<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
CHECK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
AMERICAN HOMEPATIENT, INC.
--------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 0-19532 62-1474680
-------- ------- ----------
(STATE OR OTHER JURISDICTION OF (COMMISSION (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) FILE NUMBER)
5200 MARYLAND WAY, SUITE 400, BRENTWOOD, TENNESSEE 37027
-----------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(615) 221-8884
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
-------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF
CHANGES SINCE LAST REPORT.)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
15,471,087
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF NOVEMBER 3, 2000)
TOTAL NUMBER OF SEQUENTIALLY
NUMBERED PAGES IS 29
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 28,123,000 $ 16,377,000
Accounts receivable, less allowance for doubtful accounts
of $56,876,000 and $49,778,000, respectively 75,956,000 76,466,000
Inventories 16,499,000 14,165,000
Prepaid expenses and other assets 982,000 1,140,000
------------- -------------
Total current assets 121,560,000 108,148,000
------------- -------------
PROPERTY AND EQUIPMENT, at cost 174,558,000 183,601,000
Less accumulated depreciation and amortization (113,465,000) (127,811,000)
------------- -------------
Net property and equipment 61,093,000 55,790,000
------------- -------------
OTHER ASSETS
Excess of cost over fair value of net assets acquired, net 202,622,000 198,833,000
Investment in unconsolidated joint ventures 17,473,000 9,937,000
Deferred financing costs, net 3,703,000 3,365,000
Other assets, net 17,549,000 12,467,000
------------- -------------
Total other assets 241,347,000 224,602,000
------------- -------------
$ 424,000,000 $ 388,540,000
============= =============
</TABLE>
(Continued)
2
<PAGE> 3
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt and capital leases $ 16,644,000 $ 19,137,000
Trade accounts payable 23,327,000 16,566,000
Other payables 1,854,000 2,955,000
Accrued expenses:
Payroll and related benefits 7,472,000 9,300,000
Interest 596,000 1,737,000
Insurance 3,979,000 5,463,000
Restructuring accruals 1,234,000 250,000
Other 5,924,000 8,632,000
------------- -------------
Total current liabilities 61,030,000 64,040,000
------------- -------------
NONCURRENT LIABILITIES
Long-term debt and capital leases, less current portion 298,778,000 283,657,000
Other noncurrent liabilities 7,204,000 3,504,000
------------- -------------
Total noncurrent liabilities 305,982,000 287,161,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 5,000,000 shares;
none issued and outstanding -- --
Common stock, $.01 par value; authorized 35,000,000
shares; issued and outstanding, 15,160,000 and
15,471,000 shares, respectively 152,000 155,000
Paid-in capital 172,867,000 173,029,000
Accumulated deficit (116,031,000) (135,845,000)
------------- -------------
Total stockholders' equity 56,988,000 37,339,000
------------- -------------
$ 424,000,000 $ 388,540,000
============= =============
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
3
<PAGE> 4
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------- -----------------------------
1999 2000 1999 2000
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Sales and related service revenues $ 42,694,000 $ 42,914,000 $128,273,000 $128,372,000
Rentals and other revenues 45,814,000 47,354,000 140,415,000 138,637,000
Earnings from joint ventures 804,000 1,236,000 2,285,000 3,519,000
-------------- -------------- ------------ ------------
Total revenues 89,312,000 91,504,000 270,973,000 270,528,000
-------------- -------------- ------------ ------------
EXPENSES
Cost of sales and related services, excluding
depreciation and amortization 22,286,000 21,102,000 67,562,000 64,107,000
Operating 51,326,000 53,699,000 156,077,000 161,654,000
General and administrative 3,319,000 4,110,000 10,742,000 11,141,000
Depreciation and amortization 10,224,000 10,122,000 30,208,000 30,216,000
Interest 7,189,000 7,730,000 21,571,000 22,774,000
-------------- -------------- ------------ ------------
Total expenses 94,344,000 96,763,000 286,160,000 289,892,000
-------------- -------------- ------------ ------------
LOSS FROM OPERATIONS BEFORE INCOME
TAXES (5,032,000) (5,259,000) (15,187,000) (19,364,000)
PROVISION FOR INCOME TAXES 150,000 150,000 448,000 450,000
-------------- -------------- ------------ ------------
NET LOSS $ (5,182,000) $ (5,409,000) $(15,635,000) $ (19,814,000)
============== ============== ============ ==============
NET LOSS PER COMMON SHARE
- Basic $ (0.34) $ (0.35) $ (1.03) $ (1.27)
============== ============== ============ ==============
- Diluted $ (0.34) $ (0.35) $ (1.03) $ (1.27)
============== ============== ============ ==============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
- Basic 15,246,000 15,661,000 15,221,000 15,620,000
============== ============== ============ ==============
- Diluted 15,246,000 15,661,000 15,221,000 15,620,000
============== ============== ============ ==============
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
4
<PAGE> 5
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
---------------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(15,635,000) $(19,814,000)
Adjustments to reconcile net loss from operations
to net cash provided from operating activities:
Depreciation and amortization 30,208,000 30,216,000
Equity in (earnings) losses of unconsolidated joint
ventures 651,000 (1,315,000)
Minority interest 157,000 134,000
Change in assets and liabilities:
Accounts receivable, net 7,283,000 2,566,000
Restricted cash 51,000 --
Inventories 5,475,000 2,706,000
Prepaid expenses and other assets 1,304,000 (163,000)
Income tax payable 102,000 397,000
Trade accounts payable, accrued expenses
and other current liabilities 301,000 (1,112,000)
Restructuring accruals (458,000) (985,000)
Other noncurrent liabilities 47,000 (9,000)
Other assets 1,005,000 304,000
------------ ------------
Net cash provided from operating activities 30,491,000 12,925,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (used in) joint venture dissolutions (500,000) 931,000
Additions to property and equipment, net (10,527,000) (13,877,000)
Distributions from unconsolidated joint
ventures, net 2,644,000 1,319,000
Distributions to minority interest owners (49,000) (179,000)
------------ ------------
Net cash used in investing activities (8,432,000) (11,806,000)
------------ ------------
</TABLE>
(Continued)
5
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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Continued)
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
---------------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and capital leases (3,349,000) (12,189,000)
Proceeds from issuance of debt 4,500,000 377,000
Proceeds from Employee Stock Purchase Plan 11,000 168,000
Deferred financing costs (1,406,000) (1,221,000)
------------ ------------
Net cash used in financing activities (244,000) (12,865,000)
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 21,815,000 (11,746,000)
CASH AND CASH EQUIVALENTS, beginning of period 4,276,000 28,123,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 26,091,000 $ 16,377,000
============ ============
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 23,932,000 $ 21,619,000
============ ============
Cash payments of income taxes $ 416,000 $ 300,000
============ ============
</TABLE>
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
6
<PAGE> 7
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
1. ORGANIZATION AND BACKGROUND
American HomePatient, Inc. (the "Company") was incorporated in Delaware
in September 1991. The Company's principal executive offices are located
at 5200 Maryland Way, Suite 400, Brentwood, Tennessee 37027-5018, and
its telephone number at that address is (615) 221-8884. The Company
provides home health care services and products consisting primarily of
respiratory and infusion therapies and the rental and sale of home
medical equipment and home health care supplies. For the nine months
ended September 30, 2000, such services represented 56%, 20% and 24%,
respectively of net revenues. These services and products are paid for
primarily by Medicare, Medicaid and other third-party payors. As of
September 30, 2000, the Company provided these services to patients
primarily in the home through 307 centers in 39 states: Alabama,
Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia,
Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska,
Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio,
Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South
Dakota, Tennessee, Texas, Virginia, Washington, West Virginia and
Wisconsin. From its inception through 1997 the Company experienced
substantial growth primarily as a result of its strategy of acquiring
and operating home health care businesses. Beginning in 1998, the
Company's strategy shifted from acquiring new businesses to focus more
on internal growth, the integration of its acquired operations and
achieving operating efficiencies.
2. MEDICARE OXYGEN REIMBURSEMENT REDUCTIONS
The Medicare reimbursement rate for oxygen related services was reduced
by 25% beginning January 1, 1998 as a result of the Balanced Budget Act
of 1997 (the "Medicare Oxygen Reimbursement Reduction") and an
additional reduction of 5% beginning January 1, 1999. The reimbursement
rate for certain drugs and biologicals covered under Medicare was also
reduced by 5% beginning January 1, 1998. In addition, Consumer Price
Index increases in Medicare reimbursement rates for home medical
equipment, including oxygen, will not resume until the year 2003. The
Company is one of the nation's largest providers of home oxygen services
to patients, many of whom are Medicare recipients, and is therefore
significantly affected by this legislation. Medicare oxygen
reimbursements account for approximately 27% of the Company's revenues.
3. BANK CREDIT FACILITY
The Company is the borrower under a $303.0 million credit facility (the
"Bank Credit Facility") between the Company and Bankers Trust Company,
as agent for a syndicate of banks (the "Banks"). At December 31, 1999,
the Company was in default under several of the financial covenants in
the Fourth Amended and Restated Credit Agreement, as amended, between
the Company and Bankers Trust Company, as agent for the Banks (the
Credit Agreement as amended from time to time is hereinafter referred to
as the "Credit Agreement") as a result
7
<PAGE> 8
of the Company's financial results for fiscal year 1999 and the fourth
quarter of 1999. The Credit Agreement was amended on April 6, 2000. The
Company, on that date, entered into a Third Amendment and Limited Waiver
to the Fourth Amended and Restated Credit Agreement (the "Third
Amendment"). The Third Amendment waived then existing events of default,
required a $5.0 million principal repayment to the term loan, modified
financial covenants, froze availability under the revolving loan to the
amounts outstanding under the revolving loan at the time of the Third
Amendment ($249.2 million) and made a number of other changes to the
Credit Agreement. The Company was 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 November 1, 2000, totals $303.0 million.
The modified financial covenants are structured such that the Company
would remain in compliance with the covenants if management's operating
projections and related cash flow projections for 2000 are achieved;
however, as the covenants become much more restrictive at January 31,
2001, management's projections indicate it is likely that the Company
will not be in compliance with respect to such covenants at January 31,
2001.
In addition, the amended Credit Agreement states that any liability that
results from the government investigation discussed in Note 7, which the
lenders determine could reasonably be expected to have a material
adverse effect on the Company, constitutes an event of default.
In any event of noncompliance or default under the amended Credit
Agreement, the lenders have the ability to demand payment of all
outstanding amounts, and there is currently no commitment as to how any
such demand would be satisfied by the Company.
The Credit Agreement was previously amended on April 14, 1999. The
Company, on that date, entered into a Second Amendment to the Fourth
Amended and Restated Credit Agreement (the "Second Amendment"). The
Second Amendment waived then existing events of default, modified
financial covenants and made a number of other changes to the Credit
Agreement.
As part of the Second Amendment, the Company's credit availability was
reduced from $360.0 million to $328.6 million, including a $75.0 million
term loan and $253.6 million revolving line of credit. As of December
31, 1999, the Company's credit availability was further reduced through
paydowns of the term loan portion of the Bank Credit Facility to $318.4
million, including a $64.8 million term loan and a $253.6 revolving line
of credit. As of September 30, 2000, the Company's credit availability
was further reduced to $303.0 million through paydowns of the term loan
to $53.8 million and freezing availability under the revolving loan to
$249.2 million.
As part of the Second Amendment, the Company agreed to issue on March
31, 2001 (provided loans, letters of credit or commitments are still
outstanding) warrants to the Banks representing 19.99% of the fully
diluted common stock of the Company issued and outstanding as of March
31, 2001. Fifty percent of these warrants would be exercisable at any
time after issuance and the remaining fifty percent would be exercisable
from and after September 30, 2001 (provided loans, letters of credit or
commitments have not been terminated subsequent to March 31, 2001 and
prior to September 30, 2001). If exercised, the price of the warrants
will be $0.01 per share.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
8
<PAGE> 9
4. EARNINGS PER SHARE
Under the standards established by Statement of Financial Accounting
Standards No. 128, earnings per share is measured at two levels: basic
earnings per share and diluted earnings per share. Basic earnings per
share is computed by dividing net income by the weighted average number
of common shares outstanding during the year. Diluted earnings per share
is computed by dividing net income by the weighted average number of
common shares after considering the additional dilution related to
convertible preferred stock, convertible debt, options and warrants. In
computing diluted earnings per share, the outstanding stock warrants and
stock options are considered anti-dilutive using the treasury stock
method. The following information is necessary to calculate earnings per
share for the periods presented:
<TABLE>
<CAPTION>
(unaudited)
-------------------------------------------------------------------
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------- -------------------------------
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss $ (5,182,000) $ (5,409,000) $(15,635,000) $(19,814,000)
============ ============ ============ ============
Weighted average common
shares outstanding 15,246,000 15,661,000 15,221,000 15,620,000
Effect of dilutive options and warrants -- -- -- --
------------ ------------ ------------ ------------
Adjusted diluted commons shares
outstanding 15,246,000 15,661,000 15,221,000 15,620,000
============ ============ ============ ============
Net loss per common share
- Basic $ (0.34) $ (0.35) $ (1.03) $ (1.27)
============ ============ ============ ============
- Diluted $ (0.34) $ (0.35) $ (1.03) $ (1.27)
============ ============ ============ ============
</TABLE>
5. BASIS OF FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of the Company
for the nine months ended September 30, 2000 and 1999 herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management of the Company, the
accompanying unaudited interim consolidated financial statements reflect
all adjustments (consisting of only normally recurring accruals)
necessary to present fairly the financial position at September 30, 2000
and the results of operations and the cash flows for the nine months
ended September 30, 2000 and 1999.
The results of operations for the nine months ended September 30, 2000
and 1999 are not necessarily indicative of the operating results for the
entire respective years. These unaudited interim consolidated financial
statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
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<PAGE> 10
6. IMPLEMENTATION OF FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") has been
issued effective for fiscal years beginning after June 15, 2000. SFAS
No. 133 requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. The Company is required
to adopt the provisions of SFAS No. 133 beginning in 2001; however, the
Company does not expect the adoption to have a material effect on the
Company's financial position or results of operations.
7. GOVERNMENT REGULATION
In recent years, various state and federal regulatory agencies have
stepped up investigative and enforcement activities with respect to the
health care industry, and many health care providers, including durable
medical equipment suppliers, have received subpoenas and other requests
for information in connection with such activities.
On February 12, 1998, a subpoena from the Office of the Inspector
General of the Department of Health and Human Services ("OIG") was
served on the Company at its Pineville, Kentucky center in connection
with an investigation relating to possible improper claims for payment
from Medicare. Since that time the U.S. Department of Justice has
examined issues involving Certificates of Medical Necessity and loaning
of equipment by the Company nationwide. The Company has retained
experienced health care counsel to represent it in this matter and is
cooperating with the investigation. The Company's counsel has conducted
meetings with governmental officials, and governmental officials have
interviewed certain company officers and employees. The Company has also
responded to government requests for information and documents. The
Company has been engaged in discussions with the government concerning
the investigation and settlement of these matters. To date, no
settlement or resolution has been reached; however, management believes
that the final outcome of the government's investigation will likely
have a material adverse impact on the Company's operating results and
financial condition and will also likely result in a default under the
Bank Credit Facility. The potential timing and dollar amount of any
settlement cannot be estimated, therefore no provision for the
resolution of the investigation has been reflected in the Company's
financial statements. The final outcome of the investigation could
include, among other things, the repayment of reimbursements received by
the Company related to previously billed claims, the imposition of fines
or penalties, or the suspension or exclusion of the Company from
participation in Medicare, Medicaid and other government reimbursement
programs. Although this has not been confirmed, management believes that
the investigation was initiated as a result of a qui tam complaint filed
by a former employee of the Company under the False Claims Act.
From time to time the Company also receives notices and subpoenas from
various government agencies concerning plans to audit the Company, or
requesting information regarding certain aspects of the Company's
business. The Company cooperates with the various agencies in responding
to such requests. The government has broad authority and discretion in
enforcing applicable laws and regulations, and therefore the scope and
outcome of any such investigations and inquiries cannot be predicted.
The Company expects to incur additional legal expenses in the future in
connection with all investigations.
10
<PAGE> 11
Health care law is an area of extensive and dynamic regulatory
oversight. Changes in laws or regulations or new interpretations of
existing laws or regulations can have a dramatic effect on permissible
activities, the relative costs associated with doing business, and the
amount and availability of reimbursement from government and other
third-party payors. There can be no assurance that federal, state or
local governments will not impose additional regulations upon the
Company's activities. Such regulatory changes could adversely affect the
Company's business, making the Company unable to comply with all
regulations in the geographic areas in which it presently conducts, or
wishes to commence, business. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Government
Regulation."
11
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS
"BELIEVES," "ANTICIPATES," "INTENDS," "EXPECTS," "ESTIMATES,"
"PROJECTS", "MAY," "WILL", "LIKELY" AND WORDS OF SIMILAR IMPORT. SUCH
STATEMENTS INCLUDE STATEMENTS CONCERNING THE COMPANY'S YEAR 2000
EFFORTS, BUSINESS STRATEGY, OPERATIONS, COST SAVINGS INITIATIVES, FUTURE
COMPLIANCE WITH ACCOUNTING STANDARDS, INDUSTRY, ECONOMIC PERFORMANCE,
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES, EXISTING
GOVERNMENT REGULATIONS AND CHANGES IN, OR THE FAILURE TO COMPLY WITH,
GOVERNMENTAL REGULATIONS, PROJECTIONS, FUTURE COMPLIANCE WITH BANK
CREDIT FACILITY COVENANTS, LEGISLATIVE PROPOSALS FOR HEALTHCARE REFORM,
THE ABILITY TO ENTER INTO JOINT VENTURES, STRATEGIC ALLIANCES AND
ARRANGEMENTS WITH MANAGED CARE PROVIDERS ON AN ACCEPTABLE BASIS, AND
CHANGES IN REIMBURSEMENT POLICIES. SUCH STATEMENTS ARE SUBJECT TO
VARIOUS RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS
BECAUSE OF A NUMBER OF FACTORS, INCLUDING THOSE IDENTIFIED IN THE "RISK
FACTORS" SECTION AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q.
THE FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE DATE OF THIS QUARTERLY
REPORT ON FORM 10-Q AND THE COMPANY DOES NOT UNDERTAKE TO UPDATE THE
FORWARD-LOOKING STATEMENTS OR TO UPDATE THE REASONS THAT ACTUAL RESULTS
COULD DIFFER FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
GENERAL
The Company provides home health care services and products to patients
through its 307 centers in 39 states. These services and products are
primarily paid for by Medicare, Medicaid and other third-party payors.
The Company has three principal services or product lines: home
respiratory services, home infusion services and home medical equipment
and supplies. Home respiratory services include oxygen systems,
nebulizers, aerosol medications and home ventilators and are provided
primarily to patients with severe and chronic pulmonary diseases. Home
infusion services are used to administer nutrients, antibiotics and
other medications to patients with medical conditions such as
neurological impairments, infectious diseases or cancer. The Company
also sells and rents a variety of home medical equipment and supplies,
including wheelchairs, hospital beds and ambulatory aids.
12
<PAGE> 13
The following table sets forth the percentage of the Company's net
revenues represented by each line of business for the periods presented:
Nine Months Ended Sept. 30,
---------------------------
1999 2000
---- ----
Home respiratory therapy services 53% 56%
Home infusion therapy services 21 20
Home medical equipment and medical supplies 26 24
Total 100% 100%
Prior to 1998, the Company had significantly expanded its operations
through a combination of acquisitions of home health care companies,
development of joint ventures and strategic alliances with health care
delivery systems as well as internal growth. From 1996 through 1998, the
Company acquired 72 home health care companies (40, 28 and 4 companies
in 1996, 1997, and 1998, respectively). In 1998, the Company
purposefully slowed its acquisition activity compared to prior years to
focus on existing operations. As amended, the Company's Bank Credit
Facility now requires bank consent for acquisitions or investments in
new joint ventures. The Company did not acquire any home health care
businesses or develop any new joint ventures in 1999 and does not expect
to do so in 2000. Effective in the second quarter of 2000, the Company
converted four of its 50% owned joint ventures to wholly-owned
businesses as a result of the withdrawal of the hospital partners from
the partnerships. Effective in the third quarter, one additional 50%
owned joint venture was converted to a wholly-owned business. See
"Results of Operations" for additional discussion.
GOVERNMENT REGULATION
In recent years, various state and federal regulatory agencies have
stepped up investigative and enforcement activities with respect to the
health care industry, and many health care providers, including durable
medical equipment suppliers, have received subpoenas and other requests
for information in connection with such activities.
On February 12, 1998, a subpoena from the Office of the Inspector
General of the Department of Health and Human Services ("OIG") was
served on the Company at its Pineville, Kentucky center in connection
with an investigation relating to possible improper claims for payment
from Medicare. Since that time the U.S. Department of Justice has
examined issues involving Certificates of Medical Necessity and loaning
of equipment by the Company nationwide. The Company has retained
experienced health care counsel to represent it in this matter and is
cooperating with the investigation. The Company's counsel has conducted
meetings with governmental officials, and governmental officials have
interviewed certain company officers and employees. The Company has also
responded to government requests for information and documents. The
Company has been engaged in discussions with the government concerning
the investigation and settlement of these matters. To date, no
settlement or resolution has been reached; however, management believes
that the final outcome of the government's investigation will likely
have a material adverse impact on the Company's operating results and
financial condition and will also likely result in a default under the
Bank Credit Facility. The potential timing and dollar amount of any
settlement cannot be estimated, therefore no provision for the
resolution of the investigation has been reflected in the Company's
financial statements.
13
<PAGE> 14
The final outcome of the investigation could include, among other
things, the repayment of reimbursements received by the Company related
to previously billed claims, the imposition of fines or penalties, or
the suspension or exclusion of the Company from participation in
Medicare, Medicaid and other government reimbursement programs. Although
this has not been confirmed, management believes that the investigation
was initiated as a result of a qui tam complaint filed by a former
employee of the Company under the False Claims Act.
From time to time the Company also receives notices and subpoenas from
various government agencies concerning plans to audit the Company, or
requesting information regarding certain aspects of the Company's
business. The Company cooperates with the various agencies in responding
to such requests. The government has broad authority and discretion in
enforcing applicable laws and regulations, and therefore the scope and
outcome of any such investigations and inquiries cannot be predicted.
The Company expects to incur additional legal expenses in the future in
connection with all investigations.
Health care law is an area of extensive and dynamic regulatory
oversight. Changes in laws or regulations or new interpretations of
existing laws or regulations can have a dramatic effect on permissible
activities, the relative costs associated with doing business, and the
amount and availability of reimbursement from government and other
third-party payors. There can be no assurance that federal, state or
local governments will not impose additional regulations upon the
Company's activities. Such regulatory changes could adversely affect the
Company's business, making the Company unable to comply with all
regulations in the geographic areas in which it presently conducts, or
wishes to commence business. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Risk Factors -
Government Regulation."
MEDICARE REIMBURSEMENT FOR OXYGEN THERAPY SERVICES
The Medicare reimbursement rate for oxygen related services was reduced
by 25% beginning January 1, 1998 as a result of the Balanced Budget Act
of 1997 (the "Medicare Oxygen Reimbursement Reduction") and an
additional reduction of 5% beginning January 1, 1999. The reimbursement
rate for certain drugs and biologicals covered under Medicare was also
reduced by 5% beginning January 1, 1998. In addition, Consumer Price
Index increases in Medicare reimbursement rates for home medical
equipment, including oxygen, will not resume until the year 2003. The
Company is one of the nation's largest providers of home oxygen services
to patients, many of whom are Medicare recipients, and is therefore
significantly affected by this legislation. Medicare oxygen
reimbursements account for approximately 27 percent of the Company's
revenues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors - Medicare
Reimbursement for Oxygen Therapy and Other Services."
RESULTS OF OPERATIONS
The Company reports its net revenues as follows: (i) sales and related
services; (ii) rentals and other income; and (iii) earnings from
hospital joint ventures. Sales and related services revenues are derived
from the provision of infusion therapies, the sale of home medical
equipment and supplies, the sale of aerosol and respiratory therapy
equipment and supplies and services related to the delivery of these
products. Rentals and other revenues are derived from the rental of home
health care equipment, enteral pumps and equipment related to the
provision of
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<PAGE> 15
respiratory therapies. The majority of the Company's hospital joint
ventures are not consolidated for financial statement reporting
purposes. Earnings from hospital joint ventures represent the Company's
equity in earnings from unconsolidated hospital joint ventures and
management and administrative fees from unconsolidated hospital joint
ventures. Cost of sales and related services includes the cost of
equipment, drugs and related supplies sold to patients. Operating
expenses include center labor costs, delivery expenses, selling costs,
occupancy costs, costs related to rentals other than depreciation,
billing center costs, provision for doubtful accounts, area management
and other operating costs. General and administrative expenses include
corporate and senior management expenses.
The following table and discussion sets forth items from the statements
of operations as a percentage of net revenues:
Percentage of Net Revenues
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales and related 25.0 23.1 24.9 23.7
services
Operating expenses 57.5 58.7 57.6 59.8
General and administrative 3.7 4.5 4.0 4.1
Depreciation and amortization 11.4 11.0 11.1 11.2
Interest 8.0 8.4 8.0 8.4
------ ------ ------ ------
Total costs and expenses 105.6% 105.7% 105.6% 107.2%
------ ------ ------ ------
Loss from operations
before income taxes (5.6)% (5.7)% (5.6)% (7.2)%
====== ====== ====== ======
</TABLE>
The Company's operating results for the prior two years and continuing
into the first nine months of 2000 are significantly lower than periods
prior to 1998 and have been significantly impacted by the following
factors. First, the Company has been greatly impacted by the 30%
reduction in Medicare oxygen reimbursement rates (25% reduction
effective January 1, 1998 with an additional 5% reduction effective
January 1, 1999). The Company estimates that net revenue and pre-tax
income have been reduced by approximately $21.9 million in the first
nine months of 2000 as a result of the 25% and the additional 5%
reductions. Second, beginning in the latter half of 1998, the Company
experienced a decline in revenues attributable to the exit and
de-emphasis of certain lower margin business lines and by the
termination of several managed care contracts (with continued effect
into 1999 and 2000). Third, the Company has halted the acquisition of
home health care businesses and its joint venture development program.
Fourth, accounts receivable has been adversely affected by a tougher
payor environment and by process problems at the operating and billing
center levels (caused by the consolidation of billing centers and
employee turnover) which has resulted in higher bad debt expense.
Further, the Company's implementation of process improvements in the
billing and collection functions has been slower than anticipated.
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<PAGE> 16
In order to drive internal revenue growth during the latter half of
1998, the Company embarked on a strategy to increase market share by
focusing primarily on increasing respiratory revenues in existing
centers. Concurrently, the Company determined that certain "non-core",
lower margin products and services should be eliminated during the year.
It also exited certain contracts and businesses perceived to be lower
margin during the third and fourth quarters of 1998 and first half of
1999. The result was a substantial decrease in revenues beginning during
the latter half of 1998.
A new management team joined the Company in the fourth quarter of 1998,
consisting of a new president and chief executive officer, a new chief
operating officer and a new chief financial officer. Recognizing the
negative impacts of the Company's business strategy, the new management
ceased the exiting of business lines by mid-December of 1998. A new
strategy was developed to restore the Company's revenues and decrease
expenses. Key points of this strategy are:
1. Stabilize and increase profitable revenues - respiratory therapies
will remain a primary focus of the Company. However, the Company
broadened its offering and sales focus in 1999 to include other
profitable business units such as enteral nutrition, HME rental, and
select infusion therapy services. The Company has also re-directed
its efforts to increase revenues for certain managed care contracts
- both new and existing. The Company is actively pursuing, and has
entered into, new managed care contracts that it considers an
opportunity for profitable revenue.
2. Decrease and control operating expenses - the Company took
aggressive steps in 1999 to decrease operating and general and
administrative expenses. The Company continues to monitor and
closely manage its field and overhead expenses.
3. Decrease DSO and bad debt - the Company has four key initiatives in
place to improve accounts receivable performance: (i) proper
staffing and training; (ii) process redesign and standardization;
(iii) consolidation of billing center activities; and (iv) billing
center specific goals geared toward improved cash collections and
reduced accounts receivable.
Concurrent with these activities, an enhanced program to ensure
compliance with all government requirements has been rolled out and is
being followed throughout the Company. This program seeks to ensure that
American HomePatient acts at all times in a diligent and ethical
fashion.
Effective in the second quarter of 2000, the Company converted four of
its 50% owned joint ventures to wholly-owned operations as a result of
the withdrawal of the hospital partners from the partnerships. One
additional joint venture was converted to a wholly-owned operation in
the third quarter of 2000. As a result of these transactions, the
results of operations of these five ventures have been consolidated into
the financial results of the Company. Previously, these five joint
ventures were accounted for under the equity method.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
NET REVENUES. Net revenues increased from $89.3 million for the quarter
ended September 30, 1999 to $91.5 million for the same period in 2000,
an increase of $2.2 million, or 2%. The accounting consolidation of five
of the Company's joint ventures, as described above, added approximately
$3.0 million to net revenue in the current quarter. Without this
additional revenue, net revenue in the current quarter would have
decreased by $0.8 million compared to the same quarter last year. This
decrease is primarily attributable to lower sales of non-core low
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<PAGE> 17
margin products and the exiting of lower margin contracts, offset
somewhat by increases in rentals and sales of certain respiratory
products. Also effecting the Company's decline in revenue has been the
high priority placed on compliance related activities. In late 1999, and
continuing into 2000, the Company implemented a more comprehensive
compliance program which included a major training and development
initiative. During this period, the Company trained over 1,200 employees
on compliance and reimbursement management.
Following is a discussion of the components of net revenues:
SALES AND RELATED SERVICES REVENUES. Sales and related services
revenues increased from $42.7 million for the quarter ended
September 30, 1999 to $42.9 million for the same period in 2000, an
increase of $0.2 million. This increase is primarily attributable
to the accounting consolidation of five of the Company's joint
ventures offset somewhat by lower sales of non-core low margin
products and the exiting of lower margin contracts.
RENTALS AND OTHER REVENUES. Rentals and other revenues increased
from $45.8 million for the quarter ended September 30, 1999 to
$47.4 million for the same period in 2000, an increase of $1.6
million, or 3%. This increase is also attributable to the
accounting consolidation of five of the Company's joint ventures,
offset by the exiting of lower margin contracts, many of which did
not terminate until the end of the first quarter of 1999 or later.
EARNINGS FROM HOSPITAL JOINT VENTURES. Earnings from hospital joint
ventures increased from $0.8 million for the quarter ended
September 30, 1999 to $1.2 million for the same period in 2000, an
increase of $0.4 million, or 50%, which is primarily attributable
to revenue growth, decreased bad debt expense, and increased
profitability of certain joint venture locations.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services
decreased from $22.3 million for the quarter ended September 30, 1999 to
$21.1 million for the same period in 2000, a decrease of $1.2 million,
or 5%. As a percentage of sales and related services revenues, cost of
sales and related services decreased from 52% to 49%. This decrease is
primarily attributable to a higher level of favorable book-to-physical
inventory adjustments, a lower level of sales of lower margin products,
and the Company recording a provision in 1999 for inventory related to
exiting certain contracts and the de-emphasis of soft goods.
OPERATING EXPENSES. Operating expenses increased from $51.3 million for
the quarter ended September 30, 1999 to $53.7 million for the same
period in 2000, an increase of $2.4 million, or 5%. This increase is
attributable to the accounting consolidation of five joint ventures
which added approximately $2.5 million to operating expenses in the
current quarter. Bad debt expense was 5.7% of net revenue for the
quarter ended September 30, 2000 compared to 5.6% of net revenue for the
same period in 1999. The Company's bad debt expense in 2000 has been
impacted by temporary disruptions in billing and collection activities
resulting from the introduction of the compliance program and a
standardized reimbursement process at all of its locations, as well as
the consolidation of certain billing locations into larger regional
billing centers. The Company continues to evaluate the impact of
additional compliance efforts, the current payor environment and other
factors to determine the level of bad debt expense which should be
recorded.
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<PAGE> 18
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $3.3 million for the quarter ended September 30, 1999 to
$4.1 million for the same period in 2000, an increase of $0.8 million,
or 24%. This increase is attributable to higher personnel expenses and
consulting fees, offset somewhat by lower legal fees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
decreased from $10.2 million for the quarter ended September 30, 1999 to
$10.1 million for the same period in 2000, a decrease of $0.1 million.
This decrease is primarily attributable to lower amortization expense as
a result of the $40.3 million write-off of impaired goodwill in the
fourth quarter of 1999.
INTEREST. Interest expense increased from $7.2 million for the quarter
ended September 30, 1999 to $7.7 million for the same period in 2000, an
increase of $0.5 million, or 7%, which is attributable to higher
interest rates on borrowings.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
NET REVENUES. Net revenues decreased from $271.0 million for the nine
months ended September 30, 1999 to $270.5 million for the same period in
2000, a decrease of $0.5 million, or less than 1%. The accounting
consolidation of five of the Company's joint ventures, as previously
described, added approximately $6.2 million to net revenue in the
current nine month period. Without this additional revenue, net revenue
for the nine months would have decreased by $6.7 million compared to
last year. This decrease is primarily attributable to lower sales of
non-core low margin products and the exiting of lower margin contracts,
offset somewhat by increases in rentals and sales of certain respiratory
products. Also effecting the Company's decline in revenue has been the
high priority placed on compliance related activities. In late 1999, and
continuing into 2000, the Company implemented a more comprehensive
compliance program which included a major training and development
initiative. During this period, the Company trained over 1,200 employees
on compliance and reimbursement management. Following is a discussion of
the components of net revenues:
SALES AND RELATED SERVICES REVENUES. Sales and related services
revenues increased from $128.3 million for the nine months ended
September 30, 1999 to $128.4 million for the same period in 2000,
an increase of $0.1 million. This increase is primarily
attributable to additional revenue from the accounting
consolidation of five joint ventures, offset by lower sales of
non-core low margin products and the exiting of lower margin
contracts.
RENTALS AND OTHER REVENUE. Rentals and other revenues decreased
from $140.4 million for the nine months ended September 30, 1999 to
$138.6 million for the same period in 2000, a decrease of $1.8
million, or 1%. This decrease is primarily attributable to the
exiting of lower margin contracts, offset by the additional revenue
from the accounting consolidation of five joint ventures.
EARNINGS FROM HOSPITAL JOINT VENTURES. Earnings from hospital joint
ventures increased from $2.3 million for the nine months ended
September 30, 1999 to $3.5 million for the same period in 2000, an
increase of $1.2 million, or 52%, which was due primarily to
revenue growth and decreased bad debt expense at certain joint
venture locations.
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<PAGE> 19
COST OF SALES AND RELATED SERVICES. Cost of sales and related services
decreased from $67.6 million for the nine months ended September 30,
1999 to $64.1 million for the same period in 2000, a decrease of $3.5
million, or 5%. As a percentage of sales and related services revenues,
cost of sales and related services decreased from 53% to 50%. This
decrease is primarily attributable to a higher level of favorable
book-to-physical inventory adjustments, a lower level of sales of lower
margin products, and the Company recording a provision in 1999 for
inventory related to exiting certain contracts and the de-emphasis of
soft goods.
OPERATING EXPENSES. Operating expenses increased from $156.1 million for
the nine months ended September 30, 1999 to $161.7 million for the same
period in 2000, an increase of $5.6 million, or 4%. This increase is
primarily attributable to the accounting consolidation of five joint
ventures which added approximately $4.9 million to operating expenses in
the current nine month period. Bad debt expense was 7.0% of net revenue
for the nine months ended September 30, 2000 compared to 5.1% of net
revenue for the same period in 1999. The higher bad debt expense in the
first nine months of 2000 is due to temporary disruptions in billing and
collection activities resulting from the introduction of the compliance
program and a standardized reimbursement process at all of its
locations, as well as the consolidation of certain billing locations
into larger regional billing centers. The Company continues to evaluate
the impact of additional compliance efforts, the current payor
environment and other factors to determine the level of bad debt expense
which should be recorded.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $10.7 million for the nine months ended September 30,
1999 to $11.1 million for the same period in 2000, an increase of $0.4
million or 4%. The increase is primarily attributable to higher
personnel expenses and consulting fees, offset somewhat by lower legal
fees in the nine months ended September 30, 2000.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
remained constant at $30.2 million for the nine months ended September
30, 1999 and for the same period in 2000.
INTEREST. Interest expense increased from $21.6 million for the nine
months ended September 30, 1999, to $22.8 million for the same period in
2000, an increase of $1.2 million, or 6%. The increase was attributable
to higher interest rates on borrowings.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000 the Company's working capital was $44.1 million
and the current ratio was 1.7x as compared to working capital of $60.5
million and a current ratio of 2.0x at December 31, 1999.
The Company is the borrower under a $303.0 million credit facility (the
"Bank Credit Facility") between the Company and Bankers Trust Company,
as agent for a syndicate of banks (the"Banks"). At December 31, 1999,
the Company was in default under several of the financial covenants in
the Fourth Amended and Restated Credit Agreement, as amended, between
the Company and Bankers Trust Company, as agent for the Banks (the
Credit Agreement as amended from time to time is hereinafter referred to
as the "Credit Agreement") as a result of the Company's financial
results for fiscal year 1999 and the fourth quarter of 1999.
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<PAGE> 20
On April 6, 2000, management and the lenders entered into a Third
Amendment and Limited Waiver to the Fourth Amended and Restated Credit
Agreement which waived the existing 1999 events of default, required a
$5.0 million principal repayment to the term loan portion of the Bank
Credit Facility upon the effectiveness of the amendment, modified
existing financial covenants, and froze the borrowing availability under
the revolving loan to the amounts outstanding at the time of the
amendment. Management's cash flow projections and related operating
plans indicate the Company can remain in compliance with the new
financial covenants and meet its expected obligations throughout 2000.
However, as with all projections, there is uncertainty as to whether
management's projections can be achieved.
The modified financial covenants are structured such that the Company
would remain in compliance with the covenants during 2000 if
management's operating projections and related cash flow projections are
achieved; however, as the covenants become much more restrictive at
January 31, 2001, management's projections indicate it is likely that
the Company will not be in compliance with respect to such covenants at
January 31, 2001.
In addition, the amended Credit Agreement states that any liability that
results from the government investigation discussed in Note 7 to the
interim financial statements, which the lenders determine could
reasonably be expected to have a material adverse effect on the Company,
constitutes an event of default.
In any event of noncompliance or default under the amended Credit
Agreement, the lenders have the ability to demand payment of all
outstanding amounts, and there is currently no commitment as to how any
such demand would be satisfied by the Company.
There can be no assurance that future cash flow from operations will be
sufficient to cover debt obligations. Such indebtedness, as of November
1, 2000, totals $303.0 million.
The Credit Agreement was previously amended on April 14, 1999. The
Company, on that date, entered into a Second Amendment to the Fourth
Amended and Restated Credit Agreement (the "Second Amendment"). The
Second Amendment waived then existing events of default, modified
financial covenants and made a number of other changes to the Credit
Agreement. As part of the Second Amendment, the Company's credit
availability was reduced from $360 million to $328.6 million, including
a $75 million term loan and a $253.6 million revolving line of credit.
As of December 31, 1999, the Company's credit availability was further
reduced through paydowns of the term loan portion of the Bank Credit
Facility to $318.4 million, including a $64.8 million term loan and a
$253.6 revolving line of credit. As of September 30, 2000, the Company's
credit availability was further reduced to $303.0 million through
paydowns of the term loan to $53.8 million and freezing availability
under the revolving loan to $249.2 million.
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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<PAGE> 21
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 3.50%. The margin associated with the Base
Lending Rate is fixed at 2.75%. In addition, from and after September
30, 2000, additional interest of 4.50% will accrue on that portion of
the Bank Credit Facility that is in excess of four times Adjusted
EBITDA. As of September 30, 2000 the weighted average borrowing rate was
9.89%. As of November 10, 2000, the weighted average borrowing rate was
12.26% due to the additional interest which began October 1, 2000.
The Credit Agreement, as amended, contains various financial covenants,
the most restrictive of which relate to measurements of EBITDA,
shareholder's equity, leverage, debt-to-equity ratios, interest coverage
ratios, and collections of accounts receivable. The Credit Agreement, as
amended, also contains provisions for periodic reporting and the
recapture of excess cash flow.
The Bank Credit Facility also contains covenants which, among other
things, impose certain limitations or prohibitions on the Company with
respect to the incurrence of indebtedness, the creation of liens, the
payment of dividends, the redemption or repurchase of securities,
investments, acquisitions, capital expenditures, sales of assets and
transactions with affiliates. The Company is no longer permitted to make
acquisitions or investments in joint ventures without the consent of
Banks holding a majority of the lending commitments under the Bank
Credit Facility.
In addition to maintaining compliance with its debt covenants, the
Company's future liquidity will continue to be dependent upon the
relative amounts of current assets (principally cash, accounts
receivable and inventories) and current liabilities (principally
accounts payable and accrued expenses). In that regard, accounts
receivable can have a significant impact on the Company's liquidity. The
Company has various types of accounts receivable, such as receivables
from patients, contracts, and former owners of acquisitions. The
majority of the Company's accounts receivables are patient receivables.
Accounts receivable are generally outstanding for longer periods of time
in the health care industry than many other industries because of
requirements to provide third-party payors with additional information
subsequent to billing and the time required by such payors to process
claims. Certain accounts receivable frequently are outstanding for more
than 90 days, particularly where the account receivable relates to
services for a patient receiving a new medical therapy or covered by
private insurance or Medicaid. Net patient accounts receivable were
$75.2 million and $75.5 million at December 31, 1999 and September 30,
2000, respectively. Average days' sales in accounts receivable was
approximately 81 and 79 days' at December 31, 1999, and September 30,
2000, respectively. The Company's level of DSO and net patient
receivables reflect the extended time required to obtain necessary
billing documentation, the ongoing efforts to implement a standardized
model for reimbursement and the consolidation of billing activities.
Net cash provided from operating activities was $30.5 million and $12.9
million for the nine months ended September 30, 1999 and 2000,
respectively. These amounts primarily represent net loss plus
depreciation and amortization and provisions for doubtful accounts and
changes in the various components of working capital. Net cash used in
investing activities was $8.4 million and $11.8 million for the nine
months ended September 30, 1999 and 2000, respectively. Capital
expenditures increased from $10.5 million for the nine months ended
September 30, 1999 to $13.9 million for the same period in 2000, an
increase of $3.4 million. Net cash used in financing activities was $0.2
million and $12.9 million for the nine months ended September 30, 1999
and 2000, respectively. The cash used in financing activities for the
nine months ended September 30, 1999 and 2000 primarily relates to
principal payments and deferred financing costs net of proceeds from the
Bank Credit Facility.
The Company's principal capital requirements are for working capital,
capital expenditures and debt service. 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
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<PAGE> 22
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. Management's projections indicate it is likely the Company
will not be in compliance with its debt covenants as of January 31,
2001, due to the more restrictive covenants which begin on that date.
RISK FACTORS
This section summarizes certain risks, among others, that should be
considered by stockholders and prospective investors in the Company.
SUBSTANTIAL LEVERAGE. The Company maintains a significant amount
of long-term debt pursuant to the Bank Credit Facility. As of September
30, 2000, the Company's consolidated indebtedness under the Bank Credit
Facility was $303.0 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 increased 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% accrues
on that portion of the Bank Credit Facility that is in excess of four
times Adjusted EBITDA.
The increase in interest expense and the freezing of the Bank's lending
commitments could have a material adverse effect on the Company's
liquidity, business, financial condition and results of operations. The
degree to which the Company is leveraged may impair the Company's
ability to finance, through its own cash flow or from additional
financing, its future operations or pursue its business strategy and
could make the Company more vulnerable to economic downturns,
competitive and payor pricing pressures and adverse changes in
government regulation. There can be no assurance that future cash flow
from operations will be sufficient to cover debt obligations. Additional
sources of funds may be required and there can be no assurance the
Company will be able to obtain additional funds on acceptable terms, if
at all. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
GOVERNMENT REGULATION. The Company is subject to extensive and
frequently changing federal, state and local regulation. In addition,
new laws and regulations are adopted periodically to regulate providers,
as well as new and existing health care products and services. 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 by the end of 2000. Although the Company intends to comply
with all applicable fraud and abuse laws, these laws are not always
clear and may be subject to a range of potential interpretations. There
can be no assurance that administrative or judicial clarification or
interpretation of existing laws or regulations, or legislative
enactments of new laws or regulations, will not have a material adverse
effect on the Company's business.
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<PAGE> 23
The Company is subject to state laws governing Medicaid, professional
training, 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 subsequently reversed by the
Omnibus Budget bill, signed into law by President Clinton on November
23, 1999); (ii) a pilot project in Polk County, Florida which began on
October 1, 1999 in which the Company is participating, to determine the
efficacy of competitive bidding for certain durable medical equipment
("DME"), under which pilot project Medicare reimbursement for certain
items is reduced between 18% and 31% from the current fee schedule; and
(iii) deadlines (as yet determined) for obtaining Medicare and Medicaid
surety bonds for home health agencies and DME suppliers. There can be no
assurance that federal, state or local governments will not change
existing standards or impose additional standards. Any failure to comply
with existing or future standards could have a material adverse effect
on the Company's results of operations, financial condition or
prospects. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Government Regulation."
GOVERNMENT INVESTIGATION. In addition to the regulatory
initiatives mentioned above, the OIG has received funding to expand and
intensify its auditing of the health care industry in an effort better
to detect and remedy fraud and abuse in Medicare and Medicaid billing.
The Company is currently under investigation by the OIG relating to
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 received by the Company related to
previously billed claims, the imposition of fines or penalties, or the
suspension or exclusion of the Company from participation in the
Medicare, Medicaid and other government reimbursement programs. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Government Regulation."
COLLECTIBILITY OF ACCOUNTS RECEIVABLE. The Company has
substantial accounts receivable, as well as days sales outstanding of 79
days. The Company has implemented four key initiatives to improve
accounts receivable performance: (i) proper staffing and training; (ii)
process redesign and standardization; (iii) consolidation of billing
center activities; and (iv) billing center specific goals geared toward
improved cash collections and reduced accounts receivable. 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
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Market. As a result, beginning September 2, 1999, trading of the
Company's common stock is conducted on the over-the-counter market
("OTC") or, on application by broker-dealers, in the NASD's Electronic
Bulletin Board using the Company's current trading symbol, AHOM. As a
result of the de-listing, the liquidity of the Company's common stock
and its price have been adversely affected which may limit the Company's
ability to raise additional capital. Furthermore, Counsel Corporation
("Counsel") has distributed its holdings of the Company's common stock
to its shareholders, which resulted in additional shares becoming
available in the public market and may have an adverse impact on the
price of the Company's common stock.
INFRASTRUCTURE. As the Company continues to refine its business
model, it may need to implement enhanced operational and financial
systems and may require additional employees and management, operational
and financial resources. There can be no assurance that the Company will
successfully (i) implement and maintain any such operational and
financial systems, or (ii) apply the human, operational and financial
resources needed to manage a developing and expanding business. Failure
to implement such systems successfully and use such resources
effectively could have a material adverse effect on the Company's
results of operations, financial condition or prospects.
MEDICARE REIMBURSEMENT FOR OXYGEN THERAPY AND OTHER SERVICES.
Oxygen therapy reimbursements from Medicare account for approximately
27% of the Company's revenues. The Balanced Budget Act of 1997, as
amended, reduced Medicare reimbursement rates for oxygen and certain
oxygen equipment to 75% of 1997 levels beginning January 1, 1998 and to
70% of 1997 levels beginning January 1, 1999. Reimbursement for drugs
and biologicals was reduced by 5% beginning January 1, 1998. Effective
January 1, 1998, payments for parenteral and enteral nutrition ("PEN")
were frozen at 1995 levels, through the year 2002. Effective October 1,
1999, Medicare established new guidelines for respiratory assist devices
("RAD"), which include continuous positive airway pressure devices,
bi-level respiratory devices (without backup) and bi-level respiratory
devices with back up. The changes require additional documentation in
order to continue coverage on existing patients as well as new coverage
and qualifying criteria for new patients. In addition, the bi-level
respiratory device (without backup) was transferred from a frequently
serviced item to "capped rental". Currently, respiratory assist devices
account for approximately $8 million in annualized revenues. 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. However, Congress is currently considering legislation that
would return the CPI increase for home medical equipment, except
prosthetics and orthotics, effective January 1, 2001. 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." Possible future changes in the basis for
calculating Medicare's reimbursement rates for Albuterol and other
respiratory medications could result in a reimbursement reduction for
these products, the timing and extent of which are not known at this
time. Implementation of the Albuterol reduction could begin as early as
January 1, 2001, however, Congress is currently considering legislation
that would delay implementation. 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.
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DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS. For the nine
months ended September 30, 2000, the percentage of the Company's net
revenues derived from Medicare, Medicaid and private pay was 48%, 10%
and 42%, respectively. The net revenues and profitability of the Company
are affected by the continuing efforts of all payors to contain or
reduce the costs of health care by lowering reimbursement rates,
narrowing the scope of covered services, increasing case management
review of services and negotiating reduced contract pricing. Any changes
in reimbursement levels under Medicare, Medicaid or private pay programs
and any changes in applicable government regulations could have a
material adverse effect on the Company's net revenues and net income.
Changes in the mix of the Company's patients among Medicare, Medicaid
and private pay categories and among different types of private pay
sources may also affect the Company's net revenues and profitability.
There can be no assurance that the Company will continue to maintain its
current payor or revenue mix.
ROLE OF MANAGED CARE. As managed care assumes an increasingly
significant role in markets in which the Company operates, the Company's
success will, in part, depend on retaining and obtaining profitable
managed care contracts. There can be no assurance that the Company will
retain or obtain such managed care contracts. In addition, reimbursement
rates under managed care contracts are likely to continue to experience
downward pressure as a result of payors' efforts to contain or reduce
the costs of health care by increasing case management review of
services and negotiating reduced contract pricing. Therefore, even if
the Company is successful in retaining and obtaining managed care
contracts, unless the Company also decreases its cost for providing
services and increases higher margin services, it will experience
declining profit margins.
HEALTH CARE INITIATIVES. The health care industry continues to
undergo dramatic changes. With the change in administration, new federal
health care initiatives, particularly concerning Medicare, may be
launched. There can be no assurance that sweeping federal health care
legislation will not be adopted in the future. 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. Some states are adopting health care
programs and initiatives as a replacement for Medicaid. 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 $19.8
million for the nine months ended September 30, 2000. No assurance can
be given that the Company will
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achieve profitable operations in the near term. The Company intends to
expand its business primarily through internal growth of existing
operations. There can be no assurance that the Company can achieve
growth in net revenues. The price of the Company's common stock may
fluctuate substantially in response to quarterly variations in the
Company's operating and financial results, announcements by the Company
or other developments affecting the Company, as well as general economic
and other external factors.
ABILITY TO ATTRACT AND RETAIN MANAGEMENT. The Company is highly
dependent upon its senior management, and competition for qualified
management personnel is intense. Recent organizational restructurings
and the ongoing OIG investigation, among other factors, may limit the
Company's ability to attract and retain qualified personnel, which in
turn could adversely affect profitability.
COMPETITION. The home health care market is highly fragmented
and competition varies significantly from market to market. In the small
and mid-size markets in which the Company primarily operates, the
majority of its competition comes from local independent operators or
hospital-based facilities, whose primary competitive advantage is market
familiarity. In the larger markets, regional and national providers
account for a significant portion of competition. Some of the Company's
present and potential competitors are significantly larger than the
Company and have, or may obtain, greater financial and marketing
resources than the Company. In addition, there are relatively few
barriers to entry in the local markets served by the Company, and it
encounters substantial competition from new market entrants.
LIABILITY AND ADEQUACY OF INSURANCE. The provision of health
care services entails an inherent risk of liability. Certain
participants in the home health care industry may be subject to lawsuits
which may involve large claims and significant defense costs. It is
expected that the Company periodically will be subject to such suits as
a result of the nature of its business. The Company currently maintains
product and professional liability insurance intended to cover such
claims in amounts which management believes are in keeping with industry
standards. There can be no assurance that the Company will be able to
obtain liability insurance coverage in the future on acceptable terms,
if at all. There can be no assurance that claims in excess of the
Company's insurance coverage or claims not covered by the Company's
insurance coverage will not arise. A successful claim against the
Company in excess of the Company's insurance coverage could have a
material adverse effect upon the results of operations, financial
condition or prospects of the Company. Claims against the Company,
regardless of their merit or eventual outcome, may also have a material
adverse effect upon the Company's ability to attract patients or to
expand its business.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The chief market risk factor affecting the financial condition and
operating results of the Company is interest rate risk. The Company's
Bank Credit Facility provides for a floating interest rate. As of
September 30, 2000, the Company had outstanding borrowings of
approximately $303.0 million. In the event that interest rates
associated with this facility were to increase by 10%, the impact on
future cash flows would be approximately $2.0 million. Interest expense
associated with other debts would not materially impact the Company as
most interest rates are fixed.
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PART II. OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS. The exhibits filed as part of this Report are listed on
the Index to Exhibits immediately following the signature page.
(B) REPORTS ON FORM 8-K. None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HOMEPATIENT, INC.
November 14, 2000 By: /s/ Marilyn A. O'Hara
--------------------------------------
Marilyn A. O'Hara
Chief Financial Officer and An Officer
Duly Authorized to Sign on Behalf of
the registrant
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INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
------- -----------------------
27 Financial Data Schedule (for SEC use only)
