-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FMUV6BfN+qPW6yktaImR69FFgAVuESFlSN4l5Ku2/lIool9aFrpIEmCjm2dePWWE 56uzJf9KKffrSmAZ0CMqBA== 0000950144-97-012330.txt : 19971117 0000950144-97-012330.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950144-97-012330 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN HOMEPATIENT INC CENTRAL INDEX KEY: 0000879181 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 621474680 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19532 FILM NUMBER: 97719615 BUSINESS ADDRESS: STREET 1: 5200 MARYLAND WAY STREET 2: MARYLAND FARMS OFFICE PARK CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6152218884 MAIL ADDRESS: STREET 1: MARYLAND FARMS OFFICE PARK STREET 2: 5200 MARYLAND WAY CITY: BRENTWOOD STATE: TN ZIP: 37027 FORMER COMPANY: FORMER CONFORMED NAME: DIVERSICARE INC /DE DATE OF NAME CHANGE: 19930328 10-Q 1 AMERICAN HOMEPATIENT, INC. FORM 10-Q FQE: 9/30/97 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q CHECK ONE [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1997 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM _________ TO _________. AMERICAN HOMEPATIENT, INC. -------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 0-19532 62-1474680 - ------------------------------- ------------ --------------------------------- (STATE OR OTHER JURISDICTION OF (COMMISSION (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) FILE NUMBER) 5200 MARYLAND WAY, SUITE 400, BRENTWOOD, TENNESSEE 37027 -------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (615) 221-8884 -------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NONE - -------------------------------------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT.) INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- 14,851,076 - -------------------------------------------------------------------------------- (OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF NOVEMBER 7, 1997) TOTAL NUMBER OF SEQUENTIALLY NUMBERED PAGES IS 20 1 2 PART I. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) ASSETS
December 31, September 30, 1996 1997 ------------- ------------- CURRENT ASSETS Cash and cash equivalents $ 7,299,000 $ 6,544,000 Restricted cash 425,000 50,000 Accounts receivable, less allowance for doubtful accounts of $18,755,000 and $47,548,000, respectively 79,460,000 96,969,000 Inventories 21,921,000 21,935,000 Prepaid expenses and other assets 1,353,000 3,355,000 Income tax receivable 872,000 15,747,000 Deferred tax asset 7,470,000 7,470,000 ------------- ------------- Total current assets 118,800,000 152,070,000 ------------- ------------- PROPERTY AND EQUIPMENT, at cost 95,254,000 123,181,000 Less accumulated depreciation and amortization (38,384,000) (56,591,000) ------------- ------------- Net property and equipment 56,870,000 66,590,000 ------------- ------------- OTHER ASSETS Excess of cost over fair value of net assets acquired, net 198,193,000 238,762,000 Investment in unconsolidated joint ventures 12,405,000 18,158,000 Deferred costs, net 2,761,000 2,621,000 Other assets 6,582,000 16,286,000 ------------- ------------- Total other assets 219,941,000 275,827,000 ------------- ------------- $ 395,611,000 $ 494,487,000 ============= =============
(Continued) 2 3 AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30, 1996 1997 ------------- ------------- CURRENT LIABILITIES Current portion of long-term debt and capital leases $ 10,245,000 $ 8,956,000 Trade accounts payable 8,698,000 11,023,000 Other payables 775,000 981,000 Accrued expenses: Payroll and related benefits 6,672,000 5,689,000 Restructuring accrual -- 17,318,000 Other 8,398,000 8,676,000 ------------- ------------- Total current liabilities 34,788,000 52,643,000 ------------- ------------- NONCURRENT LIABILITIES Long-term debt and capital leases, less current portion 139,458,000 247,822,000 Deferred income taxes 4,578,000 4,603,000 Other noncurrent liabilities 1,145,000 1,224,000 ------------- ------------- Total noncurrent liabilities 145,181,000 253,649,000 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued and outstanding -- -- Common stock, $.01 par value; authorized 35,000,000 shares; issued and outstanding, 14,677,000 and 14,843,000 shares, respectively 147,000 148,000 Paid-in capital 166,780,000 169,987,000 Retained earnings 48,715,000 18,060,000 ------------- ------------- Total stockholders' equity 215,642,000 188,195,000 ------------- ------------- $ 395,611,000 $ 494,487,000 ============= =============
The accompanying notes to interim condensed consolidated financial statements are an integral part of these statements. 3 4 AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended September 30 Nine Months Ended September 30 ------------------------------- ------------------------------ 1996 1997 1996 1997 ------------- ------------- ------------- ------------- REVENUES Sales and related service revenues $ 32,101,000 $ 48,074,000 $ 82,916,000 $ 130,726,000 Rentals and other revenues 38,213,000 52,706,000 102,132,000 145,955,000 Earnings from joint ventures 1,666,000 1,871,000 4,403,000 5,345,000 ------------- ------------- ------------- ------------- Total revenues 71,980,000 102,651,000 189,451,000 282,026,000 ------------- ------------- ------------- ------------- EXPENSES Cost of sales and related services, excluding depreciation and amortization 15,449,000 31,085,000 40,463,000 72,442,000 Operating 36,570,000 70,163,000 96,376,000 162,345,000 General and administrative 4,475,000 4,130,000 12,044,000 11,761,000 Depreciation and amortization 6,544,000 9,013,000 17,093,000 24,526,000 Interest 1,932,000 4,553,000 5,926,000 11,450,000 Restructuring charge -- 33,829,000 -- 33,829,000 Goodwill impairment -- 8,165,000 -- 8,165,000 ------------- ------------- ------------- ------------- Total expenses 64,970,000 160,938,000 171,902,000 324,518,000 ------------- ------------- ------------- ------------- INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES 7,010,000 (58,287,000) 17,549,000 (42,492,000) PROVISION (BENEFIT) FOR INCOME TAXES 2,706,000 (18,091,000) 6,774,000 (11,836,000) ------------- ------------- ------------- ------------- NET INCOME (LOSS) $ 4,304,000 $ (40,196,000) $ 10,775,000 $ (30,656,000) ============= ============= ============= ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES 15,010,000 15,022,000 13,414,000 15,030,000 ============= ============= ============= ============= INCOME (LOSS) PER SHARE $ 0.29 $ (2.68) $ 0.80 $ (2.04) ============= ============= ============= =============
The accompanying notes to interim condensed consolidated financial statements are an integral part of these statements. 4 5 AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the Nine Months Ended September 30 ------------------------------ 1996 1997 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) from operations $ 10,775,000 $ (30,656,000) Adjustments to reconcile net income (loss) from operations to net cash provided from (used in) operating activities: Depreciation and amortization 17,093,000 24,526,000 Equity in earnings of unconsolidated joint ventures (2,340,000) (2,806,000) Minority interest 111,000 147,000 Goodwill impairment and write-off -- 20,305,000 Other non-cash charges -- 26,877,000 Change in assets and liabilities, net of effects from acquisitions: Receivables, net (10,595,000) (20,298,000) Restricted cash (50,000) 375,000 Inventories (1,465,000) 631,000 Prepaid expenses and other 14,000 (1,922,000) Income taxes receivable (547,000) (14,538,000) Trade accounts payable, accrued expenses and other current liabilities (7,377,000) (6,108,000) Restructuring accrual -- 17,320,000 Other assets (420,000) (1,772,000) ------------ ------------- Net cash provided from operating activities 5,199,000 12,081,000 ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired (74,302,000) (99,326,000) Additions to property and equipment, net (14,831,000) (24,801,000) Distributions to unconsolidated joint ventures, net of advances (1,103,000) (322,000) Distributions to minority interest owners (9,000) (109,000) ------------ ------------- Net cash used in investing activities (90,245,000) (124,558,000) ------------ -------------
(Continued) 5 6 AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Continued)
For the Nine Months Ended September 30 ------------------------------ 1996 1997 ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on debt and capital leases (9,248,000) (9,509,000) Proceeds from issuance of debt 25,300,000 119,345,000 Proceeds from exercise of stock options 2,365,000 2,258,000 Deferred financing costs (1,309,000) (372,000) Proceeds from equity offering, net 66,032,000 -- ------------ ------------- Net cash provided from financing activities 83,140,000 111,722,000 ------------ ------------- DECREASE IN CASH AND CASH EQUIVALENTS (1,906,000) (755,000) CASH AND CASH EQUIVALENTS, beginning of period 4,224,000 7,299,000 ------------ ------------- CASH AND CASH EQUIVALENTS, end of period $ 2,318,000 $ 6,544,000 ============ ============= SUPPLEMENTAL INFORMATION: Cash payments of interest $ 6,058,000 $ 11,418,000 ============ ============= Cash payments of income taxes $ 7,588,000 $ 2,493,000 ============ =============
The accompanying notes to interim condensed consolidated financial statements are an integral part of these statements. 6 7 AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 AND 1996 1. ORGANIZATION AND BACKGROUND: The registrant is a health care services company engaged in the provision of home health care services. The Company's home health care services consist primarily of the provision of respiratory and infusion therapies and the rental and sale of home medical equipment and home health care supplies. For the nine months ended September 30, 1997, such services represented 46%, 18% and 36%, respectively, of net revenues. As of September 30, 1997, the Company provided these services to patients primarily in the home through 340 centers in 36 states. 2. OXYGEN REIMBURSEMENT CUT AND RELATED RESTRUCTURING: In August, Congress enacted and President Clinton signed the Balanced Budget Act of 1997 which will cut the Medicare reimbursement rate for oxygen related services by 25 percent on January 1, 1998, and by another five percent in 1999. In addition, Consumer Price Index increases in oxygen reimbursement rates will not resume until the year 2003. American HomePatient is one of the nation's largest providers of home oxygen services to patients, many of whom are Medicare recipients, and is therefore significantly affected by this legislation. Medicare oxygen reimbursements account for approximately 23.5 percent of the Company's revenues. On September 25, 1997, the Company announced initiatives to aggressively respond to planned Medicare reimbursement cuts by fundamentally reshaping the Company for long-term growth and value creation. More than 100 of the Company's total operating and billing locations will be impacted by the planned activities. The specific actions resulted in pre-tax accounting charges in the third quarter of 1997 of $65.0 million due to the closure, consolidation, or scaling back of approximately 20 percent of the Company's total operating centers, the closure or scaling back of nine billing centers, the elimination of four operating regions, the scaling back or elimination of marginal products and services at numerous locations, and the related termination of approximately 313 employees in the affected operating and billing centers. These activities are expected to be substantially completed by June 1998. The $65.0 million pre-tax charges recorded in the third quarter of 1997 specifically related to the write-down of goodwill and other non current assets ($8.2 million), the closure, consolidation, scaling back, or elimination of services at selected locations ($44.8 million), and the negative impact on the remaining operating locations ($12.0 million). The write-off of goodwill and other non current assets is required under SFAS No. 121 based upon management's estimate of the impact of the announced oxygen cuts on the Company's continuing operations. Management's projections of future operations considering the reduced reimbursement rates for oxygen indicated that the carrying value of goodwill and other non current assets should be written down by $8.2 million. The closure, consolidation, scaling back, or elimination of services at more than 100 of the Company's operating and billing centers resulted in the write-off of goodwill and other intangible assets specifically identified with affected locations ($12.2 million), the accrual of estimated employee severance and related exit costs ($6.7 million), the accrual of estimated facility exit costs including future lease costs, the write-off of leasehold improvements, and the write-down of furniture and equipment ($6.1 million), the write-down of accounts receivable to estimated realizable value ($8.7 million), the write-down of inventory to estimated realizable value ($2.2 million), the write-down of rental equipment to estimated realizable value ($2.8 million), the termination of related management contracts ($3.0 million), and other exit costs ($3.1 million). Due to the comprehensive nature of this restructuring, including the consolidation of regional responsibilities and additional management attention required to accomplish the restructuring in the desired timeframe, negative impacts are anticipated in the remaining operating 7 8 businesses relative to realization of accounts receivable, inventories and rental equipment, for which an additional $12.0 million charge was recorded. The cash portion of the pre-tax accounting charge is estimated to be approximately $17.3 million. No material amounts were charged against the related accruals in the third quarter of 1997. The accounting charges discussed above are recorded in the accompanying third quarter of 1997 interim condensed consolidated statements of operations in the following classifications: Cost of sales $ 5,255,000 Operating expenses 17,751,000 Restructuring charge 33,829,000 Goodwill impairment 8,165,000 ----------- Total unusual charges $65,000,000 ===========
8 9 3. BASIS OF FINANCIAL STATEMENTS: The interim condensed consolidated financial statements of the Company for the three and nine months ended September 30, 1997 and 1996 included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of only normally recurring accruals) necessary to present fairly the financial position at September 30, 1997 and the results of operations and the cash flows for the three and nine months ended September 30, 1997 and 1996. The results of operations for the three and nine months ended September 30, 1997 and 1996 are not necessarily indicative of the operating results for the entire respective years. These interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 4. ACQUISITIONS: During 1997 and effective through September 30, 1997, the Company acquired 27 home health care companies with combined annualized revenue of approximately $77 million for total consideration of approximately $94 million, including cash, satisfaction of certain liabilities, and notes payable issued to sellers. Since January 1, 1996 and effective through September 30, 1997, American HomePatient has acquired 67 home health care companies. The terms of the 1996 and 1997 acquisitions, including the consideration paid, were the result of arm's-length negotiations. The acquisitions were funded via a combination of cash from Company reserves, seller-financed notes, and draws on the Company's Bank Credit Facility (see below). On June 6, 1997, the Company entered into a Third Amended and Restated Bank Credit Facility ("Bank Credit Facility") to increase commitments thereunder to $325.0 million. This Facility includes a $150.0 million five-year term loan and a $175.0 million five-year revolving line of credit. The various financial and operating covenants are substantially similar to those under the second amended and restated Bank Credit Facility. Borrowings under the Bank Credit Facility may be used for acquisitions and other general corporate purposes, subject to the terms and conditions of the respective credit and security agreements. Most of the Company's operating assets have been pledged as security for borrowings under the Bank Credit Facility. The Bank Credit Facility contains various financial covenants, the most restrictive of which relate to measurements of shareholders' equity, leverage ratios, and interest coverage ratios. 9 10 5. NET INCOME (LOSS) PER SHARE: Net income per share is based on the weighted average number of the Company's common and common equivalent shares outstanding or subscribed which pertain to the respective operations included in each period. Common stock equivalents result from stock options issued to management, employees, and directors as well as from warrants to acquire common shares issued by the Company, and are determined using the treasury stock method. Statement of Financial Accounting Standards No. 128, "Earnings per Share", ("SFAS 128"), has been issued effective for fiscal periods ending after December 15, 1997. SFAS No. 128 establishes standards for computing and presenting earnings per share. The Company is required to adopt the provisions of SFAS No. 128 in the fourth quarter of 1997. Under the standards established by SFAS 128, earnings per share is measured at two levels: basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares after considering the additional dilution related to preferred stock, convertible debt, options and warrants. The following pro forma amounts present the basic earnings per share and diluted earnings per share as if the Company had adopted SFAS 128 for the periods presented:
(Unaudited Pro Forma) ----------------------------------------------------------- Three Months ended Sept. 30, Nine Months Ended Sept. 30, ---------------------------- --------------------------- 1996 1997 1996 1997 -------- -------- -------- -------- BASIC EARNINGS PER SHARE $0.29 $(2.70) $0.83 $(2.07) ----- ------ ----- -------- DILUTED EARNINGS PER SHARE $0.29 $(2.68) $0.80 $(2.04) ----- ------ ----- --------
10 11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RISK FACTORS - IN CONNECTION WITH THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THE COMPANY HEREBY MAKES REFERENCE TO ITEMS SET FORTH UNDER THE HEADING "RISK FACTORS" IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-2, AS AMENDED (REGISTRATION NO. 33-89568). SUCH CAUTIONARY STATEMENTS IDENTIFY IMPORTANT FACTS THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS MADE BY OR ON BEHALF OF THE COMPANY IN THIS OR ANY OTHER SECTION OF THIS FORM 10-Q. GENERAL The Company's home health care services consist primarily of the provision of home respiratory therapy, the provision of home infusion therapy and the rental and sale of home medical equipment and supplies. These services and products are paid for primarily by Medicare, Medicaid and other third-party payors. The following table sets forth the percentage of the Company's net revenues represented by each line of business for the periods presented:
Nine Months Ended September 30, ------------------------------- 1996 1997 ---- ---- Home respiratory therapy services 50% 46% Home infusion therapy services 18 18 Home medical equipment and medical supplies 32 36 ---- ---- Total 100% 100% ==== ====
The Company reports its net revenues as follows: (i) sales and related services; (ii) rentals and other; and (iii) earnings from hospital joint ventures. Sales and related services revenues are derived from the sale of aerosol and respiratory therapy equipment and supplies and services related to the delivery of these products, the provision of infusion therapies, and the sale of home health care equipment and supplies. 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 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 hospital joint ventures. Cost of sales and related services includes the cost of equipment, drugs and related supplies sold to patients. Operating expenses include center labor costs, delivery expenses, selling costs, occupancy costs, costs related to rentals other than depreciation, billing center costs, other operating costs and provision for doubtful accounts. General and administrative expenses include corporate and area management expenses and costs. Since its inception, the Company has experienced substantial growth. This growth is primarily attributable to the Company's pursuit of an acquisition strategy targeting successful, operating home health care businesses, through both 100% ownership and joint venture partnerships. Since the Company's initial public offering in November 1991, the Company 11 12 has expanded operations from 24 home health care centers in four states to 340 home health care centers in 36 states as of September 30, 1997. Effective during 1996, the Company acquired 40 home health care companies and effective during the nine months ended September 30, 1997 the Company acquired 27 home health care companies. The Company continues its integration of recently acquired home health care centers. The Company's experience and management expertise is applied wherever possible to improve the operating efficiency of the new centers. Quality methods and ideas from the acquired centers become part of the systems and procedures of the combined Company. Profitable services that were not formerly provided are being added where such opportunities exist. As the Company grows, economies of scale are realized in purchasing goods and services used in the Company's business and, to some extent, its management of overhead expenses. The Office of Inspector General of the Department of Health and Human Services ("OIG") has expanded its auditing of the healthcare industry in an effort to better detect and remedy fraud and abuse and irregularities in Medicare and Medicaid billing. The Company has been notified that the OIG plans to audit the Company for the period of time from 1990 to the present. While management does not believe such an audit will have a material impact on the Company, this matter is in its preliminary stages and its outcome cannot be predicted with certainty. MEDICARE REIMBURSEMENT FOR OXYGEN THERAPY SERVICES In August, Congress enacted and President Clinton signed the Balanced Budget Act of 1997 which will cut the Medicare reimbursement rate for oxygen related services by 25 percent on January 1, 1998, and by another five percent in 1999. In addition, Consumer Price Index increases in oxygen reimbursement rates will not resume until the year 2003. American HomePatient is one of the nation's largest providers of home oxygen services to patients, many of whom are Medicare recipients, and is therefore significantly affected by this legislation. Medicare oxygen reimbursements account for approximately 23.5 percent of the Company's revenues. On September 25, 1997, the Company announced initiatives to aggressively respond to planned Medicare reimbursement cuts by fundamentally reshaping the Company for long-term growth and value creation. More than 100 of the Company's total operating and billing locations will be impacted by the planned activities. The specific actions resulted in pre-tax accounting charges in the third quarter of 1997 of $65.0 million due to the closure, consolidation, or scaling down of approximately 20 percent of the Company's total operating centers, the closure or scaling back of nine billing centers, the elimination of four operating regions, the scaling back or elimination of marginal products and services at numerous locations, and the related termination of approximately 313 employees. RESULTS OF OPERATIONS As fully discussed in Note 2 of the September 30, 1997 interim financial statements, the Company recorded $65.0 million of accounting charges in the quarter ended September 30, 1997 related to the oxygen reimbursement cut and related restructuring. In addition to the $65.0 million charge, the Company also recorded the following unusual non-recurring charges in the third quarter of 1997. The Company finalized the results of physical inventory counts for certain acquired locations primarily in Oklahoma and Texas and recorded a charge to income of $1.0 million. In connection with the Company's analysis of locations during the planning for the restructuring discussed above, management determined that an additional charge of $1.0 million was required to appropriately state the required franchise tax accrual. The impact of these charges on the various classifications within the interim condensed statements of operations is as follows: Cost of sales $ 6,255,000 Operating expenses 18,751,000 Restructuring charge 33,829,000 Goodwill impairment 8,165,000 ----------- $67,000,000 ===========
12 13 The following table and discussion set forth items from the income statement as a percentage of net revenues before the unusual charges for the periods indicated: PERCENTAGE OF NET REVENUES
Three Months Nine Months Ended September 30 Ended September 30 ------------------ ------------------ 1996 1997 1996 1997 ------ ------ ------ ------ Net Revenues 100.0% 100.0% 100.0% 100.0% Costs and expenses: Cost of sales and related services 21.5 24.2 21.4 23.4 Operating expenses 50.8 50.1 50.9 50.9 General and administrative 6.2 4.0 6.3 4.2 Depreciation and amortization 9.1 8.8 9.0 8.7 Interest 2.7 4.4 3.1 4.1 ------ ------ ------ ------ Total costs and expenses 90.3% 91.5% 90.7% 91.3% ------ ------ ------ ------ Income from operations before income taxes 9.7% 8.5% 9.3% 8.7% ====== ====== ====== ======
The operations of acquired centers are included in the operations of the Company from the effective date of each acquisition. Because of the substantial acquisition activity, the comparison of the results of operations between 1997 and 1996 is materially impacted by the operations of these acquired businesses. For comparative purposes, the Company separates operations into "same-store" and "acquisitions." An acquired center becomes "same-store" beginning with its thirteenth month of operations as part of the Company. THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1996 NET REVENUES. Net revenues increased from $72.0 million for the quarter ended September 30, 1996 to $102.7 million for the same period in 1997, an increase of $30.7 million, or 43%. Same-store net revenues, including net revenues of same-store hospital joint ventures managed by the Company and accounted for under the equity method, increased 9%. Net revenues of same-store hospital joint ventures contributed 3% to this total same-store net revenue growth rate. Following is a discussion of the components of net revenues: Sales and Related Services Revenues. Sales and related services revenues increased from $32.1 million for the quarter ended September 30, 1996 to $48.1 million for the same period in 1997, an increase of $16.0 million, or 50%. This increase is primarily attributable to the acquisition of home health care businesses and same-store revenue growth. Rentals and Other Revenue. Rentals and other revenues increased from $38.2 million for the quarter ended September 30, 1996 to $52.7 million for the same period in 1997, an increase of $14.5 million or 38%. This increase is primarily attributable to the acquisition of home health care businesses and same-store revenue growth. Earnings from Hospital Joint Ventures. Earnings from hospital joint ventures increased from $1.7 million for the quarter ended September 30, 1996 to $1.9 million for the same period in 1997, an increase of $200,000, or 12%. This increase is primarily attributable to net growth in the Company's existing hospital joint ventures. 13 14 COST OF SALES AND RELATED SERVICES. Cost of sales and related services increased from $15.4 million for the quarter ended September 30, 1996 to $24.8 million for the same period in 1997, an increase of $9.4 million, or 61%. As a percentage of sales and related services revenues, cost of sales and related services increased from 48% to 52%. This increase is attributable to a change in the mix of sales and related services revenues attributable primarily to the acquired home health care businesses. OPERATING EXPENSES. Operating expenses increased from $36.6 million for the quarter ended September 30, 1996 to $51.4 million for the same period in 1997, an increase of $14.8 million, or 40%. This increase is primarily attributable to the acquired home health care businesses. As a percentage of revenue, operating expenses decreased from 51% to 50% despite the fact that certain expenses which were classified as general and administrative expenses in the quarter ended September 30, 1996 were classified as operating expenses in the quarter ended September 30, 1997. As a percentage of net revenues, combined operating and general and administrative expenses have decreased from 57% to 54%. This decrease is primarily attributable to operating and general and administrative expense improvement and lower operating expense levels of the acquired home health care businesses. GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased from $4.5 million for the quarter ended September 30, 1996 to $4.1 million for the same period in 1997, a decrease of $400,000. This decrease is primarily attributable to the reclassification of certain expenses which were classified as general and administrative for the quarter ended September 30, 1996 but were classified as operating expenses for the quarter ended September 30, 1997. As a percentage of net revenues, combined operating and general and administrative expenses have decreased from 57% to 54%. This decrease is primarily attributable to operating and general and administrative expense improvement and lower operating expense levels of the acquired home health care businesses. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased from $6.5 million for the quarter ended September 30, 1996 to $9.0 million for the same period in 1997, an increase of $2.5 million. This increase is primarily attributable to the acquired home health care businesses. INTEREST. Interest expense increased from $1.9 million for the quarter ended September 30, 1996 to $4.6 million for the same period in 1997, an increase of $2.7 million. The increase is due to additional interest expense associated with increased borrowings used to fund acquisitions of home health care businesses. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 NET REVENUES. Net revenues increased from $189.5 million for the nine months ended September 30, 1996 to $282.0 million for the same period in 1997, an increase of $92.5 million, or 49%. Same-store net revenues, including net revenues of same-store hospital joint ventures managed by the Company and accounted for under the equity method, increased 10%. Same-store hospital joint ventures contributed 2% of this total same-store growth rate. Following is a discussion of the components of net revenues: Sales and Related Services Revenues. Sales and related services revenues increased from $82.9 million for the nine months ended September 30, 1996 to $130.7 million for the 14 15 same period in 1997, an increase of $47.8 million or 58%. This increase is primarily attributable to the acquired home health care businesses and same-store revenue growth. Rentals and Other Revenue. Rentals and other revenues increased from $102.1 million for the nine months ended September 30, 1996 to $146.0 million for the same period in 1997, an increase of $43.9 million, or 43%. This increase is primarily attributable to the acquired home health care businesses and same-store revenue growth. Earnings from Joint Ventures. Earnings from joint ventures increased from $4.4 million for the nine months ended September 30, 1996 to $5.3 million for the same period in 1997, an increase of $900,000, or 20%. Of this increase, $700,000 is attributable to net growth in the existing hospital joint ventures. The remainder of the increase is attributable to acquired joint ventures. COST OF SALES AND RELATED SERVICES. Cost of sales and related services increased from $40.5 million for the nine months ended September 30, 1996 to $66.2 million for the same period in 1997, an increase of $25.7 million, or 63%. As a percentage of sales and related services revenues, cost of sales and related services increased from 49% to 51%. This increase is attributable to a change in the mix of sales and related services revenues attributable primarily to the acquired home health care businesses. OPERATING EXPENSES. Operating expenses increased from $96.4 million for the nine months ended September 30, 1996 to $143.6 million for the same period in 1997, an increase of $47.2 million, or 49%. This increase is primarily attributable to the acquired home health care businesses. As a percentage of net revenues, operating expenses remained constant at 51% despite the fact that certain expenses which were classified as general and administrative expenses for the nine months ended September 30, 1996 were classified as operating expenses for the nine months ended September 30, 1997. As a percentage of net revenues, combined operating and general and administrative expenses decreased from 57% to 55%. This decrease is primarily attributable to operating and general and administrative expense improvement and lower operating expense levels of the acquired home health care businesses. GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased from $12.0 million for the nine months ended September 30, 1996 to $11.8 million for the same period in 1997, a decrease of $200,000. As a percentage of net revenue, general and administrative expenses have decreased from 6% to 4%. This decrease is attributable to the reclassification of certain expenses which were classified as general and administrative for the nine months ended September 30, 1996 but were classified as operating expenses for the nine months ended September 30, 1997. As a percentage of net revenues, combined operating and general and administrative expenses decreased from 57% to 55%. This decrease is primarily attributable to operating and general and administrative expense improvement and lower operating expense levels of the acquired home health care businesses. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased from $17.1 million for the nine months ended September 30, 1996 to $24.5 million for the same period in 1997, an increase of $7.4 million, or 43%. This increase is primarily attributable to the acquired home health care businesses. 15 16 INTEREST. Interest expense increased from $5.9 million for the nine months ended September 30, 1996 to $11.4 million for the same period in 1997, an increase of $5.5 million. The increase is due to additional interest expense associated with increased borrowings used to fund acquisitions of home health care businesses. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997, the Company's working capital was $99.4 million and the current ratio was 2.9x as compared to working capital of $84.0 million and a current ratio of 3.4x at December 31, 1996. The Company had current maturities of long-term debt of approximately $9.0 million at September 30, 1997. 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. 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 (i) receiving a new medical therapy or (ii) covered by Medicare or Medicaid. Net patient accounts receivable were $76.1 million and $89.8 million at December 31, 1996 and September 30, 1997, respectively. This increase was primarily attributable to the acquisition of home health care businesses and the same-store revenue growth for the nine months ended September 30, 1997 net of $17.7 million in accounts receivable related charges incurred in the current quarter associated with the restructuring plan as described in Note 2 of the interim financial statements. This represented an average of approximately 93 and 98 days' sales in accounts receivable at December 31, 1996 and September 30, 1997, respectively. Net cash provided from operating activities was $5.2 million and $12.1 million for the nine months ended September 30, 1996 and 1997, respectively. These amounts primarily represent net income plus depreciation and amortization and provisions for doubtful accounts and changes in the various components of working capital. Net cash used in investing activities was $90.2 million and $124.6 million for the nine months ended September 30, 1996 and 1997, respectively. These amounts primarily represent acquisitions of home health care businesses and property and equipment additions. Net cash provided from financing activities was $83.1 million and $111.7 million for the nine months ended September 30, 1996 and 1997, respectively. These amounts primarily represent proceeds from the issuance of long-term debt, the issuance of common stock in connection with an equity offering and stock option exercises offset by principal repayments of debt. The Company's principal capital requirements are for acquisitions of additional home health care companies and expansion of the services provided through its existing home health care centers. The Company has financed and intends to continue to finance these requirements, its net revenue growth, and working capital needs with net cash provided by operations and with borrowings under the Bank Credit Facility. On June 6, 1997, the Company amended and restated the Bank Credit Facility to increase commitments thereunder to $325.0 million. The Bank Credit Facility includes a $150.0 million five-year term loan and a $175.0 million five- 16 17 year revolving line of credit. Borrowings under the Bank Credit Facility may be used to finance acquisitions and for other general corporate purposes, subject to the terms and conditions of the credit and security agreements. Most of the Company's operating assets have been pledged as security for borrowings under the Bank Credit Facility. Interest is payable on borrowings under the Bank Credit Facility, at the election of the Company, at either a "Base Lending Rate" or an "Adjusted Eurodollar Rate" (each as defined in the Bank Credit Facility), plus a margin from 0% to 0.5% and from 0.375% to 1.25%, respectively. The Company's ability to borrow under the Bank Credit Facility terminates on June 6, 2002, subject to exceptions set forth therein. As of September 30, 1997 the weighted average borrowing rate was 6.96%. A commitment fee of up to .375% per annum (.375% as of September 30, 1997) is payable by the Company on the undrawn balance. The interest rate and commitment fee are based on the leverage ratio as defined in the Bank Credit Facility. The Bank Credit Facility contains various financial covenants, the most restrictive of which relate to measurements of stockholders' equity, leverage ratios and interest coverage ratios. The Bank Credit Facility also contains certain covenants which, among other things, impose certain limitations or prohibitions on the Company with respect to the incurrence of certain indebtedness, the creation of security interest on the assets of the Company, the payment of dividends on and the redemption or repurchase of securities of the Company, investments, acquisitions, investments in joint ventures, capital expenditures and sales of Company assets. The Company was in compliance with these covenants at September 30, 1997. The Company's capital expenditures consist of purchases of home health care rental equipment and routine capital purchases at its regional and corporate offices. Through September 30, 1997, $24.8 million of capital expenditures had been incurred. IMPLEMENTATION OF FINANCIAL ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") has been issued effective for fiscal periods ending after December 15, 1997. SFAS 128 establishes standards for computing and presenting earnings per share. The Company is required to adopt the provisions of SFAS 128 in the fourth quarter of 1997 and does not expect adoption thereof to have a material effect on the Company's financial position or results of operations. Summary Management believes that the impact of the Medicare oxygen reimbursement rate reductions contained in the Balanced Budget Act of 1997 will require actions to help assure that available cash, funding available under the Bank Credit Facility and funds generated from operations will be sufficient for the Company to satisfy its capital expenditures, acquisition activities, working capital and debt requirements for the next twelve months. The Company's future operating results could differ materially from those historically achieved or previously projected in forward looking statements made by or on behalf of the Company. 17 18 PART II. OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS The Office of Inspector General of the Department of Health and Human Services ("OIG") has expanded its auditing of the healthcare industry in an effort to better detect and remedy fraud and abuse and irregularities in Medicare and Medicaid billing. The Company has been notified that the OIG plans to audit the Company for the period of time from 1990 to the present. While management does not believe such an audit will have a material impact on the Company, this matter is in its preliminary stages and its outcome cannot be predicted with certainty. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits. The exhibits filed as part of this Report are listed on the Index to Exhibits immediately following the signature page. (B) Reports on Form 8-K. A report on Form 8-K dated September 23, 1997 was filed to report the Company's reorganization efforts in response to the Medicare Oxygen reimbursement rate reductions included in the Balanced Budget Act of 1997. No financial statements were included. 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN HOMEPATIENT, INC. November 13, 1997 By: /s/Mary Ellen Rodgers ---------------------------------------------- Mary Ellen Rodgers Chief Financial Officer and An Officer Duly Authorized to Sign on Behalf of the registrant 19 20 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 27 Financial Data Schedule (for SEC use only) 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF AMERICAN HOMEPATIENT, INC. FOR THE DATA FROM THE 9 MONTHS ENDED SEPTEMBER 1, 1997 AMD IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 9-MOS DEC-31-1997 JAN-1-1997 SEP-30-1997 6,544,000 0 144,517,000 47,548,000 21,935,000 152,070,000 123,181,000 56,591,000 494,487,000 52,643,000 256,778,000 0 0 148,000 188,047,000 494,487,000 130,726,000 282,026,000 72,442,000 72,442,000 240,626,000 9,278,000 11,450,000 (42,492,000) (11,836,000) (30,656,000) 0 0 0 (30,656,000) (2.04) 0
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