also reduced 5% beginning January 1, 1998. In addition, payments from parenteral
and enteral nutrition were frozen at 1995 levels through the year 2002. 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
and adversely affected financially by this legislation. Medicare oxygen
reimbursements accounted for approximately 27% of the Company's net revenues in
1999. The Company estimates that the Medicare Oxygen Reimbursement Reduction
decreased net revenues and pre-tax income by approximately $24.5 million in 1998
and $29.2 million in 1999.
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Net patient accounts receivable at December 31, 1999 were $75.2 million
compared to net accounts receivable of $94.2 million at December 31, 1998. The
Company attempts to minimize DSO by screening new patient cases for adequate
sources of reimbursement and by providing complete and accurate claims data to
relevant payor sources.
The table below shows the Company's DSO for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Days' sales outstanding .................................. 88 days 92 days 81 days
</TABLE>
The decrease in DSO and net patient receivables between 1998 and 1999
is due to improved collection results on current billings in 1999 as well as the
increased accounts receivable reserve recorded in the fourth quarter of 1999.
SALES AND MARKETING
Sales. During 1998, the Company focused its selling efforts primarily
on physicians and other high-volume referral sources in an effort to increase
its respiratory rental and sales business. It also significantly increased its
investment in selling resources by hiring, on a net basis, 67 new account
executives by year-end for a total of 176. In 1999, the Company focused its
selling efforts in respiratory, but also broadened its sales efforts to include
other profitable products and services such as enteral nutrition, HME rental and
select infusion therapy.
Managed Care Sales. The Company takes a selective approach to managed
care contracts utilizing its local operating and market strengths supplemented
by area and corporate managed care expertise. Selling and negotiating with local
and regional managed care organizations are performed by general managers and
area vice presidents. Account executives do not participate in contract
negotiations with managed care payors.
During the last half of 1998, the Company de-emphasized contracting
activity with new managed care accounts and exited several existing lower margin
contracts. The 1999 sales strategy included a renewed focus on contract
development in select areas as well as a focused effort to maximize revenues
from existing contracts through improved provider relations and pull-through
selling.
Corporate Marketing Support. The Company's corporate marketing and
sales support department provides product and services planning and development,
marketing communications, and assistance in public and community relations for
the Company's centers. The Company has primarily expanded services by marketing
existing services as branded products, such as the Company's Resource(TM)
Respiratory Services, AerMeds(TM) and EnterCare(TM) programs. All marketing
programs introduced by the corporate marketing and sales support department are
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<PAGE> 14
designed to meet the needs of the Company's traditional referral sources as well
as managed care organizations and integrated health care delivery networks.
COMPETITION
The home health care industry is still consolidating but remains 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. In addition, there are still relatively few barriers to
entry in the local markets served by the Company, and it may encounter
substantial competition from new market entrants. Management believes that the
competitive factors most important in the Company's lines of business are
quality of care and service, reputation with referring sources, ease of doing
business with the provider, ability to develop and to maintain relationships
with referral sources, competitive prices, and the range of services offered.
Third-party payors and their case managers actively monitor and direct
the care delivered to their beneficiaries. Accordingly, relationships with such
payors and their case managers and inclusion within preferred provider and other
networks of approved or accredited providers has become a prerequisite, in many
cases, to the Company's ability to serve many of the patients treated by it.
Similarly, the ability of the Company and its competitors to align themselves
with other health care service providers may increase in importance as managed
care providers and provider networks seek out providers who offer a broad range
of services and geographic coverage.
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BRANCH LOCATIONS
Following is a list of the Company's 308 home health care centers as of
December 31, 1999.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ALABAMA FLORIDA KENTUCKY NEBRASKA OHIO SOUTH CAROLINA San Angelo
Alexander City(1) Crawfordville Bowling Green Beatrice(1) Bryan Columbia(1) San Antonio
Andalusia Crystal River Danville Hastings(1) Chillicothe Conway(1) Temple
Auburn(1) Daytona Beach Jackson Lincoln(1) Cincinnati Florence Texarkana
Birmingham Ft. Lauderdale Lexington Norfolk(1) Dayton Greenville Tyler
Dothan Ft. Myers London Omaha(1) Mansfield N. Charleston Victoria
Fayette Ft. Walton Beach Louisville Maumee Rock Hill(1) Waco
Florence Gainesville Paducah NEVADA Newark Union(1)
Foley Jacksonville Pineville Las Vegas Springfield VIRGINIA
Huntsville Leesburg Somerset Twinsburg TENNESSEE Charlottesville
Mobile Longwood NEW JERSEY Worthington Ashland City Chesapeake
Montgomery(1) Panama City LOUISIANA Cedar Grove Zanesville Chattanooga Farmville
Russellville Pensacola Hammond Flemington Clarksville Fishersville
Sylacauga(1) Port St. Lucie Slidell OKLAHOMA Cookeville Harrisonburg
Tuscaloosa Rockledge NEW MEXICO Antlers Dayton Onley(1)
St. Augustine MAINE Alamogordo Bartlesville Dickson Richmond
ARIZONA Tallahassee (2) Bangor Albuquerque Claremore Erin Salem
Bullhead City Tampa Rumford Clovis Enid Jackson Winchester
Globe Winter Haven Farmington Grove Johnson City
Phoenix MARYLAND Grants Lawton Kingsport WASHINGTON
GEORGIA Cumberland Las Cruces Muskogee Knoxville(1) Bremerton
ARKANSAS Albany Salisbury(1) Roswell Oklahoma City Manchester Kirkland(1)
Batesville Americus Tulsa Morristown(1) Seattle
Benton(1) Brunswick MASSACHUSETTS NEW YORK Murfreesboro Tacoma
El Dorado Dublin Chelmsford Albany OREGON Nashville Yakima
Ft. Smith(2) Eastman Auburn Eugene Oak Ridge(1)
Harrison Ft. Oglethorpe MICHIGAN Cheektowaga Medford Oneida(1) WEST VIRGINIA
Hot Springs Martinez West Branch(1) Geneva Union City Hinton
Jonesboro(2) Savannah Hudson PENNSYLVANIA Lewisburg
Little Rock(1)(2) Valdosta MINNESOTA Kingston Brookville TEXAS Rainelle
Mena Waycross Rochester Marcy Burnham Amarillo(1)
Mtn. Home Oneonta Camp Hill Austin WISCONSIN
Paragould ILLINOIS MISSISSIPPI Painted Post Clearfield Bay City Burlington
Pine Bluff Arlington Heights Tupelo Poughkeepsie Erie Borger(1) Eau Claire
Rogers Mt. Vernon Watertown Everett Brownwood Elkhorn
Russellville Peoria MISSOURI Webster Hazleton(1) Bryan Madison
Salem Springfield Cameron Johnstown Conroe Marshfield
Searcy Cape Girardeau NORTH CAROLINA Kane Corpus Christi Milwaukee
Springdale(2) IOWA Columbia(2) Asheboro Lock Haven Dallas(1) Minocqua
Warren Cedar Rapids Festus Asheville(1) McKees Rocks(2) Ennis Onalaska
Clarinda(1) Florissant Charlotte Mt. Pleasant Harlingen Racine
COLORADO Coralville Hannibal Hickory(1) Philipsburg Hereford
Cortez Davenport Ironton Kannapolis Pottsville Houston
Denver(1) Decorah Joplin Lenoir(1) Scranton(1) Irving(1)
Durango Des Moines Kansas City Maiden(1) State College Lake Jackson
Pagosa Springs Dubuque Kirksville Marion(1) Titusville Laredo
Marshalltown Mountain Grove Morganton(1) Trevose Longview
CONNECTICUT Mason City Osage Beach Newland Warren Lubbock
New Britain Ottumwa Potosi Salisbury Waynesboro Lufkin
Waterbury Sioux City(1) Rolla Sanford(1) Wilkes-Barre(1) McAllen
Waterloo Springfield(2) Spruce Pine(1) York Mount Pleasant
DELAWARE St. Louis(2) Sylva(1) Nacogdoches
Dover KANSAS St. Robert Whiteville RHODE ISLAND Pampa(1)
Newark Pittsburg Warrensburg Wingate East Providence Paris
Wilmington Winston-Salem Johnston Plainview
</TABLE>
- ----------------------------------
(1) Owned by a joint venture.
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<PAGE> 16
SUPPLIES AND EQUIPMENT
The Company purchases home medical equipment, prescription drugs,
solutions and other materials and products required in connection with the
Company's business from select suppliers. The Company has not experienced, and
management does not anticipate that the Company will experience, any significant
difficulty in purchasing equipment or supplies or in leasing equipment from
current suppliers. In the event that such suppliers are unable or fail to sell
supplies or lease equipment to the Company, management believes that other
suppliers are available to meet the Company's needs at comparable prices.
INSURANCE
The Company's professional liability policies are on an occurrence
basis and are renewable annually with per claim coverage limits of up to
$1,000,000 per occurrence and $3,000,000 in the aggregate. The Company maintains
a commercial general liability policy which includes product liability coverage
on the medical equipment that it sells or rents with per claim coverage limits
of up to $1,000,000 per occurrence with a $1,000,000 product liability annual
aggregate and a $2,000,000 general liability annual aggregate. The Company also
maintains excess liability coverage with limits of $50,000,000 per occurrence
and $50,000,000 in the aggregate. While management believes the manufacturers of
the equipment it sells or rents currently maintain their own insurance, and in
many cases the Company has received evidence of such coverage and has been added
by endorsement as additional insured, there can be no assurance that such
manufacturers will continue to do so, that such insurance will be adequate or
available to protect the Company, or that the Company will not have liability
independent of that of such manufacturers and/or their insurance coverage. There
can be no assurance that any of the Company's insurance will be sufficient to
cover any judgments, settlements or cost relating to any pending or future legal
proceedings or that any such insurance will be available to the Company in the
future on satisfactory terms, if at all. If the insurance carried by the Company
is not sufficient to cover any judgments, settlements or cost relating to
pending or future legal proceedings, the Company's business and financial
condition could be materially adversely affected.
EMPLOYEES
At December 31, 1999, the Company employed approximately 3,366
full-time, 239 part-time and 556 PRN (staff used on an "as needed" basis only)
individuals. Of these individuals, approximately 110 were employed at the
corporate Support Center in Brentwood, Tennessee.
TRADEMARKS
The Company owns and uses a variety of marks, including American
HomePatient(R), AerMeds(R), EnterCare(TM), Resource(TM) and Extracare, which
have either been registered at the federal or state level or are being used
pursuant to common law rights.
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<PAGE> 17
GOVERNMENT REGULATION
The Company, as a participant in the health care industry, is subject
to extensive federal, state and local regulation. In addition to the False
Claims Act and other federal and state anti-kickback and self-referral laws
applicable to all of the Company's operations (discussed more fully below), the
operations of the Company's home health care centers are subject to federal laws
covering the repackaging and dispensing of drugs (including oxygen) and
regulating interstate motor-carrier transportation. Such centers also are
subject to state laws (most notably licensing and controlled substances
registration) governing pharmacies, nursing services and certain types of home
health agency activities. Additionally, certain of the Company's employees are
subject to state laws and regulations governing the professional practice of
respiratory therapy, pharmacy and nursing. Recently, the federal government has
increased access to information about individuals and other health care
providers who have been sanctioned or excluded from participation in government
reimbursement programs and may impose financial penalties for contracting with
excluded providers. Information about such providers is now readily available on
the Internet, and all health care providers, including the Company, are held
responsible for carefully screening entities and individuals they employ or do
business with, to avoid contracting with an excluded provider.
The Company's operations are also subject to a series of laws and
regulations dating back to the Omnibus Budget Reconciliation Act of 1987 ("OBRA
1987") which apply to the Company's operation. Periodic changes have occurred
from time to time since the 1987 Act including reimbursement reduction and
changes to payment rules.
The Federal False Claims Act imposes civil liability on individuals or
entities that submit false or fraudulent claims to the government for payment.
False Claims Act penalties for violations can include civil monetary penalties
and exclusion from the Medicare and Medicaid programs. As a provider of services
under the federal reimbursement programs such as Medicare, Medicaid and CHAMPUS,
the Company is subject to the anti-kickback statute, also known as the "fraud
and abuse law." This law prohibits any bribe, kickback, rebate or remuneration
of any kind in return for, or as an inducement for, the referral of patients for
government-reimbursed health care services. The Company may also be affected by
the federal physician self-referral prohibition, known as the "Stark" law,
which, with certain exceptions, prohibits physicians from referring patients to
entities in which they have a financial interest. Many states in which the
Company operates have adopted similar self-referral laws, as well as laws that
prohibit certain direct or indirect payments or fee-splitting arrangements
between health care providers, under the theory that such arrangements are
designed to induce or to encourage the referral of patients to a particular
provider. In many states, these laws apply to services reimbursed by all payor
sources.
In 1996, the Health Insurance Portability and Accountability Act
introduced a new category of federal criminal health care fraud offenses. If a
violation of a federal criminal law relates to a health care benefit, then an
individual is guilty of committing a Federal Health Care Offense. The specific
offenses are: health care fraud; theft or embezzlement; false statements,
obstruction of an investigation; and money laundering. These crimes can apply to
claims submitted not only to
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<PAGE> 18
government reimbursement programs such as Medicare, Medicaid and CHAMPUS, but to
any third-party payor, and carry penalties including fines and imprisonment.
The Company regularly reviews and updates its policies and procedures
in an effort to comply with applicable laws and regulations. The Company must
follow strict requirements with paperwork and billing. As required by law, it is
Company policy that certain service charges (as defined by Medicare) falling
under Medicare Part B are confirmed with a Certificate for Medical Necessity
("CMN") signed by a physician. In January, 1999, the Office of Inspector General
of the U.S. Department of Health and Human Services ("OIG") published a draft
Model Compliance Plan for the Durable Medical Equipment, Prosthetics, Orthotics
and Supply Industry. The OIG has stressed the importance for all health care
providers to have an effective compliance plan. The Company has created and
implemented a compliance program, which it believes meets the elements of the
OIG's Model Plan for the industry. As part of its compliance program, the
Company has started performing internal audits of the adequacy of billing
documentation for certain time periods. The Company will voluntarily refund to
the government any reimbursements previously received for claims with
insufficient documentation that cannot be corrected. The liability for these
potential repayments cannot be estimated at this time, therefore no accrual for
them has been reflected in the Company's financial statements.
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,
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<PAGE> 19
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.
RISK FACTORS
This section summarizes certain risks, among others, that should be
considered by stockholders and prospective investors in the Company. Many of
these risks are discussed in other sections of this report.
Substantial Leverage. The Company maintains a significant amount of
long-term debt pursuant to the Bank Credit Facility. As of March 28, 2000, the
Company's consolidated indebtedness under the Bank Credit Facility was $312.5
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
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<PAGE> 20
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 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.
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<PAGE> 21
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
"Business -- Government Regulation" and "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 announced
that it intends to distribute its holdings of the Company's common stock to its
shareholders, which will result 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.
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<PAGE> 22
Medicare Reimbursement for Oxygen Therapy and Other Services. In 1999
oxygen therapy reimbursement from Medicare accounted 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." 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 twelve
months ended December 31, 1999, the percentage of the Company's net revenues
derived from Medicare, Medicaid and private pay was 46%, 10% and 44%,
respectively. The net revenues and profitability of the Company are affected by
the continuing efforts of all payors to contain or reduce the costs of health
care by lowering reimbursement rates, narrowing the scope of covered services,
increasing case management review of services and negotiating reduced contract
pricing. Any changes in reimbursement levels under Medicare, Medicaid or private
pay programs and any changes in applicable government regulations could have a
material adverse effect on the Company's net revenues and net income. Changes in
the mix of the Company's patients among Medicare, Medicaid and private pay
categories and among different types of private pay sources may also affect the
Company's net revenues and profitability. There can be no assurance that the
Company will continue to maintain its current payor or revenue mix.
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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 $99.9
million for the twelve months ended December 31, 1999. No assurance can be given
that the Company will achieve profitable operations in the near term. The
Company intends to expand its business primarily through internal growth of
existing operations. 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 December 31, 1999, the Company's executive officers, directors and principal
stockholder, Counsel, in the aggregate, beneficially owned approximately 34% of
the outstanding shares of the common stock of the Company. Counsel, however, has
announced that it intends to distribute its holdings of the Company's common
stock to its shareholders. If, as a result of such equity ownership and their
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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 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.
24
<PAGE> 25
ITEM 2. PROPERTIES
The Company's corporate headquarters occupy approximately 29,000 square
feet leased in the Parklane Building, Maryland Farms, Brentwood, Tennessee. The
lease has a base monthly rent of $37,000 and expires in January 2004 unless the
Company exercises its option to extend the term an additional 5 years. The
Company also leases 17,000 square feet of office space in the Parklane Building
that it does not currently occupy. This space is being sublet to other tenants
for $20,000 in monthly rent.
The Company owns its centers in Tallahassee, Florida, Waterloo, Iowa,
North Charleston, South Carolina and a warehouse in Harrisburg, Pennsylvania
which consist of approximately 15,000, 35,000, 10,000 and 42,000 square feet,
respectively and owns a 50% interest in its center in Little Rock, Arkansas,
which consists of approximately 15,000 square feet. The Company leases the
operating space required for its remaining home health care centers. A typical
center occupies between 2,000 and 6,000 square feet and generally combines
showroom, office and warehouse space, with approximately two-thirds of the
square footage consisting of warehouse space. Lease terms on most of the leased
centers range from three to five years. Management believes that the Company's
owned and leased properties are adequate for its present needs and that suitable
additional or replacement space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
As with any health care provider, the Company is engaged in routine
litigation incidental to its business and which is not material to the Company.
Additionally, in recent years, the health care industry has come under
increasing scrutiny from various state and federal regulatory agencies, which
are stepping up investigative and enforcement activities. The Company is
currently the subject of an investigation by the Justice Department and OIG. The
government has broad authority and discretion in enforcing applicable laws and
regulations, and therefore the timing, scope and outcome of these investigations
and inquiries cannot be predicted with certainty. The Company expects to incur
additional costs in the future, such as legal expenses in connection with all
investigations. For a description of these activities, see "Business -
Governmental Regulation."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
25
<PAGE> 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock of the Company was traded on the Nasdaq National
Market System under the designation "AHOM" until September 1, 1999. Effective
September 2, 1999, trading of the Company's stock has been conducted on the
over-the-counter market ("OTC") or, on application by broker-dealers, in the
NASD's Electronic Bulletin Board, also under the designation "AHOM." The
following table sets forth representative bid quotations of the common stock for
each quarter of calendar years 1998 and 1999 as provided by NASDAQ or the
over-the-counter bulletin board, as appropriate. The following bid quotations
reflect interdealer prices without retail mark-ups, mark-downs or commissions,
and may not necessarily represent actual transactions. See "Business -- Material
1999 Corporate Developments" and "Business -- Risk Factors -- Liquidity."
<TABLE>
<CAPTION>
Bid Quotations
--------------------
Fiscal Period High Low
------------- ------ ------
<S> <C> <C>
1998 1st Quarter............................ $26.87 $17.44
1998 2nd Quarter............................ $21.13 $15.50
1998 3rd Quarter............................ $19.50 $ 1.44
1998 4th Quarter............................ $ 3.50 $ 1.63
1999 1st Quarter............................ $ 3.94 $ 1.06
1999 2nd Quarter............................ $ 2.41 $ .97
1999 3rd Quarter............................ $ 1.69 $ .69
1999 4th Quarter............................ $ .97 $ .44
</TABLE>
On March 20, 2000, there were 1,426 holders of record of the Common
Stock and the closing bid quotation for the Common Stock was $0.6562 per share,
as reported by the over-the-counter bulletin board. Most of the Company's
stockholders have their holdings in the street name of their broker/dealer.
The Company has not paid cash dividends on its Common Stock and
anticipates that, for the foreseeable future, any earnings will be retained for
use in its business and no cash dividends will be paid. The Company is
prohibited from declaring and paying dividends under its Credit Agreement. See
- --"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Pursuant to a Stock Purchase Warrant issued to Age Wave, Inc. in 1993,
Age Wave, Inc. purchased 12,000 shares of the Company's Common Stock for $8.33
per share in August 1998.
26
<PAGE> 27
The Common Stock was issued to Age Wave, Inc. in reliance upon Section 4(2) of
the Securities Act of 1933, as amended, and upon Regulation D. These statutory
and regulatory exemptions were available because less than $5,000,000 of the
Company's Common Stock was issued and no general solicitation or advertising was
made with respect thereto.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FINANCIAL STATEMENTS PRESENTED AND DERIVATION OF INFORMATION
The following selected financial data below is derived from the audited
financial statements of the Company and should be read in conjunction with those
statements, including the related notes thereto. The addition of new operations
through acquisitions materially affects the comparability of the financial data
presented. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ----------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues $ 162,371 $ 268,348 $ 387,277 $ 403,868 $ 357,580
Cost of sales and related services, excluding
Depreciation and amortization expense 34,031 58,575 97,418 98,166 90,142
Operating expenses 82,608 138,213 216,532 235,269 224,018
General and administrative expenses 11,704 14,664 15,953 22,262 13,895
Depreciation and amortization expense 14,081 23,845 33,736 39,653 41,460
Interest expense 4,829 8,294 16,494 24,249 28,659
Restructuring -- -- 33,829 (3,614) (1,450)
Goodwill impairment -- -- 8,165 37,805 40,271
------------ ----------- ------------ ------------ ------------
Total expenses 147,253 243,591 422,127 453,790 436,995
------------ ----------- ------------ ------------ ------------
Income (Loss) before taxes 15,118 24,757 (34,850) (49,922) (79,415)
Provision (Benefit) for income taxes 6,029 9,556 (8,942) (10,944) 20,445
------------ ----------- ------------ ------------ ------------
Net Income (Loss) $ 9,089 $ 15,201 $ (25,908) $ (38,978) $ (99,860)
============ =========== ============ ============ ============
Net Income (Loss) per share - basic $ 0.86 $ 1.13 $ (1.75) $ (2.60) $ (6.55)
============ =========== ============ ============ ============
Net Income (Loss) per share - diluted $ 0.84 $ 1.10 $ (1.75) $ (2.60) $ (6.55)
============ =========== ============ ============ ============
Weighted average shares outstanding - basic 10,550,000 13,473,000 14,839,000 14,986,000 15,236,000
Weighted average shares outstanding - diluted 10,838,000 13,841,000 14,839,000 14,986,000 15,236,000
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ----------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 46,272 $ 84,012 $ 112,721 $ 99,115 $ 60,530
Total assets 232,516 395,611 558,366 531,892 424,000
Total debt and capital leases, including
current portion 93,606 149,703 301,324 323,942 315,422
Shareholders' equity 119,431 215,642 194,089 156,499 56,988
</TABLE>
27
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS ANNUAL REPORT ON FORM 10-K 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," "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, FUTURE COMPLIANCE WITH BANK CREDIT FACILITY COVENANTS,
LEGISLATIVE PROPOSALS FOR HEALTH CARE 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 ANNUAL REPORT ON FORM 10-K. THE FORWARD-LOOKING
STATEMENTS ARE MADE AS OF THE DATE OF THIS ANNUAL REPORT ON FORM 10-K 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.
The Company provides home health care services and products to patients
through its 308 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. 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>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Home respiratory therapy services 47% 48% 53%
Home infusion therapy services 18 22 21
Home medical equipment and medical supplies 35 30 26
--- --- ---
Total 100% 100% 100%
=== === ===
</TABLE>
28
<PAGE> 29
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. During 1999, the
Company did not acquire any home health care companies. As amended, the
Company's Credit Agreement now requires bank consent for acquisitions.
The Company's strategy for 2000 is to maintain a diversified offering
of home health care services reflective of its current business mix. Respiratory
services will remain a primary focus with increased emphasis on home medical
equipment rental, enteral nutrition products and services and select infusion
therapies.
The Company has also implemented a variety of initiatives designed to
lower its costs. Activities for 1999 included: (i) elimination of 41 positions
at the Company's corporate Support Center and approximately 400 positions in the
field; (ii) reduction of expenses related to these positions; (iii) reduction of
other general and administrative expenses and field expenses such as travel and
entertainment, marketing and advertising and consulting; and (iv) greater
control of capital expenditures at all levels.
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
and an additional reduction of 5% began 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. American HomePatient 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 accounted for approximately 27 percent of the
Company's revenues in 1999. The Company estimates that the Medicare Oxygen
Reimbursement Reduction decreased net revenue and pre-tax income by
approximately $24.5 million during 1998 and $29.2 million during 1999. Effective
January 1, 1998, payments for parenteral and enteral nutrition ("PEN") were
frozen at 1995 levels, through the year 2002. Medicare also has the option of
developing fee schedules for PEN and home dialysis supplies and equipment,
although currently there is no timetable for the development or implementation
of such fee schedules. 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." Therefore, the Company cannot be certain that
additional reimbursement reductions for oxygen therapy services or other
services and products provided by the Company will not occur. See "Business -
Risk Factors -- Government Regulation."
29
<PAGE> 30
RESULTS OF OPERATIONS
ACCOUNTING CHARGES
1997
On September 25, 1997, the Company announced initiatives to respond to
planned Medicare reimbursement reductions by fundamentally restructuring the
Company. More than 100 of the Company's total operating and billing locations
were affected by the restructuring. The specific actions resulted in pre-tax
accounting charges in the third quarter of 1997 of $65.0 million due to the
closure, consolidation, or scaling back of approximately 20 percent of the
Company's total operating centers, the closure or scaling back of nine billing
centers, the elimination of four operating regions, the scaling back or
elimination of marginal products and services at numerous locations, and the
related termination of approximately 400 employees in the affected operating and
billing centers. These activities were substantially completed by June 1998.
In addition to the $65.0 million charge, the Company also recorded $2.0
million in certain accounting charges in the third quarter of 1997 related to
physical inventory adjustments and the recording of additional franchise taxes.
1998
The Company recorded pre-tax accounting charges in the third quarter of
1998 in the amount of $15.2 million related to: (i) expenses of approximately
$3.2 million related to executive officer transition, abandoned acquisitions and
a provision for adverse settlements related to accounting disputes with certain
sellers of acquired businesses; and (ii) increased bad debt expense of
approximately $16.0 million resulting from the Company's restructuring and
disruption in collections due to the consolidation of billing centers and
changes in certain billing procedures; offset by (iii) the reversal into income
of approximately $4.0 million of excess 1997 restructuring reserves.
In the fourth quarter of 1998, goodwill was written-down by $37.8
million as required under SFAS 121. This write-down was based upon management's
estimate of the negative impact of the Company's inability to replace the
decreased cash flows associated with the Medicare oxygen reimbursement
reductions to the extent originally planned, as well as certain business
strategies implemented in the latter half of 1998 which decreased revenue and
increased operating expenses (See -- "Results of Operations" for additional
discussion). Also, in the fourth quarter of 1998, the Company expensed $1.3
million in severance-related costs associated with former senior executives of
the Company.
1999
The Company recorded $77.5 million in accounting charges in the fourth
quarter of 1999. These charges consisted of $17.1 million to increase the
Company's accounts receivable reserves
30
<PAGE> 31
which resulted in increased bad debt expense above previous quarters of 1999;
$41.1 million related to the write off of impaired goodwill; $19.9 million to
establish a valuation allowance for deferred tax assets; $0.9 million to record
the anticipated loss on the dissolution of one of the Company's joint ventures;
and a credit of $1.5 million for the reversal of excess restructuring reserves
originally recorded in 1997.
The charge of $17.1 million in additional accounts receivable reserves
relates to several changes experienced in the receivables portfolio during 1999.
During 1999, the Company placed a greater emphasis than in previous years on
collecting current billings with less emphasis on pursuing the collection of
older accounts. As a result of this strategy, overall collections of current
billings in 1999 improved over the prior year; however, accounts greater than
120 days increased. In addition, some of the billing and collection issues
experienced in 1998 continued to contribute to the deterioration in the aging
statistics, particularly accounts aged over one year. Also during 1999, the
Company has continued to experience increased delays between the date services
are provided and the actual billing date due to delays in obtaining necessary
documentation. Finally, Medicare reimbursement changes which limited coverage of
immune globulin therapies were implemented in 1999. These changing
characteristics experienced in the receivable portfolio during 1999 prompted the
Company to record additional specific reserves related to certain issues and to
adopt a reserve methodology which provides additional reserves for accounts with
advanced agings. This accounts receivable charge is included in operating
expense and as a reduction of earnings from joint ventures in the accompanying
1999 consolidated statements of operations.
The Company wrote-off $40.3 million of impaired goodwill as required
under SFAS 121 due to a continuation of poor performance into 1999 of certain
acquisitions. A deterioration in performance of many of these acquired
businesses began in mid-1998 and, contrary to management's expectations, the
negative trends did not reverse in 1999. The Company also wrote-off impaired
goodwill of several of the Company's joint ventures which adversely impacted
earnings from joint ventures by $0.8 million.
The Company recorded a valuation allowance for deferred tax assets in
the amount of $19.9 million due to uncertainty as to their realizability. Due to
the fact that the Company is currently not generating taxable income and
achieving future taxable income is uncertain, management believes a full
valuation allowance to be appropriate.
The Company has received formal notice from three of its joint venture
partners indicating a desire to dissolve their respective partnerships. The
Company anticipates that the transaction to dissolve one of these partnerships
will result in a loss to the Company in the amount of $0.9 million. After the
dissolutions, the Company intends to operate these businesses as wholly owned
operations.
Subsequent to year end, the Company settled a dispute with the owner of
a business that the Company had previously managed under the terms of a
management agreement. The potential loss on the settlement had been accrued as
part of the Company's restructuring charge recorded in 1997.
31
<PAGE> 32
Due to the favorable outcome of the settlement, the Company reversed $1.5
million in excess restructuring reserves.
The total accounting charges discussed above were recorded in the 1997,
1998 and 1999 consolidated statements of operations in the following
classifications:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Earnings from joint ventures $ -0- $ -0- $ 2,192,000
Cost of sales 6,255,000 (386,000) -0-
Operating expenses 18,751,000 14,500,000 16,638,000
General & administrative expenses -0- 6,041,000 -0-
Restructuring charge 33,829,000 (3,614,000) (1,450,000)
Goodwill impairments 8,165,000 37,805,000 40,271,000
Deferred income tax provision -0- -0- 19,847,000
----------- ------------ ------------
$67,000,000 $ 54,346,000 $ 77,498,000
=========== ============ ============
</TABLE>
The Company will continue to evaluate the operations of individual
acquisitions to determine if additional goodwill impairments will need to be
recorded in future periods. In addition, the Company continues to evaluate the
impact of its compliance efforts, the current payor environment and other
factors which could impact the level of bad debt expense. There can be no
assurance that similar accounting charges will not be recorded in future
periods.
The Company's operating results for 1998 and 1999 were significantly
lower than historical trends and were significantly impacted by the following
factors: First, the Company has been greatly impacted by the 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
$24.5 million in 1998 and $29.2 million in 1999 as a result of the Medicare
oxygen reimbursement reductions. Second, the Company experienced a decline in
revenues attributable to the exit and de-emphasis of certain lower margin
business lines and by the termination of several managed care contracts which
began in the latter half of 1998 (with continued effect into 1999). Third, the
Company has halted the acquisition of home health care businesses and its joint
venture development program. Fourth, accounts receivable have been adversely
affected by a tougher payor environment and by process problems at the operating
and billing center levels (caused by the consolidation of billing centers and
employee turnover) which has resulted in higher bad debt expense. Further, the
Company's implementation of process improvements in the billing and collection
functions has been slower than anticipated.
The Company's current financial situation stems from two pivotal
events: significant reductions in Medicare oxygen reimbursement which began
January 1, 1998 and the Company's ongoing restructuring which began in the
latter part of 1997. In response to reimbursement reductions, the Company
announced in September 1997 its intent to reshape its business model. The
necessary changes to achieve this business model were not accomplished as
rapidly as the Company had hoped. In addition, the Company believes the
disruption caused by these changes has had more of an adverse impact on the
organization as a whole than originally anticipated.
32
<PAGE> 33
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. The result was a substantial decrease in revenues during the latter
half of 1998 and into 1999.
A new management team joined the Company in the fourth quarter of 1998,
consisting of a new president and chief executive officer, a new chief operating
officer and a new chief financial officer. Recognizing the negative impacts of
the Company's business strategy, the new management ceased the exiting of
business lines and contracts by mid-December of 1998. A new strategy for 1999
was developed to restore the Company's revenues and decrease expenses. Key
points of this strategy are:
1. Stabilize and increase profitable revenues -- respiratory
therapies will remain a primary focus of the Company. However,
the Company has broadened its offering and sales focus to
include other profitable business lines 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.
2. Decrease and control operating expenses -- the Company has
taken aggressive steps to decrease operating and general and
administrative expenses. During 1999, the Company eliminated
41 positions from its corporate Support Center in Brentwood,
Tennessee and approximately 400 positions in the field.
3. Decrease DSO and bad debt -- the Company has three key
initiatives in place to improve accounts receivable
performance: (i) proper staffing and training; (ii) process
redesign and standardization; and (iii) billing center
specific goals geared toward improved cash collections and
reduced accounts receivable.
The Company does not anticipate renewing its acquisition activities nor
its joint venture development during 2000 as it focuses its efforts on existing
operations.
The Company reports its net revenues as follows: (i) sales and related
services; (ii) rentals and other; and (iii) earnings from joint ventures. Sales
and related services revenues are derived from the provision of infusion
therapies, the sale of home health care 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 for
33
<PAGE> 34
unconsolidated joint ventures. Cost of sales and related services includes the
cost of equipment, drugs and related supplies sold to patients. Operating
expenses include operating center labor costs, delivery expenses, selling costs,
occupancy costs, costs related to rentals other than depreciation, billing
center costs, provision for doubtful accounts and other operating costs. General
and administrative expenses include corporate and area management expenses and
costs.
The following table and related discussion set forth items from the
Company's consolidated statements of operations as a percentage of net revenues,
excluding the 1997, 1998 and 1999 accounting charges previously discussed, for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net revenues 100% 100% 100%
Cost of sales and related services, excluding depreciation and
amortization expense 24 24 25
Operating expenses 51 55 58
General and administrative expense 4 4 4
Depreciation and amortization expense 9 10 11
Interest expense 4 6 8
---- ---- ----
Total expenses 92 99 106
---- ---- ----
Income (loss) from operations before taxes 8 1 (6)
Provision for income taxes 3 0 0
---- ---- ----
Income (loss) from operations 5% 1% (6)%
==== ==== ====
OTHER DATA:
EBITDA 21% 17% 13%
==== ==== ====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 --
EXCLUDING ACCOUNTING CHARGES
The operations of acquired centers are included in the operations of
the Company from the effective date of each acquisition. Because of the
acquisition activity, the comparison of the results of operations between 1999
and 1998 is impacted by the operations of these acquired businesses.
The following discussion excludes the accounting charges recorded in
1999 and 1998. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Accounting Charges" and "Business -- Material 1999
Corporate Developments -- Medicare Oxygen Reimbursement Reductions" and "1999
Accounting Charges."
NET REVENUES. Net revenues decreased from $403.9 million in 1998 to
$359.8 million in 1999, a decrease of $44.1 million, or 11%. This decrease is
primarily attributable to lower sales of non-core low margin products, the
exiting of lower margin contracts, and the additional 5% Medicare oxygen
reimbursement reduction, offset somewhat by additional revenue from the 1998
acquisitions.
34
<PAGE> 35
The following is a discussion of the components of net revenues:
Sales and Related Services Revenues. Sales and
related services revenues decreased from $192.9 million in 1998 to
$172.4 million in 1999, a decrease of $20.5 million, or 11%. This
decrease is primarily attributable to lower sales of non-core low
margin products and the exiting of lower margin contracts, offset
somewhat by additional sales revenue from the 1998 acquisitions.
Rentals and Other Revenues. Rentals and other
revenues decreased from $206.5 million in 1998 to $184.9 million in
1999, a decrease of $21.6 million, or 10%. This decrease is primarily
attributable to the exiting of lower margin contracts, the additional
5% Medicare oxygen reimbursement reduction and less than expected sales
force effectiveness, offset somewhat by additional rental revenue of
the 1998 acquisitions.
Earnings from Joint Ventures. Earnings from joint
ventures decreased from $4.5 million in 1998 to $2.5 million in 1999, a
decrease of $2.0 million, or 44%, which was due primarily to the
additional 5% Medicare oxygen reimbursement reduction and higher bad
debt expense at certain joint venture locations.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services
decreased from $98.6 million in 1998 to $90.1 million in 1999, a decrease of
$8.5 million, or 9%. As a percentage of sales and related services revenues,
cost of sales and related services increased from 51% to 52%. This increase is
primarily attributable to lower vendor rebates in 1999, a higher level of
favorable book-to-physical inventory adjustments recorded in 1998 compared to
1999 and the losses incurred in 1999 related to exiting certain contracts and
the de-emphasis of soft goods.
OPERATING EXPENSES. Operating expenses decreased from $220.8 million in
1998 to $207.4 million in 1999, a decrease of $13.4 million, or 6%. This
decrease is primarily attributable to lower salary expense in 1999 as a result
of the Company's aggressive steps to control expenses which included the
elimination of 300 positions in the field. The lower salary expense was
partially offset by higher bad debt expense before the fourth quarter accounting
charge. Even though the dollar level of operating expenses decreased, operating
expenses as a percentage of net revenue increased from 55% for 1998 to 58% for
1999 as a result of decreased revenue.
Bad debt expense before accounting charges was 5.3% of net revenue
for 1999 compared to 3.8% of net revenue for 1998. Total bad debt expense,
including accounting charges, was 9.9% of net revenues for 1999 compared to 7.4%
of net revenues for 1998. The Company analyzes its accounts receivable portfolio
for collectibility on an ongoing basis. Negative trends in cash collections were
experienced in the fourth quarter of 1998 and in the first quarter of 1999. Cash
collections showed improvement beginning in the second quarter of 1999. However,
the Company's accounts greater than 1 year old have continued to increase as
collection efforts have focused more on current accounts receivable. The Company
continues to evaluate the impact of
35
<PAGE> 36
its 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 $17.6 million in 1998 to $13.9 million in 1999, a
decrease of $3.7 million, or 21%. As a percentage of net revenues, general and
administrative expenses remained constant at 4% for both 1998 and 1999. This
decrease is attributable to lower salary expense as a result of the 41 positions
eliminated at the Corporate Support Center and reduced consulting expenses.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased from $39.7 million in 1998 to $41.5 million in 1999, an
increase of $1.8 million, or 5%, which was primarily attributable to an increase
in 1999 of unfavorable book-to-physical adjustments of rental equipment which
are classified as depreciation expense.
INTEREST EXPENSE. Interest expense increased from $24.2 million in 1998
to $28.7 million in 1999, an increase of $4.5 million, or 19%. This increase was
attributable to higher interest rates on borrowings and to additional interest
expense on increased borrowings under the Bank Credit Facility to fund
acquisitions during 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 --
EXCLUDING ACCOUNTING CHARGES
The operations of acquired centers are included in the operations of
the Company from the effective date of each acquisition. Because of the
substantial acquisition activity, the comparison of the results of operations
between 1998 and 1997 is materially impacted by the operations of these acquired
businesses.
The following discussion excludes the accounting charges recorded in
1998 and 1997. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Accounting Charges" and "Business -- Material 1999
Corporate Developments -- Medicare Oxygen Reimbursement Reductions".
NET REVENUES. Net revenues increased from $387.3 million in 1997 to
$403.9 million in 1998, an increase of $16.6 million, or 4%. The Company
estimates the Medicare oxygen reimbursement reductions decreased net revenue in
1998 by approximately $24.5 million. Excluding the impact of the Medicare oxygen
reimbursement reductions, net revenues would have increased from $387.3 million
in 1997 to approximately $428.6 million in 1998, an increase of approximately
$41.3 million, or 11%. The Company estimates that $40.4 million of this increase
is attributable to the acquired businesses net of dissolutions. The remainder of
the increase is primarily attributable to internal revenue growth generated
through the Company's sales and marketing efforts. Internal revenue growth,
excluding the impact of the Medicare oxygen reimbursement reductions, was 3% for
1998 and was adversely impacted in the latter half of 1998 by the strategic
factors discussed earlier.
36
<PAGE> 37
The following is a discussion of the components of net revenues:
Sales and Related Services Revenues. Sales and
related services revenues increased from $180.2 million in 1997 to
$192.9 million in 1998, an increase of $12.7 million, or 7%. This
increase is primarily attributable to the acquisition of home health
care businesses and internal revenue growth, offset by lower sales of
low margin products and lost revenue of branches closed or scaled back
in the 1997 restructuring.
Rentals and Other Revenues. Rentals and other
revenues increased from $200.3 million in 1997 to $206.5 million in
1998, an increase of $6.2 million, or 3%. This increase is primarily
attributable to the acquisition of home health care businesses and
internal revenue growth net of the impact of the Medicare oxygen
reimbursement reductions and lost revenue of branches closed or scaled
back in the 1997 restructuring.
Earnings from Joint Ventures. Earnings from joint
ventures decreased from $6.9 million in 1997 to $4.5 million in 1998, a
decrease of $2.4 million, or 35%. This decrease was primarily
attributable to the impact of the Medicare oxygen reimbursement
reductions and higher bad debt expense at certain joint venture
locations. Internal revenue growth of joint ventures was 19% in 1998,
increasing the Company's total internal revenue growth rate by 3%.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services
increased from $91.2 million in 1997 to $98.6 million in 1998, an increase of
$7.4 million, or 8%. This increase was primarily attributable to acquisitions.
As a percentage of sales and related services revenues, cost of sales and
related services remained constant at 51% for both 1997 and 1998.
OPERATING EXPENSES. Operating expenses increased from $197.8 million in
1997 to $220.8 million in 1998, an increase of $23.0 million, or 12%. Excluding
the impact of the Medicare oxygen reimbursement reductions, operating expenses
as a percentage of net revenue would have been 52% in 1998. This percentage
increase is attributable to higher bad debt expense and to higher personnel
expenses in 1998 compared to 1997. Higher personnel expenses in 1998 were
primarily related to increased investments in selling resources and accounts
receivable management.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased from $16.0 million in 1997 to $17.6 million in 1998, an
increase of $1.6 million, or 10%. As a percentage of net revenues, general and
administrative expenses remained constant at 4% for both 1997 and 1998.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased from $33.7 million in 1997 to $39.7 million in 1998, an
increase of $6.0 million. This increase was primarily attributable to
depreciation expense and the amortization of goodwill recorded in connection
with acquisitions.
37
<PAGE> 38
INTEREST EXPENSE. Interest expense increased from $16.5 million in 1997
to $24.2 million in 1998, an increase of $7.7 million. This increase was
attributable to higher interest rates on borrowings and to additional interest
expense on increased borrowings under the Bank Credit Facility to fund
acquisitions of home health care business during 1997 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had current assets of $121.5 million
and current liabilities of $61.0 million, resulting in working capital of $60.5
million and a current ratio of 2.0x. This compares to working capital of $99.1
million and a current ratio of 3.0x at December 31, 1998.
The Company is the borrower under a $312.5 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.
On April 6, 2000, Management and the lenders agreed to amend the Credit
Agreement with terms which waive existing 1999 events of default, require a
$5,000,000 principal repayment with the effectiveness of the amendment, modify
existing financial covenants, and freeze the borrowing availability under the
Credit Agreement at 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 they achieve their
operating projections and related cash flow projections; 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 11, 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.
38
<PAGE> 39
There can be no assurance that future cash flow from operations will be
sufficient to cover debt obligations. Such indebtedness, as of March 28, 2000,
totals $312.5 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. The Company was required to employ a
manager, acceptable to the Banks, with expertise in managing companies that are
in workout situations with their lenders. The term of such Manager's employment
has expired.
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 December 31,
1999, $313.3 million was outstanding under the Credit Facility, including $248.5
million under the revolving line of credit and $64.8 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 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 December 31, 1999 the weighted average borrowing rate was
9.8%. 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.
39
<PAGE> 40
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
$94.2 million and $75.2 million at December 31, 1998 and December 31, 1999,
respectively. Average days' sales in accounts receivable was approximately 92
and 81 days' at December 31, 1998, and December 31, 1999, respectively. The
decrease in DSO and net patient receivables in 1999 is due to improved
collection results on current billings in 1999 as well as the increased accounts
receivable reserve recorded in the fourth quarter of 1999.
Net cash provided by operating activities increased from $28.1 million
in 1998 to $46.9 million in 1999, an increase of $18.8 million. Net cash used in
investing activities decreased from $90.7 million in 1998 to $13.8 million in
1999, a decrease of $76.9 million. Acquisition expenditures decreased from $58.4
million in 1998 to $.5 million in 1999, a decrease of $57.9 million. The $58.4
million in acquisition expenditures in 1998 included $31.0 million related to a
1997 acquisition. Capital expenditures decreased from $26.8 million in 1998 to
$14.6 million in 1999, a decrease of $12.2 million. Net cash provided from (used
in) financing activities decreased from $54.9 million in 1998 to $(9.3) million
in 1999, a decrease of $64.2 million. The cash provided from financing
activities in 1998 primarily related to proceeds from the Bank Credit Facility.
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.
40
<PAGE> 41
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.
YEAR 2000
Many computer software programs were written using two digits instead
of four to define the applicable year. As a result, computer programs may
interpret a date including the digits "00" to refer to the year 1900 instead of
the year 2000. Such a Year 2000 problem could result in system failures which
disrupt patient services, billing and collections, payroll and other standard
business operations.
Accordingly, the Company formally established a Year 2000 compliance
committee under the sponsorship of senior management. The committee includes
representation from information systems, purchasing, finance, and reimbursement.
An inventory of all information technology and non-information technology
systems was conducted during 1997 and a risk assessment was performed. Based on
that assessment, plans were put in place to address the Year 2000 readiness of
each system, including remediation and testing. As part of that process, a Year
2000 compliance plan was prepared, and approved by the Board of Directors.
Year 2000 remediation work was performed by both internal and external
personnel. Most of the Company's software is supplied by external vendors. In
all cases, the Company worked with the vendor to ensure that a Year 2000
compliant version was developed and certified, and that the version was
installed.
The Company incurred approximately $1.6 million in costs associated
with its Year 2000 compliance efforts, primarily as capital expenditures. These
costs were funded from operating cash flow. To date, the Company has not
experienced any major system failures or adverse consequences due to Year 2000
compliance.
41
<PAGE> 42
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The chief market risk factor affecting the financial condition and
operating results of the Company is interest rate risk. The Company's Bank
Credit Facility uses a floating interest rate. As of December 31, 1999, the
Company had outstanding borrowings of approximately $311.2 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements are contained on pages 47 through 78 of this
Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers of the Company
is incorporated by reference to the Company's definitive proxy statement dated
April 20, 2000 ("Proxy Statement") for the annual meeting of stockholders to be
held on May 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Executive compensation information is incorporated by reference to the
Proxy Statement.
42
<PAGE> 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners and management
information is incorporated by reference to the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
of the Company is incorporated by reference to the Proxy Statement.
43
<PAGE> 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
Financial statements and schedules of the Company and its subsidiaries
required to be included in Part II, Item 8 are listed below.
<TABLE>
<CAPTION>
FORM 10-K PAGES
---------------
FINANCIAL STATEMENTS
<S> <C>
Report of Independent Public Accountants 47
Consolidated Balance Sheets, December 31, 1998 and 1999 48-49
Consolidated Statements of Operations for the Years Ended December 31, 1997,
1998, and 1999 50
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1998, and 1999 51-52
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1998, and 1999 53-54
Notes to Consolidated Financial Statements, December 31, 1999 55-78
FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants S-1
Schedule II -- Valuation and Qualifying Accounts S-2
</TABLE>
EXHIBITS
The Exhibits filed as part of the Report on Form 10-K are listed in the
Index to Exhibits immediately following the financial statement schedules.
REPORTS ON FORM 8-K DURING THE LAST QUARTER OF THE YEAR ENDED DECEMBER 31, 1999.
None.
44
<PAGE> 45
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ JOSEPH F. FURLONG III
-------------------------------------------
Joseph F. Furlong III, President,
Chief Executive Officer and Director
/s/ MARILYN A. O'HARA
-------------------------------------------
Marilyn A. O'Hara
Executive Vice President and
Chief Financial Officer
Date: April 13, 2000
45
<PAGE> 46
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/Morris Perlis Chairman April 13, 2000
- ---------------------------------------
Morris A. Perlis
/s/Allan Silber Director April 13, 2000
- ---------------------------------------
Allan C. Silber
/s/Henry T. Blackstock Director April 13, 2000
- ---------------------------------------
Henry T. Blackstock
/s/Joseph F. Furlong III Director, President, April 13, 2000
- --------------------------------------- and Chief Executive
Joseph F. Furlong III Officer
/s/Edward Sonshine Director April 13, 2000
- ---------------------------------------
Edward Sonshine
/s/Mark Manner Director April 13, 2000
- ---------------------------------------
Mark Manner
/s/Edward K. Wissing Director April 13, 2000
- ---------------------------------------
Edward K. Wissing
/s/Marilyn A. O'Hara Chief Financial April 13, 2000
- --------------------------------------- Officer and Chief
Marilyn A. O'Hara Accounting Officer
</TABLE>
46
<PAGE> 47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American HomePatient, Inc.:
We have audited the accompanying consolidated balance sheets of AMERICAN
HOMEPATIENT, INC. (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We have conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The financial requirements of certain of the Company's amended loan covenants
have been established such that management's projections indicate it is likely
that the Company will not be in compliance with respect to such covenants at
January 31, 2001. Should the Company not be in compliance with such covenants,
the lenders will have the right to accelerate the due date of the applicable
debt. If the lenders exercise their right to accelerate the due date of the
applicable debt in the event of noncompliance, there is currently no commitment
as to how such demand payment would be satisfied by the Company. See Note 2 for
additional discussion regarding the Company's loan covenants.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American HomePatient, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Nashville, Tennessee
February 25, 2000 (except
with respect to the matter
discussed in Notes 2 and 8
as to which the date is
April 6, 2000).
47
<PAGE> 48
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
ASSETS 1998 1999
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,276,000 $ 28,123,000
Restricted cash 51,000 --
Accounts receivable, less allowance for doubtful accounts of
$41,147,000 and $56,876,000, respectively 99,574,000 75,956,000
Inventories 20,776,000 16,499,000
Prepaid expenses and other assets 3,135,000 982,000
Income tax receivable 13,090,000 --
Deferred tax asset 7,174,000 --
------------- -------------
Total current assets 148,076,000 121,560,000
------------- -------------
PROPERTY AND EQUIPMENT, AT COST: 165,642,000 174,558,000
Less accumulated depreciation and amortization (87,864,000) (113,465,000)
------------- -------------
Net property and equipment 77,778,000 61,093,000
------------- -------------
OTHER ASSETS:
Excess of cost over fair value of net assets acquired, net 249,173,000 202,622,000
Investment in joint ventures 23,325,000 17,473,000
Deferred financing costs, net 4,119,000 3,703,000
Deferred tax asset 6,048,000 --
Other assets, net 23,373,000 17,549,000
------------- -------------
Total other assets 306,038,000 241,347,000
------------- -------------
$ 531,892,000 $ 424,000,000
============= =============
</TABLE>
(Continued)
48
<PAGE> 49
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(Continued)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1999
------------------------------------ ------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt and capital leases $ 7,024,000 $ 16,644,000
Trade accounts payable 10,629,000 23,327,000
Other payables 1,446,000 1,854,000
Accrued expenses:
Payroll and related benefits 9,074,000 7,472,000
Interest 3,327,000 596,000
Insurance 3,776,000 3,979,000
Restructuring accruals 3,413,000 1,234,000
Other 10,272,000 5,924,000
------------- -------------
Total current liabilities 48,961,000 61,030,000
------------- -------------
NONCURRENT LIABILITIES:
Long-term debt and capital leases, less current portion 316,918,000 298,778,000
Other noncurrent liabilities 9,514,000 7,204,000
------------- -------------
Total noncurrent liabilities 326,432,000 305,982,000
------------- -------------
COMMITMENTS, CONTINGENCIES AND GUARANTEES
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized, 5,000,000 shares; none
issued and outstanding -- --
Common stock, $.01 par value; authorized, 35,000,000 shares; issued and
outstanding, 14,986,000 and 15,160,000 shares, respectively 150,000 152,000
Paid-in capital 172,520,000 172,867,000
Accumulated deficit (16,171,000) (116,031,000)
------------- -------------
Total shareholders' equity 156,499,000 56,988,000
------------- -------------
$ 531,892,000 $ 424,000,000
============= =============
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
49
<PAGE> 50
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Sales and related service revenues $ 180,176,000 $ 192,863,000 $ 172,364,000
Rentals and other revenues 200,251,000 206,464,000 184,913,000
Earnings from joint ventures 6,850,000 4,541,000 303,000
------------- ------------- -------------
Total revenues 387,277,000 403,868,000 357,580,000
------------- ------------- -------------
EXPENSES:
Cost of sales and related services, excluding
depreciation and amortization 97,418,000 98,166,000 90,142,000
Operating 216,532,000 235,269,000 224,018,000
General and administrative 15,953,000 22,262,000 13,895,000
Depreciation and amortization 33,736,000 39,653,000 41,460,000
Interest 16,494,000 24,249,000 28,659,000
Restructuring 33,829,000 (3,614,000) (1,450,000)
Goodwill impairment 8,165,000 37,805,000 40,271,000
------------- ------------- -------------
Total expenses 422,127,000 453,790,000 436,995,000
------------- ------------- -------------
LOSS BEFORE INCOME TAXES (34,850,000) (49,922,000) (79,415,000)
------------- ------------- -------------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current (5,979,000) (4,674,000) 7,223,000
Deferred (2,963,000) (6,270,000) 13,222,000
------------- ------------- -------------
(8,942,000) (10,944,000) 20,445,000
------------- ------------- -------------
NET LOSS $ (25,908,000) $ (38,978,000) $ (99,860,000)
============= ============= =============
NET LOSS PER COMMON SHARE:
BASIC $ (1.75) $ (2.60) $ (6.55)
============= ============= =============
DILUTED $ (1.75) $ (2.60) $ (6.55)
============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 14,839,000 14,986,000 15,236,000
============= ============= =============
DILUTED 14,839,000 14,986,000 15,236,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
50
<PAGE> 51
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS/
-------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
---------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 14,676,736 $147,000 $166,780,000 $ 48,715,000 $ 215,642,000
Issuance of shares through exercise of
employee stock options 184,862 2,000 3,125,000 -- 3,127,000
Issuance of shares through employee
stock purchase plan 32,152 -- 608,000 -- 608,000
Issuance of shares through exercise of
stock warrants 7,500 -- 90,000 -- 90,000
Tax benefit of stock options exercised -- -- 530,000 -- 530,000
Net loss -- -- -- (25,908,000) (25,908,000)
---------- -------- ------------ ------------ -------------
BALANCE, DECEMBER 31, 1997 14,901,250 149,000 171,133,000 22,807,000 194,089,000
---------- -------- ------------ ------------ -------------
Issuance of shares through exercise of
employee stock options 35,109 -- 518,000 -- 518,000
Issuance of shares through employee
stock purchase plan 37,600 1,000 734,000 -- 735,000
Issuance of shares through exercise of
stock warrants 12,000 -- 100,000 -- 100,000
Tax benefit of stock options exercised -- -- 35,000 -- 35,000
Net loss -- -- -- (38,978,000) (38,978,000)
---------- -------- ------------ ------------ -------------
BALANCE, DECEMBER 31, 1998 14,985,959 $150,000 $172,520,000 $(16,171,000) $ 156,499,000
---------- -------- ------------ ------------ -------------
</TABLE>
(Continued)
51
<PAGE> 52
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(Continued)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS/
------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
---------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 14,985,959 $150,000 $172,520,000 $ (16,171,000) $ 156,499,000
---------- -------- ------------ ------------- -------------
Issuance of shares through exercise of
employee stock options 10,000 -- 10,000 -- 10,000
Issuance of shares through employee
stock purchase plan 163,761 2,000 337,000 -- 339,000
Net loss -- -- -- (99,860,000) (99,860,000)
---------- -------- ------------ ------------- -------------
BALANCE, DECEMBER 31, 1999 15,159,720 $152,000 $172,867,000 $(116,031,000) $ 56,988,000
========== ======== ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
52
<PAGE> 53
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (25,908,000) $(38,978,000) $(99,860,000)
Adjustments to reconcile net loss to net cash provided from operating
activities:
Depreciation and amortization 33,736,000 39,653,000 41,460,000
Equity in earnings of unconsolidated joint ventures (3,476,000) 90,000 1,324,000
Deferred income taxes (2,963,000) (6,270,000) 13,222,000
Minority interest 244,000 306,000 112,000
Goodwill impairment and write-off 20,411,000 37,805,000 40,271,000
Other non-cash charges 26,839,000 (4,000,000) 742,000
Change in assets and liabilities, net of acquisitions:
Restricted cash 375,000 (1,000) 51,000
Accounts receivable, net (14,194,000) 10,917,000 22,236,000
Inventories (999,000) 4,206,000 4,388,000
Prepaid expenses and other assets 416,000 (2,000,000) 2,160,000
Income tax receivable (8,520,000) (4,607,000) 13,090,000
Trade accounts payable, accrued expenses and other current
liabilities (5,982,000) 79,000 4,982,000
Restructuring accruals (4,108,000) (8,602,000) (578,000)
Deferred costs (51,000) 35,000 --
Other assets and liabilities (1,475,000) (554,000) 3,321,000
------------- ------------ ------------
Net cash provided from operating activities 14,345,000 28,079,000 46,921,000
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (103,289,000) (58,420,000) (500,000)
Additions to property and equipment, net (32,530,000) (26,780,000) (14,632,000)
Distributions to minority interest owners (166,000) (80,000) (196,000)
Distributions from (advances to) unconsolidated joint ventures, net 1,839,000 (5,437,000) 1,560,000
------------- ------------ ------------
Net cash used in investing activities (134,146,000) (90,717,000) (13,768,000)
------------- ------------ ------------
</TABLE>
(Continued)
53
<PAGE> 54
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(Continued)
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs $ (1,859,000) $ (992,000) $ (1,425,000)
Proceeds from long-term debt 133,766,000 74,777,000 4,500,000
Principal payments on debt and capital leases (10,228,000) (19,539,000) (12,391,000)
Proceeds from sale of stock, net of issuance costs 2,873,000 618,000 10,000
------------- ------------ ------------
Net cash provided from (used in) financing activities 124,552,000 54,864,000 (9,306,000)
------------- ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,751,000 (7,774,000) 23,847,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,299,000 12,050,000 4,276,000
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,050,000 $ 4,276,000 $ 28,123,000
============= ============ ============
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 16,675,000 $ 22,413,000 $ 31,045,000
============= ============ ============
Cash payments of income taxes $ 2,985,000 $ 2,303,000 $ 528,000
============= ============ ============
</TABLE>
In connection with the acquisitions of home health care businesses, the Company
issued debt of $41.7 million and $1.5 million, in 1997 and 1998, respectively.
The accompanying notes are an integral part of these consolidated
financial statements.
54
<PAGE> 55
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND BACKGROUND
American HomePatient, Inc. and subsidiaries (the "Company" or "American
HomePatient") is a health care services company engaged in the provision
of home health care services. The Company's home health care services are
comprised of the rental and sale of home medical equipment and home health
care supplies, and the provision of infusion therapies and respiratory
therapies. As of December 31, 1999, the Company provides these services to
patients in the home through 308 branches in 38 states.
2. OPERATING LOSSES AND DEBT COVENANTS
The Company has suffered net losses of $25,908,000, $38,978,000 and
$99,860,000 for the years ending December 31, 1997, 1998 and 1999,
respectively, and the financial results for 1999 and the fourth quarter of
1999 caused the Company to not be in compliance with certain covenants
of its Credit Agreement (see Note 8).
On April 6, 2000, management and the lenders agreed to amend the Credit
Agreement with terms which waive existing 1999 events of default, require
a $5,000,000 principal repayment with the effectiveness of the amendment,
modify existing financial covenants, and freeze the borrowing availability
under the Credit Agreement at 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 if they achieve their
operating projections and related cash flow projections during 2000;
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 11, 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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. The results of
operations of companies and other entities acquired in purchase
transactions are included from the effective dates of their respective
acquisitions. Investments in 50% owned joint ventures are accounted for
using the equity method.
55
<PAGE> 56
REVENUES
The Company's principal business is the operation of home health care
centers. Approximately 56%, 52% and 56% of the Company's net revenues in
1997, 1998 and 1999, respectively, are from participation in Medicare and
state Medicaid programs. Amounts paid under these programs are generally
based on a fixed rate. Revenues are recorded at the expected reimbursement
rates when the services are provided, merchandise delivered or equipment
rented to patients. Amounts earned under the Medicare and Medicaid
programs are subject to review by such third party payors. In the opinion
of management, adequate provision has been made for any adjustment that
may result from such reviews, based upon information available at the date
of the financial statements. Any differences between estimated settlements
and final determinations are reflected in operations in the year
finalized.
Sales and related services revenues are derived from the provision of
infusion therapies, the sale of home health care equipment and supplies,
the sale of aerosol medications and respiratory therapy equipment and
supplies and services related to the delivery of these products. Rentals
and other patient revenues are derived from the rental of home health care
equipment, enteral pumps and equipment related to the provision of
respiratory therapy.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments that have an
original maturity of less than three months.
ACCOUNTS RECEIVABLE
The Company's accounts receivable, before allowances, consists of the
following components:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Patient receivables:
Medicare $ 45,790,000 $ 45,334,000
All other, principally commercial insurance 89,519,000 86,710,000
------------ ------------
135,309,000 132,044,000
Other receivables, principally due from vendors and
former owners 5,412,000 788,000
------------ ------------
Total $140,721,000 $132,832,000
============ ============
</TABLE>
The Company provides credit for a substantial portion of its non-third
party reimbursed revenues and continually monitors the credit worthiness
and collectibility of amounts due from its clients. The Company is subject
to accounting losses from uncollectible receivables in excess of its
reserves.
56
<PAGE> 57
PROVISION FOR DOUBTFUL ACCOUNTS
The Company includes provisions for doubtful accounts in operating
expenses in the accompanying consolidated statements of operations. The
provisions for doubtful accounts were $30,542,000, $29,857,000 and
$35,729,000 in 1997, 1998 and 1999, respectively.
INVENTORIES
All inventories represent goods or supplies and are priced at the lower of
cost (on a first-in, first-out basis) or net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated or amortized primarily using the
straight-line method over the estimated useful lives of the assets for
financial reporting purposes and the accelerated cost recovery method for
income tax reporting purposes. Assets under capital leases are amortized
over the term of the lease for financial reporting purposes. The estimated
useful lives are as follows: buildings and improvements, 18-30 years;
rental equipment, 3-7 years; furniture, fixtures and equipment, 4-5 years;
leasehold improvements, 5 years; and delivery equipment, 3-5 years. The
provision for depreciation includes the amortization of equipment and
vehicles under capital leases.
In 1997, 1998 and 1999, depreciation expense includes $20,344,000,
$23,537,000 and $25,400,000, respectively, related to the depreciation of
rental equipment.
Maintenance and repairs are charged against income as incurred, and major
betterments and improvements are capitalized. The cost and accumulated
depreciation of assets sold or otherwise disposed of are removed from the
accounts and the resulting gain or loss is reflected in the consolidated
statements of operations.
Property and equipment obtained through purchase acquisitions are stated
at their estimated fair value determined on their respective dates of
acquisition.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of cost over fair value of net assets acquired ("goodwill") is
amortized over 40 years using the straight-line method. Accumulated
amortization related to goodwill totaled $17,199,000 and $20,512,000 as of
December 31, 1998 and 1999, respectively. The Company believes its
estimated goodwill life is reasonable given the continuing movement of
patient care to noninstitutional settings, expanding demand due to
demographic trends, the emphasis of the Company on establishing
significant coverage in each local and regional market, the consistent
practice with other home care companies and other factors.
57
<PAGE> 58
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets", management
evaluates long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Management utilizes estimated undiscounted future cash flows
to determine when an impairment exists. When this analysis indicates an
impairment exists, the amount of loss is determined based upon a
comparison of estimated fair value with the net book value of the asset.
Estimated fair value is based upon the present value of estimated future
cash flows or other objective criteria.
In 1998 and 1999, the Company's evaluation of goodwill indicated
impairments related to certain acquisitions of approximately $37,805,000
and $40,271,000, respectively, which were charged to expense in the 1998
and 1999 consolidated statements of operations. The write-downs were based
upon management's estimate of the negative impact of the Company's
inability to replace the decreased cash flows associated with the Medicare
oxygen reimbursement reductions to the extent originally planned, as well
as certain business strategies implemented in the latter half of 1998
which decreased revenue and increased operating expenses. The Company has
been unable to re-establish their presence in previously exited lines of
business and thus has experienced negative operating results.
In connection with the restructuring as described in Note 4, the Company
wrote down $8,165,000 of goodwill in 1997, as required under SFAS No. 121
based upon management's estimate of the impact of the announced Medicare
oxygen reimbursement reductions on the Company's continuing operations.
Also, the Company wrote off $12,246,000 of goodwill in 1997 related to the
closure of certain operating locations which is reflected as part of the
restructuring charge in the 1997 consolidated statement of operations.
DEFERRED FINANCING COSTS
Financing costs are amortized primarily using the straight-line method
(which is not materially different from the effective interest method)
over the periods of the related indebtedness.
OTHER ASSETS
The estimated value of non-compete agreements, net of accumulated
amortization of $2,183,000 and $2,287,000 as of December 31, 1998 and
1999, respectively, are amortized over the lives of the agreements,
generally periods of up to seven years. As of December 31, 1998 and 1999,
the net amounts of non-compete agreements of $376,000 and $97,000,
respectively, are reflected in other assets in the accompanying
consolidated balance sheets.
Other intangibles are amortized over their expected benefit period of two
to three years. The net balance at December 31, 1998 and 1999 is
$1,076,000 and $376,000, respectively, and is reflected in other assets in
the accompanying consolidated balance sheets.
Investments under split dollar value life insurance arrangements of
$13,187,000 and $10,422,000 at December 31, 1998 and 1999, respectively,
were recorded in connection with the acquisitions of certain home health
care businesses and are reflected in other assets. The Company owes
premiums on the split dollar value life insurance policies of $7,711,000
and $4,711,000 at December 31, 1998 and 1999, respectively, which are
classified as other noncurrent liabilities.
58
<PAGE> 59
INCOME TAXES
The Company utilizes SFAS No. 109, "Accounting for Income Taxes" which
requires an asset and liability approach for financial accounting and
reporting for income taxes. Deferred income taxes are provided for
differences between financial reporting and tax bases of assets and
liabilities, with the primary differences related to the allowance for
doubtful accounts, accrued liabilities, depreciation methods and periods
and deferred cost amortization methods. See Note 10 for additional
information related to the provision (benefit) for income taxes.
STOCK BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but
does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method as prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), and
related Interpretations. Under APB Opinion No. 25, no compensation cost
related to stock options has been recognized because all options are
issued with exercise prices equal to the fair market value at the date of
grant. See Note 9 for further discussion.
COMPREHENSIVE INCOME
Effective April 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which establishes standards for reporting and
displaying comprehensive income or losses and its components in a full set
of general purpose financial statements. Comprehensive income or loss
encompasses all changes in shareholders' equity and includes net income
(loss), net unrealized capital gains or losses on available for sale
securities and foreign currency translation adjustments. Adoption of this
pronouncement has not had a material impact on the Company's results of
operations, as comprehensive loss for the years ended December 31, 1997,
1998 and 1999 was the same as net loss for the Company.
SEGMENT DISCLOSURES
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public business
enterprises or other enterprises that are required to file financial
statements with the Securities & Exchange Commission report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. The Company manages its business as one industry segment
and the provisions of SFAS No. 131 have no significant effect on the
Company's disclosures.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accruals approximate fair value because of the
short-term nature of these items. Based on the current market rates
offered for debt with similar risks and debt with similar maturities, the
carrying amount of the Company's long-term debt, including current
portion, also approximates fair value at December 31, 1999.
59
<PAGE> 60
ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1998 consolidated
financial statements to conform to the 1999 presentation.
4. ACCOUNTING CHARGES
1999 ACCOUNTING CHARGES
The Company recorded $77,498,000 in accounting charges in the fourth
quarter of 1999. These charges consisted of $17,133,000 to increase the
Company's accounts receivable reserves which resulted in increased bad
debt expense above previous quarters of 1999; $41,032,000 related to the
write-off of impaired goodwill; $19,847,000 to establish a valuation
allowance for deferred tax assets; $936,000 to record the anticipated
loss on the dissolution of one of the Company's joint ventures; and a
credit of $1,450,000 for the reversal of excess restructuring reserves
originally recorded in 1997.
The charge of $17,133,000 in additional accounts receivable reserves
relates to several changes experienced in the receivables portfolio during
1999. During 1999, the Company placed a greater emphasis than in previous
years on collecting current billings with less emphasis on pursuing the
collection of older accounts. As a result of this strategy, overall
collections for current billings in 1999 improved over the prior year;
however, accounts greater than 120 days increased. In addition, some of
the billing and collection issues experienced in 1998 continued to
contribute to the deterioration in the aging statistics, particularly
accounts aged over one year. Also during 1999, the Company has continued
to experience increased delays between the date services are provided and
the actual billing date due to delays in obtaining necessary
documentation. Finally, Medicare reimbursement changes which limited
coverage of immune globulin therapies were implemented in 1999. These
changing characteristics experienced in the receivable portfolio in 1999
prompted the Company to record additional specific reserves related to
certain issues and adopt a reserve methodology, which provides additional
reserves for accounts with advanced agings. This accounts receivable
charge is included in operating expense and as a reduction of earnings
from joint ventures in the accompanying 1999 consolidated statement of
operations.
The Company wrote-off $40,271,000 of impaired goodwill as required under
SFAS No. 121 due to a continuation of poor performance into 1999 of
certain acquisitions. A deterioration in performance of many of these
acquired businesses began in mid-1998 and, contrary to management's
expectations, the negative trends did not reverse in 1999. The Company
also wrote-off impaired goodwill of certain of the Company's joint
ventures which adversely impacted earnings from joint ventures by $761,000
in the accompanying 1999 consolidated statement of operations.
60
<PAGE> 61
The Company recorded a valuation allowance for deferred tax assets in the
amount of $19,847,000 due to uncertainty as to their realizability. Due
to the fact that the Company is currently not generating taxable income
and achieving future taxable income is uncertain, management believes a
full valuation allowance to be appropriate.
The Company has received formal notice from three of its joint venture
partners of their desire to dissolve their respective partnerships. The
Company anticipates that the transaction to dissolve one of these
partnerships will result in a loss to the Company in the amount of
$936,000. After the dissolutions, the Company intends to operate these
businesses as wholly-owned operations. This charge is included as a
reduction in earnings from joint ventures in the accompanying 1999
consolidated statement of operations.
Subsequent to year end, the Company settled a dispute with the owner of a
business that the Company had previously managed under the terms of a
management agreement. The potential loss on the settlement had been
accrued as part of the Company's restructuring charge recorded in 1997.
Due to the favorable outcome of the settlement, the Company reversed
$1,450,000 in excess restructuring reserves. This reversal is included in
restructuring in the accompanying 1999 consolidated statement of
operations.
1998 ACCOUNTING CHARGES
In the quarter ended September 30, 1998, the Company recorded a pre-tax
accounting charge of $15,243,000 related to: (a) certain events which
occurred in the third quarter ($3,243,000), (b) the recording of
additional reserves related to accounts receivable ($16,000,000), and (c)
the reversal of excess restructuring accruals originally recorded in
1997 ($4,000,000 credit).
The charges of $3,243,000 relate to certain expenses associated with the
retirement package of the former CEO, CEO transition expenses, deal costs
of abandoned mergers and acquisitions, and a provision for adverse
settlements related to accounting disputes with certain sellers of
acquired businesses. These charges are included in general and
administrative expenses in the accompanying 1998 consolidated statement of
operations.
The accounts receivable charge of $16,000,000 relates primarily to
disruptions in collections as a result of the consolidation of billing
centers and changes in certain billing procedures continuing from the 1997
restructuring. Billing center efficiencies have been affected because of
personnel turnover and other adverse impacts of previous cost reduction
plans. The termination of unprofitable contracts with certain health care
institutions has also adversely affected collections on existing
receivables. This accounts receivable charge is included in operating
expense ($14,500,000) and general and administrative expense ($1,500,000)
in the accompanying 1998 consolidated statement of operations.
The Company adjusted its original estimates of restructuring costs related
to the 1997 restructuring activities. This adjustment resulted in a
$4,000,000 reversal of certain restructuring accruals and other reserves
recorded in connection with the restructuring. This reversal is included
in cost of sales ($386,000) and restructuring ($3,614,000) in the
accompanying 1998 consolidated statement of operations.
In addition to the 1998 third quarter charges, $1,291,000 of severance
expense, related to former senior executive officers, was recorded as
general and administrative expense, and $37,805,000 of impaired goodwill
was written off (see Note 3).
61
<PAGE> 62
1997 MEDICARE OXYGEN REIMBURSEMENT REDUCTIONS AND RELATED RESTRUCTURING
In August of 1997, Congress enacted and President Clinton signed the
Balanced Budget Act of 1997 which reduced the Medicare reimbursement rate
for oxygen-related services by 25 percent and drugs and biologicals by
five percent on January 1, 1998, and reduced the Medicare reimbursement
rate for oxygen-related services by another five percent in 1999. In
addition, Consumer Price Index increases in oxygen reimbursement rates
will not resume until the year 2003. American HomePatient is one of the
nation's largest providers of home oxygen services to patients, many of
whom are Medicare recipients, and is therefore significantly and adversely
affected by this legislation. Medicare oxygen reimbursements account for a
significant percentage of the Company's revenues.
On September 25, 1997, the Company announced initiatives to respond to
planned Medicare oxygen reimbursement reductions by fundamentally
reshaping the Company. More than 100 of the Company's total operating and
billing locations were affected by the planned activities. The specific
actions resulted in pre-tax accounting charges in the third quarter of
1997 of $65,000,000 due to the closure, consolidation, or scaling back of
nine billing centers, the consolidation of operating regions, the scaling
back or elimination of marginal products and services at numerous
locations, and the related termination of approximately 400 employees in
the affected locations. These activities were substantially completed as
of June 30, 1998.
The $65,000,000 pre-tax charges recorded in the third quarter of 1997
specifically related to the write down of goodwill and other noncurrent
assets ($8,165,000), the closure, consolidation, scaling back, or
elimination of services at selected locations ($44,762,000), and the
anticipated negative impact on assets of the remaining operating locations
($12,073,000).
The write off of goodwill and other noncurrent assets is required under
SFAS No. 121 based upon management's estimate of the impact of the
announced Medicare oxygen reimbursement reductions on the Company's
continuing operations. Management's projections of future operations
considering the reduced reimbursement rates for oxygen-related services
indicated that the carrying value of goodwill and other noncurrent assets
should be written down by $8,165,000.
The closure, consolidation, scaling back, or elimination of services at
more than 100 of the Company's operating and billing centers resulted in
the write off of goodwill and other intangible assets specifically
identified with affected locations ($12,246,000), the accrual of estimated
employee severance and related exit costs ($6,696,000), the accrual of
estimated facility exit costs including future lease costs, the write off
of leasehold improvements, and the write down of furniture and equipment
($6,128,000), the write down of accounts receivable to estimated
realizable value ($8,728,000), the write down of inventory to estimated
realizable value ($2,204,000), the write down of rental equipment to
estimated realizable value ($2,777,000), the termination of related
management contracts ($3,018,000), and other exit costs ($2,965,000). The
accounting charges discussed in this paragraph are recorded in the
accompanying 1997 consolidated statement of operations as cost of sales
($2,204,000), operating expenses ($8,729,000), and restructuring charge
($33,829,000).
62
<PAGE> 63
Due to the comprehensive nature of this restructuring, including the
consolidation of regional responsibilities, reorganization of the field
management structure, refinements and modifications of existing procedures
in all locations and additional management attention required to
accomplish the restructuring in the desired timeframe, negative impacts
are anticipated in the remaining operating locations relative to
realization of accounts receivable, inventories and rental equipment, for
which an additional $12,073,000 charge was recorded. This accounting
charge is recorded in the accompanying 1997 consolidated statement of
operations as cost of sales ($3,051,000) and operating expenses
($9,022,000).
The following actions have occurred related to the restructuring:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
1997 1998 TOTAL
---- ---- -----
<S> <C> <C> <C>
Employees terminated 323 83 406
Operating centers closed 47 5 52
Billing locations closed 5 4 9
Operating centers consolidated, scaled back or had
marginal products and services eliminated 44 11 55
</TABLE>
The expected cash payments related to the restructuring charge accrued on
September 25, 1997 were approximately $17,712,000. As costs were incurred
and payments were made, $4,108,000, $8,602,000 and $729,000 were charged
against the related restructuring accruals during the fourth quarter of
1997 and the years ended December 31, 1998 and 1999, respectively.
In addition to cash payments related to restructuring expenses, $9,297,000
in the fourth quarter of 1997 and $15,243,000 in the year ended December
31, 1998 were charged against other valuation reserves established in
connection with the Company's restructuring related to the write down of
accounts receivable, inventory and rental equipment to their estimated
realizable value.
In the third quarter ended September 30, 1998, the Company adjusted its
original estimates of restructuring costs resulting in the reversal of
$1,589,000 of excess restructuring accruals related to items requiring a
cash payment, and $2,411,000 of other valuation reserves established in
connection with the restructurings. In the fourth quarter ended December
31, 1999, the Company adjusted its original estimates of restructuring
costs resulting in the reversal of $1,450,000 of excess restructuring
accruals related to items requiring a cash payment. The restructuring
accruals at December 31, 1999 represent estimated remaining facility costs
($455,000) and termination costs of certain management contracts
($779,000) and are included in the restructuring accruals on the
accompanying 1999 consolidated balance sheet.
63
<PAGE> 64
5. INVESTMENT IN JOINT VENTURE PARTNERSHIPS
The Company owns 50% of 17 home health care businesses (the
"Partnerships"). The remaining 50% of each business is owned by local
hospitals or other investors within the same community as the joint
ventures. The Company is solely responsible for the management of these
businesses and receives management fees ranging from 3% to 15% based on
revenues or cash collections.
The Company has received formal notice from three of its joint venture
partners of their desire to dissolve their respective partnerships. The
Company anticipates that the transaction to dissolve one of these
partnerships will result in a loss to the Company in the amount of
$936,000. After the dissolutions, the Company intends to operate these
businesses as wholly-owned operations.
The Company provides accounting and receivable billing services to the
Partnerships. The Partnerships are charged for their share of such costs
based on contract terms. The Company's earnings from joint ventures
include equity in earnings, management fees and fees for accounting and
receivable billing services. The Company's investment in unconsolidated
joint ventures includes receivables from joint ventures of $10,683,000 and
$10,728,000 at December 31, 1998 and 1999, respectively.
The Company guarantees a mortgage payable of one of the Partnerships. The
balance of the guaranteed debt at December 31, 1999 is $434,000.
Summarized financial information of the Partnerships at December 31, 1998
and 1999 and for the years then ended is as follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Cash $ 1,132,000 $ 1,450,000
Accounts receivable, net 16,300,000 10,379,000
Other current assets 2,299,000 1,886,000
Property and equipment, net 16,500,000 13,046,000
Other assets 5,744,000 4,000,000
------------ ------------
Total assets $ 41,975,000 $ 30,761,000
============ ============
Accounts payable $ 691,000 $ 610,000
Other accrued expenses 11,435,000 11,468,000
Debt 4,834,000 3,692,000
Partners' capital 25,015,000 14,991,000
------------ ------------
Total liabilities and partners' capital $ 41,975,000 $ 30,761,000
============ ============
Net sales and rental revenues $ 51,696,000 $ 48,958,000
Cost of sales 9,212,000 7,265,000
Operating and management fees 36,810,000 36,340,000
Depreciation, amortization and interest expense 5,967,000 9,287,000
------------ ------------
Total expenses 51,989,000 52,892,000
------------ ------------
Pre-tax loss $ (293,000) $ (3,934,000)
============ ============
</TABLE>
64
<PAGE> 65
6. ACQUISITIONS
1998 ACQUISITIONS
Effective in 1998, the Company acquired four home health care businesses
consisting of 18 locations having combined annualized revenues of
approximately $24.0 million. The aggregate purchase price of approximately
$31.5 million included cash of $26.5 million, assumed liabilities of $3.5
million and notes payable to sellers of $1.5 million. Of the 18 branches
acquired in 1998, the Company has consolidated one branch with another
Company location.
The allocation of the aggregate purchase price of 1998 acquisitions is
summarized as follows:
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Net current and other assets $ 4,882,000
Fixed assets 2,261,000
Goodwill, noncompete agreements and other intangibles 24,401,000
-----------
$31,544,000
===========
</TABLE>
The purchase prices for the above acquisitions were allocated to the
underlying assets based on their estimated relative fair values. Certain
of the assets acquired in 1998 were evaluated and final allocations of the
purchase prices have been made in 1999. The consolidated statements of
operations include the results of operations of the acquired businesses
from the respective dates of acquisition of the controlling interests.
The following unaudited pro forma information assumes the acquisitions
described above had occurred as of the beginning of the respective
periods:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
-------------
<S> <C>
Net revenues $ 409,870,000
=============
Net loss from operations $ (38,819,000)
=============
Net loss from operations per common share - basic $ (2.59)
=============
Net loss from operations per common share - diluted $ (2.59)
=============
Weighted average common shares outstanding - basic 14,986,000
=============
Weighted average common shares outstanding - diluted 14,986,000
=============
</TABLE>
65
<PAGE> 66
7. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Land $ 729,000 $ 734,000
Buildings and improvements 8,416,000 8,287,000
Rental equipment 127,620,000 134,292,000
Furniture, fixtures and equipment 24,735,000 26,660,000
Delivery vehicles 4,142,000 4,585,000
------------ ------------
$165,642,000 $174,558,000
============ ============
</TABLE>
Property and equipment under capital leases are included under the various
equipment categories.
8. LONG-TERM DEBT AND LEASE COMMITMENTS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Secured Revolving Line of Credit $ 241,900,000 $ 246,400,000
Secured Term Loan 75,000,000 64,765,000
Notes payable, primarily secured with acquired assets, interest at 6.8%,
principal and interest due annually, final principal and interest
payment due on February 15, 2016 832,000 806,000
Mortgage note payable, interest at 8%, principal and interest due
monthly, with balloon payment of $442,000 due July 1, 2004 567,000 548,000
Notes payable, primarily secured with acquired assets, with interest rates
from 7% to prime, interest due quarterly, principal payment due at
maturity date, final maturities through 2000 3,336,000 1,233,000
Acquisition note payable, interest at 7%, principal and interest due on
February 4, 2000 1,000,000 1,000,000
Capital lease obligations, monthly principal and interest payments until 2003 1,307,000 670,000
---------------- ----------------
323,942,000 315,422,000
Less current portion (7,024,000) (16,644,000)
---------------- ----------------
$ 316,918,000 $ 298,778,000
================ ================
</TABLE>
Principal payments required on long-term debt (excluding capital leases)
for the next five years and thereafter beginning January 1, 2000, are as
follows:
<TABLE>
<S> <C>
2000 $ 16,282,000
2001 21,052,000
2002 276,221,000
2003 60,000
2004 491,000
Thereafter 646,000
------------
$314,752,000
============
</TABLE>
66
<PAGE> 67
<PAGE> 68
On April 14, 1999, the Company entered into a Second Amendment to the
Fourth Amended and Restated Credit Agreement (the "Credit Agreement") in
order to remain in compliance with certain financial covenants. This
Second Amendment waived events of default as of December 31, 1998 and
modified previously existing financial covenants. The Second Amendment
established among other things, new covenants, a more limited borrowing
availability and higher interest rates. As part of the amendment, the
Company's credit availability under the Credit Agreement was reduced from
$360,000,000 (temporarily reduced to $340,000,000 through April 1, 1999
pursuant to the First Amendment) to $328,600,000. The Credit Agreement
included a $75,000,000 five-year Secured Term Loan and a $253,600,000
five-year Secured Revolving Line of Credit with a maturity of April 15,
2002.
The Credit Agreement contains various financial covenants, the most
restrictive of which relate to measurement of earnings before interest,
taxes, depreciation and amortization ("EBITDA"), minimum consolidated net
worth, leverage ratios, debt-to-equity ratios, interest coverage ratios
and collections of accounts receivable, in addition to provisions for
periodic reporting and the recapture of excess cash flow. The Credit
Agreement also contains certain covenants which, among other restrictions,
impose certain limitations or prohibitions on the Company with respect to
the incurrence of certain indebtedness, the creation of security interests
on the assets of the Company, investments, acquisitions, investments in
joint ventures, capital expenditures and sales of Company assets.
At December 31, 1999, the Company was not in compliance with certain
covenants of its Credit Agreement. Noncompliance with these covenants gave
the lenders the right to demand payment of outstanding amounts under the
Credit Agreement. In addition, the Company was not able to borrow
additional amounts under the Credit Agreement.
On April 6, 2000, the Company entered into a Third Amendment to the
Fourth Amended and Restated Credit Agreement in order to remain in
compliance with certain financial covenants. The terms of the Third
Amendment waive events of default as of December 31, 1999, modify existing
financial covenants, require a $5,000,000 principal repayment with the
effectiveness of the amendment, and freeze the borrowing availability at
the amounts outstanding at the time of the amendment. The Company's credit
availability has thus been reduced from $328,600,000 to $307,508,000,
including a $58,265,000 term loan, a $246,400,000 revolving line of credit
and a $2,843,000 letter of credit.
The modified financial covenants are structured such that the Company
would remain in compliance with the covenants if they achieve their
operating projections and related cash flow projections during 2000;
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 11, 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 Company has agreed to issue on March 31, 2001 (provided loans, letters
of credit or commitments are outstanding) warrants to the lenders
representing 19.99% of the fully diluted common stock of the Company
issued and outstanding as of March 31, 2001. Fifty percent of these
warrants would be exercisable at any time after issuance and the remaining
fifty percent would be exercisable from and after September 30, 2001
(provided loans, letters of credit or commitments are outstanding). The
exercise price of the warrants will be $0.01 per share.
Interest is payable on borrowings under the Credit Agreement, 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 a margin
of 2.5% and 3.25%, respectively, through September 30, 2000 and a margin
of 2.75% and 3.50%, respectively, thereafter. Beginning September 30, 2000
the Company is required to pay additional interest in the amount of 4.5%
per annum on that portion of the Credit Agreement that is in excess of
four times adjusted EBITDA. The Company's ability to borrow under the
Credit Agreement terminates on April 15, 2002, subject to exceptions set
forth therein. At December 31, 1999, the weighted average borrowing rate
was 9.8%. A commitment fee of up to .50% per annum is payable by the
Company on the undrawn balance.
67
<PAGE> 69
On September 15, 1999, the Company began making quarterly principal
payments on the Secured Term Loan of $1,500,000 per quarter and shall
continue to make these quarterly principal payments through and including
June 15, 2000. In addition, in connection with the Third Amendment a
$5,000,000 principal repayment was required to be paid to the lenders upon
the effectiveness of the amendment. Commencing on September 15, 2000, the
Company shall make quarterly principal payments on the Secured Term Loan
of $3,000,000 per quarter through and including March 15, 2001; $6,000,000
per quarter through and including December 15, 2001; and a $29,764,000
balloon payment due April 15, 2002. The original terms of the Secured
Revolving Line of Credit did not require principal payments until maturity
at December 16, 2002.
In 1998, the Company refinanced $31,000,000 of notes payable to
shareholders of acquired companies using the Secured Revolving Line of
Credit. The refinanced notes were classified in the 1997 consolidated
balance sheet according to the terms of the Secured Revolving Line of
Credit. The remaining notes to shareholders of acquired companies are
classified according to the terms of the notes.
CAPITAL LEASE COMMITMENTS
The Company leases certain equipment under capital leases. Future minimum
rental payments required on capital leases for the next five years
beginning January 1, 2000, less amounts representing interest, are as
follows:
<TABLE>
<S> <C>
2000 $ 455,000
2001 231,000
2002 118,000
2003 17,000
2004 --
------------
821,000
Less amounts representing interest (151,000)
------------
$ 670,000
============
</TABLE>
OPERATING LEASE COMMITMENTS
The Company has noncancelable operating leases on certain land, vehicles,
buildings and equipment. The approximate minimum future rental commitments
on the operating leases for the next five years beginning January 1, 2000,
are as follows:
<TABLE>
<S> <C>
2000 $ 11,191,000
2001 7,973,000
2002 4,887,000
2003 2,748,000
2004 915,000
Thereafter 1,781,000
------------
$ 29,495,000
============
</TABLE>
Rent expense for all operating leases was approximately $13,811,000,
$15,695,000 and $15,057,000, in 1997, 1998 and 1999, respectively.
68
<PAGE> 70
9. SHAREHOLDERS' EQUITY AND STOCK PLANS
NONQUALIFIED STOCK OPTION PLANS
Under the 1991 Nonqualified Stock Option Plan (the "Plan"), as amended as
of February 10, 2000, 4,000,000 shares of common stock have been reserved
for issuance upon exercise of options granted thereunder. The maximum term
of any option granted pursuant to the Plan is ten years. Shares subject to
options granted under the Plan which expire, terminate or are canceled
without having been exercised in full become available again for future
grants.
An analysis of stock options outstanding is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- -------
<S> <C> <C>
OUTSTANDING AT DECEMBER 31, 1996 1,575,395 $ 16.93
Granted 267,000 $ 21.64
Exercised (184,862) $ 15.00
Canceled (54,475) $ 19.57
--------- -------
OUTSTANDING AT DECEMBER 31, 1997 1,603,058 $ 17.85
Granted 1,274,500 $ 7.69
Exercised (35,109) $ 13.33
Canceled (772,118) $ 17.64
--------- -------
OUTSTANDING AT DECEMBER 31, 1998 2,070,331 $ 11.75
Granted 424,750 $ .60
Exercised (10,000) $ 1.06
Canceled (310,725) $ 16.72
--------- -------
OUTSTANDING AT DECEMBER 31, 1999 2,174,356 $ 8.91
========= =======
EXERCISABLE AT DECEMBER 31, 1999 1,470,544 $ 10.76
========= =======
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED EXERCISE
AVERAGE PRICE
WEIGHTED REMAINING OPTIONS OF OPTIONS
AVERAGE CONTRACTUAL EXERCISABLE AT EXERCISABLE AT
OPTIONS EXERCISE EXERCISE LIFE DECEMBER 31, DECEMBER 31,
OUTSTANDING PRICES PRICE IN YEARS 1999 1999
----------- -------- -------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
17,338 $ 6.00 $ 6.00 1.7 17,338 $ 6.00
37,500 $10.00 to $10.03 4.4 37,500 $10.03
$10.04
208,313 $15.83 to $16.53 5.1 208,313 $16.53
$20.67
360,955 $17.50 to $17.92 6.1 360,955 $17.92
$22.50
123,500 $21.50 $21.50 7.1 92,625 $21.50
1,012,750 $ 2.13 to $ 6.03 8.8 650,313 $ 5.20
$18.13
414,000 $ .56 $ .56 9.9 103,500 $ .56
--------- ---------
2,174,356 1,470,544
========= =========
</TABLE>
69
<PAGE> 71
Options granted during 1996 have a two year vesting period and expire in
ten years. Options granted during 1997 have two and three year vesting
periods and expire in ten years. Options granted during 1998 to all
employees, except officers and directors, have a one, two, three and four
year vesting periods and expire in ten years. Options granted during 1999
vested upon grant or have a three year vesting period and expire in ten
years. As of December 31, 1999, 106,754 shares remain available for future
grants of options under the Plan.
Under the 1995 Nonqualified Stock Option Plan for Directors (the "1995
Plan"), as amended as of February 10, 2000, 600,000 shares of common stock
have been reserved for issuance upon exercise of options granted
thereunder. The maximum term of any option granted pursuant to the 1995
Plan is ten years. Shares subject to options granted under the Plan which
expire, terminate or are canceled without having been exercised in full
become available for future grants. In 1996, the Company granted options
for 24,000 shares of common stock under the 1995 Plan at an exercise price
of $26.25. In 1997, the Company granted options for 24,000 shares of
common stock at an exercise price of $21.06. In 1998, the Company granted
options for 31,500 shares of common stock at exercise prices of $1.69 and
$19.00. In 1999, the Company granted options for 24,000 shares of common
stock under the 1995 Plan at an exercise price of $.53. The issued options
are fully vested and expire in ten years.
The Company has adopted the disclosure provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's stock option and employee
stock purchase plans been determined based on the fair value at the grant
date of awards in 1997, 1998 and 1999 consistent with the provisions of
SFAS No. 123, the Company's net loss and net loss per common share would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
Net loss - as reported $ (25,908,000) $ (38,978,000) $ (99,860,000)
Net loss - pro forma (31,326,000) (40,796,000) (100,998,000)
Net loss per common share - as reported
Basic (1.75) (2.60) (6.55)
Diluted (1.75) (2.60) (6.55)
Net loss per common share - pro forma
Basic (2.11) (2.72) (6.63)
Diluted (2.11) (2.72) (6.63)
</TABLE>
70
<PAGE> 72
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years. The weighted average fair value of options granted were
$13.31, $2.44 and $0.20, for 1997, 1998 and 1999, respectively. The fair
value of each grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 38.0 42.0 45.0
Expected lives 10 years 1 to 4 years 1 to 3 years
Risk-free interest rate range 5.7% to 6.5% 4.6% to 5.6% 4.8% to 6.0%
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1993 Stock Purchase Plan (the "Stock Purchase Plan")
originally reserved 750,000 shares for issuance to employees. Under the
Stock Purchase Plan, employees may purchase stock, subject to certain
limitations, at 85% of the lower of the closing market price at the
beginning or at the end of each plan year, which is the last day of
February. As of December 31, 1999, 336,902 shares have been issued under
this plan.
WARRANTS
In 1997 and 1998, warrants were exercised for 7,500 shares at $12.00 per
share and 12,000 shares at $8.33 per share, respectively. There are no
outstanding warrants as of December 31, 1999.
PREFERRED STOCK
The Company's certificate of incorporation was amended in 1996 to
authorize the issuance of up to 5,000,000 shares of preferred stock. The
Company's board of directors is authorized to establish the terms and
rights of each such series, including the voting powers, designations,
preferences, and other special rights, qualifications, limitations or
restrictions thereof. As of December 31, 1999, no preferred shares have
been issued.
EARNINGS PER SHARE
SFAS No. 128 "Earnings Per Share" establishes standards for computing and
presenting earnings per share. Under the standards established by SFAS 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.
71
<PAGE> 73
The following table information is necessary to calculate earnings per
share for the years ending December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net loss $(25,908,000) $(38,978,000) $(99,860,000)
============ ============ ============
Weighted average common shares outstanding 14,839,000 14,986,000 15,236,000
Effect of dilutive options and warrants -- -- --
------------ ------------ ------------
Adjusted diluted common shares outstanding 14,839,000 14,986,000 15,236,000
============ ============ ============
Net loss per common share
Basic $ (1.75) $ (2.60) $ (6.55)
============ ============ ============
Diluted $ (1.75) $ (2.60) $ (6.55)
============ ============ ============
</TABLE>
Securities that could potentially dilute basic EPS that were not included
in the calculations above, because of the anti-dilutive effects for 1997,
1998 and 1999 include all outstanding stock options and warrants
previously discussed.
10. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following
components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Current
Federal $ (5,702,000) $ (4,528,000) $ 6,625,000
State (277,000) (146,000) 598,000
------------ ------------ ------------
(5,979,000) (4,674,000) 7,223,000
------------ ------------ ------------
Deferred
Federal (2,826,000) (6,074,000) 12,931,000
State (137,000) (196,000) 291,000
------------ ------------ ------------
(2,963,000) (6,270,000) 13,222,000
------------ ------------ ------------
Provision (benefit) for income
taxes $ (8,942,000) $(10,944,000) $ 20,445,000
============ ============ ============
</TABLE>
72
<PAGE> 74
The difference between the actual income tax provision (benefit) and the
tax provision (benefit) computed by applying the statutory federal income
tax rate to earnings before taxes is attributable to the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Provision (benefit) for federal income taxes
at statutory rate $(12,198,000) $(17,473,000) $(27,795,000)
State income taxes, net of federal tax benefit (592,000) (564,000) (627,000)
Valuation allowance -- -- 47,906,000
Other, principally non-deductible goodwill 3,848,000 7,093,000 961,000
------------ ------------ ------------
Provision (benefit) for income taxes $ (8,942,000) $(10,944,000) $ 20,445,000
============ ============ ============
</TABLE>
The net deferred tax assets and liabilities, at the respective income tax
rates, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Current deferred tax asset:
Accrued restructuring liabilities $ 1,331,000 $ 481,000
Accounts receivable reserves 3,019,000 19,294,000
Accrued liabilities and other 2,824,000 3,710,000
------------ ------------
7,174,000 23,485,000
Less valuation allowance - (23,485,000)
------------ ------------
Net current deferred tax asset $ 7,174,000 $ -
============ ============
Noncurrent deferred tax asset:
Financial reporting amortization in excess of tax amortization $ 3,948,000 $ 15,211,000
Alternative minimum tax credit 3,000,000 1,809,000
Net operating loss carryforward - 5,674,000
Noncurrent asset valuation reserves 100,000 738,000
Employee benefit plan deposits 473,000 -
Other 2,385,000 5,050,000
Acquisition costs (2,351,000) (2,739,000)
Tax depreciation in excess of financial reporting depreciation (1,507,000) (1,322,000)
------------ ------------
6,048,000 24,421,000
Less valuation allowance - (24,421,000)
------------ ------------
Net noncurrent deferred tax asset $ 6,048,000 $ -
============ ============
</TABLE>
Due to the Company's continuing historical losses and projected future
losses, there is uncertainty surrounding the realization of the deferred
tax assets; thus the Company recorded a valuation allowance to fully
reserve all net deferred tax assets as of December 31, 1999.
73
<PAGE> 75
In 1997 and 1998 the Company realized tax deductions resulting from
employees' exercise of non-qualified stock options. Tax benefits of
$530,000 and $35,000, respectively, have been recorded to paid-in capital.
11. COMMITMENTS AND CONTINGENCIES
LITIGATION
There is certain known or possible litigation incidental to the Company's
business, which, in management's opinion, will not have a material adverse
effect on the Company's results of operations or financial condition.
Professional liability insurance up to certain limits is carried by the
Company for coverage of such claims. See Note 12 for further discussion.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has employment agreements with certain members of management
which provide for the payment to these members of amounts up to one and
one-half times their annual compensation in the event of a termination
without cause, a constructive discharge (as defined) or upon a change in
control of the Company (as defined). The terms of such agreements are from
one to three years and automatically renew for one year if not terminated
by the employee or the Company. The maximum contingent liability under
these agreements is approximately $928,000.
SELF-INSURANCE
The Company is self-insured for workers compensation claims for the first
$250,000 per claim; and for health insurance for substantially all
employees for the first $150,000 on a per claim basis. The Company
provides reserves for the settlement of outstanding claims at amounts
believed to be adequate. The differences between actual settlements and
reserves are included in expense in the year finalized.
LETTERS OF CREDIT
The Company has in place three letters of credit totaling $2,130,000
securing obligations with respect to its workers' compensation
self-insurance program and its capital equipment under operating leases.
Effective January 1, 2000, the Company was required to increase these
letters of credit to $2,843,000.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company established a Supplemental Executive Retirement Plan (the
"SERP") to provide retirement benefits for officers and employees of the
Company at the level of manager and above who have been designated for
participation by the President of the Company. Participants in the SERP
were eligible to receive benefits thereunder after reaching normal
retirement age, which was defined in the SERP as either (i) age 65, (ii)
age 60 and 10 years of service, or (iii) age 55 and 15 years of service.
74
<PAGE> 76
Under the SERP, participants could defer up to 6% of their base pay. The
Company made matching contributions of 100% of the amount deferred by each
participant.
Benefits under the SERP became fully vested upon the participant reaching
normal retirement age or the participant's disability or death. In
addition, if there was a change in control of the Company as defined in
the SERP, all participants would be fully vested and each participant
would be entitled to receive their benefits under the SERP upon
termination of employment.
The SERP trust funds were at risk of loss. If the Company became
insolvent, its creditors would be entitled to a claim to the funds
superior to the claim of SERP participants.
Due to limited participation in the SERP, the Company's board of directors
on February 3, 1999, approved the termination of the SERP and authorized
appropriate amendments to the SERP to allow the prompt distribution in
1999 of all funds thereunder to participants.
401K RETIREMENT SAVINGS PLAN
The Company has a 401K Retirement Savings Plan (the "401K"), administered
by ReliaStar Life Insurance Company, to provide a tax deferred retirement
savings plan to its employees. To qualify employees must be 21 years of
age and over, with twelve months of continuous employment and must work at
least twenty hours per week. The 401K is 100% employee funded with
contributions limited to 1% to 15% of employee compensation.
HEALTH CARE INDUSTRY
The health care industry is subject to numerous laws and regulations of
federal, state and local governments. These laws and regulations include,
but are not necessarily limited to, matters such as licensure,
accreditation, government health care program participation requirements,
reimbursement for patient services, and Medicare and Medicaid fraud and
abuse. Government activity has increased with respect to investigation and
allegations concerning possible violations of fraud and abuse statutes and
regulations by health care providers. Violations of these laws and
regulations could result in expulsion from government health care programs
together with the imposition of significant fines and penalties, as well
as significant repayment for patient services previously billed.
Management believes that the Company is in compliance with fraud and abuse
as well as other applicable government laws and regulations. Compliance
with such laws and regulations can be subject to future government review
and interpretation as well as regulatory actions unknown or unasserted at
this time.
75
<PAGE> 77
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 ("DME") suppliers, have received subpoenas and other
requests for information in connection with such activities. On February
12, 1998, a subpoena from the Office of Inspector General of the
Department of Health and Human Services ("OIG") was served on the Company
at its Pineville, Kentucky center in connection with an investigation
relating to possible improper claims for payment from Medicare. Since that
time, the U.S. Department of Justice has begun examining issues involving
CMN's 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 in the investigation. The Company's counsel has
conducted meetings with governmental officials, and governmental officials
have interviewed certain company officers and employees. The Company has
responded to government requests for information and documents, and is
working with the government investigators to move forward with the
investigation.
In addition to the above referenced investigation, the Company from
time-to-time receives notices and subpoenas from various governmental
agencies concerning their plans to audit the Company or requesting
information regarding certain aspects of the Company's business, and the
Company cooperates with the various agencies in responding to such
requests.
The government has broad authority and discretion in enforcing applicable
laws and regulations, and therefore the scope and outcome of these
investigations and inquiries cannot be predicted with certainty. The
Company 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 investigations 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 Credit Agreement. The
potential timing of any settlement and the dollar amount of any settlement
cannot be estimated, therefore no provision for the resolution of the
investigations has been reflected in the Company's financial statements.
The final outcome 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 of
the Company's participation in the Medicare and Medicaid programs.
As a part of its regulatory compliance program, the Company has started
performing internal audits of the adequacy of billing documentation for
certain time periods. The Company will voluntarily refund to the
government any reimbursements previously received for claims with
insufficient documentation that cannot be corrected. The liability for
these potential repayments cannot be estimated at this time; therefore, no
accrual has been reflected in the Company's financial statements.
76
<PAGE> 78
12. PROFESSIONAL LIABILITY INSURANCE
The Company's professional liability policies are on an occurrence basis
and are renewable annually with per claim coverage limits of up to
$1,000,000 per occurrence and $3,000,000 in the aggregate. The Company
maintains a commercial general liability policy which includes product
liability coverage on the medical equipment that it sells or rents with
per claim coverage limits of up to $1,000,000 per occurrence with a
$1,000,000 product liability annual aggregate and a $2,000,000 general
liability annual aggregate. The Company also maintains excess liability
coverage with a limit of $50,000,000 per occurrence and $50,000,000 in the
aggregate. While management believes the manufacturers of the equipment it
sells or rents currently maintain their own insurance, and in some cases
the Company has received evidence of such coverage and has been added by
endorsement as additional insured, there can be no assurance that such
manufacturers will continue to do so, that such insurance will be adequate
or available to protect the Company, or that the Company will not have
liability independent of that of such manufacturers and/or their insurance
coverage.
There can be no assurance that any of the Company's insurance will be
sufficient to cover any judgments, settlements or costs relating to any
pending or future legal proceedings or that any such insurance will be
available to the Company in the future on satisfactory terms, if at all.
If the insurance carried by the Company is not sufficient to cover
judgments, settlements or costs relating to pending or future legal
proceedings, the effect would be material to the Company's business and
financial condition.
13. RELATED PARTY TRANSACTIONS
Effective January 1, 1992 and for a term of one year, the Company entered
into a consulting agreement with the then chairman of the Company and the
chairman and chief executive officer of Counsel Corporation ("Counsel").
The agreement was renewed each year through 1998, but not renewed in 1999.
The agreement provided for a base consulting fee of $20,000 per month,
with additional compensation at the discretion of the Board of Directors
of up to $60,000 per year. The Company paid $300,000 and $240,000 pursuant
to this agreement for 1997 and 1998 respectively. In May 1994, the
president of Counsel became chairman of the Company and receives a
consulting fee of $8,500 per month for his service as chairman. The
Company paid $102,000 under this agreement for 1997, 1998 and 1999.
Counsel owns approximately 26% of the Company's common stock at December
31, 1999.
A director of the Company is a partner in the law firm of Harwell Howard
Hyne Gabbert & Manner, P.C. ("H3GM") which the Company engaged during
1997, 1998 and 1999 to render legal advice in a variety of activities for
which H3GM was paid $1,656,000, $1,727,000 and $931,000, respectively.
77
<PAGE> 79
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1999 QUARTER QUARTER QUARTER QUARTER TOTAL
----------------------------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------
<S> <C> <C> <C> <C> <C>
Net Revenues $ 91,238 $ 90,423 $ 89,312 $ 86,607 $ 357,580
=========== =========== =========== =========== ===========
Net Loss $ (5,576) $ (4,877) $ (5,182) $ (84,225)(1) $ (99,860)
=========== =========== =========== =========== ===========
Basic Loss Per Share $ (.37) $ (.32) $ (.34) $ (5.52)(1) $ (6.55)
=========== =========== =========== =========== ===========
Diluted Loss Per Share $ (.37) $ (.32) $ (.34) $ (5.52)(1) $ (6.55)
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER TOTAL
----------------------------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------
<S> <C> <C> <C> <C> <C>
Net Revenues $ 102,793 $ 103,600 $ 101,345 $ 96,130 $ 403,868
=========== =========== =========== =========== ===========
Net Income (Loss) $ 2,989 $ 3,929 $ (9,865)(2) $ (36,031)(3) $ (38,978)
=========== =========== =========== =========== ===========
Basic Income (Loss) Per Share $ .20 $ .26 $ (.66)(2) $ (2.40)(3) $ (2.60)
=========== =========== =========== =========== ===========
Diluted Income (Loss) Per Share $ .20 $ .26 $ (.66)(2) $ (2.40)(3) $ (2.60)
=========== =========== =========== =========== ===========
</TABLE>
1) Includes $77.5 million pre-tax charge primarily related to goodwill,
accounts receivable and deferred income taxes (See Note 4).
2) Includes $15.2 million pre-tax charge primarily related to accounts
receivable. (See Note 4).
3) Includes $37.8 million pre-tax charge related to goodwill. (See
Note 4).
78
<PAGE> 80
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American HomePatient, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of American HomePatient, Inc. included in this
Form 10-K, and have issued our report thereon, dated February 25, 2000 (except
with respect to the matter discussed in Notes 2 and 8, as to which the date is
April 6, 2000.) Our audit was made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed in the accompanying index
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules, and is not
part of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 25, 2000 (except with
respect to the matter discussed
in Notes 2 and 8, as to which
the date is April 6, 2000)
S-1
<PAGE> 81
AMERICAN HOMEPATIENT, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------ ----------- ------------------------------------------- ------------- -------------
Additions
Balance at -------------------------------------------
Beginning Bad Debt Charged to Balance at
Description of Period Expense Other Accounts Other(1) Deductions(2) End of Period
- ------------------------------------ ----------- ----------- -------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
For the year ended December 31, 1999:
Allowances for Doubtful Accounts $41,147,000 $35,729,000 $ -- $ 1,045,000 $21,045,000 $56,876,000
----------- ----------- ----------- ----------- ----------- -----------
For the year ended December 31, 1998:
Allowances for Doubtful Accounts $43,862,000 $29,857,000 $ -- $ 868,295 $33,440,295 $41,147,000
----------- ----------- ----------- ----------- ----------- -----------
For the year ended December 31, 1997:
Allowances for Doubtful Accounts $18,755,000 $30,541,000 $ -- $ 8,408,000 $13,842,000 $43,862,000
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
(1) Amounts recorded in connection with acquisitions.
(2) Amounts written off as uncollectible accounts, net of recoveries.
S-II
<PAGE> 82
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C> <C>
3.1 Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement No. 33-42777
on Form S-1).
3.2 Certificate of Amendment to the Certificate of Incorporation of
the Company dated October 31, 1991 (incorporated by reference to
Exhibit 3.2 to Amendment No. 2 to the Company's Registration
Statement No. 33-42777 on Form S-1).
3.3 Certificate of Amendment to the Certificate of Incorporation of
the Company Dated May 14, 1992 (incorporated by reference to
Registration Statement on Form S-8 dated February 16, 1993).
3.4 Certificate of Ownership and Merger merging American HomePatient,
Inc. into Diversicare Inc. dated May 11, 1994 (incorporated by
reference to Exhibit 4.4 to the Company's Registration Statement No.
33-89568 on Form S-2).
3.5 Certificate of Amendment to the Certificate of Incorporation of
the Company dated July 8, 1996 (incorporated by reference to
Exhibit 3.5 to the Company's Report of Form 10-Q for the Quarter
ended June 30, 1996).
3.6 Bylaws of the Company, as amended (incorporated by reference to
Exhibit 3.3 to the Company's Registration Statement No. 33-42777 on
Form S-1).
10.1 Subsidiary Security Agreement dated October 20, 1994 by and
among Bankers Trust Company and certain direct and indirect
subsidiaries of American HomePatient, Inc. (incorporated by
reference to Exhibit 10.17 to the Company's Registration
Statement No. 33-89568 on Form S-2).
10.2 Borrower Security Agreement dated October 20, 1994, by and
between Bankers Trust Company and American HomePatient, Inc.
(incorporated by reference to Exhibit 10.18 to the Company's
Registration Statement No. 33-89568 on Form S-2).
10.3 1991 Non-Qualified Stock Option Plan, as amended (incorporated
by reference to Exhibit 10.25 to the Company's Registration
Statement No. 33-89568 on Form S-2).
</TABLE>
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C> <C>
10.4 Amendment No. 4 to 1991 Nonqualified Stock Option Plan
(incorporated herein by reference to Exhibit A of Schedule 14A dated
April 17, 1995).
10.5 1995 Nonqualified Stock Option Plan for Directors (incorporated
herein by reference to Exhibit B of Schedule 14A dated April 17,
1995).
10.6 1993 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.26 to the Company's Registration Statement No. 33-89568
on Form S-2).
10.7 Trust Agreement for the Company Master Plan dated January 1,
1992, by and between the Company and C&S/Sovran Trust Company
(incorporated by reference to Exhibit 10.42 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1991).
10.8 Restated Master Agreement and Supplemental Executive Retirement
Plan (restated as of December 31, 1993) (incorporated by
reference to Exhibit 10.57 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993).
10.9 Agreement of Partnership of Alliance Home Health Care
Partnership d/b/a Medcenters Home Equipment dated January 1,
1994, by and between Medical Centers Home Equipment and American
HomePatient Ventures, Inc. (incorporated by reference to Exhibit
10.43 to the Company's Registration Statement No. 33-89568 on
Form S-2).
10.10 Agreement of Limited Partnership of Health Star DME, Ltd. dated May
19, 1988, by and between Health Star Medical of Amarillo, Inc. and
HPBH Enterprises, Inc. as amended by Amendment No. 1 to
Certificate of Limited Partnership of Health Star DME, Ltd. dated
February 4, 1994, by AHP, L.P., D/B/A AHP Health, L.P.
(incorporated by reference to Exhibit 10.44 to the Company's
Registration Statement No. 33-89568 on Form S-2).
</TABLE>
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C> <C>
10.11 Agreement of Partnership of Homelink Home Healthcare Partnership
dated February 28, 1985, by and between Med-E-Quip Rental and
Leasing, Inc. and Homelink Home Health Care Services, Inc., as
amended by First Amendment to Agreement of Partnership of
Homelink Home Health Care Partnership dated February 28, 1988, by
and between Med-E-Quip Rental and Leasing, Inc. and Homelink
Home Healthcare Services, Inc. and Second Amendment to Agreement
of Partnership of Homelink Home Health Care Partnership dated
October 1, 1988, by and between Med-E-Quip Rental and Leasing, Inc.
and Homelink Home Health Care Services, Inc. and Third Amendment
to Agreement of Partnership of Homelink Healthcare Partnership dated
October 1, 1991, by and between Med-E-Quip Rental and Leasing, Inc.
and Homelink Home Health Care Services, Inc. (incorporated by
reference to Exhibit 10.46 to the Company's Registration Statement
No. 33-89568 on Form S-2).
10.12 Management Agreement dated December 27, 1994, by and among
Rural/Metro Corporation, Coronado Health Services, Inc. and
American HomePatient, Inc. (incorporated by reference to Exhibit
10.49 to the Company's Registration Statement No. 33-89568 on
Form S-2).
10.13 Option Agreement dated December 27, 1994, by and among
Rural/Metro Corporation, Coronado Health Services, Inc. and
American HomePatient, Inc. (incorporated by reference to Exhibit
10.50 to the Company's Registration Statement No. 33-89568 on
Form S-2).
10.14 Form of Underwriting Agreement (incorporated by reference to
Exhibit 1 to the Company's Registration Statement No. 33-89568
on Form S-2).
10.15 Borrower Partnership Security Agreement dated December 28, 1995
by and between Bankers Trust Company and the Company
(incorporated by reference to Exhibit 10.69 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995).
10.16 Subsidiary Partnership Security Agreement dated December 28,
1995 by and between Bankers Trust Company and certain direct and
indirect subsidiaries of the Company (incorporated by reference
to Exhibit 10.70 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995).
</TABLE>
<PAGE> 85
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C> <C>
Exhibit
10.17 Amended and Restated Borrower Pledge Agreement dated December
28, 1995 by and between Bankers Trust Company and the Company
(incorporated by reference to Exhibit 10.71 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995).
10.18 Amended and Restated Subsidiary Pledge Agreement dated December
28, 1995 by and among Bankers Trust Company and certain direct
and indirect subsidiaries of the Company (incorporated by
reference to Exhibit 10.72 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.19 Subsidiary Guaranty dated October 20, 1994 by certain direct and
indirect subsidiaries of the Company (incorporated by reference
to Exhibit 10.73 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995).
10.20 Lease and addendum as amended dated October 25, 1995 by and
between Principal Mutual Life Insurance Company and American
HomePatient, Inc. (incorporated by reference to Exhibit 10.47 to
the Company's Report on Form 10-K for the year ended December
31, 1996).
10.21 Stock Purchase Agreement dated December 23, 1997 among National
Medical Systems, Inc., its stockholders named therein, and
American HomePatient, Inc. (incorporated by reference to Exhibit
2.1 to the Company's Report on Form 8-K dated February 17,
1998).
10.22 Amendment to Stock Purchase Agreement dated February 5, 1998
among National Medical Systems, Inc., its stockholders named
therein, and American HomePatient, Inc. (incorporated by
reference to Exhibit 2.2 to the Company's Report on Form 8-K
dated February 17, 1998).
10.23 Fourth Amended and Restated Credit Agreement dated December 19,
1997 by and among American HomePatient, Inc., the Banks named
therein and Bankers Trust Company (incorporated by reference to
Exhibit 10.44 to the Company's Report on Form 10-K for the year
ended December 31, 1997).
10.24 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and Bankers Trust Company (incorporated by
reference to Exhibit 10.45 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C> <C>
10.25 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and ABN Amrobank, N.V. (incorporated by
reference to Exhibit 10.46 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.26 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and AmSouth Bank (incorporated by reference to
Exhibit 10.47 to the Company's Report on Form 10-K for the year
ended December 31, 1997).
10.27 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and Bank of America, NT & SA (incorporated by
reference to Exhibit 10.48 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.28 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and Bank of Montreal (incorporated by
reference to Exhibit 10.49 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.29 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and Corestates Bank, N.A. (incorporated by
reference to Exhibit 10.50 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.30 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and First American National Bank (incorporated
by reference to Exhibit 10.51 to the Company's Report on Form
10-K for the year ended December 31, 1997).
10.31 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and The First National Bank of Chicago
(incorporated by reference to Exhibit 10.50 to the Company's
Report on Form 10-K for the year ended December 31, 1997).
10.32 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and The Fuji Bank, Limited, Atlanta Agency
(incorporated by reference to Exhibit 10.53 to the Company's
Report on Form 10-K for the year ended December 31, 1997).
10.33 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and NationsBank, N.A. (incorporated by
reference to Exhibit 10.54 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C> <C>
10.34 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and PNC Bank, Kentucky, Inc. (incorporated by
reference to Exhibit 10.55 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.35 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and Cooperative Centrale Raiffesen
Boerenleenbank, B.A., "Rabobank Nederland," New York Branch
(incorporated by reference to Exhibit 10.56 to the Company's
Report on Form 10-K for the year ended December 31, 1997).
10.36 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and the Sakura Bank, Limited (incorporated by
reference to Exhibit 10.57 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.37 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and SunTrust Bank, Nashville, N.A.
(incorporated by reference to Exhibit 10.58 to the Company's
Report on Form 10-K for the year ended December 31, 1997).
10.38 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and Union Bank of California, N.A.
(incorporated by reference to Exhibit 10.59 to the Company's
Report on Form 10-K for the year ended December 31, 1997).
10.39 Revolving Note dated December 23, 1997 by and between American
HomePatient, Inc. and Union Bank of Switzerland, New York Branch
(incorporated by reference to Exhibit 10.60 to the Company's
Report on Form 10-K for the year ended December 31, 1997).
10.40 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and Bankers Trust Company (incorporated by
reference to Exhibit 10.61 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.41 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and ABN Amrobank, N.V. (incorporated by
reference to Exhibit 10.60 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.42 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and AmSouth Bank. (incorporated by reference
to Exhibit 10.63 to the Company's Report on Form 10-K for the
year ended December 31, 1997).
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C> <C>
10.43 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and Bank of America, NT & SA (incorporated by
reference to Exhibit 10.64 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.44 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and Bank of Montreal (incorporated by
reference to Exhibit 10.65 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.45 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and Corestates Bank, N.A. (incorporated by
reference to Exhibit 10.66 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.46 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and First American National Bank (incorporated
by reference to Exhibit 10.67 to the Company's Report on Form
10-K for the year ended December 31, 1997).
10.47 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and The First National Bank of Chicago
(incorporated by reference to Exhibit 10.68 to the Company's
Report on Form 10-K for the year ended December 31, 1997).
10.48 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and The Fuji Bank, Limited, Atlanta Agency
(incorporated by reference to Exhibit 10.69 to the Company's
Report on Form 10-K for the year ended December 31, 1997).
10.49 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and NationsBank, N.A. (incorporated by
reference to Exhibit 10.70 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.50 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and PNC Bank, Kentucky, Inc. (incorporated by
reference to Exhibit 10.71 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.51 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and Cooperative Centrale Raiffesen
Boerenleenbank, B.A., "Rabobank Nederland," New York Branch
(incorporated by reference to Exhibit 10.70 to the Company's
Report on Form 10-K for the year ended December 31, 1997).
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C> <C>
10.52 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and the Sakura Bank, Limited (incorporated by
reference to Exhibit 10.73 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.53 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and SunTrust Bank, Nashville, N.A.
(incorporated by reference to Exhibit 10.74 to the Company's
Report on Form 10-K for the year ended December 31, 1997).
10.54 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and Union Bank of California, N.A.
(incorporated by reference to Exhibit 10.75 to the Company's
Report on Form 10-K for the year ended December 31, 1997).
10.55 Term Note dated December 19, 1997 by and between American
HomePatient, Inc. and Union Bank of Switzerland, New York Branch
(incorporated by reference to Exhibit 10.76 to the Company's
Report on Form 10-K for the year ended December 31, 1997).
10.56 Swing Line Note dated December 19, 1997 by and between American
HomePatient, Inc. and Bankers Trust Company (incorporated by
reference to Exhibit 10.78 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.57 Master Agreement dated October 11, 1996 by and between American
HomePatient, Inc. and Bank of Montreal (incorporated by
reference to Exhibit 10.78 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.58 Severance Agreement dated December 22, 1997 by and between
American HomePatient, Inc. and Thomas E. Mills (incorporated by
reference to Exhibit 10.79 to the Company's Report on Form 10-K
for the year ended December 31, 1997).
10.59 Letter Agreement dated August 7, 1997 by and between American
HomePatient, Inc., and DCAmerica Inc. (incorporated by reference
to Exhibit 10.81 to the Company's Report on Form 10-K for the
year ended December 31, 1997).
10.60 Amendment No. 7 to 1991 Nonqualified Stock Option Plan
(incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q for the quarter ended March 31, 1998).
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
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<S> <C> <C>
10.61 Asset Purchase Agreement dated February 27, 1998 among the
Company, Evocare, Inc., Evocare Home Health Care Services, Inc.
Chester Black, Bernard Lambrese and Kelly Lambrese (incorporated
by reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended March 31, 1998).
10.62 Amendment to Asset Purchase Agreement dated March 12, 1998
Company, Evocare, Inc., Evocare Home Health Care Services, Inc.
Chester Black, Bernard Lambrese and Kelly Lambrese (incorporated
by reference to Exhibit 10.3 to the Company's Report on Form
10-Q for the quarter ended March 31, 1998).
10.63 Confidentiality, Non-Competition and Severance Pay Agreement
dated December 23, 1997 between the Company and Kathey Palmer
(incorporated by reference to Exhibit 10.6 to the Company's
Report on Form 10-Q for the quarter ended March 31, 1998).
10.64 Separation Agreement dated July 6, 1998 between the Company and
Edward K. Wissing (incorporated by reference to Exhibit 10.1 to
the Company's Report on Form 10-Q for the Quarter ended June 30,
1998).
10.65 First Amendment to Fourth Amended and Restated Credit Agreement
dated October 29, 1998 among the Company, Banker's Trust Company
as Agent and the Banks named therein (incorporated by reference
to the Company's Report on Form 10-Q for the quarter ended
September 30, 1998).
10.66 Employment Agreement dated November 6, 1998 between the Company
and Joseph F. Furlong, III (incorporated by reference to Exhibit
10.71 to the Company's Report on Form 10-K for the year ended
December 31, 1998).
</TABLE>
<PAGE> 91
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C> <C>
10.67 Employment Agreement dated January 1, 1999 between the Company
and Marilyn O'Hara (incorporated by reference to Exhibit 10.72
to the Company's Report on Form 10-K for the year ended December
31, 1998).
10.68 Amendment No. 1 to Confidentiality, Non-Competition and
Severance pay Agreement dated February 15, 1999 between the
Company and Kathey Palmer (incorporated by reference to Exhibit
10.73 to the Company's Report on Form 10-K for the year ended
December 31, 1998).
10.69 Employment Agreement dated December 31, 1999 between the
Company and Thomas E. Mills.
10.70 Asset Purchase Agreement dated July 7, 1998 among the Company,
Greenbrier Respiratory Care Services, Inc. and Allen Carson
(incorporated by reference to Exhibit 10.78 the Company's Report
on Form 10-K for the year ended December 31, 1998).
10.71 Stock Purchase Warrant dated August 11, 1994, by and between
Joseph F. Furlong III and the Company (incorporated by reference
to Exhibit 10.79 the Company's Report on Form 10-K for the year
ended December 31, 1998).
10.72 Second Amendment to Fourth Amendment and Restated Credit Agreement
dated as of April 14, 1999 by and among American HomePatient,
Inc., the Banks named therein and Bankers Trust Company, as Agent
for the Banks (incorporated by reference to Exhibit 10.80 to the
Company's Report on Form 10-K for the year ended December 31,
1998).
10.73 Engagement Letter dated April 13, 1999, by and between American
HomePatient, Inc. and The Recovery Group, Inc. (incorporated by
reference to Exhibit 10.81 to the Company's Report on Form 10-K for
the year ended December 31, 1998).
10.74 Third Amendment to Fourth Amendment and Restated Credit Agreement
dated as of April 7, 2000 by and among American HomePatient, Inc.,
the Banks named therein and Bankers Trust Company, as Agent for
the Banks.
21 Subsidiary List.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule (for SEC use only).
</TABLE>
<PAGE> 1
EXHIBIT 10.69
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into as of December 31,
1999, by and between AMERICAN HOMEPATIENT, INC., a Tennessee corporation
(collectively, with its parent, American HomePatient, Inc., a Delaware
corporation, the "Employer"), and THOMAS E. MILLS, a resident of the State of
Tennessee (the "Employee").
W I T N E S S E T H:
WHEREAS, Employer and Employee have agreed to enter into this Agreement
which sets forth certain of the terms and conditions of Employee's employment by
Employer; and
WHEREAS, Employer employed Employee beginning on November 26, 1998 to
serve as Executive Vice President, Chief Operating Officer of American
HomePatient, Inc., a Delaware corporation.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements made herein, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound hereby, agree as
follows:
1. EMPLOYMENT. Employer hereby employs Employee and Employee hereby
accepts employment with Employer on the terms and conditions specified herein.
2. TERM. The term of this Agreement shall be for a period commencing on
the date hereof and ending December 31, 2001; provided, however, that this
Agreement will thereafter automatically renew for consecutive one-year terms
unless either party notifies the other party in writing at least thirty (30)
days prior to the end of the then current term that this Agreement will
terminate at the expiration of such term. Notwithstanding anything to the
contrary contained in this Agreement, except the provisions of Section 8 which
supercede this provision, the provisions of Section 6 and 7 will survive the
expiration or termination of this Agreement.
3. DUTIES OF EMPLOYEE. Employee shall be responsible for certain
assigned aspects of Employer's operations and shall initially have the title
Executive Vice President, Chief Operating Officer of American HomePatient, Inc.,
a Delaware corporation. Employee shall perform the duties and responsibilities
assigned to Employee from time to time in accordance with the policies and
objectives established by the Board of Directors and Chief Executive Officer of
Employer. Employee agrees to devote his full time, attention and skill to his
duties hereunder and to use his best efforts to attain or exceed Employer's
objective goals for profit, quality, stability and growth. Employee will at all
times while employed by Employer comply fully with Employer's Code of Ethics
Policy ("Guidelines of Company Policies and Conduct"), Corporate Compliance Plan
and any other compliance programs of Employer, as such programs may be amended
from time to time, and acknowledges that his obligations under such programs as
an employee are contractual in nature.
4. COMPENSATION.
(a) Beginning January 1, 2000, Employee will be paid a base salary
of Two Hundred Twenty Thousand and No/100 Dollars ($220,000.00) per year for the
remainder of the term
<PAGE> 2
of this Agreement, payable in accordance with Employer's standard payroll
practices. Employee will be entitled to receive incentive of compensation of up
to thirty-five percent (35%) of his annual base salary under such incentive
programs as may from time to time be provided to employees of Employer of
similar rank, which programs may be created, changed or terminated at any time
at Employer's sole discretion. Employer will periodically conduct a merit review
regarding Employee's performance to consider increasing, but not decreasing,
Employee's base salary.
(b) Employee will receive a monthly automobile allowance of Six
Hundred and No/100 Dollars ($600.00), and Employer will reimburse Employee for
all gasoline and oil expenses incurred in the operation of his personal
automobile.
(c) Employee will be entitled to such medical, dental, disability
and life insurance benefits, participation in any profit-sharing plan or similar
plans of Employer, and such other employee benefits as are provided to employees
of Employer of similar rank from time to time. In addition, during the term of
this Agreement Employer will reimburse Employee the cost of his individual
disability insurance policy premium paid to Paul Revere Insurance Group.
5. TERMINATION.
(a) Employee's employment will be terminable by Employer at any time
for "cause", which will be defined as: (i) gross insubordination, gross
malfeasance, gross misconduct, (ii) charge or conviction of a felony or of a
misdemeanor involving moral turpitude, (iii) the inability of Employee to
perform his duties hereunder for a period of sixty (60) consecutive days (or
ninety (90) total days in any 120 consecutive day period) by reason of illness
or mental or physical disability, and (iv) death. Notwithstanding the above, it
is the intent of the Employer at all times to comply with the Americans With
Disabilities Act, the Family and Medical Leave Act and any other applicable
federal and state employment laws. This Agreement will be terminable by Employee
upon thirty (30) days written notice to Employer if without cause. In the case
of termination under this Section 5(a), all obligations of the parties under
this Agreement and relating to Employee's employment will cease except for
Employee's obligations under Sections 6 and 7 hereof.
(b) Employee's employment will be terminable by Employee upon
written notice to Employer if Employer willfully breaches any material terms of
this Agreement, after fifteen (15) day's written notice and right to cure.
Employee's employment will also be terminable by Employer at any time without
"cause", as such term is defined above in clause (a). In the case of termination
under this Section 5(b), all obligations of the parties in this Agreement will
cease except for Employee's obligations under Sections 6 and 7 (the continuation
of such obligations being subject to Section 8). If Employer terminates
Employee's employment without "cause", Employee will be entitled to receive (i)
his annual base salary (not including incentive compensation or benefits) plus
his annual automobile allowance, each as in effect at the time of termination,
plus (ii) the annual incentive compensation Employee received for performance
during Employer's immediately preceding fiscal year, multiplied by a fraction,
the numerator of which is the total number of full calendar months during which
Employee was employed by Employer during Employer's current fiscal year prior to
termination and the denominator of which is twelve (12). Employer will pay
Employee such severance in a lump sum promptly following termination. In
addition, Employer will (i) pay Employee promptly following termination any
earned but unpaid base salary through
2
<PAGE> 3
the date of termination, and (ii) pay the COBRA administrative services company
the standard employer portion of the COBRA premium attributable to Employee's
medical and dental insurance benefits as such benefits were in effect
immediately prior to termination with payments beginning on the first day of the
calendar month immediately following the date of termination and continuing
until the earlier of (y) twelve (12) months after the date of termination, or
(z) the date on which Employee is eligible to receive, as an employee,
independent contractor or agent, medical and/or dental insurance benefits from a
third party. Employer will deduct from the lump severance payment due to
Employee the standard employee portion of such COBRA premium as in effect on the
date of termination for a twelve (12) month period. If Employee elects to
discontinue COBRA for any reason before expiration of the applicable period and
notifies Employer of the same in writing, Employer will thereafter refund to
Employee that portion of the deduction, if any, not attributable to the COBRA
premium actually paid. Employer acknowledges that in the event Employer
terminates Employee's employment under this Section 5(b) without "cause",
Employee will be entitled to his individual vested account balance with respect
to Employer's Stock Purchase Plan as such balance, if any, exists as of the date
of termination of employment. Employee acknowledges that in the event Employer
terminates his employment without "cause", he will be entitled to no payments
other than as expressly set forth in this Section 5(b).
(c) (i) In the event there is a "Change in Control" of the ownership
of Employer, and Employer terminates Employee's employment within twelve (12)
months following such Change in Control, Employee will be entitled to receive as
a severance payment in a lump sum upon such termination an amount equal to the
sum of (i) his monthly base salary (not including incentive compensation or
benefits) as in effect at the time of such termination multiplied by twelve
(12), plus (ii) the annual incentive compensation Employee received for
performance during Employer's immediately preceding fiscal year, multiplied by a
fraction, the numerator of which is the total number of full calendar months
during which Employee was employed by Employer during Employer's current fiscal
year prior to termination and the denominator of which is twelve (12). In
addition, any earned but unpaid base salary and incentive compensation will be
paid, and Employer will pay the COBRA administrative services company the
standard employer portion of the COBRA premium attributable to Employee's
medical and dental insurance benefits as such benefits were in effect
immediately prior to termination with payments beginning on the first day of the
calendar month immediately following termination and continuing until the
earlier of (y) twelve (12) months after the date of termination, or (z) the date
on which Employee is eligible to receive, as an employee, independent contractor
or agent, medical and/or dental insurance benefits from a third party. Employer
will deduct from the severance payment due to Employee, in accordance with its
standard payroll practices, the standard employee portion of such COBRA premium
as in effect on the date of termination for up to a twelve (12) month period. If
Employee elects to discontinue COBRA for any reason before expiration of the
applicable period and notifies Employer of the same in writing, Employer will
thereafter refund to Employee that portion of the deduction, if any, not
attributable to the COBRA premium actually paid. Employer acknowledges that, in
the event of such termination following a Change in Control, Employee will be
entitled to his individual vested account balance with respect to Employer's
Stock Purchase Plans as such balance, if any, exists as of the date of
termination of employment. Further, any stock options granted to Employee will
be fully vested upon a Change of Control, whether or not Employee's employment
is terminated, notwithstanding any previously stated vesting restrictions but
subject to expiration or termination pursuant to the governing stock option
plan. Employee acknowledges that if the provisions of this
3
<PAGE> 4
clause (c) become operative, the payments and obligations of Employer hereunder
are in lieu of any obligation of Employer under Section 5(b), and such
obligations of Employer under Section 5(b) will be rendered null and void.
(ii) A "Change in Control" will be deemed to have occurred if
(i) a tender offer will be made and consummated for the ownership of
more than fifty percent (50%) of the outstanding voting securities of
Employer, (ii) Employer will be merged or consolidated with another
corporation and as a result of such merger or consolidation less than
fifty percent (50%) of the outstanding voting securities of the
surviving or resulting corporation will be owned in the aggregate by
the former shareholders of Employer, as the same will have existed
immediately prior to such merger or consolidation, (iii) Employer will
sell all or substantially all of its assets to another corporation that
is not a wholly-owned subsidiary, or (iv) a person, within the meaning
of Section 3(a)(9) or of Section 13 (d)(3) (as in effect on the date
hereof) of the Securities and Exchange Act of 1934 ("Exchange Act"),
will acquire more than fifty percent (50%) of the outstanding voting
securities of Employer (whether directly, indirectly, beneficially or
of record). For purposes hereof, ownership of voting securities shall
take into account and shall include ownership as determined by applying
the provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof)
pursuant to the Exchange Act. For purposes hereof, a "Change in
Control" will not include any transaction of the type described above
with or undertaken by Counsel Corporation or its affiliates, within the
meaning of Exchange Act Rule 12b-2 (as in effect on the date hereof).
6. CONFIDENTIAL INFORMATION. In consideration of the covenants of
Employer contained herein, Employee agrees as follows:
(a) Employee hereby agrees and acknowledges that he has had access
to, will have access to, and is and will become aware of certain confidential,
restricted and/or proprietary information concerning operation by the Employer
and its affiliates of their home health care businesses (collectively the
"Business"). Employee hereby undertakes and agrees that he will have a duty to
Employer and its affiliates to protect such information from use or disclosure.
(b) For the purposes of this Section 6, the following definitions
will apply:
(i) "Trade Secret" as related to the Business, will mean any
specialized technical information or data relating to (w) procurement
of medical equipment and other inventory for resale; (x) marketing
strategy or plans of Employer or its affiliates; (y) proprietary
computer software; and (z) terms of contracts with suppliers, employees
and principal customers of Employer or its affiliates which are not
generally known to the competitors of Employer.
(ii) "Confidential Information," as related to the Business,
will mean any data or information, other than Trade Secrets, which is
material to Employer or its affiliates and not generally known by the
public. Confidential Information will include, without limitation, any
information pertaining to the Business Opportunities (as hereinafter
defined) of Employer or its affiliates, the details of this Agreement,
and the business plans, financial statements and projections of
Employer or its affiliates.
4
<PAGE> 5
(iii) "Business Opportunity" will mean any information or plans
of Employer or its affiliates concerning the purchase of or investment
in any retail outlets, stores, distribution centers or similar retail
facilities in the field of home health care, or the availability of any
such outlets for purchase or investment by Employer or its affiliates,
together with all related information, concerning the specifics of any
contemplated purchase or investment (including price, terms and the
identity of such outlet), regardless of whether Employer or its
affiliates have entered any agreement, made any commitment, or issued
any bid or offer to such outlet or other facility.
(c) Employee will not, without the prior written consent of
Employer, use or disclose, or negligently permit any unauthorized person who is
not an employee of Employer to use, disclose, or gain access to, any Trade
Secrets or Confidential Information.
(d) Employee hereby agrees to maintain on behalf of Employer, or,
upon request or termination of this Agreement, deliver to Employer, all
memoranda, notes, records, drawings, manuals, documents, disks, computer
software and other materials, including all copies and derivations of such
materials, containing Trade Secrets or Confidential Information, whether made or
compiled by Employee or furnished to him from any source by virtue of his
relationship with Employer or its affiliates.
(e) Employee will, with reasonable notice during and after his
employment by Employer, furnish information as may be in his possession and
cooperate with Employer or its affiliates as may reasonably be requested in
connection with any claims or legal actions in which Employer is or may become a
party. Employer will reimburse Employee for any reasonable out-of-pocket
expenses he incurs in order to satisfy his obligations under this clause (e).
7. NONCOMPETE, ETC. In consideration of the covenants of the Employer
contained herein, the Employee agrees as follows:
(a) During and after his employment by Employer, Employee will not
use his status with Employer to obtain loans, goods or services from another
organization on terms that would not be available to him in the absence of his
relationship to Employer. During the period of employment and for a twelve (12)
month period following termination of such employment for any reason, (i)
Employee will not make any statements or perform any acts intended to advance
the interest of any existing or prospective competitor of Employer in any way
that will injure the interests of Employer or an affiliate; and (ii) Employee
will not directly or indirectly own or hold any "Proprietary Interest" in or be
employed by or receive compensation from any party engaged in the same or any
similar business within fifty (50) miles of any location of Employer upon the
date of termination of employment. The states in which Employer and its
affiliates currently conduct business are 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. During his employment
by Employer and for a twelve (12) month period following termination of such
employment for any or no reason, (i) Employee will not solicit any client of
Employer or an affiliate or discuss with any client or
5
<PAGE> 6
employee of Employer or an affiliate any information or the operation of any
business intended to compete with Employer or an affiliate; and (ii) Employee
will not, directly or indirectly, hire any current or future employee of
Employer or an affiliate, or solicit or encourage any such employee to leave the
employ of Employer or an affiliate. For the purposes of this Agreement,
"Proprietary Interest" means legal or equitable ownership, whether through stock
holdings or otherwise, of a debt or equity interest (including options,
warrants, rights and convertible interests) in a business firm or entity, or
ownership of more than 5% of any class of equity interest in a publicly-held
company. Employee acknowledges that the covenants contained herein are
reasonable as to geographic and temporal scope.
(b) Employee acknowledges that his breach or threatened or attempted
breach of any provision of Section 6 or 7 would cause irreparable harm to
Employer not compensable in monetary damages and that Employer will be entitled,
in addition to all other applicable remedies, to a temporary and permanent
injunction and a decree for specific performance of the terms of Section 6 or 7
without being required to prove damages or furnish any bond or other security.
Nothing herein contained will be construed as prohibiting Employer from pursuing
any other remedy available to it for such breach or threatened or attempted
breach.
(c) All parties hereto acknowledge the necessity of protection
against the competition of the Employee and that the nature and scope of such
protection has been carefully considered by the parties. The period and area
covered are expressly acknowledged and agreed to be fair, reasonable and
necessary. If any covenant contained in Section 6 or 7 is held to be invalid,
illegal or unenforceable because of the duration of such covenant, the
geographic area covered thereby or otherwise, the parties agree that the court
making such determination will have the power to reduce the duration, the area
and/or other provision(s) of any such covenant to the maximum permissible and to
include as much of its nature and scope as will render it enforceable, and, in
its reduced form said covenant will be valid, legal and enforceable.
8. PAYMENT BREACH BY EMPLOYER. Notwithstanding anything to the contrary
in this Agreement, Employee's obligations under Sections 6 and 7 will
automatically cease in the event Employer fails to make a severance or other
payment to which Employee is entitled pursuant to Section 5(b) or 5(c).
9. COVENANT REGARDING CERTAIN PROCEEDINGS. Employee covenants that he
will not, without Employer's prior written consent unless required to do so by
means of a valid court order or subpoena, cooperate with any person in the
institution or prosecution of any proceeding, suit, claim, investigation or
administrative proceeding brought, initiated or conducted by any person against
Employer, its affiliates, agents, employees, officers and representatives.
Employee further covenants that he will notify Employer immediately if he is
contacted by any person regarding any pending or contemplated proceeding, suit,
claim or investigation involving Employer, its affiliates, agents, employees,
officers or representatives. The parties understand that the covenants
stipulated in this paragraph 8 do not limit Employee's ability to initiate or
bring any proceeding, suit, claim or action against Employer regarding his
employment hereunder.
10. ASSIGNMENTS; SUCCESSORS AND ASSIGNS. The rights and obligations of
Employee hereunder are not assignable or delegable and any prohibited assignment
or delegation will be null
6
<PAGE> 7
and void. Employer may assign and delegate this Agreement. The provisions hereof
shall inure to the benefit of and be binding upon the permitted successors and
assigns of the parties hereto.
11. GOVERNING LAW. This Agreement will be interpreted under, subject to
and governed by the substantive laws of the State of Tennessee, without giving
effect to provisions thereof regarding conflict of laws, and all questions
concerning its validity, construction, and administration will be determined in
accordance thereby.
12. COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original but all of
which will together constitute one and same instrument.
13. INVALIDITY. The invalidity or unenforceability of any provision of
this Agreement will not affect any other provision hereof, and this Agreement
will be construed in all respects as if such invalid or unenforceable provision
was omitted. Furthermore, in lieu of such illegal, invalid, or unenforceable
provision there will be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid and enforceable.
14. EXCLUSIVENESS. This Agreement, the Guidelines of Company Policies
and Conduct and other policies of Employer constitute the entire understanding
and agreement between the parties with respect to the employment by Employer of
Employee and supersedes any and all other agreements, oral or written, between
the parties.
15. MODIFICATION. This Agreement may not be modified or amended except
in writing signed by the parties. No term or condition of this Agreement will be
deemed to have been waived except in writing by the party charged with waiver. A
waiver will operate only as to the specific term or condition waived and will
not constitute a waiver for the future or act on anything other than that which
is specifically waived.
16. NOTICES. All notices, requests, consents and other communications
hereunder will be in writing and will be deemed to have been made when delivered
or mailed first-class postage prepaid by registered mail, return receipt
requested, or when delivered if by hand, overnight delivery service or confirmed
facsimile transmission, to the following:
(a) If to the Employer, at 5200 Maryland Way, Suite 400, Brentwood,
Tennessee 37027 Attention: President and Chief Executive Officer, or at such
other address as may have been furnished to the Employee by the Employer in
writing; or
(b) If to the Employee, at 915 Ashford Court, Brentwood, Tennessee
37027 or such other address as may have been furnished to Employer by Employee
in writing.
17. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this Agreement
will preclude Employer from consolidating or merging in to or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement and all obligations and undertaking of Employer
hereunder.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Employment Agreement
as of the date first above written.
"EMPLOYER"
AMERICAN HOMEPATIENT, INC.,
a Tennessee corporation
/s/ Joseph F. Furlong
--------------------------------------------
By: Joseph F. Furlong
-------------------------------------
Title: President & Chief Executive Officer
-------------------------------------
"EMPLOYEE"
/s/ Thomas E. Mills
--------------------------------------------
THOMAS E. MILLS
8
<PAGE> 1
EXHIBIT 10.74
AMERICAN HOMEPATIENT, INC.
THIRD AMENDMENT AND LIMITED WAIVER TO FOURTH
AMENDED AND RESTATED CREDIT AGREEMENT
This THIRD AMENDMENT AND LIMITED WAIVER TO FOURTH AMENDED AND
RESTATED CREDIT AGREEMENT (this "AMENDMENT") is dated as of March 30, 2000 and
entered into by and among American HomePatient, Inc., a Delaware corporation
(the "BORROWER"), the financial institutions listed on the signature pages
hereof (each a "BANK" and collectively, the "BANKS"), and Bankers Trust Company,
as agent for the Banks (in such capacity, the "AGENT"), and, for purposes of
Sections 5 and 6, the Credit Support Parties (as defined in Section 5 hereof)
listed on the signature pages hereof, and is made with reference to that certain
Fourth Amended and Restated Credit Agreement dated as of December 19, 1997, as
amended to the date hereof (as so amended, the "CREDIT AGREEMENT"). Capitalized
terms used herein without definition shall have the same meanings herein as set
forth in the Credit Agreement.
RECITALS
WHEREAS, the Borrower has advised the Banks that the Borrower
was not in compliance with the provisions of the negative covenants set forth in
Sections 8.07, 8.08, 8.09, 8.10 and 8.17 of the Credit Agreement for the four
fiscal quarter period ending December 31, 1999, which non-compliance constituted
Events of Default under the Credit Agreement (the Events of Default resulting
from such non-compliance with such enumerated covenants for such particular
period being the "EXISTING DEFAULTS"); and
WHEREAS, the Borrower has requested that the Banks waive the
Existing Defaults, such waiver to be effective as of the Third Amendment
Effective Date (as hereinafter defined) for the period prior to such date; and
WHEREAS, the Banks have agreed to grant such limited waivers
with respect to the Existing Defaults resulting from the Borrower's failure to
comply with Sections 8.07, 8.08, 8.09, 8.10 and 8.17 of the Credit Agreement for
the four fiscal quarter period ending December 31, 1999 (and only for such
particular period) on the terms and conditions set forth herein; and
WHEREAS, the Borrower and the Banks desire to amend certain of
the terms and provisions of the Credit Agreement as set forth below:
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
1
<PAGE> 2
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT
1.1 AMENDMENTS TO SECTION 1: DEFINITIONS AND PRINCIPLES OF
CONSTRUCTION.
A. (i) Section 1.01 of the Credit Agreement is hereby
amended by deleting "and" immediately before clause "(c)" of the definition of
"Consolidated EBIT" and by adding the following after such clause:
"and (d) the engagement of the Bank Financial Advisor by the
Banks, at the Borrower's expense,"
(ii) Section 1.01 of the Credit Agreement is hereby
further amended by:
(a) restating subclause (a) of clause (i) of
the definition of "Consolidated Excess Cash Flow" as
follows:
"(a) Consolidated EBITDA plus any and all
noncash losses (however characterized,
whether usual, unusual, extraordinary or
any other write-off of any kind or nature)
to the extent such noncash losses were
given effect in the calculation of
Consolidated EBIT and Consolidated EBITDA,"
and
(b) adding to the end of the definition of
"Consolidated Excess Cash Flow" the following new
sentence:
"The calculation of Consolidated Excess
Cash Flow for any fiscal year shall be
based upon actual results for such fiscal
year; provided that for purposes of
calculating Consolidated Excess Cash Flow,
in no event shall the deductions set forth
in clause (ii) of the definition of
"Consolidated Excess Cash Flow" exceed the
amounts permitted under this Agreement or
otherwise breach the terms hereof."
(iii) Section 1.01 of the Credit Agreement is hereby
further amended by restating the definition of "Interest
Payment Date" as follows:
"INTEREST PAYMENT DATE" means, with respect to any
Eurodollar Rate Loan, the last day of the Interest
Period applicable to such Loan; provided that in the
case of each Interest Period of longer than one month
"Interest Payment Date" shall mean the date that is
one month after the commencement of such Interest
Period and each successive date that is one month
after that."
B. Section 1.01 of the Credit Agreement is hereby further
amended by adding thereto the following definitions, which shall be inserted in
proper alphabetical order:
2
<PAGE> 3
"BANK FINANCIAL ADVISOR" means Zolfo Cooper, LLC, and shall
include any successor or replacement therefor.
"THIRD AMENDMENT" means that certain Third Amendment and
Limited Waiver to Fourth Amended and Restated Credit Agreement dated as
of March 30, 200 by and among the Borrower, and for purposes of
Sections 5 and 6 thereof, the Credit Support Parties (as such term is
defined therein), the Banks listed on the signature pages thereof and
the Agent.
"THIRD AMENDMENT EFFECTIVE DATE" has the meaning assigned to
that term in Section 3 of the Third Amendment.
1.2 AMENDMENTS TO SECTION 2: AMOUNT AND TERMS OF CREDIT.
A. Section 2.01(a) of the Credit Agreement is hereby amended
by (i) deleting the reference therein to "253,600,000" and replacing it with
"$249,243,329" and (ii) restating clause (ii) of the second paragraph thereof in
its entirety a follows:
"(ii) In no event shall the Total Utilization of Revolving
Loan Commitments at any time exceed the lesser of (1) the
Total Utilization of Revolving Loan Commitments as of the
Third Amendment Effective Date and (2) the Total Revolving
Loan Commitments then in effect."
B. Section 2.06(b) of the Credit Agreement is hereby amended
by restating the first paragraph thereof in its entirety as follows:
"In connection with each Eurodollar Rate Loan, the Borrower
may, pursuant to the applicable Notice of Revolver Borrowing or Notice
of Conversion/Continuation, as the case may be, select an interest
period (each an "Interest Period") to be applicable to such Loan, which
Interest Period shall be, at the Borrower's option, either a one, two
or three month period; provided that:"
C. Section 2.06(e) of the Credit Agreement is hereby amended
by deleting "Post Maturity Interest" as the heading thereof and substituting
therefor the heading "Default Rate".
D. Section 2.06(g)(ii) of the Credit Agreement is hereby
amended by deleting the reference therein to "Section 2.06(f)" and substituting
therefor "Section 2.06(g)".
1.3 AMENDMENTS TO SECTION 7: AFFIRMATIVE COVENANTS.
A. INFORMATION COVENANTS.
(i) Section 7.01(g) of the Credit Agreement is hereby
amended by adding to the end thereof the following new
sentence:
Borrower shall furnish the Agent (with sufficient
copies for each Bank) no later than 5 days after the
end of each month, a narrative report
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<PAGE> 4
summarizing all negotiations and other discussions
among the Borrower and the Subsidiaries (including
their respective counsel and representatives) and
representatives of the O.I.G. or any other
Governmental Authority since the last report
submitted to the Agent regarding (x) any
investigation and/or audit of the Borrower and/or its
Subsidiaries that is pending as of the Third
Amendment Effective Date and (y) any material claim,
complaint, notice or request for information that the
Borrower or any of its Subsidiaries receives from any
Governmental Authority after the Third Amendment
Effective Date."
(ii) Section 7.01(l) of the Credit Agreement is
hereby amended by deleting "and" immediately before clause
(vi) and inserting immediately after clause (vi) the
following:
"and (vii) an employee head count trend analysis for
the Borrower and its Subsidiaries for such month,
together with a comparison to the assumptions set
forth in the Performance Plan"
(iii) Section 7.01(m) of the Credit Agreement is
hereby amended by deleting therefrom the following:
"and (iv) an employee headcount report for the
Borrower and its Subsidiaries for such month,"
and adding thereto the following:
", (iv) a report, in form and substance satisfactory
to the Banks, setting forth the location and account
number of each bank account of Borrower and each of
its Subsidiaries and the closing balance thereof at
the end of the preceding month, (v) a report, in form
and substance satisfactory to the Banks, on the
status of the implementation of the modifications to
be made by Borrower to its registration,
authorization and billing procedures pursuant to the
plan provided by Borrower to Banks, Agent and the
Bank Financial Advisor, and (vi) a report, in form
and substance satisfactory to the Banks, on the
status of the consolidation and closure by Borrower
of 9 billing centers (leaving a total of 47 billing
centers) in calendar year 2000 and the consolidation
and closure of an additional 22 billing centers in
the aggregate during calendar years 2001 and 2002
(leaving a total of 25 billing centers) in accordance
with the plan provided by Borrower to Banks, Agent
and the Bank Financial Advisor."
(iv) Section 7.01 of the Credit Agreement is hereby further
amended by adding the following subsection thereto:
(q) ADDITIONAL DOCUMENTATION. Borrower shall deliver
(i) to the Banks and their respective counsel within five
Business Days after the Third Amendment Effective Date
originally executed copies of one or more favorable written
opinions of Harwell Howard Hyne Gabbert & Manner, P.C.,
counsel for
4
<PAGE> 5
the Borrower, in form and substance reasonably satisfactory to
Agent and its counsel, with respect to the enforceability of
the Amended Agreement and as to such other matters as Agent
acting on behalf of the Banks may reasonably request, (ii) to
each Bank within three Business Days after the Third Amendment
Effective Date a report, in form and substance satisfactory to
the Banks, setting forth the location and account number of
each bank account of Borrower and each of its Subsidiaries and
the closing balance thereof as of December 31, 1999, and (iii)
to the Agent within 30 days after the Third Effective Date an
Officer's Certificate signed by the President or Vice
President of the Borrower and attested to by the Secretary or
Assistant Secretary of the Borrower, in form and substance
satisfactory to Agent, to the effect that (w) Borrower is in
good standing as a foreign corporation in the State of New
York, (x) each of American HomePatient East, Inc.and Volunteer
Medical Oxygen and Hospital Equipment Company, Inc. is in good
standing under the laws of its jurisdiction of incorporation,
(y) American HomePatient of New York, Inc. is a validly
existing corporation and in good standing under the laws of
its jurisdiction of incorporation and has all requisite
corporate power and authority to enter into the Amendment and
to carry out the transactions contemplated by, and perform its
obligations under, the Credit Agreement as amended by the
Amendment and the other Credit Documents, and (z) American
HomePatient, Inc. a Tennessee corporation, American
HomePatient East, Inc., The National Medical Rentals, Inc. and
National I.V., Inc. are duly qualified and in good standing as
a foreign corporation in each jurisdiction where its
ownership, leasing or operation of property or the conduct of
its business requires such qualification, except if the
failure to be so qualified could not reasonably be expected to
have a material adverse effect on the business, operations,
property, assets, condition (financial or otherwise) or
prospects of Borrower and its Subsidiaries taken as a whole.
B. BOOKS, RECORDS AND INSPECTIONS.
Section 7.02 of the Credit Agreement is hereby amended by
restating it in its entirety as follows:
"7.02 BOOKS, RECORDS AND INSPECTIONS.
(a) The Borrower will, and will cause each of its Subsidiaries
to, keep proper books of record and account in which full,
true and correct entries in conformity with generally accepted
accounting principles consistently applied and all
requirements of law (including, without limitation, Section
13(b)(2) of the Securities Exchange Act of 1934, as amended)
shall be made of all dealings and transactions in relation to
its business and activities. The Borrower will, and will cause
each of its Subsidiaries to, permit the officers and
designated representatives of the Agent or any Bank to visit
and inspect any of the properties of the Borrower or such
Subsidiary, and to examine the books of record and account of
the Borrower or such Subsidiary (including, without
limitation, any cost or other reimbursement reports submitted
to a Governmental Authority in contemplation of any
receivable, any responses, statements or reports relating
5
<PAGE> 6
thereto prepared by any Person and any medical record audits)
and discuss the affairs, finances and accounts of the Borrower
or such Subsidiary with, and be advised as to the same by, its
and their management, officers and independent accountants,
all at reasonable times and upon reasonable notice, as the
Agent or such Bank or any of their officers or designated
representatives may request.
(b) Without limiting the generality of clause (a) of this
Section 7.02, the Borrower will, and will cause each of its
Subsidiaries to, permit the Bank Financial Advisor to visit
and inspect, on a daily basis, any of the properties of the
Borrower or such Subsidiary, and to examine the books of
record and account of the Borrower or such Subsidiary and
discuss the affairs, finances and accounts of the Borrower or
such Subsidiary with, and to be advised as to the same by, its
and their management, officers and independent accountants in
order to, among other things (w) render accounting and
reporting assistance to the Agent and the Banks in connection
with the Borrower's compliance or noncompliance with the
covenants set forth in this Agreement, (x) review monthly,
quarterly, annual and any other financial information
delivered to the Agent and the Banks or included in reports to
be filed with the Securities and Exchange Commission, (y)
review, evaluate and provide the Agent and the Banks
recommendations regarding the Borrower's and its Subsidiaries'
short and long term financial projections and (z) develop for
the Agent and the Banks strategies and initiatives and perform
such other duties as the Agent or the Banks may request from
time to time."
C. COLLATERAL QUESTIONNAIRE, ETC. Section 7 of the Credit
Agreement is hereby further amended by adding to the end thereof the following
new Section 7.16:
"7.16 COLLATERAL QUESTIONNAIRE; THIRD AMENDMENT CERTIFICATES,
etc. (a) Within 30 days after the Third Amendment Effective
Date, the Borrower shall complete and deliver to the Agent an
updated collateral questionnaire, substantially in the form of
the collateral questionnaire dated November 20, 1998 and in
any case in form and substance satisfactory to the Agent and
its counsel. The Borrower will, and will cause its
Subsidiaries to, cooperate with the Agent and deliver to the
Agent all such documents and instruments that the Agent deems
necessary or desirable to perfect, preserve and protect the
Liens created under the Credit Documents.
(b) Within 10 days after the Third Amendment Effective Date,
the Borrower shall, and shall cause each Subsidiary set forth
on Schedule 1 to the Third Amendment, to deliver to the Banks
(or to Agent for the Banks with sufficient originally executed
copies, where appropriate, for each Bank and its counsel) (i)
resolutions of the Board of Directors of each Subsidiary
approving, authorizing and ratifying the execution, delivery,
and performance of the Third Amendment, signed by the
President or Vice President of such Subsidiary and attested to
by the Secretary or any Assistant Secretary of such
Subsidiary, and in form and substance satisfactory to the
Banks, and (ii) a good standing certificate for each
Subsidiary from the Secretary of State of its jurisdiction of
incorporation, dated a date acceptable to the Agent."
6
<PAGE> 7
1.4 AMENDMENTS TO SECTION 8: NEGATIVE COVENANTS.
A. LEVERAGE RATIO. Section 8.08 of the Credit Agreement
is hereby amended by restating it in its entirety as follows:
"8.08 LEVERAGE RATIO. The Borrower shall not permit the ratio
of (i) Total Debt to (ii) Consolidated Adjusted EBITDA for any
consecutive four-fiscal quarter period ending as of the last
day of any fiscal quarter of the Borrower set forth below to
be more than the correlative amount set forth below (it being
understood and agreed that for purposes of determining
compliance with this covenant, 1999 FQ4 Consolidated EBITDA
shall be deemed to be $12,510,000):
<TABLE>
<CAPTION>
FISCAL QUARTER LEVERAGE RATIO
-------------- --------------
<S> <C>
2000 FQ1 6.84:1.00
2000 FQ2 7.29:1.00
2000 FQ3 7.70:1.00
2000 FQ4 7.88:1.00
2001 FQ1 5.00:1.00
2001 FQ2 5.00:1.00
2001 FQ3 5.00:1.00
2001 FQ4 5.00:1.00
2002 FQ1 4.75:1.00
</TABLE>
B. MINIMUM CONSOLIDATED NET WORTH. Section 8.09 is hereby
amended by deleting it in its entirety and substituting the following therefor:
"8.09 MINIMUM CONSOLIDATED NET WORTH. The Borrower shall not
permit Consolidated Net Worth of the Borrower and its Subsidiaries to
be less than $26,679,000 (i) at December 31, 2000 for Fiscal Year 2000
and (ii) on the last day of any fiscal quarter after December 31, 2000,
for any consecutive four-fiscal quarter period ending as of the last
day of such fiscal quarter."
C. MINIMUM INTEREST COVERAGE RATIO. Section 8.10 of the Credit
Agreement is hereby amended by restating it in its entirety as follows:
"8.10 MINIMUM INTEREST COVERAGE RATIO. The Borrower shall not
permit the ratio of (i) Consolidated EBITDA of the Borrower
and its Subsidiaries to (ii) Consolidated Interest Expense for
any consecutive four-fiscal quarter period
7
<PAGE> 8
ending as of the last day of any fiscal quarter of the
Borrower set forth below to be less than the correlative
amount set forth below (it being understood and agreed that
for purposes of determining compliance with this covenant,
1999 FQ4 Consolidated EBITDA shall be deemed to be
$12,510,000):
<TABLE>
<CAPTION>
FISCAL QUARTER MINIMUM INTEREST COVERAGE RATIO
-------------- -------------------------------
<S> <C>
2000 FQ1 1.57:1.00
2000 FQ2 1.44:1.00
2000 FQ3 1.32:1.00
2000 FQ4 1.19:1.00
2001 FQ1 2.00:1.00
2001 FQ2 2.10:1.00
2001 FQ3 2.20:1.00
2001 FQ4 2.30:1.00
2002 FQ1 2.30:1.00
</TABLE>
D. MINIMUM CONSOLIDATED EBITDA. Section 8.17 of the Credit
Agreement is hereby amended by deleting it in its entirety and substituting the
following therefor:
"8.17. MINIMUM CONSOLIDATED EBITDA. The Borrower shall not
permit Consolidated EBITDA for the three-month period ending on the
last day of any month set forth below to be less than the correlative
amount indicated (it being understood and agreed that for purposes of
determining compliance with this covenant, November 1999 Consolidated
EBITDA shall be deemed to be $3,868,000 and December 1999 Consolidated
EBITDA shall be deemed to be $4,862,000):
<TABLE>
<CAPTION>
MONTH ENDING MINIMUM CONSOLIDATED EBITDA
------------ ---------------------------
<S> <C>
January 2000 $11,793,000
February 2000 $10,993,000
March 2000 $ 8,833,000
April 2000 $ 8,953,000
May 2000 $ 9,067,000
June 2000 $ 9,548,000
July 2000 $ 9,598,000
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
MONTH ENDING MINIMUM CONSOLIDATED EBITDA
------------ ---------------------------
<S> <C>
August 2000 $ 9,647,000
September 2000 $ 9,697,000
October 2000 $10,186,000
November 2000 $10,676,000
December 2000 $11,165,000
January 2001 $15,750,000
February 2001 $14,750,000
March 2001 $13,500,000
April 2001 $14,750,000
May 2001 $14,750,000
June 2001 $15,000,000
July 2001 $15,250,000
August 2001 $15,750,000
September 2001 $16,000,000
October 2001 $16,500,000
November 2001 $16,750,000
December 2001 $17,250,000
January 2002 $16,000,000
February 2002 $15,000,000
March 2002 $13,750,000
April 2002 $14,750,000
</TABLE>
E. MONTHLY ACCOUNTS RECEIVABLE COVENANT. Section 8 of the
Credit Agreement is hereby further amended by amending and restating Section
8.18 in its entirety as follows:
"8.18 ACCOUNTS RECEIVABLE COLLECTIONS.
A. The Borrower shall not permit the average daily amount
collected by the Borrower and its Subsidiaries in respect of Accounts
Receivable for each Collection Day during any consecutive three-month
period (the "CURRENT THREE-MONTH PERIOD") to be less than the Applicable
Three-Month Percentage (as hereinafter defined) of the average daily
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<PAGE> 10
Adjusted Net Revenues for each Collection Day during the consecutive
three-month period immediately preceding the commencement of such Current
Three-Month Period. For purposes of this Section 8.18A, the term
"APPLICABLE THREE-MONTH PERCENTAGE" shall mean (i) for any Current
Three-Month Period ending during the first-two fiscal quarters of 2000,
85%, (ii) for any Current Three-Month Period ending during the third fiscal
quarter of 2000, 86%, (iii) for any Current Three-Month Period ending
during the fourth fiscal quarter of 2000, 87%, and (iv) for any Current
Three-Month Period ending during the first fiscal quarter of 2001 or
thereafter, 90%.
B. The Borrower shall not permit the average daily
amount collected by the Borrower and its Subsidiaries in respect of
Accounts Receivable for each Collection Day during any month (the "CURRENT
MONTH") to be less than the Applicable Monthly Percentage (as hereinafter
defined) of the average daily Adjusted Net Revenues for each Collection Day
during the third month immediately preceding such Current Month. For
purposes of this Section 8.18B, the term "APPLICABLE MONTHLY PERCENTAGE"
shall mean (i) for any Current Month ending during the first-two fiscal
quarters of 2000, 83%, (ii) for any Current Month ending during the third
fiscal quarter of 2000, 84%, (iii) for any Current Month ending during the
fourth fiscal quarter of 2000, 85%, and (iv) for any Current Month ending
during the first fiscal quarter of 2001 or thereafter, 86%."
1.5 AMENDMENT TO SECTION 9: EVENTS OF DEFAULT.
A. O.I.G. INVESTIGATION.
Section 9.12 of the Credit Agreement is hereby amended by
restating it in its entirety as follows:
"9.12 O.I.G. INVESTIGATION. Any investigation and/or audit of
the Borrower and its Subsidiaries by the O.I.G. or any other Governmental
Authority that (x) is pending as of the Third Amendment Effective Date or
(y) arises or is pending at any time on or after the Third Amendment
Effective Date, shall result in a liability (whether or not being
contested) on the part of the Borrower and its Subsidiaries and/or a
reduction or set-off in respect of future Accounts Receivable of the
Borrower and its Subsidiaries in an aggregate amount which, in the opinion
of the Required Banks, could reasonably be expected to have a material
adverse effect on the business, operations, properties, assets, condition
(financial or otherwise) or prospects of the Borrower and its Subsidiaries
taken as a whole or there shall have been a development in any such
investigation and/or audit that the Required Banks determine could
reasonably be expected to have material adverse effect on the business,
operations, properties, assets, condition (financial or otherwise) or
prospects of the Borrower and its Subsidiaries taken as a whole;"
1.6 AMENDMENT TO SECTION 11: MISCELLANEOUS.
A. PAYMENT OF EXPENSES, ETC. Section 11.01 of the
Credit Agreement is hereby amended by restating it in its entirety as follows:
"11.01 PAYMENT OF EXPENSES, ETC. The Borrower shall: (i) pay
all the actual costs and reasonable expenses (w) of the Agent
(including, without limitation, the
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<PAGE> 11
reasonable fees and disbursements of O'Melveny & Myers LLP, special
counsel to the Agent) in connection with the preparation, execution,
delivery and syndication of this Agreement and the other Credit
Documents and the Existing Credit Agreement and the documents and
instruments referred to herein and therein and any amendment, waiver or
consent relating hereto or thereto, (x) of the Agent and each of the
Banks in connection with the enforcement of this Agreement and the
other Credit Documents and the documents and instruments referred to
herein and therein (including, without limitation, the reasonable fees
and disbursements of O'Melveny & Myers LLP, special counsel to the
Agent, and such other counsel as any other Bank may retain from time to
time in connection herewith), (y) of the Agent (including, without
limitation, the reasonable fees and disbursements of O'Melveny & Myers
LLP, special counsel to the Agent) in connection with the custody or
preservation of any of the Collateral or in connection with creating,
perfecting and preserving Liens in favor of the Agent on behalf of the
Banks pursuant to any Credit Document, including any filing and
recording fees, expenses and taxes, stamp or documentary taxes, search
fees and title insurance premiums and (z) of the Bank Financial Advisor
and any other consultants, advisors, agents, auditors or accountants
chosen by the Agent or the Required Banks, to perform, investigate,
test or review such matters relating to the Borrower and its
Subsidiaries as the Agent or the Required Banks shall designate
(including, without limitation, any review, investigation or evaluation
conducted pursuant to Section 7.02); (ii) pay and hold each of the
Banks harmless from and against any and all present and future stamp
and other similar taxes with respect to the foregoing matters and save
each of the Banks harmless from and against any and all liabilities
with respect to or resulting from any delay or omission (other than to
the extent attributable to such Bank) to pay such taxes; and (iii)
indemnify the Agent and each Bank, its officers, directors, employees,
representatives and agents from and hold each of them harmless against
any and all liabilities, obligations, losses, damages, penalties,
claims, actions, judgments, suits, costs, expenses and disbursements
incurred by any of them as a result of, or arising out of, or in any
way related to, or by reason of, any investigation, litigation or other
proceeding (whether or not the Agent or any Bank is a party thereto)
related to the entering into and/or performance of this Agreement or
any other Credit Document or the use of the proceeds of any Loans or
Letters of Credit hereunder or the consummation of any transactions
contemplated herein or in any other Credit Document, including, without
limitation, the reasonable fees and disbursements of counsel incurred
in connection with any such investigation, litigation or other
proceeding (but excluding any such liabilities, obligations, losses,
etc., to the extent incurred by reason of the gross negligence or
willful misconduct of the Person to be indemnified). After the
occurrence of an Event of Default or upon the acceleration of the
Obligations (whether pursuant to the terms hereof or applicable law),
the Borrower shall pay all costs and expenses, including reasonable
attorneys' fees (including, without limitation, allocated costs of
internal counsel) and costs of settlement, incurred by the Agent and/or
the Banks in enforcing any Obligations of, or in collecting any
payments due from, the Borrower or any Subsidiary hereunder or under
the other Credit Documents by reason of such Event of Default
(including in connection with the sale of, collection from, or other
realization upon any of the Collateral or the enforcement of the
Subsidiary Guaranty) or in connection with any refinancing or
restructuring of the credit
11
<PAGE> 12
arrangements provided under this Agreement in the nature of a
"work-out" or pursuant to any insolvency or bankruptcy proceedings."
B. ASSIGNMENTS AND PARTICIPATIONS IN LOANS AND LETTERS OF
CREDIT. Section 11.05(b)(i)(B) is hereby amended by adding immediately after the
parenthetical "(which consent of the Borrower and the Agent shall not be
unreasonably withheld or delayed)" the following:
"; provided that in no event shall the Borrower's consent be
required if a Default or an Event of Default has occurred and
is continuing."
SECTION 2. LIMITED WAIVER
A. WAIVERS. Subject to the terms and conditions set forth
herein and in reliance on the representations and warranties of the Borrower
herein contained, the Banks hereby waive (i) the Existing Defaults, such waiver
to be effective as of the Third Amendment Effective Date for the period prior to
the Third Amendment Effective Date and, for purposes of clarity, such limited
waiver shall be solely with respect to the Existing Defaults caused by the
Borrower's non-compliance with Sections 8.07, 8.08, 8.09, 8.10 and 8.17 of the
Credit Agreement for the four fiscal quarter period ending December 31, 1999
(and only for such period), (ii) payment of the Default Rate of interest
provided for under Section 2.06(c) of the Credit Agreement that would otherwise
have been due through the Third Amendment Effective Date, and (iii) compliance
with any provisions of the Credit Agreement based on the revisions to the
definition of "Consolidated Excess Cash Flow" set forth herein for Fiscal Year
1999.
B. LIMITATION OF WAIVER. Without limiting the generality of
the provisions of subsection 11.13 of the Credit Agreement, the waiver set forth
in Section 2A shall be limited precisely as written and relates solely to the
waiver of the Existing Defaults for the period prior to the Third Amendment
Effective Date in the manner and to the extent described above, and nothing in
this Amendment shall be deemed to:
(a) constitute a waiver of compliance by the Borrower with
respect to (i) Sections 8.07, 8.08, 8.09, 8.10 and 8.17 of the Credit
Agreement in any other instance or for any other period or (ii) any
other term, provision or condition of the Credit Agreement, the other
Credit Documents or any other instrument or agreement referred to
therein; or
(b) prejudice any right or remedy that the Agent or any Bank
may now have or may have in the future under or in connection with the
Credit Agreement (including, without limitation, rights and remedies
relating to the Borrower's failure to comply with the covenants amended
hereby), the other Credit Documents or any other instrument or
agreement referred to therein.
SECTION 3. CONDITIONS TO EFFECTIVENESS
Sections 1 and 2 of this Amendment shall become effective only
upon the satisfaction of all of the following conditions precedent (the date of
satisfaction of such conditions being referred to herein as the "THIRD AMENDMENT
EFFECTIVE DATE"):
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<PAGE> 13
A. On or before the Third Amendment Effective Date, the
Borrower shall deliver to the Banks (or to Agent for the Banks with sufficient
originally executed copies, where appropriate, for each Bank and its counsel)
resolutions of the Board of Directors of the Borrower approving and
authorizing the execution, delivery, and performance of this Amendment, signed
by the President or Vice President of the Borrower and attested to by the
Secretary or any Assistant Secretary of the Borrower, and dated the Third
Amendment Effective Date.
B. On or before the Third Amendment Effective Date, the
Borrower shall have delivered to the Agent:
(i) for distribution to each Bank that executes and
delivers this Amendment to the Agent on or before the Third Amendment
Effective Date, a non-refundable amendment fee equal to 1/4 of 1% of
the sum of the outstanding principal amount of the Term Loan of such
Bank as of the Third Amendment Effective Date (and prior to giving
effect to the payment set forth in clause (ii) below) plus the
Revolving Loan Commitment prior to giving effect to the Third
Amendment;
(ii) for distribution to each Bank, in accordance
with its Pro Rata Share, $5,000,000 to be applied to prepay in inverse
order of maturity the scheduled installments of principal of the Term
Loans as set forth in Section 4.01; and
(iii) for distribution to the Agent and the
applicable Banks, all of their respective costs and expenses
(including, without limitation, attorneys' fees and disbursements, the
fees and costs of the Bank Financial Advisor and the fees and costs of
any other consultant or advisor retained by the Agent or the Banks in
connection herewith) incurred as of the Third Amendment Effective Date
in connection with the administration of the Credit Agreement and the
negotiation, preparation, execution and delivery of this Amendment and
the other documents, agreements, certificates and instruments delivered
hereunder or in connection herewith.
The payments made pursuant to Section 3B(i), (ii) and (iii) hereof
shall be made in Dollars in immediately available funds at the Payment Office of
the Agent.
SECTION 4. BORROWER'S REPRESENTATIONS AND WARRANTIES
In order to induce the Banks to enter into this Amendment and
to amend the Credit Agreement in the manner provided herein, the Borrower
represents and warrants to each Bank that the following statements are true,
correct and complete:
A. CORPORATE POWER AND AUTHORITY. The Borrower and each
Subsidiary (as applicable), other than American HomePatient of New York, Inc.,
has all requisite corporate, partnership or other power and authority to enter
into this Amendment and to carry out the transactions contemplated by, and
perform its obligations under, the Credit Agreement as amended by this Amendment
(the "AMENDED AGREEMENT") and the other Credit Documents.
B. AUTHORIZATION OF AGREEMENTS. The execution and delivery of
this Amendment, the performance of the Amended Agreement and the consummation of
the
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<PAGE> 14
transactions contemplated hereby have been duly authorized by all necessary
corporate, partnership or other action (as applicable) on the part of the
Borrower and each Subsidiary.
C. NO CONFLICT. The execution and delivery by the Borrower and
each Subsidiary of this Amendment, the performance by the Borrower and each such
Subsidiary of the Amended Agreement and the consummation of the transactions
contemplated hereby do not and will not (i) violate any provision of any law or
any governmental rule or regulation applicable to the Borrower or any of its
Subsidiaries, the Certificate or Articles of Incorporation or Bylaws (or other
documents of formation and governance, as the case may be) of the Borrower or
any of its Subsidiaries, or any order, judgment or decree of any court or other
agency of government binding on the Borrower or any of its Subsidiaries, (ii)
conflict with, result in a breach of or constitute (with due notice or lapse of
time or both) a default under any Contractual Obligation of the Borrower or any
of its Subsidiaries, (iii) result in or require the creation or imposition of
any Lien upon any of the properties or assets of the Borrower or any of its
Subsidiaries, or (iv) require any approval of stockholders or any approval or
consent of any Person under any Contractual Obligation of the Borrower or any of
its Subsidiaries except for such approvals or consents which will be obtained on
or before the Third Amendment Effective Date (as hereinafter defined).
D. GOVERNMENTAL CONSENTS. The execution and delivery by the
Borrower and each Subsidiary of this Amendment, the performance by the Borrower
and each such Subsidiary of the Amended Agreement and the consummation of the
transactions contemplated hereby do not and will not require any registration
with, consent or approval of, or notice to, or other action to, with or by, any
federal, state or other governmental authority or regulatory body.
E. BINDING OBLIGATION. This Amendment and the Amended
Agreement have been duly executed and delivered by the Borrower and each
Subsidiary and are the legally valid and binding obligations of the Borrower and
each such Subsidiary, enforceable against the Borrower and each such Subsidiary
in accordance with their respective terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or limiting creditors' rights generally or by equitable principles relating to
enforceability.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM CREDIT
DOCUMENTS. All representations and warranties of the Borrower or any of its
Subsidiaries contained in the Credit Documents are and will be true, correct and
complete in all material respects on and as of the Third Amendment Effective
Date to the same extent as though made on and as of that date, except (i) to the
extent such representations and warranties specifically relate to an earlier
date, in which case they were true, correct and complete in all material
respects on and as of such earlier date, (ii) the failure of American
HomePatient East, Inc. to be in good standing in its jurisdiction of
incorporation, to be in good standing as a foreign corporation in Connecticut or
to be in good standing or duly qualified as a foreign corporation in Michigan,
(iii) the failure of American HomePatient of New York, Inc. to be validly
existing and in good standing under the laws of its jurisdiction of
incorporation, (iv) the failure of American HomePatient, Inc., a Tennessee
corporation, to be in good standing as a foreign corporation in New Mexico, (v)
the failure of Borrower to be in good standing as a foreign corporation in New
York, (vi) the failure of The National Medical Rentals, Inc. to be in good
standing or duly qualified as a foreign corporation in Missouri, (vii) the
failure of National I.V., Inc. to be in good
14
<PAGE> 15
standing or duly qualified as a foreign corporation in Missouri, or (viii) the
failure of Volunteer Medical Oxygen and Hospital Equipment Company, Inc. to be
in good standing in its jurisdiction of incorporation. Without limiting the
generality of the foregoing, all information supplied to the Agent by or on
behalf of the Borrower or any Subsidiary with respect to any of the Collateral
is accurate and complete in all material respects, including, without
limitation, the information supplied in any of the schedules to the Credit
Documents.
G. ABSENCE OF DEFAULT. No event has occurred and is continuing
or will result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default or a Potential Event of
Default.
H. ACKNOWLEDGEMENT OF DEBT. As of the Third Amendment
Effective Date, prior to the effectiveness of the limited waivers and amendments
herein and prior to giving effect to the payment made pursuant to Section 3C(ii)
of this Amendment, the aggregate Term Loan Exposure is $63,264,691.09 and the
Total Utilization of Revolving Loan Commitments is $249,243,329. The
Obligations, including, without limitation, the amounts set forth in the
preceding sentence, are jointly and severally payable by the Borrower and the
Credit Support Parties without defense, offset, presentment, protest, demand or
notice of any kind and interest, fees, costs and expenses continue to accrue
with respect thereto.
I. SUBSIDIARIES; JOINT VENTURES. Schedule 1 annexed hereto
sets forth, as of the Third Amendment Effective Date, each Subsidiary of the
Borrower and each Joint Venture. Except as set forth on Schedule 2 annexed
hereto, the Borrower and its Subsidiaries have not created and/or acquired any
Subsidiaries since the Third Amendment Effective Date.
J. SUBSIDIARY MERGERS. The Subsidiaries set forth on Schedule
3 annexed hereto have merged with other Subsidiaries in accordance with the
terms of the Credit Agreement as provided therein.
SECTION 5. ACKNOWLEDGEMENT AND CONSENT
Each Subsidiary set forth on Schedule 1 annexed hereto is a
party to the Subsidiary Guaranty and one or more of the following: (i) the
Subsidiary Partnership Security Agreement, (ii) the Subsidiary Pledge Agreement,
(iii) the Subsidiary Security Agreement and (iv) the Subsidiary Trademark
Security Agreement, in each case as amended through the Third Amendment
Effective Date, pursuant to which each such Subsidiary has (x) irrevocably
guarantied the prompt payment and performance of the Obligations and (y) granted
to the Agent (for the benefit of the Banks) valid and perfected first priority
security interests in and liens on the Collateral (subject to Liens consented to
by the Required Banks with respect to such Collateral and other Liens permitted
by Section 8.01 of the Credit Agreement) to secure the obligations of such
Subsidiary under the Subsidiary Guaranty. The Subsidiaries set forth on Schedule
A annexed hereto are collectively referred to herein as the "CREDIT SUPPORT
PARTIES", and the Subsidiary Guaranty, the Subsidiary Partnership Security
Agreement, the Subsidiary Pledge Agreement, the Subsidiary Security Agreement
and the Subsidiary Trademark Security Agreement are collectively referred to
herein as the "CREDIT SUPPORT DOCUMENTS".
15
<PAGE> 16
Each Credit Support Party hereby acknowledges that it has
reviewed the terms and provisions of the Credit Agreement and this Amendment and
consents to the amendment of the Credit Agreement effected pursuant to this
Amendment. Each Credit Support Party hereby confirms that each Credit Support
Document to which it is a party or otherwise bound and all Collateral encumbered
thereby will continue to guaranty or secure, as the case may be, to the extent
set forth in such Credit Support Document the payment and performance of all
"Guarantied Obligations" and "Secured Obligations", as the case may be (in each
case as such terms are defined in the applicable Credit Support Document),
including, without limitation, the payment and performance of all such
"Guarantied Obligations" or "Secured Obligations", as the case may be, in
respect of the Obligations of the Borrower now or hereafter existing under or in
respect of the Amended Agreement and the Notes defined therein.
Each Credit Support Party acknowledges and agrees that any of
the Credit Support Documents to which it is a party or otherwise bound shall
continue in full force and effect and that all of its obligations thereunder
shall be valid and enforceable and shall not be impaired or limited by the
execution or effectiveness of this Amendment. Each Credit Support Party
represents and warrants that all representations and warranties contained in the
Amended Agreement and the Credit Support Documents to which it is a party or
otherwise bound are true, correct and complete in all material respects on and
as of the Third Amendment Effective Date to the same extent as though made on
and as of that date, except to the extent such representations and warranties
specifically relate to an earlier date, in which case they were true, correct
and complete in all material respects on and as of such earlier date.
Each Credit Support Party acknowledges and agrees that
notwithstanding the conditions to effectiveness set forth in this Amendment,
such Credit Support Party is not required by the terms of the Credit Agreement
or any other Credit Document to consent to the amendments to the Credit
Agreement effected pursuant to this Amendment.
SECTION 6. MISCELLANEOUS
A. RELEASE.
The Borrower, each of the Credit Support Parties, their
respective successors and assigns and any Person that may derivatively or
otherwise assert a claim through or by any of the foregoing to the fullest
extent permitted by applicable law (collectively, the "RELEASORS") hereby
releases, remises, acquits and forever discharges the Agent, each Bank and each
of their respective employees, agents representatives, consultants, attorneys,
fiduciaries, servants, officers, directors, partners, predecessors, successors
and assigns, subsidiary corporations, parent corporations, related corporate
divisions, participants and assigns (all of the foregoing hereinafter called the
"RELEASED PARTIES"), from any and all actions and causes of action, judgments,
executions, suits, debts, claims, demands, liabilities, obligations, setoffs,
recoupments, counterclaims, defenses, damages and expenses of any and every
character, known or unknown, suspected or unsuspected, direct and/or indirect,
at law or in equity, of whatsoever kind or nature, whether heretofore or
hereafter arising, for or because of any matter or things done, omitted or
suffered to be done by any of the Released Parties prior to and including the
Third Amendment Effective Date, and in any way directly or indirectly arising
out of or in any way connected to this Amendment, the Credit Agreement or the
other Credit Documents (all of the
16
<PAGE> 17
foregoing hereinafter called the "RELEASED MATTERS"). Each Releasor acknowledges
that the agreements in this Section 6A are intended to be in full satisfaction
of all or any alleged injuries or damages arising in connection with the
Released Matters and constitute a complete waiver of any right of setoff or
recoupment, counterclaim or defense of any nature whatsoever which arose prior
to the Third Amendment Effective Date to payment or performance of the
Obligations. Each Releasor represents and warrants that it has no knowledge of
any claim by it against the Released Parties or of any facts, or acts or
omissions of the Released Parties which on the Third Amendment Effective Date
would be the basis of a claim by the Releasors against the Released Parties
which is not released hereby. Each Releasor represents and warrants that it has
not purported to transfer, assign, pledge or otherwise convey any of its right,
title or interest in any Released Matter to any other Person and that the
foregoing constitutes a full and complete release of all Released Matters.
Releasors have been advised by counsel of their choosing and have granted this
release freely, and voluntarily and without duress.
The foregoing release shall be effective as a bar to any and
all actions, fees, damages, losses, claims, liabilities and demands of
whatsoever character, nature and kind, known or unknown, suspected or
unsuspected, notwithstanding any provisions of applicable law restricting the
effect of such a release. In furtherance thereof, the Releasors expressly waive
any and all rights conferred upon them by any provisions of applicable law to
the effect that a general release does not extend to claims which the creditor
does not know or suspect to exist in its factor at the time of executing the
release, which if known by it must have materially affected its settlement with
the debtor.
B. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND
THE OTHER CREDIT DOCUMENTS.
(i) The Borrower hereby agrees and confirms that on and after
the Third Amendment Effective Date each Credit Document and all
collateral encumbered thereby shall continue to secure to the fullest
extent possible the payment and performance of all "Secured
Obligations" (as defined in each applicable Credit Document), including
without limitation the payment and performance of all such "Secured
Obligations" in respect of the Obligations of the Borrower now or
hereafter existing under or in respect of the Amended Agreement and the
Notes.
(ii) On and after the Third Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the Credit
Agreement, and each reference in the other Credit Documents to the
"Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement shall mean and be a reference to the
Amended Agreement.
(iii) The Borrower acknowledges and agrees that any of the
Credit Documents to which it is a party or otherwise bound shall
continue in full force and effect, and are hereby ratified and
confirmed, and that all of its respective obligations thereunder shall
be valid and enforceable and shall not be impaired, limited or
otherwise affected by the execution, delivery or effectiveness of this
Amendment or any future amendment or modification of the Amended
Agreement.
17
<PAGE> 18
(iv) The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein or therein, constitute a
waiver of any provision of, or operate as a waiver of any right, power
or remedy of the Agent or any Bank under, the Credit Agreement or any
of the other Credit Documents.
C. HEADINGS. Section and subsection headings in this
Amendment are included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be given any
substantive effect.
D. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY,
AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE
OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. COUNTERPARTS; EFFECTIVENESS. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall constitute but one
and the same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document. This Amendment (other than the
provisions of Sections 1 and 2 hereof, the effectiveness of which is governed by
Section 3 hereof) shall become effective upon the execution of a counterpart
hereof by the Borrower, the Agent and the Required Banks and receipt by the
Borrower and the Agent of written or telephonic notification of such execution
and authorization of delivery thereof.
[Remainder of page intentionally left blank]
18
<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
BORROWER:
AMERICAN HOMEPATIENT, INC.,
a Delaware corporation
By:
------------------------------
Name:
------------------------
Title:
-----------------------
S-1
<PAGE> 20
CREDIT SUPPORT PARTIES:
AHP, L.P.
AHP FINANCE, INC.
ALLEGHENY RESPIRATORY ASSOCIATES, INC.
AMERICAN HOMEPATIENT, INC.
AMERICAN HOMEPATIENT OF ARKANSAS, INC.
AMERICAN HOMEPATIENT OF ILLINOIS, INC.
AMERICAN HOMEPATIENT OF IOWA, INC.
AMERICAN HOMEPATIENT OF NEVADA, INC.
AMERICAN HOMEPATIENT OF TEXAS, L.P.
AMERICAN HOMEPATIENT VENTURES, INC.
AMERICAN HOMEPATIENT EAST, INC.
AMERICAN HOMEPATIENT OF NEW YORK, INC.
BREATHING EQUIPMENT INC. D/B/A HAZELTON MEDICAL AND BREATHING EQUIPMENT
COLUMBIA-AHP HOME CARE ALLIANCE OF GAINESVILLE, GAINESVILLE, FL
COLUMBIA-AHP HOME CARE ALLIANCE, NASHVILLE AND JACKSON TN
DESIGNATED COMPANIES, INC. D/B/A CAREPLAN
DOWNEAST MEDICAL SHOPPE
HAPPY HARRY'S HEALTHCARE, INC.
MEDICAL EQUIPMENT SERVICES, INC.
NATIONAL I.V., INC.
THE NATIONAL MEDICAL RENTALS, INC.
NATIONAL MEDICAL SYSTEMS, INC.
PARAGON HOME MEDICAL EQUIPMENT PARTNERSHIP, DALLAS, IRVING AND GRAND
PRAIRIE, TX
SOUND MEDICAL EQUIPMENT, INC.
UNITED CLINICAL SERVICES, INC.
VOLUNTEER MEDICAL OXYGEN AND HOSPITAL EQUIPMENT COMPANY, INC.
On behalf of all of the above:
By:
---------------------------------
Name:
---------------------------
Title:
---------------------------
S-2
<PAGE> 21
BANKERS TRUST COMPANY,
Individually and as the Agent
By:
------------------------------
Name:
------------------------
Title:
------------------------
S-3
<PAGE> 22
ABN AMRO BANK, N.V.
By:
-------------------------------
Name:
-------------------------
Title:
-------------------------
By:
-------------------------------
Name:
-------------------------
Title:
-------------------------
S-4
<PAGE> 23
AMSOUTH BANK
By:
-------------------------------
Name:
----------------------------
Title
----------------------------
S-5
<PAGE> 24
BANK OF AMERICA, N.T. & S.A.
(including the former NationsBank, N.A.)
By:
------------------------------
Name:
------------------------
Title:
------------------------
S-6
<PAGE> 25
BANK OF MONTREAL
By:
------------------------------
Name:
-------------------------
Title:
-------------------------
S-7
<PAGE> 26
FIRST UNION NATIONAL BANK
(formerly Corestates Bank, N.A.)
By:
-------------------------------
Name:
-------------------------
Title:
-------------------------
S-8
<PAGE> 27
[Intentionally left blank]
S-9
<PAGE> 28
BANK ONE
(formerly The First National Bank of Chicago)
By:
-------------------------------
Name:
------------------------
Title:
-----------------------
S-10
<PAGE> 29
BEAR STEARNS & CO. INC.
By:
-------------------------------
Name:
------------------------
Title:
-----------------------
S-11
<PAGE> 30
CITIBANK, N.A.
By:
-------------------------------
Name:
------------------------
Title:
-----------------------
S-12
<PAGE> 31
THE FUJI BANK, LIMITED, NEW YORK BRANCH
By:
-------------------------------
Name:
------------------------
Title:
-----------------------
S-13
<PAGE> 32
COOPERATIEVE CENTRALE RAIFFESEN -
BOERENLEENBANK, B.A., "RABOBANK
NEDERLAND", NEW YORK BRANCH
By:
-------------------------------
Name:
------------------------
Title:
-----------------------
By:
-------------------------------
Name:
------------------------
Title:
-----------------------
S-14
<PAGE> 33
THE SAKURA BANK, LIMITED
By:
-------------------------------
Name:
------------------------
Title:
-----------------------
S-15
<PAGE> 34
SUNTRUST BANK, NASHVILLE, N.A.
By:
-------------------------------
Name:
------------------------
Title:
-----------------------
S-16
<PAGE> 35
UNION BANK OF CALIFORNIA, N.A.
By:
-------------------------------
Name:
------------------------
Title:
-----------------------
S-17
<PAGE> 36
WILLIAM E. SIMON & SONS SPECIAL
SITUATIONS PARTNERS, L.P.
By:
-------------------------------
Name:
------------------------
Title:
-----------------------
S-18
<PAGE> 37
SCHEDULE 1
SUBSIDIARIES
<PAGE> 38
SCHEDULE 2
NEW SUBSIDIARIES
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF AMERICAN HOMEPATIENT, INC.
<TABLE>
<CAPTION>
NAME OF STATE OF D/B/A
SUBSIDIARY INCORPORATION NAME
<S> <C> <C>
Designated Companies, Inc. New York CarePlan
AHP Finance, Inc. Delaware
American HomePatient of Iowa, Inc. Delaware
American HomePatient, Inc. Tennessee
American HomePatient of Texas, L.P. Texas
AHP, L.P. Tennessee
Outpatient Medical Network, Inc. Washington
American HomePatient, East, Inc. Massachusetts
American HomePatient Of New York, New York
Inc.
Breathing Equipment Incorporated Pennsylvania Hazelton Medical &
Breathing Equipment
Happy Harry's Health Care, Inc. Delaware
AHP HomeCare of Gainesville Florida
Downeast Medical Shoppe Maine
American HomePatient of Nevada, Inc Nevada
Volunteer Medical Oxygen and Hospital Tennessee
Equipment Company, Inc.
United Clinical Services, Inc. New Jersey
Allegheny Respiratory Associates, Inc. Pennsylvania
Medical Equipment Services, Inc. Illinois
American HomePatient of Illinois, Inc. Illinois
ProCare Medical Supply Co., Inc. Missouri
American HomePatient of Arkansas, Inc. Arkansas
Neogenesis, Inc. South Carolina
American HomePatient Ventures, Inc. Tennessee
National Medical Systems, Inc. Arkansas
The National Medical Rentals, Inc. Arkansas
National I.V., Inc. Arkansas
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
NAME OF STATE OF D/B/A
SUBSIDIARY INCORPORATION NAME
<S> <C> <C>
Sound Medical Equipment, Inc. Washington
Baptist Ventures AHP Homecare Alliance Alabama
HomeLink Home Health Care Services, Arkansas
Inc.
Home Care Resource Alliance-American South Carolina
HomePatient
Coastal Home Care South Carolina
Total Home Care of East Alabama, LLC Alabama
Alliance Home Health Care Partnership Tennessee
Health Star DME, Ltd. Texas
Piedmont Medical Equipment South Carolina
Blue Ridge Home Care North Carolina
Medical Arts Joint Venture Michigan
Colorado Home Medical Equipment Colorado
Alliance. LLC
American HomePatient of Unifour, LLC North Carolina
American HomePatient of Sanford, LLC North Carolina
Pro Med South Carolina
AHP Delmarva, LLP Maryland
Twin Tier Home Care New York
AHP-MHR Home Care, LLP Nebraska
Northeast Pennsylvania Alliance, LLC Pennsylvania d/b/a American
HomePatient
Northwest Washington Alliance, LLC Washington
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated February 25, 2000 (except with respect to the matter discussed in
Notes 2 and 8, as to which the date is April 6, 2000), included in this Annual
Report on Form 10-K of American HomePatient, Inc. and Subsidiaries into the
Company's previously filed Registration Statement File Number 000-19532. It
should be noted that we have not audited any financial statements of the Company
subsequent to December 31, 1999, or performed any audit procedures subsequent to
the date of our report.
Arthur Andersen LLP
Nashville, Tennessee
April 12, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICAN HOMEPATIENT, INC. FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 28,123,000
<SECURITIES> 0
<RECEIVABLES> 132,832,000
<ALLOWANCES> 56,876,000
<INVENTORY> 16,499,000
<CURRENT-ASSETS> 121,560,000
<PP&E> 174,558,000
<DEPRECIATION> 113,465,000
<TOTAL-ASSETS> 424,000,000
<CURRENT-LIABILITIES> 61,030,000
<BONDS> 315,422,000
0
0
<COMMON> 152,000
<OTHER-SE> 56,836,000
<TOTAL-LIABILITY-AND-EQUITY> 424,000,000
<SALES> 172,364,000
<TOTAL-REVENUES> 357,580,000
<CGS> 90,142,000
<TOTAL-COSTS> 90,142,000
<OTHER-EXPENSES> 346,853,000
<LOSS-PROVISION> 35,729,000
<INTEREST-EXPENSE> 28,659,000
<INCOME-PRETAX> (79,415,000)
<INCOME-TAX> 20,445,000
<INCOME-CONTINUING> (99,860,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (99,860,000)
<EPS-BASIC> (6.55)
<EPS-DILUTED> (6.55)
</TABLE>
