10-K/A 1 g70082ae10-ka.txt AMERICAN HOMEPATIENT,INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A 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, 2000 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/A or any amendment to this Form 10-K/A. [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 June 13, 2001 was $8,163,695. On June 13, 2001, 16,327,389 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/A: Portions of the Registrant's definitive proxy statement for its 2001 Annual Meeting of stockholders. 1 2 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, 2000, the Company provided these services to patients primarily in the home through 304 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 focusing more on internal growth, integrating its acquired operations and achieving operating efficiencies. RECENT DEVELOPMENTS Bank Credit Facility. The Company is the borrower under a credit facility (the "Bank Credit Facility") between the Company and Bankers Trust Company, as agent for a syndicate of lenders (the "Lenders"). The Company's breach of several of the financial covenants in its Credit Agreement and its failure to make a scheduled principal payment due March 15, 2001 caused the Company to be not in compliance with certain covenants of its Credit Agreement. The Company, on June 8, 2001, entered into a Fifth Amended and Restated Credit Agreement (the "Amended Credit Agreement") that provided a new loan to the Company from which the proceeds were used to pay off all existing loans under the Credit Agreement. The Amended Credit Agreement also includes modified financial covenants and a revised amortization schedule. In addition, the Amended Credit Agreement no longer contains a revolving loan component; all existing indebtedness is now in the form of a term loan which matures on December 31, 2002. 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 June 13, 2001, totals $299.8 million. There can be no assurance that future cash flow from operations will be sufficient to cover debt obligations, especially those obligations due at maturity of the Bank Credit Facility. As part of the Second Amendment to the Fourth Amended and Restated Credit Agreement, the Company agreed to issue on March 31, 2001 warrants to the Lenders representing 19.999% of the Common Stock of the Company issued and outstanding as of March 31, 2001. To fulfill these obligations, warrants to purchase 3,265,315 shares of Common Stock were issued to the Lenders on 2 3 June 8, 2001. Fifty percent of these warrants are exercisable at any time after issuance, and the remaining fifty percent will be exercisable on 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). The exercise price of the warrants is $0.01 per share. See "Business - Risk Factors - Substantial Leverage" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Government Investigation. On June 11, 2001, a settlement agreement (the "Settlement") was entered among the Company, the United States of America, acting through the United States Department of Justice ("DOJ") and on behalf of the Office of Inspector General of the Department of Health and Human Services ("OIG") and the TRICARE Management Activity, and a former Company employee, as relator. The Settlement covers alleged improprieties by the Company during the period from January 1, 1995 through December 31, 1998, including allegedly improper billing activities and allegedly improper remuneration to and contracts with physicians, hospitals and other healthcare providers. The Company has been dealing with the issues covered by the Settlement since February 1998, when the OIG served a subpoena on the Company at its Pineville, Kentucky center. Pursuant to the Settlement, the Company has made an initial payment of $3.0 million and has agreed to make additional payments in the principal amount of $4.0 million, together with interest on this amount, in installments due at various times over the next 57 months. The Company has also agreed to pay the relator's attorneys fees and expenses, the amount of which will be determined by binding arbitration. The Company has recorded a reserve in the amount of $7.5 million based upon the Settlement. The Settlement does not resolve the relator's claims that the Company discriminated against him as a result of his reporting alleged violations of the law to the government. The Company denies and intends to vigorously defend these claims. The Settlement has been submitted to Judge Russell of the United States District Court for the Western District of Kentucky for his final approval, which is expected to be received. The Company also was named as a defendant in two other False Claims Act cases. In each of those cases the DOJ declined to intervene and such cases were subsequently dismissed in March 2001. The first of these cases, United States ex. rel. Kirk S. Corsello v. Lincare, et al. (N.D. Ga.), was dismissed with prejudice on the motion of the Company on March 9, 2001. Mr. Corsello's qui tam complaint alleged that the Company and numerous other unrelated defendants, including other large DME suppliers, engaged in a kickback scheme to provide free or below market value equipment and medicine to physicians who would in turn refer patients to the defendants in violation of the False Claims Act. The plaintiff has appealed the dismissal of this action. The other case, United States ex. rel. Alan D. Hutchison v. Respironics, et al. (S.D. NY and N.D. Ga.), was dismissed without prejudice on Mr. Hutchison's own motion on March 22, 2001. Mr. Hutchison's qui tam complaint alleged that the Company and numerous other unrelated defendants, filed false claims with Medicare for ventilators that the defendants allegedly knew were not medically necessary. The Company also has been informed that the United States is investigating its conduct during periods after December 31, 1998, and believes that this investigation was prompted by 3 4 another qui tam complaint against the Company under the False Claims Act. The Company has not seen a complaint in this action, but believes that it contains allegations similar to the ones investigated by the government in connection with the False Claims Act case covered by the Settlement discussed above. The Company believes that this second case will be limited to allegedly improper activities occurring after December 31, 1998. There can be no assurances as to the final outcome of the pending False Claims Act lawsuits or any pending or future investigation by the government. Possible outcomes include, among other things, the repayment of reimbursements previously received by the Company related to improperly billed claims, the imposition of fines or penalties, and the suspension or exclusion of the Company from participation in the Medicare, Medicaid and other government reimbursement programs. The outcome of the pending lawsuits and investigations could have a material adverse effect on the Company. 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. 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 2000. The Company estimates that the Medicare Oxygen Reimbursement Reductions decreased revenue and pre-tax income by approximately $24.5 million during 1998, $29.2 million during 1999 and $29.4 million during 2000. In January 2001, federal legislation was signed into law that provided for a one-time increase beginning July 1, 2001 in Medicare reimbursement rates for home medical equipment, excluding oxygen related services, based on the consumer price index (CPI). The Company estimates that this CPI increase will increase revenue and pre-tax income by approximately $1.0 million over the third and fourth quarters of 2001 and $1.0 million on an annual basis thereafter. 4 5 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, 2000, such services represented 56%, 19% and 25% of 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, 2000, the Company provided services to patients primarily in the home through 304 centers in the following 38 states: Alabama, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, 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. The Company had approximately 3,400 full-time employees and 200 part-time employees at December 31, 2000. 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 and 2000, the Company did not acquire any businesses or develop any new joint ventures other than converting previously owned 50% joint ventures to wholly owned operations. See "Business - Joint Ventures" for discussion. The Company does not anticipate renewing its acquisition or joint venture development activities during 2001 as it continues to focus 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 revenues represented by each line of business for the periods presented:
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1999 2000 ---- ---- ---- Home respiratory therapy services 48% 53% 56% Home infusion therapy services 22 21 19 Home medical equipment and medical supplies 30 26 25 ---- ---- ---- Total 100% 100% 100% ==== ==== ====
5 6 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. 6 7 - Home sleep screenings and studies to detect sleep disorders and the magnitude of such disorders. Oxygen-related services and systems comprised approximately 48% of the Company's 2000 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 16 of its 304 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 30% of the Company's infusion revenues, while antibiotic therapy, TPN, and pain management accounted for approximately 26%, 7% and 1% respectively. The Company's remaining infusion revenues were derived from the provision of infusion nursing services, chemotherapy, prescription drug sales and 7 8 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 47 of its 304 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. Effective April 1, 2001 rather than reporting to the area vice presidents, the Company's billing centers began reporting directly to the corporate reimbursement department under the leadership of the Vice President of Reimbursement and six directors of compliance and reimbursement. This new organizational structure allows area management more time to focus on revenue growth as well as add specialized knowledge and focused management resources to the billing function. 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 8 9 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, corporate compliance, reimbursement oversight, clinical policy and procedure development, regulatory affairs and licensure, and system design. 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 in an effort 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, Vice President of Marketing, Vice President of Clinical and Regulatory Affairs, a division vice president, two area vice presidents, two division quality improvement specialists, and a corporate medical director, 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, comparisons among Company centers, a communication network for electronic mail and access to the Internet. Through these systems management is able to identify areas for improvement. Medicare and many third-party payor claims are billed electronically, thereby facilitating the collection of accounts 9 10 receivable. In addition, the Company's financial reporting system monitors certain key data for each center, such as accounts receivable, payor mix, cash collections, revenues and operating trends. Corporate Compliance. The Company's goal is to operate its business with honesty, integrity and in compliance with the numerous laws that govern its operations. The Company's Corporate Compliance Program is designed to help 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. The Compliance Committee is comprised of the Company's President and CEO, Chief Operating Officer, Chief Financial Officer, Vice President of Human Resources, Vice President of Clinical and Regulatory Affairs, Vice President of Reimbursement, Vice President of Purchasing, Director of Internal Audit, both division vice presidents, and two area vice presidents. The Compliance Committee meets quarterly, but there can be no assurance that the Company's compliance activities will prevent violations of the governing laws and regulations. See "Business - Government Regulation." HOSPITAL JOINT VENTURES As of December 31, 2000, the Company operated 12 home health care joint ventures with hospitals or hospital systems. During 1999, the Company converted one of its previously 50% owned joint ventures to a wholly owned operation through the acquisition of the hospital partner's equity. During 2000, the Company converted six of its previously 50% owned joint ventures to wholly owned operations as a result of the withdrawal of the hospital partners from the partnerships. As a result of these transactions, the results of operations of these joint ventures have been consolidated into the financial results of the Company. Previously, these joint ventures were accounted for under the equity method. In the fourth quarter of 2000, the Company and its hospital partner sold substantially all of the assets of the Amarillo, Texas partnership to a third party and discontinued operations in preparation for dissolving the Amarillo partnership in 2001. The Company did not develop any new joint ventures during 1999 and 2000. 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 revenues generated by the provision of those services for which the 10 11 joint venture was formed are deemed to be revenues of the hospital joint venture, including revenues from sources other than the hospital joint venture partner. The following table lists the Company's hospital joint venture partners and locations for all joint ventures in operation as of December 31, 2000:
HOSPITAL JOINT VENTURE PARTNER LOCATIONS ------------------------------ --------- Baptist Medical Center (5 hospitals) Montgomery, AL Baptist Medical System (3 hospitals) Benton, Little Rock, North Little Rock, AR Central Carolina Hospital Sanford, NC Conway Hospital Conway, SC(1) East Alabama Medical Center Alexander City, Auburn, Sylacauga, AL Frye Regional Medical Center/Grace Franklin, Hickory, Lenoir, Maiden, Morganton, NC Hospital/Caldwell Memorial Midlands Health Resources (12 hospitals) Beatrice, Hastings, Lincoln, Norfolk, Omaha, NE; Clarinda, IA Peninsula Regional Medical Center Salisbury, MD; Onley, VA Piedmont Medical Center Rock Hill, SC Spruce Pine Community Hospital Asheville, Marion, Spruce Pine, NC Tolfree Memorial Hospital West Branch, MI Wallace Thompson Hospital Union, SC(1)
(1) 70% owned consolidated joint venture. REVENUES AND COLLECTIONS The Company derives substantially all of its 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. The following table sets forth the percentage of the Company's revenues from each source indicated for the years presented:
Year Ended December 31, ---------------------------- 1998 1999 2000 ---- ---- ---- Medicare .................................... 42% 46% 48% Private pay, primarily private insurance .... 48 44 42 Medicaid .................................... 10 10 10 ---- ---- ---- Total ................................ 100% 100% 100% ==== ==== ====
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 11 12 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 1997, President Clinton signed the Balanced Budget Act of 1997 that reduced the Medicare reimbursement rate for oxygen by 25% beginning January 1, 1998 and by another 5% beginning January 1, 1999. 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 revenues in 2000. The Company estimates that the Medicare Oxygen Reimbursement Reduction decreased revenues and pre-tax income by approximately $24.5 million in 1998, $29.2 million in 1999 and $29.4 million in 2000. Net patient accounts receivable at December 31, 2000 was $74.5 million compared to net patient accounts receivable of $75.2 million at December 31, 1999. 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:
YEAR ENDED DECEMBER 31, ------------------------------------ 1998 1999 2000 ------- ------- ------- Days' sales outstanding ....... 92 days 81 days 76 days
The decrease in DSO and net patient receivables between 1999 and 2000 is due to improved collection results on current billings in 2000. 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. 12 13 SALES AND MARKETING Sales. In 1999, the Company focused its selling efforts in the respiratory services product line, but also broadened sales initiatives to include other profitable products and services such as enteral nutrition, HME rental and select infusion therapy. During 2000, the Company determined that additional sales infrastructure would be required to accelerate revenue growth and in May of 2000, the Company hired a new Vice President of Sales and Marketing. Six directors of sales were subsequently hired with the directive of working in conjunction with the Vice President of Sales and Marketing and the area vice presidents to facilitate the implementation of revenue growth strategies at the field level. The Company also analyzed market data and referral/utilization trends to identify a subset of forty centers with the greatest potential for market share gain. The directors of sales are accountable for sales activity specifically for these forty "target centers". These target centers also serve as primary pilot sites for new sales and marketing initiatives. Also in 2000, the Company committed resources to quarterly sales training meetings. As the Company increased its investment in selling resources, it simultaneously enhanced its systems for measuring individual performance and accountability for results. The incentive plan for account executives has been modified such that incentives have been better aligned with specific products and services offering the greatest opportunities for revenue gain. Managed Care Sales. A new Director of Managed Care joined the Company at the end of 2000. With new expertise in place, the Company is now focusing its efforts on maximizing revenues with existing contracts, as well as new contracts, through more strategic price negotiations and improved operational strategies for implementation. Corporate Marketing Support. The Company's internal marketing department was reorganized to better facilitate product line revenue growth strategies. Today, the marketing team serves the field by analyzing new programs, developing product line strategies, organizing sales training materials and creating sales support collateral materials. 13 14 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 referral 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 it treats. 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. 14 15 BRANCH LOCATIONS Following is a list of the Company's 304 home health care centers as of December 31, 2000. ALABAMA FLORIDA KENTUCKY NEBRASKA OHIO Rock Hill(1) VIRGINIA ------- ------- -------- -------- ---- Union(1) -------- Alexander City(1) Crawfordville Bowling Green Beatrice(1) Bryan Charlottesville Andalusia Crystal River Danville Hastings(1) Chillicothe SOUTH DAKOTA Chesapeake Auburn(1) Daytona Beach Jackson Lincoln(1) Cincinnati ------------ Farmville Birmingham Ft. Lauderdale Lexington Norfolk(1) Dayton Sioux Falls Fishersville Dothan Ft. Myers London Omaha(1) Mansfield Harrisonburg Fayette Ft. Walton Beach Louisville Maumee TENNESSEE Onley(1) Florence Gainesville Paducah NEVADA Newark --------- Richmond Foley Jacksonville Pineville ------ Springfield Ashland City Salem Huntsville Leesburg Somerset Las Vegas Twinsburg Chattanooga Mobile Longwood Worthington Clarksville WASHINGTON Montgomery(1) Panama City LOUISIANA NEW JERSEY Zanesville Cookeville ---------- Russellville Pensacola --------- ---------- Dayton Bremerton Sylacauga1 Port St. Lucie Hammond Cedar Grove OKLAHOMA Dickson Kirkland Tuscaloosa Rockledge Slidell Flemington -------- Erin Seattle St. Augustine Antlers Huntington Tacoma ARIZONA Tallahassee(2) MAINE NEW MEXICO Bartlesville Jackson Yakima ------- Tampa ----- ---------- Claremore Johnson City Bullhead City Winter Haven Bangor Alamogordo Enid Kingsport WEST VIRGINIA Globe Mexico Albuquerque Muskogee Knoxville ------------- Phoenix GEORGIA Clovis Tulsa Manchester Hinton ------- MARYLAND Farmington Murfreesboro Lewisburg ARKANSAS Albany -------- Grants OREGON Nashville Rainelle -------- Brunswick Cumberland Las Cruces ------ Oak Ridge Batesville Dublin Salisbury(1) Roswell Eugene Oneida WISCONSIN Benton(1) Eastman Medford Union City --------- El Dorado Rossville (Ft. Oglethorpe) MICHIGAN NEW YORK Burlington Ft. Smith(2) Martinez -------- -------- PENNSYLVANIA TEXAS Eau Claire Harrison Savannah West Branch(1) Albany ------------ ----- Elkhorn Hot Springs Valdosta Auburn Brookville Austin Madison Jonesboro(2) Waycross MINNESOTA Cheektowaga Burnham Bay City Marshfield Little Rock(1)(2) --------- Geneva Camp Hill Brownwood Milwaukee Mena ILLINOIS Albert Lea Hudson Chambersburg Bryan Minocqua Mtn. Home -------- Rochester Kingston Clearfield Conroe Onalaska N. Little Rock(1) Elk Grove Marcy Erie Corpus Christi Racine Paragould Mt. Vernon MISSISSIPPI Oneonta Everett Dallas Pine Bluff Peoria ----------- Painted Post Johnstown Ennis Rogers Springfield Tupelo Poughkeepsie Kane Harlingen Russellville Watertown Lock Haven Hereford Salem IOWA MISSOURI Webster McKees Rocks(2) Houston Searcy ---- -------- Mt. Pleasant Irving Springdale Cedar Rapids Cameron NORTH CAROLINA Philipsburg Lake Jackson Warren Clarinda(1) Cape Girardeau -------------- Pottsville Laredo Coralville Columbia(2) Asheboro State College Longview COLORADO Davenport Festus Asheville(1) Titusville Lubbock -------- Decorah Florissant Charlotte Trevose Lufkin Cortez Des Moines Hannibal Franklin(1) W. Hazleton McAllen Denver Dubuque Ironton Hickory(1) Warren Mount Durango Fort Dodge Joplin Kannapolis Waynesboro Pleasant Pagosa Springs Marshalltown Kansas City Lenoir(1) York Nacogdoches Mason City Kirksville Maiden(1) Paris CONNECTICUT Ottumwa Mountain Grove Marion(1) RHODE ISLAND Plainview ----------- Sioux City Mt. Vernon Morganton(1) ------------ San Angelo New Britain Waterloo Osage Beach Newland East Providence San Antonio Waterbury West Burlington Perryville Salisbury Temple Potosi Sanford(1) SOUTH CAROLINA Texarkana DELAWARE KANSAS Rolla Spruce Pine(1) -------------- Tyler -------- ------ Springfield(2) Whiteville Columbia Victoria Dover Pittsburg St. Louis(2) Wilmington Conway(1) Waco Newark St. Robert Wingate Florence Wilmington Warrensburg Winston-Salem Greenville N. Charleston
--------------- (1) Owned by a joint venture. 15 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 $1.0 million per occurrence and $3.0 million 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 $1.0 million per occurrence with a $2.0 million product liability annual aggregate and a $2.0 million general liability annual aggregate. The Company also maintains excess liability coverage with limits of $50.0 million per occurrence and $50.0 million 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. The Company is self-insured for workers compensation claims for the first $250,000 on a per claim basis and maintains annual aggregate stop loss coverage ranging from $1.5 million to $1.7 million over the last three years. The Company is self-insured for health insurance for substantially all employees for the first $150,000 on a per claim basis and maintains annual aggregate stop loss coverage ranging from $6.0 million to $10.1 million over the last three years. The health insurance policies are limited to a maximum lifetime reimbursement of $1.0 million per person for medical claims and $1.0 million per person for mental illness and drug and alcohol abuse claims. Liabilities in excess of these aggregate amounts are the responsibility of the insurer. The Company provides reserves for the settlement of outstanding claims and claims incurred but not reported at amounts believed to be adequate. The differences between actual settlements and reserves are included in expense in the year finalized. 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. 16 17 EMPLOYEES At December 31, 2000, the Company employed approximately 3,400 full-time, 200 part-time and 500 PRN (staff used on an "as needed" basis only) individuals. Of these individuals, approximately 100 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. GOVERNMENT REGULATION General. 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. Information about individuals and other health care providers who have been sanctioned or excluded from participation in government reimbursement programs is 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 federal government may impose sanctions, including financial penalties, on companies that contract with excluded providers. 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 OBRA 1987, 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 sanctions, including civil monetary penalties. As a provider of services under the federal reimbursement programs such as Medicare, Medicaid and TRICARE (formerly 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 17 18 "Stark Law", which, with certain exceptions, prohibits physicians from referring patients to entities in which they have a financial relationship. 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 ("HIPAA") 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 government reimbursement programs such as Medicare, Medicaid and TRICARE, but to any third-party payor, and carry penalties including fines and imprisonment. 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 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 performs internal audits of the adequacy of billing documentation. The Company's policy is to voluntarily refund to the government any reimbursements previously received for claims with insufficient documentation that are identified in this process and that cannot be corrected. The Company regularly reviews and updates its policies and procedures in an effort to comply with applicable laws and regulations; however, certain proceedings have been and may in the future be commenced against the Company alleging violations of applicable laws governing the operation of the Company's business and its billing practices. See "Business -- Government Regulation -- Legal Proceedings." 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. Compliance with these extensive, complex and frequently changing laws and regulations is difficult. 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 the Company and other durable medical equipment suppliers, have received subpoenas and other requests for information in connection with their business operations and practices. 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 18 19 subpoenas and requests. The Company expects to incur additional legal expenses in the future in connection with existing and future investigations. The government has broad authority and discretion in enforcing applicable laws and regulations; therefore, the scope and outcome of any such investigations, inquiries, or legal actions cannot be predicted. There can be no assurance that federal, state or local governments will not impose additional regulations upon the Company's activities nor that the Company's activities will not be found to have violated some of the governing laws and regulations. Any such regulatory changes or findings of violations of laws could adversely affect the Company's business and financial position, and could even result in the exclusion of the Company from participating in Medicare, Medicaid, and other government reimbursement programs. Legal Proceedings. On June 11, 2001, a settlement agreement (the "Settlement") was entered among the Company, the United States of America, acting through the United States Department of Justice and on behalf of the Office of Inspector General of the Department of Health and Human Services ("OIG") and the TRICARE Management Activity, and a former Company employee, as relator. The Settlement covers alleged improprieties by the Company during the period from January 1, 1995 through December 31, 1998, including allegedly improper billing activities and allegedly improper remuneration to and contracts with physicians, hospitals and other healthcare providers. The Company has been dealing with the issues covered by the Settlement since February 1998, when the OIG served a subpoena on the Company at its Pineville, Kentucky center. Pursuant to the Settlement, the Company has made an initial payment of $3.0 million and has agreed to make additional payments in the principal amount of $4.0 million, together with interest on this amount, in installments due at various times over the next 57 months. The Company has also agreed to pay the relator's attorneys fees and expenses, the amount of which will be determined by binding arbitration. The Company has recorded a reserve in the amount of $7.5 million based upon the Settlement. The Settlement does not resolve the relator's claims that the Company discriminated against him as a result of his reporting alleged violations of the law to the government. The Company denies and intends to vigorously defend these claims. The Settlement has been submitted to Judge Russell of the United States District Court for the Western District of Kentucky for his final approval, which is expected to be received. The Company also was named as a defendant in two other False Claims Act cases. In each of those cases the DOJ declined to intervene and such cases were subsequently dismissed in March 2001. The first of these cases, United States ex. rel. Kirk S. Corsello v. Lincare, et al. (N.D. Ga.), was dismissed with prejudice on the motion of the Company on March 9, 2001. Mr. Corsello's qui tam complaint alleged that the Company and numerous other unrelated defendants, including other large DME suppliers, engaged in a kickback scheme to provide free or below market value equipment and medicine to physicians who would in turn refer patients to the defendants in violation of the False Claims Act. The plaintiff has appealed the dismissal of this action. The other case, United States ex. rel. Alan D. Hutchison v. Respironics, et al. (S.D. NY and N.D. Ga.), was dismissed without prejudice on Mr. Hutchison's own motion on March 22, 2001. Mr. Hutchison's qui tam complaint alleged that the Company and numerous other unrelated defendants, filed false 19 20 claims with Medicare for ventilators that the defendants allegedly knew were not medically necessary. The Company also has been informed that the United States is investigating its conduct during periods after December 31, 1998, and believes that this investigation was prompted by another qui tam complaint against the Company under the False Claims Act. The Company has not seen a complaint in this action, but believes that it contains allegations similar to the ones investigated by the government in connection with the False Claims Act case covered by the settlement discussed above. The Company believes that this second case will be limited to allegedly improper activities occurring after December 31, 1998. There can be no assurances as to the final outcome of any pending False Claims Act lawsuits. Possible outcomes include, among other things, the repayment of reimbursements previously received by the Company related to improperly billed claims, the imposition of fines or penalties, and the suspension or exclusion of the Company from participation in the Medicare, Medicaid and other government reimbursement programs. The outcome of any pending lawsuits could have a material adverse effect on the Company. 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 debt pursuant to the Bank Credit Facility. If an event of default occurs under the Amended Credit Agreement or the indebtedness is not paid at maturity, the Lenders have the right to exercise remedies detailed in the Bank Credit Facility section of this document. In addition, proceeds of all of the Company's accounts receivable are transferred daily into a bank account at PNC Bank, National Association which, under the terms of a Concentration Bank Agreement, requires that all amounts in excess of $3.0 million be transferred to an account at Bankers Trust Company in the Company's name. Upon the occurrence of an event of default under the Amended Credit Agreement, the Lenders have the right to instruct PNC Bank, National Association and Bankers Trust Company to cease honoring any drafts under the accounts and apply all amounts in the bank accounts against the indebtedness owed to the Lenders. Interest is payable on borrowings under the Amended Credit Agreement, at the election of the Company, at either a Base Lending Rate or an Adjusted Eurodollar Rate (each as defined in the Amended Credit Agreement) plus a margin of 2.75% and 3.50%, respectively. Also, additional interest of 4.50% accrues on that portion of the outstanding indebtedness of the Bank Credit Facility that is in excess of four times Adjusted EBITDA as defined by the Amended Credit Agreement. Upon the occurrence of an event of default under the Amended Credit Agreement, interest is payable by the Company at 2.00% per annum in excess of the rate provided by the Amended Credit Agreement and the Company no longer has the right to utilize the 20 21 Adjusted Eurodollar Rate plus the applicable margin. All new loans would bear interest at the Base Lending Rate plus the applicable margin, which is currently a substantially higher rate of interest. An annual fee of .50% per annum is payable by the Company on the average balance of the outstanding indebtedness. The occurrence of a default by the Company under the Amended Credit Agreement 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 scheduled 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 as well as Medicare reimbursement and certification and certain financial relationships with health care providers (collectively, the "fraud and abuse laws"). Although the Company intends to comply with all applicable federal and state 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, 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) pilot projects in Polk County, Florida and San 21 22 Antonio, Texas which began on October 1, 1999 and February 1, 2001, respectively, to determine the efficacy of competitive bidding for certain durable medical equipment ("DME"), under which Medicare reimbursements for certain items are reduced between 17% and 31% from the current fee schedules (the Company is participating in both pilot projects); and (iii) deadlines (as yet undetermined) 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. Government Investigation and Federal False Claims Act Cases. 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 errors in Medicare and Medicaid billing. The Company has reason to believe a qui tam complaint has been filed against the Company under the False Claims Act alleging violations of law occurring after December 31, 1998. The Company has not seen a complaint in this action, but believes that it contains allegations similar to the ones alleged in the Settlement recently entered in connection with the False Claims Act case originating with the Pineville, Kentucky center described above. The Company believes that this second case will be limited to allegedly improper activities occurring after December 31, 1998. There can be no assurances as to the final outcome of the pending False Claims Act lawsuits. Possible outcomes include, among other things, the repayment of reimbursements previously received by the Company related to improperly billed claims, the imposition of fines or penalties, and the suspension or exclusion of the Company from participation in the Medicare, Medicaid and other government reimbursement programs. The outcome of the pending lawsuits could have a material adverse effect on the Company. See "Business - Government Regulation." Collectibility of Accounts Receivable. The Company has substantial accounts receivable, as well as days sales outstanding of 76 days as of December 31, 2000. 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 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 22 23 the de-listing, the liquidity of the Company's common stock and its price have been adversely affected which may have limited the Company's ability to raise additional capital. Infrastructure. As the Company continues to refine its business model, it may need to implement enhanced operational and financial systems and may require additional employees and management, operational and financial resources. There can be no assurance that the Company will successfully (i) implement and maintain any such operational and financial systems, or (ii) apply the human, operational and financial resources needed to manage a developing and expanding business. Failure to implement such systems successfully and use such resources effectively could have a material adverse effect on the Company's results of operations, financial condition or prospects. Medicare Reimbursement for Oxygen Therapy and Other Services. Oxygen therapy reimbursement from Medicare accounts 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 $29 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. Following promulgation of a final rule, the Centers for Medicare and Medicaid Services ("CMS"), formerly known as the Healthcare Financing Administration ("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. 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 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, 2000, the percentage of the Company's revenues derived from Medicare, Medicaid and private pay was 48%, 10% and 42%, respectively. The revenues and profitability of the 23 24 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 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 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. For example, the HIPAA has mandated an extensive set of regulations to protect the privacy of identifiable health information, and is currently scheduled to become effective in early 2002. The Company has created a HIPAA Compliance working group that is in the process of identifying information inflow and outflow throughout the organization, which will then be analyzed to determine the appropriate privacy protections the Company will need to put in place to be HIPAA-compliant. There can be no assurance that other equally 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 24 25 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 $31.7 million for the twelve months ended December 31, 2000. No assurance can be given that the Company will achieve profitable operations in the near term. The Company intends to expand its business primarily through internal growth of existing operations. There can be no assurance that the Company can achieve growth in 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. The Company's current financial results 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. In addition, the Company is self-insured for its workers compensation and health insurance and is at risk for claims up to the individual stop loss and aggregate stop loss. See "Business - Insurance" for additional discussion. 25 26 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 $36,000 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 $22,000 in monthly rent. A sublease comprising $20,000 in monthly rent expires in August 2001. The Company has currently listed the property with a real estate company and anticipates finding a suitable replacement tenant. The Company owns its centers in Tallahassee, Florida, Waterloo, Iowa and North Charleston, South Carolina which consist of approximately 15,000, 35,000 and 10,000 square feet, respectively and owns a 50% interest in its center in Little Rock, Arkansas, which consists of approximately 15,000 square feet. Under the terms of the Amended Credit Agreement, the Company must sell its wholly owned real estate by December 31, 2001 or grant mortgages on the real estate to the Lenders. 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 DOJ and OIG of conduct occurring after December 31, 1998, and believes it is a defendant in at least one pending qui tam case in addition to the one covered by the Settlement described above. For a description of these activities, see "Business - Government Regulation - Legal Proceedings." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS None. 26 27 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 1999 and 2000 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 -- Risk Factors -- Liquidity."
Bid Quotations ------------------ Fiscal Period High Low ---------------- ------ ------ 1999 1st Quarter.................. $ 3.94 $ 1.06 1999 2nd Quarter.................. $ 2.41 $ .97 1999 3rd Quarter.................. $ 1.69 $ .69 1999 4th Quarter.................. $ .97 $ .44 2000 1st Quarter.................. $ 1.25 $ .53 2000 2nd Quarter.................. $ .94 $ .25 2000 3rd Quarter.................. $ .41 $ .23 2000 4th Quarter.................. $ .25 $ .13
On June 13, 2001, there were 1,792 holders of record of the Common Stock and the closing bid quotation for the Common Stock was $0.50 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." 27 28 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. The Common Stock was issued to Age Wave, Inc. in reliance upon Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), 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. In connection with the Second Amendment to the Fourth Amended and Restated Credit Agreement, the Company agreed to issue on March 31, 2001, warrants to the Lenders representing 19.999% of the Common Stock of the Company issued and outstanding as of March 31, 2001. These warrants were issued to the Lenders on June 8, 2001, in reliance upon Section 4(2) of the Securities Act and upon Regulation D. These statutory and regulatory exemptions were available because less than $5,000,000 of the Company's securities were issued and no general solicitation or advertising was made with respect thereto. Fifty percent of these warrants are exercisable at any time after issuance and the remaining fifty percent will be exercisable from and after September 30, 2001. The exercise price of the warrants is $0.01 per share. The Company has accounted for the fair value of these warrants during the fourth quarter of 2000 as the issuance of these warrants was determined to be probable. As such, the Company increased deferred financing costs to recognize the fair value of the warrants as of December 31, 2000 and adjusted the related amortization of these costs on a cumulative basis using the effective interest method. 28 29 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 in 1997 and 1998 materially affects the comparability of the financial data presented. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31, 1996 1997 1998 1999 2000 ------------ ------------ ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenues $ 268,348 $ 387,277 $ 403,868 $ 357,580 $ 363,372 Cost of sales and related services, excluding depreciation and amortization expense 58,575 97,418 98,166 90,142 85,473 Operating expenses 138,213 216,532 235,269 224,018 214,075 General and administrative expenses 14,664 15,953 22,262 13,895 15,823 Depreciation and amortization expense 23,266 33,075 39,105 39,682 37,121 Amortization of deferred financing costs 579 661 548 1,778 2,517 Interest expense 8,294 16,494 24,249 28,659 31,929 Restructuring -- 33,829 (3,614) (1,450) -- Goodwill impairment -- 8,165 37,805 40,271 -- Provision for litigation settlement -- -- -- -- 7,500 ------------ ------------ ------------ ------------ ------------ Total expenses 243,591 422,127 453,790 436,995 394,438 ------------ ------------ ------------ ------------ ------------ Income (Loss) before taxes 24,757 (34,850) (49,922) (79,415) (31,066) Provision (Benefit) for income taxes 9,556 (8,942) (10,944) 20,445 600 ------------ ------------ ------------ ------------ ------------ Net Income (Loss) $ 15,201 $ (25,908) $ (38,978) $ (99,860) $ (31,666) ============ ============ ============ ============ ============ Net Income (Loss) per share - basic $ 1.13 $ (1.75) $ (2.60) $ (6.55) $ (2.01) ============ ============ ============ ============ ============ Net Income (Loss) per share - diluted $ 1.10 $ (1.75) $ (2.60) $ (6.55) $ (2.01) ============ ============ ============ ============ ============ Weighted average shares outstanding - basic 13,473,000 14,839,000 14,986,000 15,236,000 15,783,000 Weighted average shares outstanding - diluted 13,841,000 14,839,000 14,986,000 15,236,000 15,783,000 YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Working capital $ 84,012 $112,721 $ 99,115 $ 60,530 $ 54,671 Total assets 395,611 558,366 531,892 424,000 378,514 Total debt and capital leases, including current portion 149,703 301,324 323,942 315,422 299,152 Shareholders' equity 215,642 194,089 156,499 56,988 26,239
29 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS ANNUAL REPORT ON FORM 10-K/A 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 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/A. THE FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE DATE OF THIS ANNUAL REPORT ON FORM 10-K/A 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 304 centers in 38 states. These services and products are primarily paid for by Medicare, Medicaid and other third-party payors. The Company has three principal services or product lines: home respiratory services, home infusion services and home medical equipment and supplies. Home respiratory services include oxygen systems, nebulizers, aerosol medications and home ventilators and are provided primarily to patients with severe and chronic pulmonary diseases. Home infusion services are used to administer nutrients, antibiotics and other medications to patients with medical conditions such as neurological impairments, infectious diseases or cancer. The Company also sells and rents a variety of home medical equipment and supplies, including wheelchairs, hospital beds and ambulatory aids. The following table sets forth the percentage of the Company's revenues represented by each line of business for the periods presented:
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1999 2000 ---- ---- ---- Home respiratory therapy services 48% 53% 56% Home infusion therapy services 22 21 19 Home medical equipment and medical supplies 30 26 25 ---- ---- ---- Total 100% 100% 100% ==== ==== ====
30 31 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 Credit Agreement 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 2000. During 2000, the Company converted six of its previously owned 50% joint ventures to wholly owned operations as a result of the withdrawal of the hospital partners from the partnerships. See "Business -- Hospital Joint Ventures" for additional discussion. The Company's strategy for 2001 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. 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. 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% of the Company's revenues in 2000. The Company estimates that the Medicare Oxygen Reimbursement Reduction decreased revenue and pre-tax income by approximately $24.5 million during 1998, $29.2 million during 1999 and $29.4 million during 2000. Effective January 1, 1998, payments for parenteral and enteral nutrition ("PEN") were frozen at 1995 levels, through the year 2002. In January 2001, federal legislation was signed into law that provided for a one-time increase in Medicare reimbursement rates for home medical equipment, excluding oxygen related services, based on the consumer price index (CPI). The increase is scheduled to go into effect July 1, 2001. The Company estimates that this CPI increase will increase revenue and pre-tax income by approximately $1.0 million over the third and fourth quarters of 2001 and $1.0 million on an annual basis thereafter. 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, CMS 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." 31 32 RESULTS OF OPERATIONS ACCOUNTING CHARGES 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 pre-tax accounting charges in the fourth quarter of 1999 in the amount of $77.5 million related to: (i) $17.1 million to increase the Company's accounts receivable reserves which resulted in increased bad debt expense above previous quarters of 1999; (ii) $41.1 million related to the write off of impaired goodwill; (iii) $19.9 million to establish a valuation allowance for deferred tax assets; (iv) $0.9 million to record the anticipated loss on the dissolution of one of the Company's joint ventures; offset by (v) 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 continued to experience increased delays between the date services were 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 32 33 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 in accordance with 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 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 received formal notice from three of its joint venture partners indicating a desire to dissolve their respective partnerships. The Company anticipated that the transaction to dissolve one of these partnerships would result in a loss to the Company in the amount of $0.9 million. After the dissolutions, these businesses are operated as wholly owned operations. Subsequent to year end 1999, 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 $1.5 million in excess restructuring reserves. 2000 The Company recorded a pre-tax accounting charge in the fourth quarter of 2000 in the amount of $7.5 million to establish a reserve for the Settlement in the government OIG investigation. See "Business -- Government Regulation." 33 34 The total accounting charges discussed above were recorded in the 1998, 1999 and 2000 consolidated statements of operations in the following classifications:
1998 1999 2000 ------------ ------------ ----------- Earnings from joint ventures $ -0- $ 2,192,000 $ -0- Cost of sales (386,000) -0- -0- Operating expenses 14,500,000 16,638,000 -0- General & administrative expenses 6,041,000 -0- -0- Restructuring charge (3,614,000) (1,450,000) -0- Goodwill impairments 37,805,000 40,271,000 -0- Provision for litigation settlement -0- -0- 7,500,000 Deferred income tax provision -0- 19,847,000 -0- ------------ ------------ ----------- $ 54,346,000 $ 77,498,000 $ 7,500,000 ============ ============ ===========
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, 1999 and 2000 were significantly lower than previous years and were 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 revenue and pre-tax income have been reduced by approximately $24.5 million in 1998, $29.2 million in 1999 and $29.4 million in 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 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 in 1998 and 1999. Further, the Company's implementation of process improvements in the billing and collection functions was slower than anticipated. In order to drive internal revenue growth during the latter half of 1998, the Company embarked on a strategy to increase market share by focusing primarily on increasing respiratory revenues in existing centers. Concurrently, the Company determined that certain "non-core", lower margin products and services should be eliminated during the year. It also exited certain contracts and businesses perceived to be lower margin during the third and fourth quarters of 1998. The result was a substantial decrease in revenues as well as in profitability during the latter half of 1998 and into 1999 and 2000. 34 35 A new management team joined the Company in the fourth quarter of 1998, consisting of a new president and chief executive officer, a new chief operating officer and a new chief financial officer. Recognizing the negative impacts of the Company's business strategy, the new management ceased the exiting of business lines and contracts by mid-December of 1998. A new strategy was developed and implemented in 1999 and continued in 2000 to restore the Company's revenues and decrease expenses. Key points of this strategy are: 1. Stabilize and increase profitable revenues - respiratory therapies 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. 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 reimbursement 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. The Company's recovery of revenues is taking longer than originally anticipated. During 2000, the Company determined that additional sales infrastructure would be required to accelerate revenue growth and in May, 2000, the Company hired a new Vice President of Sales and Marketing. Six directors of sales were subsequently hired with the directive of working in conjunction with the Vice President of Sales and Marketing and the area vice presidents to facilitate the implementation of revenue growth strategies at the field level. The Company also analyzed market data and referral/utilization trends to identify a subset of forty centers with the greatest potential for market share gain. The directors of sales are accountable for sales activity specifically for these forty "target centers". These target centers also serve as primary pilot sites for new sales and marketing initiatives. In addition, a new Director of Managed Care joined the Company at the end of 2000. With new expertise in place, the Company is now focusing its efforts on maximizing 35 36 revenues with existing contracts, as well as new contracts, through more strategic price negotiations and improved operational strategies for implementation. Effective April 1, 2001 rather than reporting to the area vice presidents, the Company's billing centers will begin reporting directly to the Corporate Reimbursement Department under the leadership of the Vice President of Reimbursement and six directors of compliance and reimbursement. This new organizational structure will allow area management more time to focus on revenue growth as well as add specialized knowledge and focused management resources to the billing function. The Company does not anticipate renewing its acquisition activities nor its joint venture development during 2001 as it continues focusing its efforts on existing operations. The Company reports its 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 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, division and area management 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 senior management expenses. 36 37 The following table and related discussion set forth items from the Company's consolidated statements of operations as a percentage of revenues, excluding the 1998, 1999 and 2000 accounting charges previously discussed, for the periods indicated:
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1999 2000 ---- ---- ---- Revenues 100% 100% 100% Cost of sales and related services, excluding depreciation and amortization expense 24 25 24 Operating expenses 55 58 59 General and administrative expense 4 4 4 Depreciation and amortization expense 10 11 10 Amortization of deferred financing costs -- -- 1 Interest expense 6 8 9 ---- ---- ---- Total expenses 99 106 107 ---- ---- ---- Income (loss) from operations before taxes 1 (6) (7) Provision for income taxes 0 0 0 ---- ---- ---- Income (loss) from operations 1% (6)% (7)% ==== ==== ==== OTHER DATA: EBITDA(1) 17% 13% 13% ==== ==== ====
(1) EBITDA represents income before interest, taxes, depreciation and amortization. While EBITDA should not be construed as a substitute for operating income, net income, or cash flows from operating activities as determined under GAAP, in analyzing the referenced company's operating performance, financial position or cash flows, the referenced company has included EBITDA because it is commonly used by certain investors and analysts to analyze and compare companies on the basis of operating performance, leverage and liquidity and to determine a company's ability to service debt. As all companies may not calculate EBITDA in the same manner, these amounts may not be comparable to other companies. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 - EXCLUDING ACCOUNTING CHARGES The comparison of the results of operations between 2000 and 1999 is impacted by the conversions of several unconsolidated joint ventures to wholly owned businesses. The following discussion excludes the accounting charges recorded in 2000 and 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Accounting Charges -- 1999 and 2000." REVENUES. Revenues increased from $359.8 million in 1999 to $363.4 million in 2000, an increase of $3.6 million, or 1%. The accounting consolidation of six of the Company's joint ventures added approximately $8.8 million to revenue in the current year. Without this additional revenue, revenue in the current year would have decreased by $5.2 million compared to 1999. This 37 38 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. The following is a discussion of the components of revenues: Sales and Related Services Revenues. Sales and related services revenues decreased from $172.4 million in 1999 to $171.7 million in 2000, a decrease of $0.7 million. This decrease is primarily attributable to lower sales of non-core low margin products and the exiting of lower margin contracts, offset somewhat by additional sales revenue from the accounting consolidation of six of the Company's previously owned 50% joint ventures. Rentals and Other Revenues. Rentals and other revenues increased from $184.9 million in 1999 to $186.4 million in 2000, an increase of $1.5 million, or 1%. This increase is also attributable to the accounting consolidation of six of the Company's previously owned 50% 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 Joint Ventures. Earnings from joint ventures increased from $2.5 million in 1999 to $5.3 million in 2000, an increase of $2.8 million, or 112%, which is primarily attributable to revenue growth, decreased bad debt expense and the related increased profitability of certain joint venture locations. COST OF SALES AND RELATED SERVICES. Cost of sales and related services decreased from $90.1 million in 1999 to $85.5 million in 2000, a decrease of $4.6 million, or 5%. As a percentage of sales and related services revenues, cost of sales and related services decreased from 52% to 50%. This decrease is primarily attributable to 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 $207.4 million in 1999 to $214.1 million in 2000, an increase of $6.7 million, or 3%. This increase is primarily attributable to the accounting consolidation of six of the Company's previously owned 50% joint ventures which added approximately $7.2 million to operating expenses in 2000. Bad debt expense was 6.5% of revenue for 2000 compared to 10.0% of revenue for 1999 including the $17.1 million charge recorded in the fourth quarter of 1999. This improvement in bad debt expense is the result of improved cash collections resulting from the process redesign, standardization and consolidation of billing center activities. 38 39 GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased from $13.9 million in 1999 to $15.8 million in 2000, an increase of $1.9 million, or 14%. This increase is attributable to higher personnel expenses as a result of the billing initiatives, corporate compliance activities and increased marketing efforts as well as higher consulting fees, offset somewhat by lower legal fees. As a percentage of revenues, general and administrative expenses remained constant at 4% for both 1999 and 2000. DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses decreased from $39.7 million in 1999 to $37.1 million in 2000, a decrease of $2.6 million, or 7%. The decrease in depreciation expense is primarily attributable to a lower level of unfavorable book-to-physical adjustments of rental equipment which are classified as depreciation expense. Lower amortization expense is a result of the $40.3 million write off of impaired goodwill in the fourth quarter of 1999. AMORTIZATION OF DEFERRED FINANCING COSTS. Amortization of deferred financing costs increased from $1.8 million in 1999 to $2.5 million in 2000, an increase of $0.7 million, or 39%. This increase is primarily attributable to additional deferred financing costs associated with amendments to the Credit Agreement. In addition, in the fourth quarter of 2000, the Company recorded the estimated fair value of warrants ($686,000) to be issued to the banks in connection with the Second Amendment and the related amortization of these costs on a cumulative basis using the effective interest rate method. INTEREST EXPENSE. Interest expense increased from $28.7 million in 1999 to $31.9 million in 2000, an increase of $3.2 million, or 11%. This increase is attributable to higher interest rates on borrowings under the Bank Credit Facility. 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 -- 1998 and 1999". REVENUES. 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. 39 40 The following is a discussion of the components of 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 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 revenue for 1999 compared to 3.8% of revenue for 1998. Total bad debt expense, including accounting charges, was 10.0% of revenues for 1999 compared to 7.4% of 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 additional compliance 40 41 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 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 $39.1 million in 1998 to $39.7 million in 1999, an increase of $0.6 million, or 2%, which was primarily attributable to an increase in 1999 of unfavorable book-to-physical adjustments of rental equipment which are classified as depreciation expense. AMORTIZATION OF DEFERRED FINANCING COSTS. Amortization of deferred financing costs increased from $0.5 million in 1998 to $1.8 million in 1999, an increase of $1.3 million. This increase is primarily attributable to additional deferred financing costs associated with amendments to the Credit Agreement. 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. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Company had current assets of $104.7 million and current liabilities of $50.1 million, resulting in working capital of $54.7 million and a current ratio of 2.1x. This compares 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 credit facility (the "Bank Credit Facility") between the Company and Bankers Trust Company, as agent for a syndicate of lenders (the "Lenders"). The Company's breach of several of the financial covenants in its Credit Agreement and its failure to make a scheduled principal payment due March 15, 2001 caused the Company to be not in compliance with certain covenants of its Credit Agreement. The Company, on June 8, 2001, entered into a Fifth Amended and Restated Credit Agreement (the "Amended Credit Agreement") that provided a new loan to the Company from which the proceeds were used to pay off all existing loans under the Credit Agreement. The Amended Credit Agreement also includes modified financial covenants and a revised amortization schedule. In addition, the Amended Credit Agreement no longer contains a revolving loan component; all existing indebtedness is now in the form of a term loan which matures on December 31, 2002. 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 June 13, 2001, totals $299.8 million. The Amended Credit 41 42 Agreement further provides for mandatory prepayments of principal from the Company's excess cash flow, as defined, or from the proceeds of the Company's sales of securities, sales of assets, tax refunds or excess casualty payments. The Amended Credit Agreement further provides for the payment to the Lenders of certain fees. These fees include a restructuring fee of $1.2 million (paid on the effective date of the Amended Credit Agreement), $200,000 payable on each of December 31, 2001, March 31, 2002 and June 30, 2002, as well as $459,000 payable on September 30, 2002. In addition, the Company has an obligation to pay the agent an annual administrative fee of $75,000 and an annual fee of .50% of the average outstanding indebtedness on each anniversary of the Amended Credit Agreement. The Amended Credit Agreement contains various financial covenants, the most restrictive of which relate to measurements of EBITDA, leverage, interest coverage ratios, and collections of accounts receivable. The Amended Credit Agreement also contains provisions for periodic reporting. The Amended Credit Agreement also contains restrictions 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 not permitted to make acquisitions or investments in joint ventures without the consent of Lenders holding a majority of the lending commitments under the Bank Credit Facility. In addition, proceeds of all of the Company's accounts receivable are transferred daily into a bank account at PNC Bank, National Association which, under the terms of a Concentration Bank Agreement, requires that all amounts in excess of $3.0 million be transferred to an account at Bankers Trust Company in the Company's name. Upon occurrence of an event of default under the Amended Credit Agreement, the Lenders have the right to instruct PNC Bank, National Association and Bankers Trust Company to cease honoring any drafts under the accounts and apply all amounts in the bank accounts against the indebtedness owed to the Lenders. Interest is payable on the unpaid principal amount under the Amended Credit Agreement, at the election of the Company at either a "Base Lending Rate" or an "Adjusted Eurodollar Rate" (each defined in the Amended Credit Agreement), plus an applicable margin of 2.75% and 3.50%, respectively. The Company is also required to pay additional interest in the amount of 4.50% per annum on that principal portion outstanding of the Amended Credit Agreement that is in excess of four times adjusted EBITDA. Upon the occurrence and during the continuation of any events of noncompliance, interest is payable upon demand at a rate that is 2.00% per annum in excess of the interest rate otherwise payable under the Amended Credit Agreement. In addition, in the event of noncompliance, the Adjusted Eurodollar Rate is no longer available for selection by the Company. There can be no assurance that future cash flow from operations will be sufficient to cover debt obligations, especially those obligations due upon maturity of the Bank Credit Facility. 42 43 The Credit Agreement was previously amended on April 6, 2000. The Company, on that date, entered into a Third Amendment 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 with the effectiveness of the amendment, modified existing financial covenants, froze the borrowing availability under the Bank Credit Facility at the amounts outstanding at the time of the amendment 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. In addition, the Third Amendment states that any development in the government investigation, which the Lenders determine could reasonably be expected to have a material adverse effect on the Company, constitutes an event of default. As of December 31, 2000, $299.5 million was outstanding under the Credit Facility, including $248.7 million under the revolving line of credit (which includes letters of credit totaling $2.8 million) and $50.8 million under the term loan. The Credit Agreement was also 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 Lenders, 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 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 warrants to the Lenders representing 19.999% of the Common Stock of the Company issued and outstanding as of March 31, 2001. To fulfill these obligations, warrants to purchase 3,265,315 shares of Common Stock were issued to the Lenders on June 8, 2001. Fifty percent of these warrants are exercisable at any time after issuance, and the remaining fifty percent will 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). The exercise price of the warrants is $0.01 per share. Interest was 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 43 44 Credit Agreement) plus a margin of 2.75% and 3.50%, respectively. Also, additional interest of 4.50% accrued on that portion of the outstanding indebtedness of the Bank Credit Facility that was in excess of four times Adjusted EBITDA as defined by the Credit Agreement. Upon the occurrence of an event of default under the Credit Agreement, interest was payable by the Company at 2.00% per annum in excess of the rates charged under the Bank Credit Facility and the Company no longer had the right to borrow at the Adjusted Eurodollar Rate plus the applicable margin. In addition, upon the occurrence of an event of default, all new borrowings would have to be subject to the Base Lending Rate plus the applicable margin, which was a substantially higher rate of interest. As of December 31, 2000 the weighted average borrowing rate was 12.4%. Management has plans to improve financial performance through stabilizing and increasing profitable revenues, decreasing and controlling operating expenses and improving accounts receivable performance. Management's cash flow projections and related operating plans indicate the Company can remain in compliance with the new financial covenants under the Amended Credit Agreement and meet its expected obligations throughout 2001. However, as with all projections, there is uncertainty as to whether management's projections can be achieved. 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. Any demands for repayment by Lenders or the inability to obtain waivers or refinance the related debt would have a material adverse impact on the financial position, results of operations and cash flows of the Company. 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 receivable are patient receivables. Accounts receivable are generally outstanding for longer periods of time in the health care industry than many other industries because of requirements to provide third-party payors with additional information subsequent to billing and the time required by such payors to process claims. Certain accounts receivable frequently are outstanding for more than 90 days, particularly where the account receivable relates to services for a patient receiving a new medical therapy or covered by private insurance or Medicaid. Net patient accounts receivable were $75.2 million and $74.5 million at December 31, 1999 and December 31, 2000, respectively. Average days' sales in accounts receivable was approximately 81 and 76 days at December 31, 1999, and December 31, 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 by operating activities decreased from $46.6 million in 1999 to $14.0 million in 2000, a decrease of $32.6 million. This decrease is primarily due to the prior year decrease in various receivables. Net cash used in investing activities decreased from $13.9 million in 1999 to $13.5 million in 2000, a decrease of $0.4 million, and primarily relates to capital expenditures. Capital expenditures increased from $14.6 million in 1999 to $17.8 million in 2000, an increase of $3.2 million. Net cash used in financing activities increased from $8.8 million in 1999 to $16.5 million in 2000, an increase of $7.7 million. The cash used in financing activities for 1999 and 2000 primarily relates to principal payments and deferred financing costs net of proceeds from the Bank Credit Facility. 44 45 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 Company's current level of operations as long as the Company maintains compliance with its debt covenants and the due dates of amounts outstanding under the Bank Credit Facility are not accelerated. Management also believes these sources are adequate to fund the Settlement in the government investigation based upon the payment terms, as more fully described in "Business -- Government Regulation." IMPLEMENTATION OF FINANCIAL ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133, as amended, "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, as amended, 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, as amended, effective January 1, 2001; however, the Company does not expect the adoption to have a material effect on the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") regarding revenue recognition in financial statements. SAB 101 was effective January 1, 2000 but implementation was delayed until the fourth quarter of 2000. The Company's implementation of SAB 101 in the fourth quarter did not have a material impact on its financial position, results of operations or cash flows on a quarterly or annual basis. 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, 2000, the Company had outstanding borrowings of approximately $296.6 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 50 through 81 of this Report and are incorporated herein by reference. 45 46 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 30, 2001 ("Proxy Statement") for the annual meeting of stockholders held on May 30, 2001. ITEM 11. EXECUTIVE COMPENSATION Executive compensation information is incorporated by reference to the Proxy Statement. 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. 46 47 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.
FORM 10-K PAGES --------------- FINANCIAL STATEMENTS Report of Independent Public Accountants F-50 Consolidated Balance Sheets, December 31, 1999 and 2000 F-51 - F-52 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1999, and 2000 F-53 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1999, and 2000 F-54 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1999, and 2000 F-55 - F-56 Notes to Consolidated Financial Statements, December 31, 2000 F-57 - F-81 FINANCIAL STATEMENT SCHEDULES Report of Independent Public Accountants S-1 Schedule II -- Valuation and Qualifying Accounts S-2
EXHIBITS The Exhibits filed as part of the Report on Form 10-K/A 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, 2000. None. 47 48 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: June 20, 2001 48 49 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. /s/Henry T. Blackstock Director June 20, 2001 ------------------------------------ Henry T. Blackstock /s/Joseph F. Furlong III Director, President, June 20, 2001 ------------------------------------ and Chief Executive Joseph F. Furlong III Officer /s/Mark Manner Director June 20, 2001 ------------------------------------ Mark Manner /s/Donald R. Millard Director June 20, 2001 ------------------------------------ Donald R. Millard /s/Marilyn A. O'Hara Chief Financial June 20, 2001 ------------------------------------ Officer and Marilyn A. O'Hara Chief Accounting Officer
49 50 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, 1999 and 2000, as restated (see Note 2), and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of American HomePatient, Inc.'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. 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, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Nashville, Tennessee March 6, 2001 (except with respect to the matters discussed in Notes 2 and 7, as to which the date is June 8, 2001 and the matter discussed in Note 8, as to which the date is June 11, 2001) F-50 51 AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 2000
ASSETS 1999 2000 ------ -------------- -------------- CURRENT ASSETS: Cash and cash equivalents $ 28,123,000 $ 12,081,000 Restricted cash -- 179,000 Accounts receivable, less allowance for doubtful accounts of $56,876,000 and $40,862,000, respectively 75,956,000 75,465,000 Inventories 16,499,000 15,522,000 Prepaid expenses and other current assets 982,000 1,489,000 -------------- -------------- Total current assets 121,560,000 104,736,000 -------------- -------------- PROPERTY AND EQUIPMENT, AT COST: 174,558,000 184,661,000 Less accumulated depreciation and amortization (113,465,000) (131,663,000) -------------- -------------- Property and equipment, net 61,093,000 52,998,000 -------------- -------------- OTHER ASSETS: Excess of cost over fair value of net assets acquired, net 202,622,000 197,491,000 Investment in joint ventures 17,473,000 7,918,000 Deferred financing costs, net 3,703,000 3,269,000 Other assets, net 17,549,000 12,102,000 -------------- -------------- Total other assets 241,347,000 220,780,000 -------------- -------------- $ 424,000,000 $ 378,514,000 ============== ==============
(Continued) F-51 52 AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 2000 (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 2000 ------------------------------------ -------------- -------------- CURRENT LIABILITIES: Current portion of long-term debt and capital leases $ 16,644,000 $ 2,679,000 Accounts payable 23,327,000 16,449,000 Other payables 1,854,000 2,478,000 Accrued expenses: Payroll and related benefits 7,472,000 8,204,000 Interest 596,000 1,748,000 Insurance 3,979,000 5,162,000 Other 7,158,000 13,345,000 -------------- -------------- Total current liabilities 61,030,000 50,065,000 -------------- -------------- NONCURRENT LIABILITIES: Long-term debt and capital leases, less current portion 298,778,000 296,473,000 Other noncurrent liabilities 7,204,000 5,737,000 -------------- -------------- Total noncurrent liabilities 305,982,000 302,210,000 -------------- -------------- COMMITMENTS AND CONTINGENCIES 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, 15,160,000 and 15,856,000 shares, respectively 152,000 159,000 Paid-in capital 172,867,000 173,777,000 Accumulated deficit (116,031,000) (147,697,000) -------------- -------------- Total shareholders' equity 56,988,000 26,239,000 -------------- -------------- $ 424,000,000 $ 378,514,000 ============== ==============
The accompanying notes are an integral part of these consolidated balance sheets. F-52 53 AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1998 1999 2000 -------------- -------------- -------------- REVENUES: Sales and related service revenues $ 192,863,000 $ 172,364,000 $ 171,685,000 Rentals and other revenues 206,464,000 184,913,000 186,386,000 Earnings from joint ventures 4,541,000 303,000 5,301,000 -------------- -------------- -------------- Total revenues 403,868,000 357,580,000 363,372,000 -------------- -------------- -------------- EXPENSES: Cost of sales and related services, excluding depreciation and amortization 98,166,000 90,142,000 85,473,000 Operating 235,269,000 224,018,000 214,075,000 General and administrative 22,262,000 13,895,000 15,823,000 Depreciation and amortization 39,105,000 39,682,000 37,121,000 Amortization of deferred financing costs 548,000 1,778,000 2,517,000 Interest 24,249,000 28,659,000 31,929,000 Restructuring (3,614,000) (1,450,000) -- Goodwill impairment 37,805,000 40,271,000 -- Provision for litigation settlement -- -- 7,500,000 -------------- -------------- -------------- Total expenses 453,790,000 436,995,000 394,438,000 -------------- -------------- -------------- LOSS BEFORE INCOME TAXES (49,922,000) (79,415,000) (31,066,000) -------------- -------------- -------------- PROVISION (BENEFIT) FOR INCOME TAXES: Current (4,674,000) 7,223,000 600,000 Deferred (6,270,000) 13,222,000 -- -------------- -------------- -------------- (10,944,000) 20,445,000 600,000 -------------- -------------- -------------- NET LOSS $ (38,978,000) $ (99,860,000) $ (31,666,000) ============== ============== ============== NET LOSS PER COMMON SHARE: BASIC $ (2.60) $ (6.55) $ (2.01) ============== ============== ============== DILUTED $ (2.60) $ (6.55) $ (2.01) ============== ============== ============== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 14,986,000 15,236,000 15,783,000 ============== ============== ============== DILUTED 14,986,000 15,236,000 15,783,000 ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. F-53 54 AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
RETAINED COMMON STOCK EARNINGS/ ---------------------- PAID-IN (ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT) TOTAL ---------- -------- ------------ -------------- -------------- BALANCE, DECEMBER 31, 1997 14,901,000 $149,000 $171,133,000 $ 22,807,000 $ 194,089,000 ---------- -------- ------------ -------------- -------------- Issuance of shares through exercise of employee stock options 35,000 -- 518,000 -- 518,000 Issuance of shares through employee stock purchase plan 38,000 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 14,986,000 150,000 172,520,000 (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 164,000 2,000 337,000 -- 339,000 Net loss -- -- -- (99,860,000) (99,860,000) ---------- -------- ------------ -------------- -------------- BALANCE, DECEMBER 31, 1999 15,160,000 152,000 172,867,000 (116,031,000) 56,988,000 ---------- -------- ------------ -------------- -------------- Issuance of shares to management 385,000 4,000 62,000 -- 66,000 Issuance of shares through employee stock purchase plan 311,000 3,000 162,000 -- 165,000 Fair value of stock warrants to be issued to lenders -- -- 686,000 -- 686,000 Net loss -- -- -- (31,666,000) (31,666,000) ---------- -------- ------------ -------------- -------------- BALANCE, DECEMBER 31, 2000 15,856,000 $159,000 $173,777,000 $ (147,697,000) $ 26,239,000 ========== ======== ============ ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. F-54 55 AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1998 1999 2000 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(38,978,000) $(99,860,000) $(31,666,000) Adjustments to reconcile net loss to net cash provided from operating activities: Depreciation and amortization 39,105,000 39,682,000 37,121,000 Amortization of deferred financing costs 548,000 1,778,000 2,517,000 Equity in earnings of unconsolidated joint ventures 90,000 1,324,000 (2,462,000) Deferred income taxes (6,270,000) 13,222,000 -- Minority interest 306,000 112,000 395,000 Goodwill impairment and write-off 37,805,000 40,271,000 -- Other non-cash charges (4,000,000) 742,000 -- Change in assets and liabilities, net of acquisitions: Restricted cash (1,000) 51,000 (179,000) Accounts receivable, net 10,182,000 21,897,000 3,898,000 Inventories 4,206,000 4,388,000 1,399,000 Prepaid expenses and other current assets (2,000,000) 2,160,000 (510,000) Income tax receivable (4,607,000) 13,090,000 425,000 Accounts payable, accrued expenses and other current liabilities 79,000 4,982,000 (576,000) Restructuring accruals (8,602,000) (578,000) (1,097,000) Deferred costs 35,000 -- -- Other assets and liabilities (554,000) 3,321,000 4,696,000 ------------ ------------ ------------ Net cash provided from operating activities 27,344,000 46,582,000 13,961,000 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired (58,420,000) (450,000) -- Additions to property and equipment, net (26,780,000) (14,632,000) (17,811,000) Distributions to minority interest owners (80,000) (196,000) (250,000) Distributions from (advances to) unconsolidated joint ventures, net (5,506,000) 1,560,000 3,747,000 Proceeds from (payments for) joint venture dissolutions 69,000 (200,000) 781,000 ------------ ------------ ------------ Net cash used in investing activities (90,717,000) (13,918,000) (13,533,000) ============ ============ ============
(Continued) F-55 56 AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 (Continued)
1998 1999 2000 ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Deferred financing costs $ (992,000) $ (1,425,000) $ (1,398,000) Proceeds from long-term debt 74,777,000 4,500,000 377,000 Principal payments on long-term debt and capital leases (19,539,000) (12,241,000) (15,680,000) Proceeds from employee stock purchase plan 735,000 339,000 165,000 Proceeds from sale of stock, net of issuance costs 618,000 10,000 66,000 ------------ ------------ ------------ Net cash provided from (used in) financing activities 55,599,000 (8,817,000) (16,470,000) ------------ ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,774,000) 23,847,000 (16,042,000) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 12,050,000 4,276,000 28,123,000 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,276,000 $ 28,123,000 $ 12,081,000 ============ ============ ============ SUPPLEMENTAL INFORMATION: Cash payments of interest $ 22,413,000 $ 31,045,000 $ 30,761,000 ============ ============ ============ Cash payments of income taxes $ 2,303,000 $ 528,000 $ 453,000 ============ ============ ============
In connection with the acquisitions of home health care businesses, the Company issued debt of $1,500,000 in 1998. The accompanying notes are an integral part of these consolidated financial statements. F-56 57 AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 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, 2000, the Company provides these services to patients in the home through 304 branches in 38 states. 2. OPERATING LOSSES, DEBT COVENANTS AND NEW DEBT AGREEMENT The Company has incurred net losses of $38,978,000, $99,860,000 and $31,666,000 for the years ending December 31, 1998, 1999 and 2000, respectively, and has a tangible shareholders' deficit at December 31, 2000. In addition, the Company's breach of several of the financial covenants in its Credit Agreement (see Note 7) and its failure to make a scheduled principal payment due March 15, 2001 caused the Company to be not in compliance with certain covenants of its Credit Agreement (see Note 7). These defaults gave lenders the right to demand payment of $296,608,000 of the Company's debt and to seize the Company's assets. On June 8, 2001, management and the lenders entered into the Fifth Amended and Restated Credit Agreement (the "Amended Credit Agreement") that provided a new loan to the Company from which the proceeds were used to pay off all existing loans under the Credit Agreement. The Amended Credit Agreement also includes modified financial covenants, a revised amortization schedule, and an extended maturity date of December 31, 2002. In addition, the Amended Credit Agreement no longer contains a revolving loan component; all existing indebtedness is now in the form of a term loan. Substantially all of the Company's assets have been pledged as security for borrowings under the Amended Credit Agreement. Based upon the Credit Agreement defaults discussed above and in Note 7, the Company's previously issued consolidated financial statements included all debt outstanding under the Credit Agreement as a current liability. As a result of the Amended Credit Agreement, the financial statements have been restated to reflect the revised amortization schedule, which allows a significant portion of the debt under the Amended Credit Agreement to be classified as non-current. Management has plans to improve financial performance through stabilizing and increasing profitable revenues, decreasing and controlling operating expenses and improving accounts receivable performance. Management's cash flow projections and related operating plans indicate the Company can remain in compliance with the new financial covenants under the Amended Credit Agreement and meet its expected obligations throughout 2001. However, as with all projections, there is uncertainty as to whether management's projections can be achieved. 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. Any demands for repayment by lenders or the inability to obtain waivers or refinance the related debt would have a material adverse impact on the financial position, results of operations and cash flows of the Company. F-57 58 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. REVENUES The Company's principal business is the operation of home health care centers. Approximately 52%, 56% and 58% of the Company's net revenues in 1998, 1999 and 2000, 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. 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. F-58 59 ACCOUNTS RECEIVABLE The Company's accounts receivable, before allowance for doubtful accounts, consists of the following components:
DECEMBER 31, -------------------------------- 1999 2000 ------------ ------------ Patient receivables: Medicare $ 45,334,000 $ 38,225,000 All other, principally commercial insurance 86,710,000 77,135,000 ------------ ------------ 132,044,000 115,360,000 Other receivables, principally due from vendors and former owners 788,000 967,000 ------------ ------------ Total $132,832,000 $116,327,000 ============ ============
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. 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 $29,857,000, $35,729,000 and $23,449,000 in 1998, 1999 and 2000, 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 1998, 1999 and 2000, depreciation expense includes $23,537,000, $25,400,000 and $25,640,000, respectively, related to the depreciation of rental equipment. Maintenance and repairs are charged to expense 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. F-59 60 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 $20,512,000 and $25,927,000 as of December 31, 1999 and 2000, 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. 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 if 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. During 1999, the Company was unable to re-establish its presence in previously exited lines of business as rapidly as originally projected, and thus, continued to experience negative operating results. DEFERRED FINANCING COSTS Financing costs are amortized using methods which are not materially different from the effective interest method over the periods of the related indebtedness. OTHER ASSETS The estimated value of non-compete agreements are amortized over the lives of the agreements, generally periods of up to seven years. As of December 31, 1999 and 2000, the net amounts of non-compete agreements of $97,000 and $150,000, 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, 1999 and 2000 is $376,000 and $6,000, respectively, and is reflected in other assets in the accompanying consolidated balance sheets. Investments under split dollar value life insurance arrangements of $10,422,000 and $6,487,000 at December 31, 1999 and 2000, respectively, were recorded in connection with the acquisitions of certain home health care businesses and are reflected in other assets in the accompanying consolidated balance sheets. These investments are held in escrow accounts and are restricted for premiums owed on the split dollar value life insurance arrangements. Premiums owed on the split dollar value life insurance polices of $4,711,000 and $1,097,000 at December 31, 1999 and 2000, respectively, are classified as other noncurrent liabilities in the accompanying consolidated balance sheets. The Company is the holder of promissory notes receivable from joint ventures, totaling $2,802,000 and $1,666,000 as of December 31, 1999 and 2000, respectively. The Company also has deposits with vendors and lessors which total $2,402,000 and $2,570,000 as of December 31, 1999 and 2000, respectively. F-60 61 INCOME TAXES The Company utilizes SFAS No. 109, "Accounting for Income Taxes", which requires an asset and liability approach for financial accounting and reporting of income taxes. Under this method, deferred tax assets and liabilities are determined based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax laws that will be in effect when the differences are expected to reverse. 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, 1998, 1999 and 2000 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 accounting principles generally accepted in the United States 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 F-61 62 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, 2000. RECENT 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, as amended, 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, as amended, effective January 1, 2001; however, the Company does not expect the adoption to have a material effect on the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") regarding revenue recognition in financial statements. SAB 101 was effective January 1, 2000 but implementation was delayed until the fourth quarter of 2000. The Company's implementation of SAB 101 in the fourth quarter did not have a material impact on its financial position, results of operations or cash flows on a quarterly or annual basis. RECLASSIFICATIONS Certain reclassifications have been made to the 1998 and 1999 consolidated financial statements to conform to the 2000 presentation. 4. ACCOUNTING CHARGES 1999 ACCOUNTING CHARGES In the fourth quarter of 1999, the Company recorded pre-tax accounting charges totaling $77,498,000 related to: (a) the recording of additional reserves related to accounts receivable that resulted in increased bad debt expense above previous quarters in 1999 ($17,133,000), (b) the write off of impaired goodwill ($41,032,000), (c) the recording of a valuation allowance for deferred tax assets ($19,847,000), (d) the recording of the anticipated loss on the dissolution of one of the Company's joint ventures ($936,000), and (e) the reversal of excess restructuring reserves originally recorded in 1997 ($1,450,000). 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 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 F-62 63 Company's joint ventures which adversely impacted earnings from joint ventures by $761,000 in the accompanying 1999 consolidated statement of operations. The Company also 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 has not generated taxable income for the three years ended December 31, 2000 and achieving future taxable income is uncertain, management believes a full valuation allowance to be appropriate. The Company received formal notice from three of its joint venture partners of their desire to dissolve their respective partnerships. The Company anticipated that the transaction to dissolve one of these partnerships would result in a loss to the Company in the amount of $936,000. This charge is included as a reduction in earnings from joint ventures in the accompanying 1999 consolidated statement of operations. After the dissolutions, these businesses are operated as wholly-owned operations. Subsequent to December 31, 1999, 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 in the year ended December 31, 1999. 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 pre-tax accounting charges totaling $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). 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). F-63 64 5. INVESTMENT IN JOINT VENTURE PARTNERSHIPS The Company owns 50% of 10 home health care businesses (the "Partnerships") that are operational as of December 31, 2000. The remaining 50% of each business is owned by local hospitals or other investors within the same community. The Company is solely responsible for the management of these businesses and receives management fees based upon a percentage of net revenues, net income or cash collections (ranging from 2% to 15%) or flat monthly fees (ranging from $500 to $18,500). During 2000, the Company converted six of its previously owned 50% joint ventures to wholly-owned operations as a result of the withdrawal of the hospital partners from the Partnerships. As a result of these transactions, the results of operations of these joint ventures have been consolidated into the financial results of the Company. Previously, these six joint ventures were accounted for under the equity method. In addition, the Company sold substantially all of the assets of one joint venture to a third-party and discontinued operations in preparation for dissolving the partnership in 2001. 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 (payables to) joint ventures of $10,728,000 and $(8,000) at December 31, 1999 and 2000, respectively. F-64 65 The Company guarantees a mortgage payable of one of the Partnerships. The balance of the guaranteed debt at December 31, 2000 is $414,000. Summarized financial information of all 50% owned partnerships at December 31, 1999 and 2000 and for the years then ended is as follows:
1999 2000 ------------ ------------ Cash $ 1,450,000 $ 772,000 Accounts receivable, net 10,379,000 6,499,000 Property and equipment, net 13,046,000 6,346,000 Other assets 5,886,000 4,843,000 ------------ ------------ Total assets $ 30,761,000 $ 18,460,000 ============ ============ Accounts payable and accrued expenses $ 12,078,000 $ 1,035,000 Debt 3,692,000 1,953,000 Partners' capital 14,991,000 15,472,000 ------------ ------------ Total liabilities and partners' capital $ 30,761,000 $ 18,460,000 ============ ============ Net sales and rental revenues $ 48,958,000 $ 38,667,000 Cost of sales 7,265,000 5,701,000 Operating and management fees 36,340,000 23,022,000 Depreciation, amortization and interest expense 9,287,000 4,679,000 ------------ ------------ Total expenses 52,892,000 33,402,000 ------------ ------------ Pre-tax income (loss) $ (3,934,000) $ 5,265,000 ============ ============
F-65 66 6. PROPERTY AND EQUIPMENT Property and equipment, at cost, consist of the following:
DECEMBER 31, -------------------------------- 1999 2000 ------------ ------------ Land $ 734,000 $ 647,000 Buildings and improvements 8,287,000 7,934,000 Rental equipment 134,292,000 143,000,000 Furniture, fixtures and equipment 26,660,000 29,202,000 Delivery equipment 4,585,000 3,878,000 ------------ ------------ $174,558,000 $184,661,000 ============ ============
Property and equipment under capital leases are included under the various equipment categories. 7. LONG-TERM DEBT AND LEASE COMMITMENTS Long-term debt and capital lease obligations consist of the following:
DECEMBER 31, -------------------------------- 1999 2000 -------------- -------------- Secured revolving line of credit $ 246,400,000 $ 245,843,000 Secured term loan 64,765,000 50,765,000 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 806,000 778,000 Mortgage note payable, secured by a building, interest at 8%, principal and interest due monthly, with balloon payment of $442,000 due July 1, 2004 548,000 527,000 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. Amounts unpaid as of December 31, 2000 1,233,000 906,000 Acquisition note payable, interest at 7%, principal repaid in February 2000 1,000,000 -- Capital lease obligations, monthly principal and interest payments until 2003 670,000 333,000 -------------- -------------- 315,422,000 299,152,000 Less current portion (16,644,000) (2,679,000) -------------- -------------- $ 298,778,000 $ 296,473,000 ============== ==============
F-66 67 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. At December 31, 1999, the Company was not in compliance with certain covenants of the 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 waived events of default as of December 31, 1999, modified existing financial covenants, required a $5,000,000 principal repayment with the effectiveness of the amendment, and froze the borrowing availability at the amounts outstanding at the time of the amendment. The Company's credit availability was 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. As of January 31, 2001, the Company was not in compliance with several of the financial covenants of the Fourth Amended and Restated Credit Agreement; in addition, the Company failed to make the scheduled principal payment due March 15, 2001. Noncompliance with these covenants and failure to make the scheduled principal payment gave the lenders the right to demand payment of the Company's debt and to seize the Company's assets. On June 8, 2001, the Company entered into the Fifth Amended and Restated Credit Agreement (the "Amended Credit Agreement") that provided a new loan to the Company from which the proceeds were used to pay off all existing loans under the Credit Agreement. The Amended Credit Agreement also includes modified financial covenants and a revised amortization schedule. In addition, the Amended Credit Agreement no longer contains a revolving loan component, and all existing indebtedness is now in the form of a term loan which matures on December 31, 2002. Substantially all of the Company's assets have been pledged as security for borrowings under the Amended Credit Agreement. The Amended Credit Agreement further provides for the payment to the lenders of certain fees. These fees include a restructuring fee of $1,200,000 (paid on the effective date of the Amended Credit Agreement), $200,000 payable on each of December 31, 2001, March 31, 2002 and June 30, 2002, as well as $459,000 payable on September 30, 2002. In addition, the Company has an obligation to pay the agent an annual administrative fee of $75,000 and an annual fee of .50% of the average outstanding debt on each anniversary of the Amended Credit Agreement. The Amended Credit Agreement contains various financial covenants, the most restrictive of which relate to measurements of EBITDA, leverage, interest coverage ratios, and collections of accounts receivable. The Amended Credit Agreement also contains provisions for periodic reporting. The Amended Credit Agreement also contains restrictions 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 not permitted to make acquisitions or investments in joint ventures without the consent of lenders holding a majority of the lending commitments under the Amended Credit Agreement. In addition, proceeds of all of the F-67 68 Company's accounts receivable are transferred daily into a bank account at PNC Bank, National Association which, under the terms of a Concentration Bank Agreement, requires that all amounts in excess of $3,000,000 be transferred to an account at Bankers Trust Company in the Company's name. Upon the occurrence of an event of default under the Amended Credit Agreement, the lenders have the right to instruct PNC Bank, National Association and Bankers Trust Company to cease honoring any drafts under the accounts and apply all amounts in the bank accounts against the indebtedness owed to the lenders. Interest is payable on the unpaid principal amount under the Amended Credit Agreement, at the election of the Company at either a "Base Lending Rate" or an "Adjusted Eurodollar Rate" (each defined in the Amended Credit Agreement), plus an applicable margin of 2.75% and 3.5%, respectively. The Company is also required to pay additional interest in the amount of 4.5% per annum on that principal portion outstanding of the Amended Credit Agreement that is in excess of four times adjusted EBITDA. Upon the occurrence and during the continuation of any events of noncompliance, interest is payable upon demand at a rate that is 2.00% per annum in excess of the interest rate otherwise payable under the Amended Credit Agreement. In addition, in the event of noncompliance, the Adjusted Eurodollar Rate is no longer available for selection by the Company. In connection with the Second Amendment, the Company agreed to issue on March 31, 2001 warrants to the lenders representing 19.999% of the common stock of the Company issued and outstanding as of March 31, 2001. To fulfill these obligations, warrants to purchase 3,265,315 shares of common stock were issued to the Lenders on June 8, 2001. Fifty percent of these warrants are exercisable immediately and the remaining fifty percent will be exercisable on and after September 30, 2001 (provided loans, letters of credit or commitments are outstanding). The exercise price of the warrants is $0.01 per share. The Company has accounted for the fair value of these warrants during the fourth quarter of 2000 as the issuance of these warrants was determined to be probable. As such, the Company increased deferred financing costs to recognize the estimated fair value of the warrants as of December 31, 2000 ($686,000). As a result, in 2000, the Company also adjusted the related amortization of these costs on a cumulative basis using the effective interest method. Interest was 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 2.50% 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 was required to pay additional interest in the amount of 4.5% per annum on that principal portion outstanding of the Credit Agreement that is in excess of four times adjusted EBITDA. In events of noncompliance, interest was payable by the Company at 2.0% per annum in excess of the rate defined by the Credit Agreement and the Company no longer had the right to borrow at the Adjusted Eurodollar rate, plus the applicable margin. All new borrowings would have to be subject to the Base Lending Rate, plus the applicable margin, which was a substantially higher rate of interest. At December 31, 2000, the weighted average borrowing rate was 12.4%. On September 15, 1999, the Company began making quarterly principal payments on the Secured Term Loan of $1,500,000 per quarter, and continued 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. On September 15, 2000, the Company began making quarterly principal payments on the Secured Term Loan of $3,000,000 per quarter through and including December 15, 2000. The Company was scheduled to make an additional quarterly principal payment of $3,000,000 on March 15, 2001, which was not made, and payments of $6,000,000 per quarter, beginning June 15, 2001, through and including December 15, 2001; and a $29,765,000 balloon payment due April 15, 2002. The Amended Credit Agreement requires principal payments of $750,000 on September 30, 2001 and December 31, 2001; a principal payment of $11,600,000 on March 31, 2002; principal payments of $1,000,000 on June 30, 2002 and September 30, 2002; and a $281,508,000 balloon payment due December 31, 2002. The Amended Credit Facility further provides for mandatory prepayments of principal from the Company's excess cash flow, as defined, or F-68 69 from the proceeds of the Company's sales of securities, sales of assets, tax refunds or excess casualty payments. Principal payments required on long-term debt (excluding capital leases) for the next five years and thereafter beginning January 1, 2001, based on the Amended Credit Agreement, are as follows: 2001 $ 2,458,000 2002 295,165,000 2003 60,000 2004 491,000 2005 38,000 Thereafter 607,000 ------------- $ 298,819,000 =============
CAPITAL LEASES The Company leases certain equipment under capital leases. Future minimum rental payments required on capital leases beginning January 1, 2001, less amounts representing interest, are as follows: 2001 $ 243,000 2002 127,000 2003 18,000 --------- 388,000 Less amounts representing interest (55,000) --------- $ 333,000 =========
8. COMMITMENTS AND CONTINGENCIES 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, 2001 are as follows: 2001 $ 13,143,000 2002 9,376,000 2003 5,167,000 2004 2,259,000 2005 1,117,000 Thereafter 1,643,000 ------------ $ 32,705,000 ============
Rent expense for all operating leases was approximately $15,695,000, $15,057,000 and $14,672,000, in 1998, 1999 and 2000, respectively. LITIGATION The Company is subject to 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. See discussion of government investigation issues under the Health Care Industry section of this Note. F-69 70 Professional liability insurance up to certain limits is carried by the Company for coverage of such claims. See Note 11 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 to three 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. The maximum contingent liability under these agreements at December 31, 2000 is approximately $5,749,000. SELF-INSURANCE The Company is self-insured for workers compensation claims for the first $250,000 on a per claim basis and maintains annual aggregate stop loss coverage ranging from $1,500,000 to $1,700,000 over the last three years. The Company is self-insured for health insurance for substantially all employees for the first $150,000 on a per claim basis and maintains annual aggregate stop loss coverage ranging from $6,000,000 to $10,100,000 over the last three years. The health insurance policies are limited to a maximum lifetime reimbursement of $1,000,000 per person for medical claims and $1,000,000 per person for mental illness and drug and alcohol abuse claims. Liabilities in excess of these aggregate amounts are the responsibility of the insurer. The Company provides reserves for the settlement of outstanding claims and claims incurred but not reported 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 $2,843,000 securing obligations with respect to its workers' compensation self-insurance program and its capital equipment under operating leases. Effective January 1, 2001, the Company was required to increase these letters of credit to $3,400,000. 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. 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. F-70 71 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 maintains 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 at least 21 years of age, 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. Effective January 1, 2001 the Company will match 25% of the first 3% of employee contributions. HEALTH CARE INDUSTRY 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. Information about individuals and other health care providers who have been sanctioned or excluded from participation in government reimbursement programs is 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 federal government may impose financial penalties on companies that contract with excluded providers. 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 OBRA 1987, 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 sanctions, including civil monetary penalties. As a provider of services under the federal reimbursement programs such as Medicare, Medicaid and TRICARE (formerly 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 relationship. 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 government reimbursement programs F-71 72 such as Medicare, Medicaid and TRICARE, but to any third-party payor, and carry penalties including fines and imprisonment. 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 performs internal audits of the adequacy of billing documentation. The Company's policy is to voluntarily refund to the government any reimbursements previously received for claims with insufficient documentation that are identified in this process and that cannot be corrected. The Company regularly reviews and updates its policies and procedures in an effort to comply with applicable laws and regulations; however, certain proceedings have been and may in the future be commenced against the Company alleging violations of applicable laws governing the operation of the Company's business and its billing practices. 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. Compliance with these extensive, complex and frequently-changing laws and regulations is difficult. 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 the Company and other durable medical equipment suppliers, have received subpoenas and other requests for information in connection with their business operations and practices. 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 subpoenas and requests. The Company expects to incur additional legal expenses in the future in connection with existing and future investigations. The government has broad authority and discretion in enforcing applicable laws and regulations; therefore, the scope and outcome of any such investigations, inquiries, or legal actions cannot be predicted. There can be no assurance that federal, state or local governments will not impose additional regulations upon the Company's activities nor that the Company's activities will not be found to have violated some of the governing laws and regulations. Any such regulatory changes or findings of violations of laws could adversely affect the Company's business and financial position, and could even result in the exclusion of the Company from participating in Medicare, Medicaid, and other government reimbursement programs. On June 11, 2001, a settlement agreement (the "Settlement") was entered among the Company, the United States of America, acting through the United States Department of Justice ("DOJ") and on behalf of the OIG and the TRICARE Management Activity, and a former Company employee, as relator. This settlement covers alleged improprieties by the Company during the period from January 1, 1995 through December 31, 1998, including allegedly improper billing activities and allegedly improper remuneration to, and contracts with physicians, hospitals and other healthcare providers. The Company has been dealing with the issues covered by the Settlement since February 1998, when the OIG served a subpoena on the Company at its Pineville, Kentucky center. Pursuant to the Settlement, the Company has made an initial payment of $3,000,000 and has agreed to make additional payments in the principal amount of $4,000,000, together with interest on this amount, in installments due at various times over the next 57 months. The Company has also agreed to pay the relator's attorneys fees and expenses, the amount of which will be determined by binding arbitration. The Company has recorded a reserve in the amount of $7,500,000 based upon the F-72 73 Settlement Agreement. The Settlement does not resolve the relator's claims that the Company discriminated against him as a result of his reporting alleged violations of the law to the government. The Company denies and intends to vigorously defend these claims. The Settlement has been submitted to Judge Russell of the United States District Court for the Western District of Kentucky for his final approval, which is expected to be received. The Company also was named as a defendant in two other False Claims Act cases. In each of those cases the DOJ declined to intervene and such cases were subsequently dismissed in March 2001. In one of these cases, the plaintiff has appealed the dismissal of this action. The Company also has been informed that the United States is investigating its conduct during periods after December 31, 1998, and believes that this investigation was prompted by another qui tam complaint against the Company under the False Claims Act. The Company has not seen a complaint in this action, but believes that it contains allegations similar to the ones investigated by the government in connection with the False Claims Act case covered by the settlement discussed above. The Company believes that this second case will be limited to allegedly improper activities occurring after December 31, 1998. There can be no assurances as to the final outcome of the pending False Claims Act lawsuits or any pending or future investigation by the government. Possible outcomes include, among other things, the repayment of reimbursements previously received by the Company related to improperly billed claims, the imposition of fines or penalties, and the suspension or exclusion of the Company from participation in the Medicare, Medicaid and other government reimbursement programs. The outcome of any pending lawsuits and investigations could have a material adverse effect on the Company. F-73 74 9. SHAREHOLDERS' EQUITY AND STOCK PLANS NONQUALIFIED STOCK OPTION PLANS Under the 1991 Nonqualified Stock Option Plan (the "Plan"), as amended as of November 8, 2000, 4,500,000 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:
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ---------- -------------- OUTSTANDING AT DECEMBER 31, 1997 1,603,058 $17.85 Granted 1,274,500 $ 7.70 Exercised (35,109) $13.33 Canceled (787,118) $17.34 ---------- ------ OUTSTANDING AT DECEMBER 31, 1998 2,055,331 $11.82 Granted 424,000 $ 0.56 Exercised (10,000) $ 1.06 Canceled (310,725) $16.72 ---------- ------ OUTSTANDING AT DECEMBER 31, 1999 2,158,606 $ 8.96 Granted 803,000 $ 0.18 Canceled (226,577) $10.97 ---------- ------ OUTSTANDING AT DECEMBER 31, 2000 2,735,029 $ 6.22 ========== ====== EXERCISABLE AT DECEMBER 31, 2000 1,800,191 $ 8.75 ========== ======
F-74 75 Options granted under the Plan have the following characteristics:
WEIGHTED AVERAGE WEIGHTED EXERCISE PRICE AVERAGE OPTIONS OF OPTIONS WEIGHTED REMAINING EXERCISABLE AT EXERCISABLE AT OPTIONS EXERCISE AVERAGE CONTRACTUAL DECEMBER 31, DECEMBER 31, OUTSTANDING PRICES EXERCISE PRICE LIFE IN YEARS 2000 2000 ----------- --------- -------------- ------------- -------------- -------------- 17,338 $ 6.00 $ 6.00 0.7 17,338 $ 6.00 30,000 $10.04 $10.04 3.5 30,000 $10.04 192,188 $15.83 to $16.53 4.1 192,188 $16.53 $20.67 345,203 $17.50 to $17.93 5.1 345,203 $17.93 $22.50 96,500 $21.50 $21.50 6.1 96,500 $21.50 836,800 $ 2.13 to $ 5.70 7.8 711,212 $ 5.28 $18.13 414,000 $ 0.56 $ 0.56 8.9 207,000 $ 0.56 803,000 $ 0.17 to $ 0.18 9.8 200,750 $ 0.18 $ 0.54 --------- --------- 2,735,029 1,800,191 ========= =========
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 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. Options granted during 2000 have a three year vesting period and expire in ten years. As of December 31, 2000, shares available for future grants of options under the Plan total 530,581. F-75 76 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 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 at an exercise price of $.53. In 2000, the Company granted options for 215,000 shares of common stock at exercise prices of $0.30, $0.22 and $0.20. The issued options are fully vested and expire in ten years. None of these options have been exercised. 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 1998, 1999 and 2000 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:
1998 1999 2000 ------------ -------------- ------------ Net loss - as reported $(38,978,000) $ (99,860,000) $(31,666,000) Net loss - pro forma (40,796,000) (100,998,000) (32,158,000) Net loss per common share - as reported Basic (2.60) (6.55) (2.01) Diluted (2.60) (6.55) (2.01) Net loss per common share - pro forma Basic (2.72) (6.63) (2.04) Diluted (2.72) (6.63) (2.04)
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 $2.44, $0.20 and $0.08 for 1998, 1999 and 2000, 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 1998, 1999 and 2000:
1998 1999 2000 ------------ ------------ ------------ Dividend yield 0% 0% 0% Expected volatility 42.0 45.0 45.0 Expected lives 1 to 4 years 1 to 3 years 1 to 3 years Risk-free interest rate range 4.6% to 5.6% 4.8% to 6.0% 5.87% to 6.42%
F-76 77 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 common 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, 2000, 648,268 shares have been issued under this plan. COMMON STOCK ISSUED TO COMPANY MANAGEMENT On November 8, 2000, the Company's Board of Directors granted certain members of Company management the right to immediately purchase 385,000 shares of common stock directly from the Company at the closing market price of $0.17 per share on that date. WARRANTS In 1998, warrants were exercised for 12,000 shares of common stock at $8.33 per share. There are no outstanding warrants as of December 31, 2000. In connection with the Second Amendment to the Fourth Amended and Restated Credit Agreement, the Company agreed to issue on March 31, 2001, warrants to the lenders representing 19.999% of the common stock of the Company issued and outstanding as of March 31, 2001. To fulfill these obligations, warrants to purchase 3,265,315 shares of common stock were issued to the lenders on June 8, 2001. Fifty percent of these warrants are exercisable immediately, and the remaining fifty percent will be exercisable on and after September 30, 2001. The exercise price of the warrants is $0.01 per common share. The Company has accounted for the estimated fair value of these warrants ($686,000) during the fourth quarter of 2000 as the issuance of these warrants was determined to be probable. As such, the Company increased deferred financing costs to recognize the fair value of the warrants as of December 31, 2000, and adjusted the related amortization. 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, 2000, no preferred shares have been issued. EARNINGS (LOSS) 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 (loss) by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing net income (loss) 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. F-77 78 The following table information is necessary to calculate earnings per share for the years ending December 31, 1998, 1999 and 2000:
1998 1999 2000 ---------------- ---------------- ------------ Net loss $ (38,978,000) $ (99,860,000) $(31,666,000) ================ ================ ============ Weighted average common shares outstanding 14,986,000 15,236,000 15,783,000 Effect of dilutive options and warrants -- -- -- ---------------- ---------------- ------------ Adjusted diluted common shares outstanding 14,986,000 15,236,000 15,783,000 ================ ================ ============ Net loss per common share Basic $ (2.60) $ (6.55) $ (2.01) ================ ================ ============ Diluted $ (2.60) $ (6.55) $ (2.01) ================ ================ ============
Securities that could potentially dilute basic earnings (loss) per share that were not included in the calculations above, because of the anti-dilutive effects for 1998, 1999 and 2000, include all outstanding stock options and warrants previously discussed. 10. INCOME TAXES The provision (benefit) for income taxes is comprised of the following components:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------ 1998 1999 2000 ------------ ------------ -------- Current Federal $ (4,528,000) $ 6,625,000 $ -- State (146,000) 598,000 600,000 ------------ ------------ -------- (4,674,000) 7,223,000 600,000 ------------ ------------ -------- Deferred Federal (6,074,000) 12,931,000 -- State (196,000) 291,000 -- ------------ ------------ -------- (6,270,000) 13,222,000 -- ------------ ------------ -------- Provision (benefit) for income taxes $(10,944,000) $ 20,445,000 $600,000 ============ ============ ========
F-78 79 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:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1998 1999 2000 ------------ ------------ ------------ Provision (benefit) for federal income taxes at statutory rate $(17,473,000) $(27,795,000) $(10,873,000) State income taxes, net of federal tax benefit (564,000) (627,000) (1,081,000) Valuation allowance -- 47,906,000 8,768,000 Other, principally non-deductible goodwill and other expenses 7,093,000 961,000 3,786,000 ------------ ------------ ------------ Provision (benefit) for income taxes $(10,944,000) $ 20,445,000 $ 600,000 ============ ============ ============
The net deferred tax assets and liabilities, at the respective income tax rates, are as follows:
DECEMBER 31, ---------------------------- 1999 2000 ------------ ------------ Current deferred tax assets (liabilities): Accrued restructuring liabilities $ 481,000 $ 209,000 Accounts receivable reserves 19,294,000 13,133,000 Accrued liabilities and other 3,710,000 4,643,000 ------------ ------------ 23,485,000 17,985,000 Less valuation allowance (23,485,000) (17,985,000) ------------ ------------ Net current deferred tax asset $ -- $ -- ============ ============ Noncurrent deferred tax assets (liabilities): Financial reporting amortization in excess of tax amortization $ 15,211,000 $ 15,463,000 Alternative minimum tax credit 1,809,000 2,164,000 Net operating loss carryforward 5,674,000 19,929,000 Noncurrent asset valuation reserves 738,000 638,000 Other 5,050,000 5,687,000 Acquisition costs (2,739,000) (2,739,000) Tax depreciation in excess of financial reporting depreciation (1,322,000) (2,453,000) ------------ ------------ 24,421,000 38,689,000 Less valuation allowance (24,421,000) (38,689,000) ------------ ------------ Net noncurrent deferred tax assets $ -- $ -- ============ ============
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 and 2000. At December 31, 2000, the Company had net operating loss carryforwards of approximately $51,431,000 available to offset future taxable income which expire in varying amounts in 2020 and 2021. In 1998, the Company realized tax deductions resulting from employees' exercise of non-qualified stock options and recorded tax benefits of $35,000 to paid-in capital. There was no exercise of employees' non-qualified stock options in 1999 or 2000. F-79 80 11. 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 $2,000,000 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. 12. 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 $240,000 pursuant to this agreement for 1998. Effective May 1994 through May 2000, the president of Counsel became chairman of the Company and received a consulting fee of $8,500 per month for his service as chairman. The Company paid $102,000, $102,000 and $43,000 under this agreement for 1998, 1999 and 2000, respectively. As of December 31, 1999 Counsel owned approximately 26% of the Company's common stock. In 2000, Counsel distributed its holdings of the Company's common stock to Counsel's shareholders. 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 1998, 1999 and 2000 to render legal advice in a variety of activities for which H3GM was paid $1,727,000, $931,000 and $687,000, respectively. F-80 81 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The unaudited quarterly financial data for December 31, 1999 and 2000 consists of the following:
FIRST SECOND THIRD FOURTH 2000 QUARTER QUARTER QUARTER QUARTER TOTAL ---- -------- -------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) -------------------------------------------------------------- Net revenues $ 87,890 $ 91,135 $ 91,504 $ 92,843 $ 363,372 ======== ======== ======== ========= ========= Net loss $ (8,574) $ (5,830) $ (5,409) $ (11,853)(1) $ (31,666) ======== ======== ======== ========= ========= Basic loss per share $ (.55) $ (.37) $ (.35) $ (.74)(1) $ (2.01) ======== ======== ======== ========= ========= Diluted loss per share $ (.55) $ (.37) $ (.35) $ (.74)(1) $ (2.01) ======== ======== ======== ========= ========= FIRST SECOND THIRD FOURTH 1999 QUARTER QUARTER QUARTER QUARTER TOTAL ---- -------- -------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) -------------------------------------------------------------- Net revenues $ 91,238 $ 90,423 $ 89,312 $ 86,607 $ 357,580 ======== ======== ======== ========= ========= Net loss $ (5,576) $ (4,877) $ (5,182) $ (84,225)(2) $ (99,860) ======== ======== ======== ========= ========= Basic loss per share $ (.37) $ (.32) $ (.34) $ (5.52)(2) $ (6.55) ======== ======== ======== ========= ========= Diluted loss per share $ (.37) $ (.32) $ (.34) $ (5.52)(2) $ (6.55) ======== ======== ======== ========= =========
1) Includes $7,500,000 pre-tax charge related to a provision for litigation settlement. 2) Includes $77,500,000 of pre-tax charges primarily related to goodwill, accounts receivable and deferred income taxes (see Note 4). F-81 82 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT --------- ---------------------- 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 the Company's 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). 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).
83
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT --------- ---------------------- 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 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). 10.10 Form of Underwriting Agreement (incorporated by reference to Exhibit 1 to the Company's Registration Statement No. 33-89568 on Form S-2). 10.11 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). 10.12 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).
84
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT --------- ---------------------- 10.13 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). 10.14 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). 10.15 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). 10.16 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). 10.17 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). 10.18 Employment Agreement effective December 1, 2000 between the Company and Joseph F. Furlong, III (incorporated by reference to Exhibit 10.57 to the Company's Report on Form 10-K for the year ended December 31, 2000). 10.19 Employment Agreement dated January 1, 2001 between the Company and Marilyn O'Hara (incorporated by reference to Exhibit 10.58 to the Company's Report on Form 10-K for the year ended December 31, 2000). 10.20 Employment Agreement dated January 1, 2001 between the Company and Thomas E. Mills (incorporated by reference to Exhibit 10.59 to the Company's Report on Form 10-K for the year ended December 31, 2000). 10.21 Fifth Amended and Restated Credit Agreement dated June 12, 2001 by and among American HomePatient, Inc., the Lenders named therein and Bankers Trust Company. 10.22 Form of Promissory Note dated May 25, 2001 by and between American HomePatient, Inc. and each of Bankers Trust Company, Longacre Master Fund Ltd. and Citibank, N.A. 10.23 Warrant Agreement dated June 12, 2001 by and among American HomePatient, Inc., the Lenders and Bankers Trust Company.
85
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT --------- ---------------------- 21 Subsidiary List (incorporated by reference to Exhibit 21 to the Company's Report on Form 10-K for the year ended December 31, 2000). 23.1 Consent of Arthur Andersen LLP. 99.1 Press Release.
86 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS to American HomePatient, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements, as restated, included in American HomePatient, Inc. and subsidiaries' annual report to shareholders in this Form 10-K/A, and have issued our report thereon, dated March 6, 2001 (except with respect to the matters discussed in Notes 2 and 7, as to which the date is June 8, 2001 and the matter discussed in Note 8, as to which the date is June 11, 2001). 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 American HomePatient, Inc.'s management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated 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 consolidated financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Nashville, Tennessee March 6, 2001 (except with respect to the matters discussed in Notes 2 and 7, as to which the date is June 8, 2001 and the matter discussed in Note 8, as to which the date is June 11, 2001) S-1 87 AMERICAN HOMEPATIENT, INC. SCHEDULE II - VALUATION AND QUALIFYING Accounts For the Years Ended December 31, 1998, 1999 and 2000
Column A Column B Column C Column D Column E -------- -------- -------- ------------- ----------- Additions --------------------------------------- Balance at Charged Balance at Beginning Bad Debt to Other End of Description of Period Expense Accounts Other Deductions(3) Period ----------- ----------- ----------- ---------- ---------- ------------- ----------- FOR THE YEAR ENDED DECEMBER 31, 2000: Allowance for doubtful accounts $56,876,000 $23,449,000 $ -- $3,766,000(1) $43,229,000 $40,862,000 ----------- ----------- ---------- ---------- ----------- ----------- FOR THE YEAR ENDED DECEMBER 31, 1999: Allowance for doubtful accounts $41,147,000 $35,729,000 $ -- $1,045,000(1) $21,045,000 $56,876,000 ----------- ----------- ---------- ---------- ----------- ----------- FOR THE YEAR ENDED DECEMBER 31, 1998: Allowance for doubtful accounts $43,862,000 $29,857,000 $ -- $ 868,295(2) $33,440,295 $41,147,000 ----------- ----------- ---------- ---------- ----------- -----------
(1) Amounts recorded as a result of dissolving and consolidating previously 50% owned joint ventures. (2) Amounts recorded in connection with acquisitions. (3) Amounts written off as uncollectible accounts, net of recoveries. S-2