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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CHECK ONE FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
---------- ----------
AMERICAN HOMEPATIENT, INC.
--------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-19532 62-1474680
-------- ------- ----------
(STATE OR OTHER JURISDICTION OF (COMMISSION (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) FILE NUMBER)
5200 MARYLAND WAY, SUITE 400, BRENTWOOD, TENNESSEE 37027
--------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(615) 221-8884
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF
CHANGES SINCE LAST REPORT.)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
16,367,389
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF AUGUST 8, 2002)
TOTAL NUMBER OF SEQUENTIALLY
NUMBERED PAGES IS 38
1
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THESE FINANCIAL STATEMENTS HAVE NOT BEEN REVIEWED BY INDEPENDENT PUBLIC
ACCOUNTANTS - SEE NOTE 5
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
June 30, December 31,
2002 2001
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,693,000 $ 9,159,000
Restricted cash 67,000 265,000
Accounts receivable, less allowance for doubtful accounts of
$28,884,000 and $32,152,000, respectively 57,452,000 61,661,000
Inventories 14,023,000 13,257,000
Prepaid expenses and other current assets 1,947,000 1,583,000
------------- -------------
Total current assets 78,182,000 85,925,000
------------- -------------
PROPERTY AND EQUIPMENT, at cost: 171,537,000 171,266,000
Less accumulated depreciation and amortization (123,399,000) (125,043,000)
------------- -------------
Property and equipment, net 48,138,000 46,223,000
------------- -------------
OTHER ASSETS:
Goodwill 121,214,000 189,699,000
Investment in joint ventures 9,238,000 9,492,000
Deferred financing costs, net 2,996,000 2,939,000
Other assets, net 9,472,000 10,386,000
------------- -------------
Total other assets 142,920,000 212,516,000
------------- -------------
$ 269,240,000 $ 344,664,000
============= =============
(Continued)
2
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
June 30, December 31,
2002 2001
------------- -------------
CURRENT LIABILITIES:
Current portion of long-term debt and capital leases $ 276,376,000 $ 282,087,000
Accounts payable 18,809,000 19,360,000
Other payables 2,510,000 2,600,000
Accrued expenses:
Payroll and related benefits 6,125,000 8,054,000
Interest 677,000 907,000
Insurance 6,357,000 5,229,000
Other 5,793,000 6,024,000
------------- -------------
Total current liabilities 316,647,000 324,261,000
------------- -------------
NONCURRENT LIABILITIES:
Long-term debt and capital leases, less current portion 692,000 723,000
Other noncurrent liabilities 4,790,000 4,783,000
------------- -------------
Total noncurrent liabilities 5,482,000 5,506,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
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, 16,367,000 and
16,327,000 shares, respectively 164,000 163,000
Paid-in capital 173,985,000 173,975,000
Accumulated deficit (227,038,000) (159,241,000)
------------- -------------
Total shareholders' equity (deficit) (52,889,000) 14,897,000
------------- -------------
$ 269,240,000 $ 344,664,000
------------- -------------
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
3
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
REVENUES:
Sales and related service revenues $ 33,757,000 $ 42,453,000 $ 68,580,000 $ 86,321,000
Rentals and other revenues 45,453,000 46,182,000 90,653,000 92,376,000
Earnings from joint ventures 1,120,000 1,140,000 2,415,000 2,199,000
------------ ------------ ------------- -------------
Total revenues 80,330,000 89,775,000 161,648,000 180,896,000
------------ ------------ ------------- -------------
EXPENSES:
Cost of sales and related services 15,553,000 21,424,000 31,828,000 43,594,000
Cost of rentals and other revenues, including rental
equipment depreciation of $4,767,000, $5,492,000,
$9,406,000 and $10,664,000, respectively 8,580,000 8,978,000 16,778,000 17,496,000
Operating 45,392,000 48,492,000 91,363,000 98,112,000
General and administrative 4,392,000 3,952,000 8,498,000 7,890,000
Depreciation, excluding rental equipment, and amortization 952,000 2,609,000 1,866,000 5,313,000
Amortization of deferred financing costs 880,000 659,000 1,593,000 1,298,000
Interest 4,720,000 5,621,000 9,501,000 15,600,000
Gain on sale of assets of center -- -- (667,000) --
------------ ------------ ------------- -------------
Total expenses 80,469,000 91,735,000 160,760,000 189,303,000
------------ ------------ ------------- -------------
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (139,000) (1,960,000) 888,000 (8,407,000)
PROVISION FOR INCOME TAXES 100,000 150,000 200,000 300,000
------------ ------------ ------------- -------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (239,000) (2,110,000) 688,000 (8,707,000)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- (68,485,000) --
------------ ------------ ------------- -------------
NET LOSS $ (239,000) $ (2,110,000) $ (67,797,000) $ (8,707,000)
============ ============ ============= =============
NET INCOME (LOSS) PER COMMON SHARE BEFORE CHANGE
IN ACCOUNTING PRINCIPLE:
- Basic $ (0.01) $ (0.13) $ 0.04 $ (0.53)
============ ============ ============= =============
- Diluted $ (0.01) $ (0.13) $ 0.04 $ (0.53)
============ ============ ============= =============
NET LOSS PER COMMON SHARE:
- Basic $ (0.01) $ (0.13) $ (4.15) $ (0.53)
============ ============ ============= =============
- Diluted $ (0.01) $ (0.13) $ (4.05) $ (0.53)
============ ============ ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
- Basic 16,367,000 16,661,000 16,349,000 16,552,000
============ ============ ============= =============
- Diluted 16,367,000 16,661,000 16,732,000 16,552,000
============ ============ ============= =============
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
4
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30,
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) before cumulative effect of change in
accounting principle $ 688,000 $ (8,707,000)
Adjustments to reconcile net income (loss) before
cumulative effect of change in accounting principle to net cash provided
from (used in) operating activities:
Depreciation and amortization 11,272,000 15,977,000
Amortization of deferred financing costs 1,593,000 1,298,000
Equity in earnings of unconsolidated joint ventures (1,430,000) (1,157,000)
Minority interest 145,000 144,000
Gain on sale of assets of center (667,000) --
Change in assets and liabilities, net of effects from sales of assets of
centers:
Restricted cash 198,000 82,000
Accounts receivable, net 3,705,000 5,881,000
Inventories (1,036,000) 2,254,000
Prepaid expenses and other current assets (364,000) (317,000)
Accounts payable, other payables and accrued expenses (2,098,000) (6,128,000)
Other noncurrent liabilities (19,000) 32,000
Other assets 890,000 11,000
------------- -------------
Net cash provided from operating activities 12,877,000 9,370,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets of centers 1,805,000 189,000
Additions to property and equipment, net (13,258,000) (10,046,000)
Distributions and loan payments from (advances to)
unconsolidated joint ventures, net 1,610,000 934,000
Distributions to minority interest owners (119,000) (124,000)
------------- -------------
Net cash used in investing activities (9,962,000) (9,047,000)
------------- -------------
(Continued)
5
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Continued)
Six Months Ended June 30,
2002 2001
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and capital leases $ (5,742,000) $ (329,000)
Proceeds from Employee Stock Purchase Plan -- 202,000
Proceeds from exercise of stock options 11,000 --
Deferred financing costs (1,650,000) (1,660,000)
------------- -------------
Net cash used in financing activities (7,381,000) (1,787,000)
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS (4,466,000) (1,464,000)
CASH AND CASH EQUIVALENTS, beginning of period 9,159,000 12,081,000
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 4,693,000 $ 10,617,000
============= =============
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 9,609,000 $ 15,696,000
============= =============
Cash payments of income taxes $ 299,000 $ 2,122,000
============= =============
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these statements.
6
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
1. BASIS OF PRESENTATION
American HomePatient, Inc. (the "Company") was incorporated in Delaware in
September 1991. The Company's principal executive offices are located at 5200
Maryland Way, Suite 400, Brentwood, Tennessee 37027-5018, and its telephone
number at that address is (615) 221-8884. The Company provides home health care
services and products consisting primarily of respiratory and infusion therapies
and the rental and sale of home medical equipment and home health care supplies.
For the six months ended June 30, 2002, such services represented 65%, 15% and
20%, respectively of revenues. These services and products are paid for
primarily by Medicare, Medicaid and other third-party payors. As of June 30,
2002, the Company provided these services to patients primarily in the home
through 286 centers in 35 states: Alabama, Arizona, Arkansas, Colorado,
Connecticut, Delaware, Florida, Georgia, Illinois, Iowa, Kansas, Kentucky,
Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada,
New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania,
South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, West
Virginia and Wisconsin. The Company and certain of its subsidiaries filed
voluntary petitions for protection under Chapter 11 of Title 11 of the United
States Code (the "Bankruptcy Code") on July 31, 2002 (the "Bankruptcy Filing").
The Company currently is operating its business as a debtor-in-possession
subject to the jurisdiction of the United States Bankruptcy Court for the Middle
District of Tennessee. The Bankruptcy Filing is discussed in more detail in Note
9. Since the Bankruptcy Filing occurred after the end of the quarterly results
presented herein, such results have not been prepared in accordance with the
American Institute of Certified Public Accountants Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code."
2. BANK CREDIT FACILITY
The Company is the borrower under a credit facility (the "Bank Credit Facility")
evidenced by a Fifth Amended and Restated Credit Agreement (the "Amended Credit
Agreement") between the Company and Bankers Trust Company, as agent for a
syndicate of lenders (the "Lenders"). Indebtedness under the Bank Credit
Facility as of July 31, 2002 totals approximately $275.4 million (which excludes
letters of credit totaling $3.4 million).
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
7
3. SALE OF ASSETS OF CENTER
In the quarter ended March 31, 2002 the Company recorded a pre-tax gain of
approximately $0.7 million related to the sale of the assets of an infusion
center. Effective March 19, 2002 substantially all of the assets of the center
were sold for approximately $1.3 million in cash. Funds representing the value
of the remaining assets of the center have been escrowed pending regulatory
approvals and will be released once these are obtained. During 2001, the
infusion center generated approximately $9.4 million in total annualized
revenues. The proceeds of this sale were used to pay down debt under the
Company's Bank Credit Facility.
4. EARNINGS PER SHARE
Under the standards established by Statement of Financial Accounting Standards
No. 128, earnings per share is measured at two levels: basic earnings per share
and diluted earnings per share. Basic earnings per share is computed by dividing
net income (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. The following information is necessary to calculate earnings per
share for the periods presented:
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
------------ ------------ ------------- -------------
Income (loss) before cumulative effect of
change in accounting principle $ (239,000) $ (2,110,000) $ 688,000 $ (8,707,000)
Cumulative effect of change in accounting
principle -- -- (68,485,000) --
------------ ------------ ------------- -------------
Net loss $ (239,000) $ (2,110,000) $ (67,797,000) $ (8,707,000)
============ ============ ============= =============
Weighted average common shares
outstanding 16,367,000 16,661,000 16,349,000 16,552,000
Effect of dilutive options and warrants -- -- 383,000 --
------------ ------------ ------------- -------------
Adjusted diluted common shares outstanding 16,367,000 16,661,000 16,732,000 16,552,000
============ ============ ============= =============
Net income (loss) per common share before
cumulative effect of change in accounting
principle
- Basic $ (0.01) $ (0.13) $ 0.04 $ (0.53)
============ ============ ============= =============
- Diluted $ (0.01) $ (0.13) $ 0.04 $ (0.53)
============ ============ ============= =============
Net loss per common share
- Basic $ (0.01) $ (0.13) $ (4.15) $ (0.53)
============ ============ ============= =============
- Diluted $ (0.01) $ (0.13) $ (4.05) $ (0.53)
============ ============ ============= =============
8
5. BASIS OF FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of the Company for the
six months ended June 30, 2002 and 2001 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 June 30, 2002 and the results of operations and the cash
flows for the six months ended June 30, 2002 and 2001.
The Company terminated its former auditor, Arthur Andersen LLP, effective July
3, 2002, and is in the process of selecting a new auditor. As a result, these
interim consolidated financial statements have not been reviewed by an
independent public accountant. This review is required pursuant to the rules
and regulations in effect for the Company as a filing entity under Section
13(a) of the Securities Exchange Act of 1934 and could have resulted in
modifications to the accompanying financial statements, thus limiting the
ability of the officers of the Company to certify these financials as required
by Section 906 of the Sarbanes-Oxley Act of 2002.
The results of operations for the six months ended June 30, 2002 and 2001 are
not necessarily indicative of the operating results for the entire respective
years. These unaudited interim consolidated financial statements should be read
in conjunction with the audited financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2001.
Certain reclassifications have been made to the 2001 consolidated financial
statements to conform to the 2002 presentation.
6. COMPREHENSIVE LOSS
Comprehensive loss for the six months ended June 30, 2002 and 2001 was comprised
solely of net losses.
7. NEW FINANCIAL ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141")
and Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. SFAS No. 141 also specifies criteria which intangible assets acquired
in a purchase method business combination must meet to be recognized and
reported apart from goodwill. SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 requires that intangible assets with finite useful
lives be amortized, and that goodwill and intangible assets with indefinite
lives no longer be amortized, but instead be tested for impairment at least
annually. Specifically, goodwill and intangible assets with indefinite useful
lives will not be amortized but will be subject to impairment tests based on
their estimated fair value. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated
9
residual values, and reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company was required to adopt the provisions of SFAS No. 141 immediately
upon issuance and the provisions of SFAS No. 142 effective January 1, 2002.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that was acquired in a purchase business combination
completed after June 30, 2001 would not be amortized, but would be evaluated for
impairment in accordance with the appropriate pre-SFAS No. 142 accounting
literature. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 continued to be amortized until the adoption of
SFAS No. 142. See Note 8 "Adoption of SFAS No. 142."
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 143, "Accounting for Asset Retirement Obligations"
("SFAS No. 143") effective for fiscal years beginning after June 15, 2002. SFAS
No. 143 requires that a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The Company does not expect the future adoption of SFAS
No. 143 to have a material effect on its financial position or results of
operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144") effective for fiscal years
beginning after December 15, 2001. SFAS No. 144 establishes a single accounting
model for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and broadens the presentation of discontinued
operations to include more disposal transactions. The Company's January 1, 2002
adoption of SFAS No. 144 has not had a material impact on its financial position
or results of operations.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS No. 145"). SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No.
145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also makes several technical corrections and clarifications to other
existing authoritative pronouncements. SFAS No. 145 is effective May 2002,
except for the rescission of SFAS No. 4, which is effective January 2003. The
Company is currently evaluating the impact of SFAS No. 145 on its financial
statements and will adopt the provisions of this statement accordingly.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146") effective for exit or disposal
activities that are initiated after December 31, 2002. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition
10
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The principal difference
between SFAS No. 146 and Issue 94-3 relates to the requirements for recognition
of a liability for a cost associated with an exit or disposal activity. SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at the date
of an entity's commitment to an exit plan. The Company is currently evaluating
the impact of SFAF No. 146 on its financial statements and will adopt the
provisions of this statement on January 1, 2003.
8. ADOPTION OF SFAS NO. 142
The Company adopted the provisions of SFAS No. 142 effective January 1, 2002. As
of the adoption date, the Company had unamortized goodwill in the amount of
$189.7 million. In accordance with SFAS No. 142, effective January 1, 2002 the
Company discontinued amortization of goodwill, which goodwill amortization
expense was $2.8 million for the six months ended June 30, 2001. Goodwill was
tested for impairment by comparing the fair value of goodwill to the carrying
value of goodwill. Fair value was determined using a combination of analyses
which included discounted cash flow calculations, market multiples and other
market information. The implied fair value of goodwill did not support the
carrying value of goodwill primarily due to the Company's highly leveraged
capital structure.
Based upon the results of the Company's initial impairment tests, the Company
recorded an impairment loss of $68.5 million in the quarter ended March 31,
2002, recognized as a cumulative effect of change in accounting principle. The
Company will conduct annual impairment tests hereafter, unless specific events
arise which warrant more immediate testing. Any subsequent impairment losses
will be recognized as an operating expense in the Company's consolidated
statements of operations.
11
The change in the carrying amount of goodwill for the six months ended June 30,
2002 is as follows:
Goodwill, net of accumulated amortization, as of January 1, 2002 $189,699,000
Transitional impairment loss 68,485,000
------------
Goodwill, net of accumulated amortization, as of June 30, 2002 $121,214,000
============
Actual results of operations for the three months and six months ended June 30,
2002 and pro forma results of operations for the three months and six months
ended June 30, 2001 had the Company applied the non-amortization provisions of
SFAS No. 142 in that period are as follows:
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ------------------------------------
2002 2001 2002 2001
------------ ------------ -------------- -------------
Reported net loss $ (239,000) $ (2,110,000) $ (67,797,000) $ (8,707,000)
Add: Goodwill amortization -- 1,420,000 -- 2,839,000
------------ ------------ -------------- -------------
Adjusted net loss $ (239,000) $ (690,000) $ (67,797,000) $ (5,868,000)
============ ============ ============== =============
Basic loss per share
Reported net loss $ (0.01) $ (0.13) $ (4.15) $ (0.53)
Goodwill amortization -- 0.09 -- 0.18
------------ ------------ -------------- -------------
Adjusted net loss $ (0.01) $ (0.04) $ (4.15) $ (0.35)
============ ============ ============== =============
Diluted loss per share
Reported net loss $ (0.01) $ (0.13) $ (4.05) $ (0.53)
Goodwill amortization -- 0.09 -- 0.18
------------ ------------ -------------- -------------
Adjusted net loss $ (0.01) $ (0.04) $ (4.05) $ (0.35)
============ ============ ============== =============
9. SUBSEQUENT EVENT
On July 31, 2002, the Company and 24 of its subsidiaries filed voluntary
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United
States Bankruptcy Court for the Middle District of Tennessee. These cases have
been administratively consolidated under case number 02-08915-GP3-11. Pleadings
in these cases may be viewed at the Court's website, www.tnmb.uscourts.gov. The
filing was prompted by the impending December 31, 2002 maturity of the Company's
Bank Credit Facility.
The Company continues to operate its business as a "debtor-in-possession" in
accordance with the applicable provisions of the Bankruptcy Code. The Company
has not sought to obtain debtor-in-possession secured financing (DIP Financing)
and currently does not intend to do so.
12
Rather, the Company intends to use cash flow and cash on hand to fund
day-to-day operations during the bankruptcy process, which is consistent with
its operations since the Lenders terminated the Company's ability to access a
revolving credit in 2000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
The filing of the bankruptcy stayed all actions against the Company to collect
any debts outstanding as of the petition date. The Company has filed a plan of
reorganization providing for the full repayment of these debts over time. The
interests of all shareholders in the Company would remain in place if the
proposed plan is confirmed. The interests of Creditors and other
parties-in-interest have a right to object to the Company's proposed plan. The
hearing on confirmation of this plan, which plan may be amended prior to the
hearing, will not occur prior to November 20, 2002. There can be no assurances
that the Court will confirm the Company's Plan of Reorganization and it is
uncertain what would happen to the Company in that event.
The Bankruptcy Filing should have no impact on the Company's existing joint
ventures with unrelated parties, and the Company currently does not anticipate
that any other subsidiary or affiliate of the Company will file a voluntary
petition for relief.
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 INCLUDING,
WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES," "ANTICIPATES,"
"INTENDS," "EXPECTS," "ESTIMATES," "PROJECTS", "MAY," "WILL", "LIKELY", "COULD"
AND WORDS OF SIMILAR IMPORT. SUCH STATEMENTS INCLUDE STATEMENTS CONCERNING THE
COMPANY'S PLAN OF REORGANIZATION, OTHER EFFECTS AND CONSEQUENCES OF THE
BANKRUPTCY FILING, FORECASTS UPON WHICH THE PLAN OF REORGANIZATION IS BASED,
BUSINESS STRATEGY, OPERATIONS, COST SAVINGS INITIATIVES, INDUSTRY, ECONOMIC
PERFORMANCE, FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES, EXISTING
GOVERNMENT REGULATIONS AND CHANGES IN, OR THE FAILURE TO COMPLY WITH,
GOVERNMENTAL REGULATIONS, LEGISLATIVE PROPOSALS FOR HEALTHCARE REFORM, THE
ABILITY TO ENTER INTO STRATEGIC ALLIANCES AND ARRANGEMENTS WITH MANAGED CARE
PROVIDERS ON AN ACCEPTABLE BASIS, AND CHANGES IN REIMBURSEMENT POLICIES. SUCH
STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING
STATEMENTS BECAUSE OF A NUMBER OF FACTORS, INCLUDING THOSE IDENTIFIED IN THE
"RISK FACTORS" SECTION AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q. THE
FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE DATE OF THIS QUARTERLY REPORT ON
FORM 10-Q AND THE COMPANY DOES NOT UNDERTAKE TO UPDATE THE FORWARD-LOOKING
STATEMENTS OR TO UPDATE THE REASONS THAT ACTUAL RESULTS COULD DIFFER FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
RECENT DEVELOPMENTS
The Company and certain of its subsidiaries filed voluntary petitions for
protection under the Bankruptcy Code on July 31, 2002. The Company currently is
operating its business as a debtor-in-possession subject to the jurisdiction of
the United States Bankruptcy Court for the Middle District of Tennessee. See
Note 9 "Subsequent Event" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
GENERAL
The Company provides home health care services and products to patients through
its 286 centers in 35 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.
14
The following table sets forth the percentage of the Company's revenues
represented by each line of business for the periods presented:
Six Months Ended June 30,
-------------------------
2002 2001
----- ----
Home respiratory therapy services 65% 58%
Home infusion therapy services 15 18
Home medical equipment and medical supplies 20 24
----- ----
Total 100% 100%
===== ====
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. In 1998, the Company
purposefully slowed its acquisition activity compared to prior years to focus on
existing operations. Since 1998, the Company has not acquired any home health
care businesses or developed any new joint ventures other than converting
several of its previously owned 50% joint ventures to wholly owned operations
during 1999 and 2000. During 2001, the Company sold the assets of its rehab
centers, three infusion centers, and two respiratory and home medical equipment
centers for $11.1 million in cash in order to pay down the Bank Credit Facility.
In addition, during 2001 the Company used $1.0 million in proceeds from the
sales of its wholly owned real estate and $0.5 million in proceeds from the
collection of patient receivables associated with the sold centers to pay down
the Bank Credit Facility. In March 2002, the Company sold substantially all of
the assets of an infusion center for $1.3 million in cash and used the proceeds
to pay down the Bank Credit Facility. In addition, during 2002 the Company used
$2.2 million in proceeds from the collection of patient receivables associated
with the sold centers to pay down the Bank Credit Facility.
The Company's strategy for 2002 is to maintain a diversified offering of home
health care services reflective of its current business mix. Respiratory
services will remain a primary focus along with home medical equipment rental
and enteral nutrition products and services.
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.
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
15
operation. Periodic changes have occurred from time to time since the enactment
of OBRA 1987, including reimbursement reductions 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 with 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 periodically 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.
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
16
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 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 to some extent in
both pilot projects). These pilot projects will expire September 30, 2002, at
which time the DME items will revert to normal Medicare procedures; and (iii)
deadlines (as yet undetermined) for obtaining Medicare and Medicaid surety bonds
for home health agencies and DME suppliers. In addition, in early 2002 the State
of Florida Agency for Health Care Administration ("AHCA") established statewide
competitive bidding for all Medicaid hospital beds and respiratory equipment and
supplies. The entire state of Florida was divided into eleven geographical
areas, and each area was bid separately. The program initially was to be
effective May 2002 through April 2004. However, the AHCA delayed the bid process
until May 31, 2002. The Company declined to participate in any of the various
Florida Medicaid areas.
The Company is also 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. 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 entity cannot bill government programs for services or
supplies provided by an excluded provider, and the federal government may also
impose sanctions, including financial penalties, on companies that contract with
excluded providers.
Health care law is an area of extensive and dynamic regulatory oversight.
Changes in laws or regulations or new interpretations of existing laws or
regulations can have a dramatic effect on permissible activities, the relative
costs associated with doing business, and the amount and availability of
reimbursement from government and other third-party payors. There can be no
assurance that federal, state or local governments will not impose additional
standards or change existing standards or interpretations.
Enforcement Activities. 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
17
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 current activities nor that the Company's past 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. All of the Company's legal proceedings have been
stayed pursuant to the Bankruptcy Filing. The following is a summary of the
Company's material legal proceedings that existed as of the Bankruptcy Filing.
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. This Settlement
was approved by the United States District Court for the Western District of
Kentucky, the court in which the relator's false claim action was filed. 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. Pursuant to the Settlement, the
Company made an initial payment of $3.0 million in the second quarter of 2001
and 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
until March, 2006. The Company also agreed to pay the relator's attorneys fees
and expenses. The Company's Plan of Reorganization proposes that the Company
will timely pay all amounts owed in accordance with the Settlement. The Company
has reserved $4.0 million for its future obligations pursuant to 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 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. The appeal of that
dismissal was argued in November 2001, however, in December 2001 the Court of
Appeals for the Eleventh Circuit dismissed the appeal on jurisdictional grounds
and returned the case to the trial court. In January 2002, one of the other
defendants filed a Motion for Reconsideration with the Court of Appeals and the
parties are awaiting the court's decision in the case. The Company cannot
predict when the appeals court decision will be handed down, or the outcome of
the appeal. 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
18
defendants in violation of the False Claims Act. 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.
Since that date, the Company has not been served with any additional papers in
this case. 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 was informed in May, 2001 that the United States is investigating
its conduct during periods after December 31, 1998, and the Company 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. Other than the $4.0 million reserve discussed above
which relates to the settled government investigation, the Company has not
recorded any reserves related to the unsettled government investigations. The
outcome of any pending lawsuits or future settlements could have a material
adverse effect on the Company.
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 with 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 account for approximately 32% of the Company's on-going revenues.
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 increased
revenue and pre-tax income by approximately $1.0 million over the third and
fourth quarters of 2001 and will increase revenue by approximately $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 "Management's Discussion and Analysis of
Financial Condition and Results of
19
Operations - Significant Accounting Policies" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Government
Regulation."
SIGNIFICANT ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Company's consolidated financial statements. The
preparation of these consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the dates of the
financial statements, and the reported amounts of revenues and expenses during
the reporting periods. On an on-going basis, management evaluates its critical
accounting policies and estimates.
In December 2001, the Securities and Exchange Commission ("SEC") requested that
all registrants discuss their three to five critical accounting policies in the
text of "Management's Discussion and Analysis of Financial Condition and Results
of Operations." The SEC indicated that a "critical accounting policy" is one
which is both important to the understanding of the financial condition and
results of operations of the Company and requires management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. Management believes
the following accounting policies fit this definition:
Revenue Recognition and Allowance for Doubtful Accounts. The Company
provides credit for a substantial part of its non third-party reimbursed
revenues and continually monitors the credit worthiness and collectibility of
amounts due from its patients. Approximately 61% of the Company's year to date
2002 revenues are derived from participation in Medicare and state Medicaid
programs. Amounts paid under these programs are generally based upon a fixed
rate. Revenues are recorded at the expected reimbursement rates when the
services are provided, merchandise delivered or equipment rented to patients.
Although amounts earned under the Medicare and Medicaid programs are subject to
review by such third-party payors, subsequent adjustments to such reimbursements
are historically insignificant as these reimbursements are based on fixed fee
schedules. 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 include all product sales to patients and
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. Sales revenues are recognized at the time of delivery, and are billed
using fixed fee schedules based upon the type of product and the payor. 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. All rentals of equipment are provided by the Company on a
month-to-month basis and are billed using fixed monthly fee schedules based upon
the type of rental and the payor. The fixed monthly fee encompasses the rental
of the product as well as the delivery and the set-up and instruction by the
product technician.
20
The Company recognizes revenues at the time services are performed. As such, a
portion of patient receivables consists of unbilled receivables for which the
Company has not obtained all of the necessary medical documentation, but has
provided the service or equipment. The Company calculates its allowance for
doubtful accounts based upon the type of receivable (billed or unbilled) as well
as the age of the receivable. As a receivable balance ages, an increasingly
larger allowance is recorded for the receivable. All billed receivables over one
year old and all unbilled receivables over 180 days old are fully reserved.
Management believes that the recorded allowance for doubtful accounts is
adequate and that historical collections substantiate the percentages at which
amounts are reserved. However, the Company is subject to loss to the extent
uncollectible receivables exceed its allowance for doubtful accounts. If the
Company were to experience a deterioration in the aging of its accounts
receivable due to disruptions or a slow down in cash collections, the Company's
allowance for doubtful accounts and bad debt expense would likely increase from
current levels. Conversely, an improvement in the Company's cash collection
trends and in its receivable aging would likely result in a decrease in both the
allowance for doubtful accounts and bad debt expense.
Inventory Valuation Reserves and Cost of Sales Recognition. Inventories
represent goods and supplies and are priced at the lower of cost (on a first-in,
first-out basis) or net realizable value. The Company recognizes cost of sales
and relieves inventory at estimated amounts on an interim basis based upon the
type of product sold and payor mix, and performs physical counts of inventory at
each center on an annual basis. Any resulting adjustment from these physical
counts is charged to cost of sales. Management applies a reserve methodology as
a benchmark to measure the valuation reserve necessary for inventory balances
and believes the recorded inventory reserve is adequate. The Company is subject
to loss for unrecorded inventory adjustments in excess of its recorded inventory
reserves.
Rental Equipment Reserves. Rental equipment is rented to patients for
use in their homes and is depreciated over the equipment's estimated useful
life. On an annual basis, the Company performs physical counts of rental
equipment at each center and reconciles all recorded rental assets to internal
billing reports. Any resulting adjustment for unlocated or obsolete equipment is
charged to rental equipment depreciation expense. Since rental equipment is
maintained in the patient's home, the Company is subject to loss resulting from
lost equipment as well as losses for outdated or obsolete equipment. Management
records a reserve for potentially lost, broken, or obsolete rental equipment
based upon historical adjustment amounts and believes the recorded rental
reserve is adequate. The Company is subject to loss for unrecorded adjustments
in excess of its recorded rental equipment reserves.
Valuation of Long-lived Assets. In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"). The Company adopted the
provisions of SFAS No. 142 effective January 1, 2002. SFAS No. 142 requires that
intangible assets with finite useful lives be amortized, and that goodwill and
intangible assets with indefinite lives no longer be amortized, but instead be
tested for impairment at least annually. The Company recorded goodwill
amortization expense of $5.6 million in 2001 and ceased amortizing goodwill
effective January 2002. Upon adoption of SFAS No. 142, the Company performed an
initial impairment review of goodwill, and in the quarter ended March 31, 2002
recorded an impairment charge of $68.5
21
million as a cumulative effect of change in accounting principle. Hereafter, the
Company will conduct annual impairment reviews of goodwill.
Self Insurance. Self-insurance reserves primarily represent the accrual
for self-insurance risks associated with workers' compensation insurance and
employee health insurance. The Company is self-insured for the majority of its
workers' compensation and maintains specific stop loss coverage in the amount of
$250,000 on a per claim basis. The Company did not maintain annual aggregate
stop loss coverage for the years 2002 and 2001. The estimated liability for
workers' compensation claims totaled $3.8 million and $3.2 million as of June
30, 2002 and December 31, 2001, respectively. The Company utilizes analyses
prepared by its third-party administrator based on historical claims information
to support the required reserve and related expense associated with workers'
compensation. The Company records claims expense by plan year based on the
lesser of the aggregate stop loss (if applicable) or the developed losses as
calculated by its third-party administrator.
The Company is also self-insured for health insurance for substantially all
employees for the first $150,000 on a per person, per year basis and maintained
annual aggregate stop loss coverage of $14.7 million and $8.6 million as of June
30, 2002 and December 31, 2001, respectively. The health insurance policies have
maximum lifetime reimbursements of $2.0 million per person for 2002 and had
unlimited lifetime reimbursements for 2001. The estimated liability for health
insurance claims totaled $2.2 million and $1.9 million as of June 30, 2002 and
December 31, 2001, respectively. The Company reviews health insurance trends and
payment history and maintains a reserve for incurred but not reported claims
based upon its assessment of lag time in reporting and paying claims.
Management continually analyzes its reserves for incurred but not reported
claims related to its self-insurance programs and believes these reserves to be
adequate. However, significant judgment is involved in assessing these reserves,
and the Company is at risk for differences between actual settlement amounts and
recorded reserves, and any resulting adjustments are included in expense in the
year finalized.
RESULTS OF OPERATIONS
The Company reports its revenues as follows: (i) sales and related services;
(ii) rentals and other revenues; and (iii) earnings from hospital 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 from unconsolidated hospital joint ventures.
Cost of sales and related services includes the cost of equipment, drugs and
related supplies sold to patients. Cost of rentals and other revenues includes
the costs of oxygen and rental supplies, demurrage for leased oxygen tanks, rent
expense for leased equipment, and rental equipment depreciation expense, and
excludes delivery expenses and salaries associated with the rental set-up.
Operating expenses
22
include operating center labor costs, delivery expenses, division and area
management expenses, selling costs, occupancy costs, billing center costs,
provision for doubtful accounts, and other operating costs. General and
administrative expenses include corporate and senior management expenses.
NON-RECURRING ITEMS
Sale of Assets of Center. In the quarter ended March 31, 2002 the
Company recorded a pre-tax gain of $0.7 million related to the sale of the
assets of an infusion center. Effective March 19, 2002 substantially all of the
assets of the center were sold for approximately $1.3 million in cash. Funds
representing the value of the remaining assets of the center have been escrowed
pending regulatory approvals and will be released once these are obtained.
During 2001, the infusion center generated approximately $9.4 million in
annualized revenues. The proceeds of the sale were used to pay down debt under
the Company's Bank Credit Facility.
Cumulative Effect of Change in Accounting Principle. The Company
adopted the provisions of SFAS No. 142 effective January 1, 2002. As of the
adoption date, the Company had unamortized goodwill in the amount of $189.7
million. In accordance with SFAS No. 142, effective January 1, 2002 the Company
discontinued amortization of goodwill, which goodwill amortization expense was
$2.8 million for the six months ended June 30, 2002. Goodwill was tested for
impairment by comparing the fair value of goodwill to the carrying value of
goodwill. Fair value was determined using a combination of analyses which
included discounted cash flow calculations, market multiples and other market
information. The implied fair value of goodwill did not support the carrying
value of goodwill.
Based upon the results of the Company's initial impairment tests, the Company
recorded an impairment loss of $68.5 million in the quarter ended March 31,
2002, recognized as a cumulative effect of change in accounting principle. The
Company will conduct annual impairment tests hereafter, unless specific events
arise which warrant more immediate testing. Any subsequent impairment losses
will be recognized as an operating expense in the Company's consolidated
statements of operations.
23
The following table and discussion sets forth items from the Company's
consolidated statements of operations as a percentage of revenues, excluding the
previously discussed non-recurring items, for the periods indicated:
PERCENTAGE OF REVENUES
(EXCLUDING NON-RECURRING ITEMS)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
----- ----- ----- -----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales and related services 19.3 23.9 19.7 24.1
Cost of rentals and other revenues,
including rental equipment
depreciation expense 10.7 10.0 10.4 9.7
Operating expenses 56.5 54.0 56.5 54.2
General and administrative 5.5 4.4 5.2 4.4
Depreciation, excluding rental
equipment, and amortization
expense 1.2 2.9 1.2 2.9
Amortization of deferred financing costs 1.1 0.7 1.0 0.7
Interest expense 5.9 6.3 5.9 8.6
----- ----- ----- -----
Total expenses 100.2 102.2 99.9 104.6
Income (loss) from operations before
taxes (0.2)% (2.2)% 0.1% (4.6)%
Provision for income taxes 0.1 0.2 0.1 0.2
----- ----- ----- -----
Income (loss) from operations (0.3)% (2.4)% 0.0% (4.8)%
===== ===== ===== =====
OTHER DATA:
EBITDA (1) 13.9% 13.8% 14.0% 13.5%
===== ===== ===== =====
(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, lenders 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. This EBITDA definition differs from the definition of EBITDA
utilized in the Bank Credit Facility.
24
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
The results of operations between 2002 and 2001 are impacted by the asset sales
of several centers in 2002 and 2001.
REVENUES. Revenues decreased from $89.8 million for the quarter ended June 30,
2001 to $80.3 million for the same period in 2002, a decrease of $9.5 million,
or 11%. During 2001, the Company sold the assets of three infusion centers, two
respiratory and home medical equipment centers, and all of its rehab centers, in
addition to the sale of substantially all of the assets of one infusion center
during the first quarter of 2002. As a result of these asset sales, revenues
were negatively impacted by $10.8 million in the current quarter. Without these
occurrences, revenue for the quarter would have increased by $1.3 million
compared to last year. Following is a discussion of the components of revenues:
Sales and Related Services Revenues. Sales and related services
revenues decreased from $42.5 million for the quarter ended June 30,
2001 to $33.8 million for the same period in 2002, a decrease of $8.7
million, or 20%. The 2001 sales of assets of three infusion centers,
two respiratory and home medical equipment centers, and all of the
rehab centers, as well as the sale of the assets of an infusion center
during the first quarter of 2002, have negatively impacted sales in the
current quarter by approximately $10.3 million.
Rentals and Other Revenues. Rentals and other revenues decreased from
$46.2 million for the quarter ended June 30, 2001 to $45.5 million for
the same period in 2002, a decrease of $0.7 million, or 2%. The 2001
sales of two respiratory and home medical equipment centers have
negatively impacted rental revenue in the current quarter by
approximately $0.5 million.
Earnings from Hospital Joint Ventures. Earnings from hospital joint
ventures remained constant at $1.1 million for the quarters ended June
30, 2001 and June 30, 2002.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services decreased
from $21.4 million for the quarter ended June 30, 2001 to $15.6 million for the
same period in 2002, a decrease of $5.8 million, or 27%. As a percentage of
sales and related services revenues, cost of sales and related services
decreased from 50.5% for the quarter ended June 30, 2001 to 46.1% for the same
period in 2002. This decrease is primarily attributable to the sales of the
infusion centers and the rehab centers which contributed lower margins.
COST OF RENTALS AND OTHER REVENUES. Cost of rentals and other revenues decreased
from $9.0 million for the quarter ended June 30, 2001 to $8.6 million for the
same period in 2002, a decrease of $0.4 million, or 4%. As a percentage of
rentals and other revenue, cost of rentals and other revenues were 19.4% and
18.9% for the quarters ended June 30, 2001 and 2002, respectively.
OPERATING EXPENSES. Operating expenses decreased from $48.5 million for the
quarter ended June 30, 2001 to $45.4 million for the same period in 2002, a
decrease of $3.1 million, or 6%. This decrease is attributable to reduced
operating expense as a result of the sales of certain centers during 2001 and
the first quarter of 2002, as well as lower overall bad debt expense. Bad debt
expense
25
was 3.7% of revenues for the quarter ended June 30, 2001 compared to 3.4% of
revenues for the same period in 2002. The decrease in bad debt expense is
attributable to strong cash collections during the second quarter of 2002.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $4.0 million for the quarter ended June 30, 2001 to $4.4 million
for the same period in 2002, an increase of $0.4 million, or 10%. As a
percentage of revenues, general and administrative expenses were 4.4% and 5.5%
for the quarters ended June 30, 2001 and 2002, respectively. This increase is
attributable to higher legal and consulting fees in the quarter ended June 30,
2002 as well as higher rent expense.
DEPRECIATION AND AMORTIZATION. Depreciation (excluding rental equipment) and
amortization expenses decreased from $2.6 million for the quarter ended June 30,
2001 to $1.0 million for the same period in 2002, a decrease of $1.6 million, or
62%. Effective January 1, 2002 the Company adopted the provisions of SFAS No.
142 and accordingly, ceased the amortization of its goodwill. Amortization
expense related to goodwill was $1.4 million in the quarter ended June 30, 2001.
The remaining decrease is primarily attributable to certain property and
equipment becoming fully depreciated.
AMORTIZATION OF DEFERRED FINANCING COSTS. Amortization of deferred financing
costs increased from $0.7 million in 2001 to $0.9 million in 2002, an increase
of $0.2 million or 29%. This increase is primarily attributable to additional
deferred financing costs associated with the Amended Credit Agreement.
INTEREST. Interest expense decreased from $5.6 million for the quarter ended
June 30, 2001, to $4.7 million for the same period in 2002, a decrease of $0.9
million, or 16%. This decrease is attributable to reductions in the prime
borrowing rate and reduced principal amounts outstanding.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased from
$150,000 in 2001 to $100,000 in 2002. This decrease is due to reduced state
income taxes paid in 2002 versus 2001.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
The results of operations between 2002 and 2001 are impacted by the asset sales
of several centers in 2002 and 2001.
REVENUES. Revenues decreased from $180.9 million for the six months ended June
30, 2001 to $161.6 million for the same period in 2002, a decrease of $19.3
million, or 11%. During 2001, the Company sold the assets of three infusion
centers, two respiratory and home medical equipment centers, and all of its
rehab centers, in addition to the sale of substantially all of the assets of one
infusion center during the first quarter of 2002. As a result of these asset
sales, revenues were negatively impacted by $20.5 million for the six months
ended June 30, 2002. Without these occurrences, revenue for the current six
months would have increased by $1.2 million compared to the same period last
year. Following is a discussion of the components of revenues:
Sales and Related Services Revenues. Sales and related services
revenues decreased from $86.3 million for the six months ended June 30,
2001 to $68.6 million for the same period
26
in 2002, a decrease of $17.7 million, or 21%. The 2001 sales of assets
of three infusion centers, two respiratory and home medical equipment
centers, and all of the rehab centers, as well as the sale of the
assets of an infusion center during the first quarter of 2002, have
negatively impacted sales in the six months ended June 30, 2002 by
approximately $19.4 million.
Rentals and Other Revenues. Rentals and other revenues decreased from
$92.4 million for the six months ended June 30, 2001 to $90.7 million
for the same period in 2002, a decrease of $1.7 million, or 2%. The
2001 sales of two respiratory and home medical equipment centers have
negatively impacted rental revenue in the six months ended June 30,
2002 by approximately $1.1 million.
Earnings from Hospital Joint Ventures. Earnings from hospital joint
ventures increased from $2.2 million for the six months ended June 30,
2001 to $2.4 million for the same period in 2002, an increase of $0.2
million, or 9%, which is primarily attributable to continued
improvements in performance of certain joint ventures.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services decreased
from $43.6 million for the six months ended June 30, 2001 to $31.8 million for
the same period in 2002, a decrease of $11.8 million, or 27%. As a percentage of
sales and related services revenues, cost of sales and related services
decreased from 50.5% for the six months ended June 30, 2001 to 46.4% for the
same period in 2002. This decrease is primarily attributable to the sales of the
infusion centers and the rehab centers which contributed lower margins.
COST OF RENTALS AND OTHER REVENUES. Cost of rentals and other revenues decreased
from $17.5 million for the six months ended June 30, 2001 to $16.8 million for
the same period in 2002, a decrease of $0.7 million, or 4%. As a percentage of
rentals and other revenue, cost of rentals and other revenues were 18.9% and
18.5% for the six months ended June 30, 2001 and 2002, respectively.
OPERATING EXPENSES. Operating expenses decreased from $98.1 million for the six
months ended June 30, 2001 to $91.4 million for the same period in 2002, a
decrease of $6.7 million, or 7%. This decrease is attributable to reduced
operating expense as a result of the sales of certain centers during 2001 and
the first quarter of 2002. Bad debt expense was 4.0% of revenue for the six
months ended June 30, 2001 compared to 4.2% of revenue for the same period in
2002. The increase in current year bad debt expense as a percentage of revenue
is attributable to a temporary slowdown in cash collections during January and
February 2002.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $7.9 million for the six months ended June 30, 2001 to $8.5
million for the same period in 2002, an increase of $0.6 million, or 8%. As a
percentage of revenues, general and administrative expenses were 4.4% and 5.2%
for the six months ended June 30, 2001 and 2002, respectively. This increase is
attributable to higher legal and consulting fees in the six months ended June
30, 2002 as well as higher rent expense.
DEPRECIATION AND AMORTIZATION. Depreciation (excluding rental equipment) and
amortization expenses decreased from $5.3 million for the six months ended June
30, 2001 to $1.9 million for
27
the same period in 2002, a decrease of $3.4 million, or 64%. Effective January
1, 2002 the Company adopted the provisions of SFAS No. 142 and accordingly,
ceased the amortization of its goodwill. Amortization expense related to
goodwill was $2.8 million for the six months ended June 30, 2001. The remaining
decrease is primarily attributable to certain property and equipment becoming
fully depreciated.
AMORTIZATION OF DEFERRED FINANCING COSTS. Amortization of deferred financing
costs increased from $1.3 million for the six months ended June 30, 2001 to $1.6
million for the same period in 2002, an increase of $0.3 million, or 23%. This
increase is primarily attributable to additional deferred financing costs
associated with the Amended Credit Agreement.
INTEREST. Interest expense decreased from $15.6 million for the six months ended
June 30, 2001, to $9.5 million for the same period in 2002, a decrease of $6.1
million, or 39%. This decrease is attributable to reductions in the prime
borrowing rate and reduced principal amounts outstanding.
LIQUIDITY AND CAPITAL RESOURCES
On July 31, 2002, the Company and 24 of its subsidiaries filed voluntary
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United
States Bankruptcy Court for the Middle District of Tennessee. These cases have
been administratively consolidated under case number 02-08915-GP3-11. Pleadings
in these cases may be viewed at the Court's website, www.tnmb.uscourts.gov. The
filing was prompted by the impending December 31, 2002 maturity of the Company's
Bank Credit Facility.
The Company continues to operate its business as a "debtor-in-possession" in
accordance with the applicable provisions of the Bankruptcy Code. The Company
has not sought debtor-in-possession financing and currently does not intend to
do so. Rather, the Company intends to use cash generated from operations and
cash on hand to fund day-to-day operations during the bankruptcy. This practice
is consistent with the Company's pre-filing practices, as the Lenders terminated
the Company's access to a revolving credit facility in 2000.
The Company's principal cash requirements are for working capital, capital
expenditures and debt service. The Company has met and intends to continue to
meet these requirements with existing cash balances, net cash provided by
operations and other available capital expenditure financing vehicles.
The Company is currently authorized to use cash collateral on an interim basis.
The final hearing on the Company's motion seeking use of cash collateral is
scheduled for August 30, 2002. If the Company's motion were denied, there likely
would be a material adverse effect on the Company's ability to continue
operations.
Management's cash flow projections and related operating plans indicate that the
Company can operate on its existing cash and cash flow and make all payments
provided for in its proposed Plan of Reorganization. However, as with all
projections, there can be no guarantee that management's projections will be
achieved. The Bankruptcy Filing and the related uncertainties could disrupt
operations and could negatively affect the Company's business, financial
condition, results of operations and cash flows. See "Risk Factors." The Company
has taken a number of
28
steps designed to minimize any such disruptions including requesting critical
vendor status for certain vendors, communicating with other vendors regarding
ongoing operations, requesting Bankruptcy Court permission to assume certain
executory contracts, seeking approval of a Key Employee Retention Plan,
establishing an employee communication program regarding the Bankruptcy Filing
and related issues, and communicating with referral sources and patients as
needed.
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
$56.5 million and $60.1 million at June 30, 2002 and December 31, 2001,
respectively. Average days' sales in accounts receivable ("DSO") was
approximately 65 and 67 days at June 30, 2002 and December 31, 2001,
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 was $12.9 million and $9.4 million for
the six months ended June 30, 2002 and 2001, respectively. This increase of $3.5
million is primarily due to the change in accounts payable, other payables and
accrued expenses. These items used cash of $2.1 million and $6.1 million for the
six months ended June 30, 2002 and 2001, respectively. This variance is
primarily due to 2001 payments of $3.0 million related to the Settlement of the
government investigation and income tax payments of $1.8 million related to a
federal income tax audit assessment covering the period 1994 through 1998. Net
cash used in investing activities was $10.0 million and $9.0 million for the six
months ended June 30, 2002 and 2001, respectively. Capital expenditures were
$13.3 million for the six months ended June 30, 2002 compared to $10.0 million
for the same period in 2001, and the sales of assets of centers contributed $1.8
million for the six months ended June 30, 2002 compared to $0.2 million for same
period in 2001. Net cash used in financing activities was $7.4 million and $1.8
million for the six months ended June 30, 2002 and 2001, respectively. The cash
used in financing activities for the six months ended June 30, 2002 and 2001
primarily relates to principal payments and deferred financing costs.
RISK FACTORS
This section summarizes certain risks, among others, that should be considered
by stockholders and prospective investors in the Company.
29
Bankruptcy Filing. The Company filed a voluntary petition for relief
under the U.S. Bankruptcy Code on July 31, 2002. The Bankruptcy Filing and
related processes give rise to a number of uncertainties relating to the
Company. While the Company is making substantial efforts to operate its business
in the ordinary course, the Bankruptcy Filing could negatively impact the
Company's relationships with its vendors, referral sources, business partners,
employees, or patients, any of which could have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
Furthermore, the Company, its business prospects and its shareholders could be
materially adversely impacted by the final resolution of the Bankruptcy Filing.
See Note 9 "Subsequent Event" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Substantial Leverage. The Company maintains a significant amount of
debt. Indebtedness under the Bank Credit Facility totals approximately $275.4
million (excluding outstanding, undrawn letters of credit totaling $3.4 million)
as of July 31, 2002. If a plan of reorganization is not approved and confirmed
that restructures this debt, other outcomes likely would have a material adverse
effect on the current shareholders of the Company and also could have a material
adverse effect on the Company or its business prospects. If the Plan of
Reorganization is approved, the Company will still be obligated to repay its
debt with interest, which payments will impact results of operations for a
number of years. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Medicare Reimbursement for Oxygen Therapy and Other Services. The
Company has been affected by previous cuts in Medicare reimbursement rates for
oxygen therapy and other services. Additional reimbursement reductions for
oxygen therapy services or other services and products provided by the Company
could 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Medicare Reimbursement for Oxygen Therapy Services."
Dependence on Reimbursement by Third-Party Payors. For the six months
ended June 30, 2002, the percentage of the Company's revenues derived from
Medicare, Medicaid and private pay was 52%, 9% and 39%, respectively. The
revenues and profitability of the Company may be affected by the efforts of
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. Reductions 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Significant
Accounting Policies - Revenue Recognition and Allowance for Doubtful Accounts."
30
Collectibility of Accounts Receivable. The Company has substantial
accounts receivable, as well as days sales outstanding of 65 days as of June 30,
2002. No assurances can be given 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Significant
Accounting Policies - Revenue Recognition and Allowance for Doubtful Accounts."
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 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. There can be no assurance that the Company is in compliance with all
applicable existing laws and regulations or that the Company will be able to
comply with any new laws or regulations that may be enacted in the future.
Changes in applicable laws, any failure by the Company to comply with existing
or future laws, regulations or standards, or discovery of past regulatory
noncompliance by the Company could have a material adverse effect on the
Company's results of operations, financial condition, business or prospects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Government Regulation."
Government Investigations 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 to better 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 2001
Settlement of another False Claims Act case. 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 lawsuits that may be filed in the
future. 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 of the pending lawsuits could have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Government
Regulation."
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, trading of the Company's
common stock is conducted on the over-the-counter market ("OTC") or, on
application by broker-dealers, in the NASD's Electronic Bulletin Board using the
Company's current trading symbol, AHOM. As a result of the de-listing, the
liquidity of the Company's common stock and its price have been adversely
affected, which may limit the Company's ability to raise additional capital.
31
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 influenced in larger part by federal legislative initiatives.
Under the Bush administration, new federal health care initiatives may be
launched. For example, adding a prescription drug benefit to Medicare, a
patient's bill of rights, providing an array of protections for managed care
patients, and changes to Medicare funding are a few of the initiatives currently
under discussion. There can be no assurance that these or other federal
legislative and regulatory initiatives will not be adopted in the future. It is
also possible that proposed federal legislation will include language that
provides incentives to further encourage Medicare recipients to shift to
Medicare at-risk managed care programs, potentially limiting patient access to,
and reimbursement for, products and services provided by the Company. 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 government health care
programs or initiatives will not have a material adverse effect on the Company.
32
HIPAA Compliance. HIPAA has mandated an extensive set of regulations to
protect the privacy of identifiable health information. The regulations consist
of three sets of standards, each with a different date for required compliance:
(1) Privacy Standards have a compliance date of April 14, 2003; (2) Transactions
and Code Sets Standards require compliance by October 16, 2002 (this compliance
date may be extended by one year, if a compliance extension form is submitted by
October 15, 2002); and (3) Security Standards which are yet to be published in
final form and therefore have no compliance date. The Company is actively
pursuing its strategies toward compliance with the final Privacy Standards and
Transaction Standards with a plan flexible enough to adapt to any modifications
to the rules that may be issued by HHS. The Company's HIPAA compliance plan will
require modifications to existing information management systems and physical
security mechanisms, and may require additional personnel, the full cost of
which has not yet been determined. HIPAA compliance could impose significant
costs on the Company, and the Company cannot predict the final form these
regulations will take or the impact that final regulations, when fully
implemented, will have on its operations.
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 Bankruptcy Filing and current financial
results, 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. The Company's competitors may
attempt to use its Bankruptcy Filing to convince referral sources and patients
to use the Company less frequently or not at all.
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 that 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 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-
33
insured for its workers' compensation insurance and employee health insurance
and is at risk for claims up to individual stop loss and aggregate stop loss
amounts.
NEW FINANCIAL ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141")
and Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. SFAS No. 141 also specifies criteria which intangible assets acquired
in a purchase method business combination must meet to be recognized and
reported apart from goodwill. SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 requires that intangible assets with finite useful
lives be amortized, and that goodwill and intangible assets with indefinite
lives no longer be amortized, but instead be tested for impairment at least
annually. Specifically, goodwill and intangible assets with indefinite useful
lives will not be amortized but will be subject to impairment tests based on
their estimated fair value. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of."
The Company was required to adopt the provisions of SFAS No. 141 immediately
upon issuance and the provisions of SFAS No. 142 effective January 1, 2002.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that was acquired in a purchase business combination
completed after June 30, 2001 would not be amortized, but would be evaluated for
impairment in accordance with the appropriate pre-SFAS No. 142 accounting
literature. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 continued to be amortized until the adoption of
SFAS No. 142. See Note 8 - "Adoption of SFAS No. 142."
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 143, "Accounting for Asset Retirement Obligations"
("SFAS No. 143") effective for fiscal years beginning after June 15, 2002. SFAS
No. 143 requires that a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The Company does not expect the future adoption of SFAS
No. 143 to have a material effect on its financial position or results of
operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144") effective for fiscal years
beginning after December 15, 2001. SFAS No. 144 establishes a single accounting
model for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired and broadens the presentation of discontinued
operations to include more disposal transactions. The Company's January 1, 2002
adoption of SFAS No. 144 has not had a material impact on its financial position
or results of operations.
34
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS No. 145"). SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No.
145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the require accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also makes several technical corrections and clarifications to other
existing authoritative pronouncements. SFAS No. 145 is effective May 2002,
except for the rescission of SFAS No. 4, which is effective January 2003. The
Company is currently evaluating the impact of SFAS No. 145 on its financial
statements and will adopt the provisions of this statement accordingly.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146") effective for exit or disposal
activities that are initiated after December 31, 2002. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
principal difference between SFAS No. 146 and Issue 94-3 relates to the
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue
94-3 was recognized at the date of an entity's commitment to an exit plan. The
Company is currently evaluating the impact of SFAF No. 146 on its financial
statements and will adopt the provisions of this statement on January 1, 2003.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The chief market risk factor affecting the financial condition and operating
results of the Company is interest rate risk. The Company's Bank Credit Facility
provides for a floating interest rate. As of June 30, 2002, the Company had
outstanding borrowings of approximately $275.4 million, which excludes letters
of credit totaling $3.4 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 $0.5 million. Interest expense associated with other
debts would not materially impact the Company as most interest rates are fixed.
The Company is not required to pay interest during its bankruptcy proceedings,
but may be required to make adequate protection payments as a condition to its
being authorized to use cash collateral during the course of the bankruptcy.
Additionally, the Company requests a fixed interest rate on all debt to be
restructured under its proposed Plan of Reorganization, but there can be no
assurance that the plan will be confirmed. See Note 9 "Subsequent Event."
35
PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2002 annual meeting of shareholders was held on June 5, 2002. At the
meeting, the re-election of the sole individual nominated as a Class 2 director
of the Company's Board of Directors, Joseph F. Furlong, III, was approved.
Continuing directors consisted of: Class 1 directors Henry T. Blackstock and
Mark Manner; and Class 3 director Donald R. Millard. On July 19, 2002, Mark
Manner resigned from his position as a Class 1 director. No other matters were
voted upon at the annual meeting.
The following table sets forth the voting tabulation for the matter voted upon
at the meeting:
VOTES VOTES BROKER
FOR WITHHELD ABSTENTIONS NON-VOTES
------- -------- ----------- ---------
REELECTION OF
CLASS 2 DIRECTOR JOSEPH 12,401,424 654,080 N/A N/A
F. FURLONG, III
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. No reports on Form 8-K have been filed during the
quarter for which this report is filed.
36
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.
August 14, 2002 By: /s/Marilyn A. O'Hara
---------------------------------
Marilyn A. O'Hara
Chief Financial Officer and An Officer Duly
Authorized to Sign on Behalf of the registrant
37
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
3.1 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).
3.2 Certificate of Amendment to the Certificate of Incorporation of the
Company dated October 31, 1991 (incorporated by reference to Exhibit
3.2 to Amendment No. 2 to the Company's Registration Statement No.
33-42777 on Form S-1).
3.3 Certificate of Amendment to the Certificate of Incorporation of the
Company dated May 14, 1992 (incorporated by reference to Registration
Statement on Form S-8 dated February 16, 1993).
3.4 Certificate of Ownership and Merger merging American HomePatient, Inc.
into Diversicare Inc. dated May 11, 1994 (incorporated by reference to
Exhibit 4.4 to the Company's Registration Statement No. 33-89568 on
Form S-2).
3.5 Certificate of Amendment to the Certificate of Incorporation of the
Company dated July 8, 1996 (incorporated by reference to Exhibit 3.5 to
the Company's Report of Form 10-Q for the quarter ended June 30, 1996).
3.6 Bylaws of the Company, as amended (incorporated by reference to Exhibit
3.3 to the Company's Registration Statement No. 33-42777 on Form S-1).
38