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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Check One:

Commission file number 0-19532

AMERICAN HOMEPATIENT, INC.

Registrant’s telephone number, including area code: (615) 221-8884

None.

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

      The aggregate market value of registrant’s voting stock held by non-affiliates of the registrant, computed by reference to the price at which the stock was sold, or average of the closing bid and asked prices, as of March 24, 2003 was $4,582,869.

      On March 24, 2003, 16,367,869 shares of the registrant’s $0.01 par value Common Stock were outstanding.

Documents Incorporated by Reference

      The following documents are incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Form 10-K: Portions of the Registrant’s definitive proxy statement for its 2003 Annual Meeting of Stockholders.

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PART I

ITEM 1.      BUSINESS

Introductory Summary

      American HomePatient, Inc. was incorporated in Delaware in September 1991. American HomePatient, Inc.’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. American HomePatient, Inc. and subsidiaries (the “Company”) provides home health care services and products consisting primarily of respiratory and infusion therapies and the rental and sale of home medical equipment and home health care supplies. These services and products are paid for primarily by Medicare, Medicaid and other third-party payors. As of December 31, 2002, the Company provided these services to patients primarily in the home through 285 centers in 35 states. From its inception through 1997 the Company experienced substantial growth primarily as a result of its strategy of acquiring and operating home health care businesses. Beginning in 1998, the Company’s strategy shifted from acquiring new businesses to focusing more on internal growth, integrating its acquired operations and achieving operating efficiencies. The Company’s periodic and current reports, as filed with the Securities and Exchange Commission, are available, free of charge, on the website of the Securities and Exchange Commission (www.sec.gov).

Recent Developments

      Proceedings under Chapter 11 of the Bankruptcy Code. On July 31, 2002, American HomePatient, Inc. and 24 of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief to reorganize under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Filing”) in the United States Bankruptcy Court for the Middle District of Tennessee (the “Bankruptcy Court”). These cases (the “Chapter 11 Cases”) have been consolidated for the purpose of joint administration under Case Number 02-08915-GP3-11. Pleadings in these cases may be viewed at the Court’s website, www.tnmb.uscourts.gov. On January 2, 2003, the Company filed its Second Amended Joint Plan of Reorganization (the “Plan”), proposed by the Company and the Official Committee of Unsecured Creditors appointed by the Office of the United States Trustee in the Chapter 11 Cases. A Disclosure Statement, the purpose of which is to enable creditors entitled to vote on the Plan to make an informed decision before exercising their right to vote, accompanied the Plan and was also filed on January 2, 2003. The hearing before the Bankruptcy Court on confirmation of the Plan has been set for April 23, 2003. The bankruptcy filing was prompted by the impending December 31, 2002 maturity of a credit facility (the “Bank Credit Facility”) evidenced by a Fifth Amended and Restated Credit Agreement (the “Amended Credit Agreement”) between the Company and Bank of Montreal, as agent for a syndicate of lenders (the “Lenders”). Indebtedness under the Bank Credit Facility as of December 31, 2002 totals $278.7 million (which excludes adequate protection payments to the Lenders totaling $8.0 million as of that date).

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      The Debtors are currently operating their business as debtors-in-possession under the supervision of the Bankruptcy Court. As a debtor-in-possession, the Company is authorized to operate its business but may not engage in transactions outside its ordinary course of business without the approval of the Bankruptcy Court. The Company has not sought to obtain debtor-in-possession secured financing (“DIP Financing”) and currently does not intend to do so. Rather, the Company has operated using 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 line of credit in 2000. At December 31, 2002 the Company had cash and cash equivalents of approximately $22.8 million. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources”). The Bankruptcy Filing is not anticipated to have a material 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.

      On October 15, 2002, the Company, the Lenders and the unsecured creditors filed an agreed order with the Bankruptcy Court authorizing the use of cash collateral and granting adequate protection payments to the Lenders. This order authorizes the Company to use cash collateral, but provides certain restrictions on the Company’s ability to make cash disbursements. The Company is authorized to use cash collateral solely for the following purposes: (i) to make cash disbursements as set forth in a cash forecast prepared by the Company, not to exceed 5% in any four week rolling period; (ii) to pay fees required by the Office of the United States Trustee; (iii) to make adequate protection payments to the Lenders; and (iv) to replace or increase certain letters of credit. The Company agreed to make adequate protection payments to the Lenders of $1.6 million per month beginning with the month of August 2002, subject to maintaining a required minimum cash balance of $12.0 million plus the amount necessary to fund incentive bonuses that will come due through March 31, 2003, as well as any amounts necessary to replace or increase letters of credit. An initial payment totaling $3.2 million for August and September 2002, in the aggregate, was made on October 15, 2002, and additional adequate protection payments have been paid on the 15th of each successive month. All payments due to the Lenders in connection with the cash collateral usage have been timely made through and including the payment due March 15, 2003. The application of such payments is subject to further order of the Bankruptcy Court and the Bankruptcy Court may recharacterize the application of any payment regardless of how characterized by the Company or the Lenders.

      The accompanying consolidated financial statements have been prepared on a going concern basis and in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7 (“SOP 90-7”), “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.” Accordingly, these consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. All pre-petition liabilities subject to compromise have been segregated in the consolidated balance

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sheets and classified as liabilities subject to compromise, at the estimated amount of allowable claims. Liabilities not subject to compromise are separately classified as current and non-current in the consolidated balance sheets. Revenues, expenses, realized gains and losses, and provisions for losses and expenses resulting from the reorganization are required to be reported separately as reorganization items. Cash used for reorganization items is disclosed separately in the consolidated statements of cash flows.

      Liabilities Subject to Compromise and Reorganization Items. Liabilities subject to compromise refer to liabilities incurred prior to the commencement of the Chapter 11 Cases. These liabilities consist primarily of amounts outstanding under the Bank Credit Facility, the Government Settlement (as defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Government Regulation – Legal Proceedings”), and capital leases, and also include accounts payable, accrued interest, amounts accrued for future lease rejections, professional fees related to the reorganization, and other accrued expenses. Such claims remain subject to future adjustments based on negotiations, actions of the Bankruptcy Court, further developments with respect to disputed claims, and other events. Payment terms for these amounts will be established in connection with the Chapter 11 Cases.

      The Company has received approval from the Bankruptcy Court to pay or otherwise honor certain pre-petition liabilities, including wages and benefits of employees, reimbursement of employee business expenses, insurance costs, medical directors fees, utilities and patient refunds in the ordinary course of business. The Company is also authorized to pay pre-petition liabilities to certain vendors providing critical goods and services, provided these payments do not exceed a predetermined amount. As a debtor-in-possession, the Company also has the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. The parties affected by these rejections may file claims with the Bankruptcy Court in accordance with bankruptcy procedures. Any such damages resulting from lease rejections will be treated as general unsecured claims in the reorganization.

      The principal categories of claims classified as liabilities subject to compromise under reorganization proceedings are as follows:

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      Reorganization items represent expenses that are incurred by the Company as a result of reorganization under Chapter 11 of the Federal Bankruptcy Code. These items are comprised of the following:

      See “Risk Factors – Bankruptcy Proceeding” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

      Debtors and Non-Debtors Financial Statements. The Debtors filed voluntary petitions for relief to reorganize under Chapter 11 of the U.S. Bankruptcy Code. The Company’s joint ventures (both consolidated and non-consolidated) are not part of the bankruptcy filing.

      In accordance with SOP 90-7, the Company is presenting the following condensed combining financial statements as of and for the year ended December 31, 2002:

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American HomePatient, Inc. and Subsidiaries
Condensed Combining Balance Sheets as of December 31, 2002
(unaudited)

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American HomePatient, Inc. and Subsidiaries
Condensed Combining Statements of Operations
for the Year Ended December 31, 2002
(unaudited)

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American HomePatient, Inc. and Subsidiaries
Condensed Combining Statements of Cash Flows
for the Year Ended December 31, 2002
(unaudited)

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      Sales of Certain Non-Core Assets. Effective March 19, 2002 the Company sold certain non-core assets, consisting of an infusion business and nursing agency, for approximately $1.3 million in cash, resulting in a pre-tax gain of approximately $0.7 million. During 2002 and 2001, this business generated approximately $2.0 million and $9.4 million, respectively, in total revenues. During 2001, the Company sold non-core assets consisting of its rehab centers, three infusion centers, and two respiratory and home medical equipment centers for $11.1 million in cash and used the proceeds to pay debt under the Bank Credit Facility. In addition, during 2001 the Company used $1.0 million in proceeds from the sales of certain wholly-owned real estate and $0.5 million in proceeds from the collection of patient receivables associated with the sold centers to pay debt under the Bank Credit Facility.

Business

      The Company provides home health care services and products consisting primarily of respiratory therapy services, infusion therapy services and the rental and sale of home medical equipment and home health care supplies. For the year ended December 31, 2002, such services and products represented 66%, 14% and 20% of revenues, respectively. These services and products are paid for primarily by Medicare, Medicaid and other third-party payors. The Company’s objective is to be a leading provider of home health care products and services in the markets in which it operates. The Company’s centers are regionally located to achieve the market penetration necessary for the Company to be a cost-effective provider of comprehensive home health care services to managed care and other third-party payors.

      As of December 31, 2002, the Company provided services to patients primarily in the home through 285 centers in the following 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.

      Prior to 1998, the Company had significantly expanded its operations through a combination of home health care acquisitions and joint ventures and strategic alliances with integrated health care delivery systems. The Company purposefully slowed its growth through acquisitions during 1998 compared to prior years to focus more on existing operations. Since 1998, the Company has not acquired any businesses or developed any new joint ventures other than converting previously owned 50% joint ventures to wholly owned operations during 1999 and 2000.

      The Company does not anticipate renewing its acquisition or joint venture development activities during 2003 as it continues to focus its efforts on internal operational matters.

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      Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” (“SFAS No. 131”) establishes standards for the way that public business enterprises or other enterprises that are required to file financial statements with the Securities and Exchange Commission (“SEC”) report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company manages its business as one operating segment.

Services and Products

      The Company provides a diversified range of home health care services and products. The following table sets forth the percentage of revenues represented by each line of business for the periods presented:

      Home Respiratory Therapy Services. The Company provides a wide variety of home respiratory services primarily to patients with severe and chronic pulmonary diseases. Patients are referred to a Company center most often by primary care and pulmonary physicians as well as by hospital discharge planners and case managers. After reviewing pertinent medical records on the patient and confirming insurance coverage information, a Company respiratory therapist or technician visits the patient’s home to deliver and to prepare the prescribed therapy or equipment. Company representatives coordinate the prescribed therapy with the patient’s physician and train the patient and caregiver in the correct use of the equipment. For rental patients, Company representatives also make periodic follow-up visits to the home to provide additional instructions, required equipment maintenance and deliver oxygen and other supplies.

      The respiratory services that the Company provides include the following:

•

Oxygen systems to assist patients with breathing. There are three types of oxygen systems: (i) oxygen concentrators, which are stationary units that filter ordinary room air to provide a continuous flow of oxygen; (ii) liquid oxygen systems, which are portable, thermally-insulated containers of liquid oxygen which can be used as stationary units and/or as portable options for patients; and (iii) high pressure oxygen cylinders, which are used primarily for portability as an adjunct to oxygen concentrators. Oxygen systems are used to treat patients with chronic obstructive pulmonary disease, cystic fibrosis and neurologically-related respiratory problems.

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•

Nebulizers to deliver aerosol medications to patients. Nebulizer compressors are used to administer aerosolized medications (such as albuterol) to patients with asthma, bronchitis, chronic obstructive pulmonary disease, and cystic fibrosis. “AerMeds” is the Company’s branded marketing name for its aerosol medications business.

•

Home ventilators to sustain a patient’s respiratory function mechanically in cases of severe respiratory failure when a patient can no longer breathe independently.

•

Non-invasive positive pressure ventilation (“NPPV”) to provide ventilation support via a face mask for patients with chronic respiratory failure and neuromuscular diseases. This therapy enables patients to receive positive pressure ventilation without the invasive procedure of intubation.

•

Continuous positive airway pressure (“CPAP”) and bi-level positive airway pressure therapies to force air through respiratory passage-ways during sleep. These treatments are used on adults with obstructive sleep apnea (“OSA”), a condition in which a patient’s normal breathing patterns are disturbed during sleep.

•

Apnea monitors to monitor and to warn parents of apnea episodes in newborn infants as a preventive measure against sudden infant death syndrome.

•

Home sleep screenings and studies to detect sleep disorders and the magnitude of such disorders.

      Oxygen-related services and systems comprised approximately 54% of the Company’s 2002 respiratory revenues with the balance generated from nebulizers and related aerosol medication services, home ventilators, CPAP and bi-level therapies, home sleep studies and infant apnea monitors. The Company provides respiratory therapy services at all but 4 of its 285 centers.

      Home Infusion Therapy Services. The Company provides a wide range of home infusion therapy services. Patients are referred to a Company center most often by primary care and specialist physicians (such as infectious disease physicians and oncologists) as well as by hospital discharge planners and case managers. After confirming the patient’s treatment plan with the physician, the pharmacist mixes the medications and coordinates with the nurse the delivery of necessary equipment, medication and supplies to the patient’s home. The Company provides the patient and caregiver with detailed instructions on the patient’s prescribed medication, therapy, pump and supplies. For rental patients, the Company also schedules follow-up visits and deliveries in accordance with physicians’ orders.

      Home infusion therapy involves the administration of nutrients, antibiotics and other medications intravenously (into the vein), subcutaneously (under the skin), intramuscularly (into the muscle), intrathecally (via spinal routes), epidurally (also via spinal routes) or through feeding tubes into the digestive tract. The primary infusion therapy services that the Company provides include the following:

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•

Enteral nutrition is the infusion of nutrients through a feeding tube inserted directly into the functioning portion of a patient’s digestive tract. This long-term therapy is often prescribed for patients who are unable to eat or to drink normally as a result of a neurological impairment such as a stroke or a neoplasm (tumor).

•

Anti-infective therapy is the infusion of anti-infective medications into a patient’s bloodstream typically for 5 to 14 days to treat a variety of serious bacterial and viral infections and diseases.

•

Total parenteral nutrition (“TPN”) is the long-term provision of nutrients through central vein catheters that are surgically implanted into patients who cannot absorb adequate nutrients enterally due to a chronic gastrointestinal condition.

•

Pain management involves the infusion of certain drugs into the bloodstream of patients, primarily terminally or chronically ill patients, suffering from acute or chronic pain.

      The Company’s other infusion therapies include chemotherapy, hydration, growth hormone and immune globulin therapies. Enteral nutrition services account for approximately 48% of the Company’s infusion revenues, while antibiotic therapy, TPN, and pain management account for approximately 11%, 9% and 2%, respectively. The Company’s remaining infusion revenues are derived from the provision of infusion nursing services, chemotherapy, prescription drug sales and other miscellaneous infusion therapies. Enteral nutrition services are provided at most of the Company’s centers, and the Company currently provides other infusion therapies in 42 of its 285 centers.

      Home Medical Equipment and Supplies. The Company provides a comprehensive line of equipment to serve the needs of home care patients. Revenues from home equipment services are derived principally from the rental and sale of wheelchairs, hospital beds, ambulatory aids, bathroom aids and safety equipment, and rehabilitation equipment.

Operations

      Organization. Currently, the Company’s operations are divided into two geographic divisions, each headed by a division vice president. Each division is further divided into geographic areas with each area headed by an area vice president. There are a total of 13 geographic areas within the Company. Each area vice president oversees the operations of approximately 12 — 36 centers. Management believes this field organizational structure enhances management flexibility and facilitates communication by enabling a greater focus on local market operations. Area vice presidents focus on revenue development, cost control and assist local management with decision making to improve responsiveness in local markets. The Company’s billing centers report directly to the corporate reimbursement department under the leadership of the Vice President of Reimbursement and six directors of compliance and reimbursement. This organizational structure adds specialized knowledge and focused management resources to the billing, compliance and reimbursement functions.

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      The Company’s centers are typically staffed with a general manager, a business office manager, a director of patient services (normally a registered nurse or respiratory therapist), registered nurses, clinical coordinators, respiratory therapists, service technicians and customer service representatives. In most of its markets, the Company employs account executives who are responsible for local sales efforts. In addition, the Company employs a licensed pharmacist in all centers that provide a significant amount of infusion therapy.

      The Company has achieved what management believes is an appropriate balance between centralized and decentralized management. Management believes that home care is a local business dependent in large part on personal relationships and, therefore, provides the Company’s operating managers with a significant degree of autonomy to encourage prompt and effective responses to local market demands. In conjunction with this local operational authority, the Company provides, through its corporate office, sophisticated management support, compliance oversight and training, marketing and managed care expertise, sales training and support, product development, and financial and information systems. The Company retains centralized control over those functions necessary to monitor quality of patient care and to maximize operational efficiency. Services performed at the corporate office include financial and accounting functions, corporate compliance, reimbursement oversight, sales and marketing support, clinical policy and procedure development, regulatory affairs and licensure, and system design.

      Commitment to Quality. The Company maintains quality and performance improvement programs related to the proper implementation of its service standards. Management believes that the Company has developed and implemented service policies and procedures that comply with the standards required by the Joint Commission on Accreditation of Health Care Organizations (“JCAHO”). All of the Company’s centers are JCAHO-accredited or are in the process of being reviewed for accreditation from the JCAHO. The Company has Quality Improvement Advisory Boards at many of its centers, and center general managers conduct quarterly quality improvement reviews. Area quality improvement (“AQI”) specialists conduct quality compliance audits at each center in an effort to ensure compliance with state and federal regulations, JCAHO, FDA and internal standards. The AQI specialists also help train all new clinical personnel on the Company’s policies and procedures.

      Training and Retention of Quality Personnel. Management recognizes that home health care is by nature a localized business. General managers attempt to recruit knowledgeable local talent for all positions including account executives who are capable of gaining new business from the local medical community. In addition, the Company provides sales training and orientation to general managers and account executives.

      Management Information Systems. Management believes that periodic refinement and upgrading of its management information systems, which permit management to monitor closely the activities of the Company’s centers, is important to the Company’s business. The Company’s

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financial systems provide, among other things, monthly budget analyses, trended financial data, financial comparisons to prior periods, and comparisons among Company centers. These systems also provide a means for management to monitor key statistical data for each center, such as accounts receivable, payor mix, cash collections, revenue mix and expense trends. Additionally, Medicare and other third party claims are billed electronically through the Company’s systems, thereby facilitating and improving the timeliness of accounts receivable collections. The Company also maintains a communication network that provides company-wide access to email and the Internet. The Company maintains an intranet program, AMNET, which is a productivity driven, secure site focused on reducing paperwork, disseminating information throughout the Company, and facilitating communication among the Company’s employees.

      Corporate Compliance. The Company’s goal is to operate its business with honesty and integrity, and in compliance with the numerous laws that govern its operations. The Company’s corporate compliance program is designed to help accomplish these goals through employee training and education, a confidential disclosure program, written policy guidelines, periodic reviews, compliance audits and other programs. The Company’s corporate compliance program is monitored by its Compliance Officer, Assistant Compliance Officer and Compliance Committee. The Compliance Committee, which meets quarterly, is comprised of the Company’s President and CEO, Chief Operating Officer, Chief Financial Officer, Vice President of Human Resources, Vice President of Reimbursement, Vice President of Purchasing, Director of Internal Audit, both division vice presidents, and two area vice presidents. There can be no assurance that the Company’s compliance activities will prevent or detect violations of the governing laws and regulations. See “Business – Government Regulation.”

Hospital Joint Ventures

      The Company owns 50% of ten home health care businesses, and 70% of two other home health care businesses that were operational as of December 31, 2002. The remaining ownership percentage of each business is owned by local hospitals. The Company is solely responsible for the management of these businesses and receives fixed monthly management fees or monthly management fees based upon a percentage of net revenues, net income or cash collections. The Company has not developed any new joint ventures since 1998.

      The Company’s joint ventures typically are 50/50% equity partnerships with an initial term of between three and ten years and with the following typical provisions: (i) the Company contributes assets of an existing business in the designated market or contributes cash to fund half of the initial working capital required for the hospital joint venture to commence operations; (ii) the hospital partner contributes similar assets and/or an amount of cash equal, in the aggregate, to the fair market value of the Company’s net contribution; (iii) the Company is the managing partner for the hospital joint venture and receives a monthly management and administrative fee; and (iv) distributions, to the extent made, are generally made on a quarterly basis and are consistent with each partner’s capital contributions. Within the hospital joint venture’s designated market, all services provided within the geographic market are deemed to be revenues of the hospital joint venture, including revenues from sources other than the hospital joint venture partner.

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      The following table lists the Company’s hospital joint venture partners and locations for all joint ventures in operation as of December 31, 2002:

(1)		70% owned consolidated joint venture.
(2)		50% owned non-consolidated joint venture.

Revenues and Collections

      The Company derives substantially all of its revenues from third-party payors, including Medicare, private insurers and Medicaid. Medicare is a federally funded and administered health insurance program that provides coverage for beneficiaries who require certain medical services and products. Medicaid is a state administered reimbursement program that provides reimbursement for certain medical services and products. 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

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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.

      The following table sets forth the percentage of the Company’s revenues from each source indicated for the years presented:

      The Omnibus Budget Reconciliation Act of 1987 (“OBRA 1987”) created six categories for home medical equipment reimbursement under the Medicare Part B program, for which the Company qualifies. OBRA 1987 also defined whether products would be paid for on a rental or sale basis and established fixed monthly payment rates for oxygen service regardless of the type of service (i.e. concentrators, liquid oxygen, etc.) as well as a 15-month rental ceiling on certain medical equipment such as hospital beds. After 15 months of rental, rental payments cease for HME and the Company receives a “maintenance fee” each six months equivalent to one-month’s rental. The Omnibus Budget Reconciliation Act of 1990 (“OBRA 1990”) made new changes to Medicare Part B reimbursement. The substantive changes relating to OBRA 1990 included a national standardization of Medicare rates for certain equipment categories, which vary slightly state by state, and further reductions in amounts paid for HME rentals.

      The Balanced Budget Act of 1997 reduced the Medicare reimbursement rate for oxygen by 25% beginning January 1, 1998, and by another 5% beginning January 1, 1999. The reimbursement rate for certain drugs and biologicals covered under Medicare was also reduced 5% beginning January 1, 1998. The Company is one of the nation’s largest providers of home oxygen services to patients, many of whom are Medicare recipients, and is therefore significantly and adversely affected financially by this legislation. Medicare oxygen reimbursements account for a significant portion of the Company’s 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”).

      Effective January 1, 1998, payments for parenteral and enteral nutrition (“PEN”) were frozen at 1995 levels, through the year 2002. Effective October 1, 1999, Medicare established new guidelines for respiratory assist devices (“RAD”), which include continuous positive airway pressure devices, bi-level respiratory devices (without backup) and bi-level respiratory devices with back up. The changes require additional documentation in order to continue coverage on existing patients as well as new coverage and qualifying criteria for new patients. In addition, the bi-level respiratory device (without backup) was transferred from a frequently serviced item to “capped rental.” Medicare is also considering the transfer of non-invasive positive pressure ventilators from

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a frequently serviced item to “capped rental.” 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. Under a recently promulgated interim final rule to be effective February 11, 2003, the Centers for Medicare and Medicaid Services (“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.” Possible future changes in the basis for calculating Medicare’s reimbursement rates for Albuterol and other respiratory medications could result in a reimbursement reduction for these products, the timing and extent of which are not known at this time.

      The Company has implemented four key initiatives to improve accounts receivable performance: (i) proper staffing and training; (ii) process redesign and standardization; (iii) consolidation of billing center activities; and (iv) billing center specific goals geared toward improved cash collections and reduced accounts receivable.

      Net patient accounts receivable at December 31, 2002 was $54.2 million compared to net patient accounts receivable of $60.1 million at December 31, 2001.

      The table below shows the Company’s days’ sales outstanding (“DSO”) for the periods indicated and is calculated by dividing the previous 90 days of revenue (excluding dispositions and acquisitions), net of bad debt expense into net patient accounts receivable and multiplying the ratio by 90 days:

      The Company attempts to minimize DSO by screening new patient cases for adequate sources of reimbursement and by providing complete and accurate claims data to relevant payor sources. The decrease in DSO and net patient receivables between 2000 and 2002 is due to improved collection results on current billings and improved timeliness in obtaining necessary billing documentation. In addition, the sales of assets of centers in 2001 reduced net patient receivables by $5.6 million. The Company’s level of DSO and net patient receivables is affected by the extended time required to obtain necessary billing documentation.

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      The Company monitors DSO trends for each of its branches and billing centers, and for the Company in total, as part of the management of the billing and collections process. An increase in DSO usually indicates a breakdown in processes at the billing centers. A decline in DSO usually results from process improvements and improved cash collections. Management uses the calculated DSO to evaluate the performance of the billing centers.

Sales and Marketing

      Over the past three years, the Company has committed additional financial resources and personnel to sales and marketing. Concurrent with its increased investment in selling resources, the Company enhanced its systems for measuring individual performance and accountability for results. During 2001, revenue growth improvement was noted in many of the Company’s centers and was directly related to the Company’s sales initiatives described above. However, as a result of revenue losses at certain centers, the revenue growth for the Company as a whole was not significant during 2001. In order to improve the Company’s ability to grow revenue, the Company’s sales and marketing organization was restructured in February 2002. After adjusting for the loss of $33.2 million in revenue associated with certain non-core assets sold by the Company in 2001 and 2002, revenues for 2002 increased by 1.4% over 2001 revenues. Management believes this improvement is directly related to its initiatives to improve the sales and marketing function.

Competition

      The home health care industry is still consolidating but remains highly fragmented and competition varies significantly from market to market. In the small and mid-size markets in which the Company primarily operates, the majority of its competition comes from local independent operators or hospital-based facilities, whose primary competitive advantage is market familiarity. In the larger markets, regional and national providers account for a significant portion of competition. In addition, there are still relatively few barriers to entry in the local markets served by the Company, and it may encounter substantial competition from new market entrants. In addition, the bankruptcy filing could be used by competitors to attempt to convince referral sources and patients to use the Company less frequently or not at all. Management believes that the competitive factors most important in the Company’s lines of business are quality of care and service, reputation with referral sources, ease of doing business with the provider, ability to develop and to maintain relationships with referral sources, competitive prices, and the range of services offered.

      Third-party payors and their case managers actively monitor and direct the care delivered to their beneficiaries. Accordingly, relationships with such payors and their case managers and inclusion within preferred provider and other networks of approved or accredited providers has become a prerequisite, in many cases, to the Company’s ability to serve many of the patients it treats. Similarly, the ability of the Company and its competitors to align themselves with other health care service providers may increase in importance as managed care providers and provider networks seek out providers who offer a broad range of services and geographic coverage.

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Branch Locations

      Following is a list of the Company’s 285 home health care centers as of December 31, 2002.

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Supplies and Equipment

      The Company centrally purchases home medical and respiratory equipment, prescription drugs, solutions and other materials and products required in connection with the Company’s business from select suppliers. The Company has not experienced any significant difficulty in purchasing equipment or supplies or in leasing equipment from current suppliers. However, the bankruptcy filing could have a material adverse impact on the Company’s ability to receive trade credit and competitive pricing from its suppliers. In the event that such suppliers are unable or fail to sell supplies or lease equipment to the Company, management believes that other suppliers are available to meet the Company’s needs.

Insurance

      The Company maintains a commercial general liability policy which is on a claims made basis. This insurance is renewed annually and includes product liability coverage on the medical equipment that it sells or rents with per claim coverage limits of up to $1.0 million per claim with a $3.0 million product liability annual aggregate and a $3.0 million general liability annual aggregate. The Company’s professional liability policy is on a claims made basis and is renewable annually with per claim coverage limits of up to $1.0 million per claim and $3.0 million in the aggregate. The Company retains the first $50,000 of each professional or general liability claim. The Company also maintains excess liability coverage with limits of $50.0 million per claim and $50.0 million in the aggregate. Management believes the manufacturers of the equipment it sells or rents currently maintain their own insurance, and in some cases the Company has received evidence of such coverage and has been added by endorsement as an additional insured. However, there can be no assurance that such manufacturers will continue to do so, that such insurance will be adequate or available to protect the Company, or that the Company will not have liability independent of that of such manufacturers and/or their insurance coverage.

      The Company is insured for auto liability coverage for $1.0 million per accident. The Company retains the first $250,000 of each claim with an aggregate retention of $1.0 million. The Company is insured for workers’ compensation but retains the first $250,000 of each claim. The insurance carrier is responsible for amounts in excess of $250,000 on each claim. The Company did not maintain annual aggregate stop loss coverage for the years 2002 and 2001, as such coverage was not available, and maintained annual aggregate stop loss coverage of approximately $1.5 million for 2000. The Company is self-insured for health insurance for substantially all employees for the first $150,000 on a per person, per year basis and maintains annual aggregate stop loss coverage of $14.7 million for 2002. The health insurance policies are limited to maximum lifetime reimbursements of $2.0 million per person for 2002, had unlimited lifetime reimbursements for 2001, and were limited to maximum lifetime reimbursements of $1.0 million per person for medical claims and $1.0 million per person for mental illness and drug and alcohol abuse claims for 2000. Liabilities in excess of these aggregate amounts are the responsibility of the insurer. The Company provides reserves for the settlement of outstanding claims and claims incurred but not reported at amounts believed to be adequate. The differences between actual settlements and reserves are included in expense once a probable amount is known. The Company has purchased insurance protecting its directors and officers for a limit of $20.0 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Significant Accounting Policies and Estimates.”

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      There can be no assurance that any of the Company’s insurance will be sufficient to cover any judgments, settlements or costs relating to any pending or future legal proceedings or that any such insurance will be available to the Company in the future on satisfactory terms, if at all. If the insurance carried by the Company is not sufficient to cover any judgments, settlements or costs relating to pending or future legal proceedings, the Company’s business and financial condition could be materially adversely affected.

Employees

      At December 31, 2002, the Company had approximately 3,100 full-time employees, 160 part-time employees and 200 employees used on an “as needed” basis only. Approximately 110 individuals were employed at the corporate office in Brentwood, Tennessee.

Trademarks

      The Company owns and uses a variety of marks, including American HomePatient®, AerMeds®, EnterCare^sm, Resource^sm, Extracare, EnSpire^sm, OPUS^sm, SLEEP^sm, Go Paperless^sm and Personal Caring Service^sm which have either been registered at the federal or state level or are being used pursuant to common law rights.

Government Regulation

      General. The Company, as a participant in the health care industry, is subject to extensive federal, state and local regulation. In addition to the Federal False Claims Act (“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 OBRA 1987 that apply to the Company’s 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

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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 fraud and abuse and 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 Office of Inspector General of the Department of Health and Human Services (“OIG”) published a draft Model Compliance Plan for the Durable Medical Equipment, Prosthetics, Orthotics and Supply Industry. The OIG has stressed the importance for all health care providers to have an effective compliance plan. The Company has created and implemented a compliance program, which it believes meets the elements of the OIG’s Model Plan for the industry. As part of its compliance program, the Company performs internal audits of the adequacy of billing documentation. The Company’s policy is to voluntarily refund to the government any reimbursements previously received for claims with insufficient documentation that are identified in this process and that cannot be corrected. The Company 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”) requirements for skilled nursing facilities and PPS for home health agencies, which do not affect the Company directly but could affect the Company’s contractual relationships with such entities; (ii) deadlines (as yet undetermined) for obtaining Medicare and Medicaid surety bonds for home health agencies and DME suppliers; and (iii) pilot projects in Polk County, Florida and San Antonio, Texas, which were

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effective between October 1, 1999 and September 30, 2002, and February 1, 2001 and December 31, 2002, respectively, to determine the efficacy of competitive bidding for certain durable medical equipment (“DME”), under which Medicare reimbursements for certain items are reduced between 19% and 34% from the current fee schedules (the Company participated to some extent in both pilot projects). At expiration, the DME items reverted to normal Medicare fees and procedures, although the Bush administration has announced that it intends to expand competitive bidding on a national basis, building on these two pilot projects that yielded savings to Medicare. The United States House of Representatives recently passed a bill that includes provisions for a national competitive bidding program for durable medical equipment, including home oxygen equipment. The United States Senate has recently considered three separate bills that include some provision for national competitive bidding. At the present time, the Senate has not voted on any of these three bills under consideration. The Company cannot predict at this time the outcome of proposed legislation related to a national competitive bidding program or the financial impact of such a program on the Company’s business, if it should become law.

      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

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information regarding certain aspects of the Company’s business. The Company cooperates with the various agencies in responding to such subpoenas and requests. The Company expects to incur additional legal expenses in the future in connection with existing and future investigations.

      The government has broad authority and discretion in enforcing applicable laws and regulations; therefore, the scope and outcome of any such investigations, inquiries, or legal actions cannot be predicted. There can be no assurance that federal, state or local governments will not impose additional regulations upon the Company’s activities nor that the Company’s 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 contracts for goods or services reimbursed by the government.

      Legal Proceedings. All of the civil legal proceedings against the Company were stayed by 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 “Government Settlement”) was entered among the Company, the United States of America, acting through the United States Department of Justice (“DOJ”) and on behalf of the OIG and the TRICARE Management Activity, and a former Company employee, as relator. The Government 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 Government 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 Government 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 Government Settlement. The Company has reserved $4,246,000 for its future obligations of principal and interest pursuant to the Government Settlement. The Government 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 against 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 both 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 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 defendants filed a Motion for Reconsideration with the Court of Appeals, and the Court of Appeals denied the motion on July 10, 2002. On August 5, 2002 the

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Company filed a Notice of Bankruptcy which stays the proceedings as to the Company. Mr. Corsello’s qui tam complaint alleged that the Company and numerous other unrelated defendants, including other large DME suppliers, engaged in a kickback scheme to provide free or below market value equipment and medicine to physicians who would in turn refer patients to the defendants in violation of the False Claims Act. The 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 also 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 Government 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 billed claims that are found to be improper, 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.

Risk Factors

      This section summarizes certain risks, among others, that should be considered by stockholders and prospective investors in the Company. Many of these risks are also discussed in other sections of this report.

      Bankruptcy Proceeding. The Debtors filed voluntary petitions for relief under the U.S. Bankruptcy Code on July 31, 2002. The Debtors are currently operating as debtors-in-possession subject to the jurisdiction of the Bankruptcy Court. The Debtors and the Official Committee of Unsecured Creditors jointly proposed the Second Amended Joint Plan of Reorganization that, among other terms, proposed paying all creditors of the Debtors in full and allowing the stockholders of the Company to retain their ownership interest. However, there can be no assurance that the proposed plan will be approved with these proposed terms or at all. Furthermore, the Debtors are subject to a number of uncertainties while operating its business during bankruptcy proceedings including maintaining its relationships with vendors, referral sources, business partners, employees, and patients. If the proposed plan is approved, the

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Company’s future results of operations will be subject to the business risks associated with the Company’s operations and the markets in which it operates as described in “Risk Factors-Business Risks.” See Note 2 “Proceedings Under Chapter 11 of the Bankruptcy Code” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

      Business Risks

      Substantial Leverage. The Company maintains a significant amount of debt. Indebtedness under the Bank Credit Facility totaled approximately $275.4 million as of July 31, 2002, the date the Chapter 11 proceedings commenced. The Lenders have asserted that additional sums are due that will increase their claims to in excess of $280.0 million. If a plan of reorganization is not approved and confirmed that extends the payment terms for 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 proposed plan is approved, a substantial portion of its cash flow from operations will be dedicated to repaying debt. Although the Company believes it will generate sufficient cash flow from operations to meet its obligations, if it cannot, the inability to pay debt would likely have a material adverse effect on the Company. The substantial leverage could adversely affect the Company’s ability to grow its business or to withstand adverse economic conditions or competitive pressures. 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 year ended December 31, 2002, the percentage of the Company’s revenues derived from Medicare, Medicaid and private pay was 52%, 10% and 38%, respectively. The revenues and profitability of the Company may be impacted 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.”

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      Collectibility of Accounts Receivable. The Company has substantial accounts receivable, as well as DSO of 61 days as of December 31, 2002. No assurances can be given that future bad debt expense will not increase above current operating levels as a result of difficulties associated with the Company’s billing activities and meeting payor documentation requirements and claim submission deadlines. Increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on cash flows and results of operations. 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

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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, between September 1, 1999 and September 30, 2002, trading of the Company’s common stock was 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. Because the Company was unable to timely file its Form 10-Q for the quarter ended September 30, 2002, the Company’s common stock has traded only in the “pink sheets” since that date. While the Company intends to seek to have its common stock again traded on the OTC, there can be no assurance that it will be able to obtain that result. As a result, 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 and the ability of shareholders to sell their shares.

      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, it will experience declining profitability, unless the Company also decreases its cost for providing services and increases higher margin services.

      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.

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      HIPAA Compliance. HIPAA has mandated an extensive set of regulations to protect the privacy of individually 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 required compliance by October 16, 2002 except as extended by one year to October 16, 2003 for providers that filed a compliance extension form 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 has filed its compliance extension form and is actively pursuing its strategies toward compliance with the final Privacy Standards and Transaction and Code Sets Standards. The Company’s HIPAA compliance plan will require modifications to existing information management systems and physical security mechanisms, and may require additional personnel as well as extensive training of existing personnel, the full cost of which has not yet been determined. The Company cannot predict 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. Although there has been no material adverse impact to date from the Bankruptcy Filing, 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 the 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

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operations, financial condition or prospects of the Company. Claims against the Company, regardless of their merit or eventual outcome, may also have a material adverse effect upon the Company’s ability to attract patients or to expand its business. In addition, the Company is self-insured for its workers’ compensation insurance and employee health insurance and is at risk for claims up to individual stop loss and aggregate stop loss amounts.

ITEM 2.      PROPERTIES

      As of December 31, 2002, the Company’s corporate headquarters occupied approximately 29,000 square feet leased in the Parklane Building, Maryland Farms, Brentwood, Tennessee. The Company entered into an amended lease effective January 1, 2003 that reduced this leased space to 12,000 square feet. The amended lease has a base monthly rent of $41,000 and expires in January 2009.

      The Company owns a center in Waterloo, Iowa, which consists of approximately 35,000 square feet and owns a 50% interest in its center in Little Rock, Arkansas, which consists of approximately 15,000 square feet. Under the terms of the Amended Credit Agreement, the Company was required to sell its wholly owned real estate by December 31, 2001 or grant mortgages on the real estate to the Lenders. The Company sold its previously owned real estate in Tallahassee, Florida and North Charleston, South Carolina through sale-leaseback transactions in the fourth quarter of 2001. These transactions generated cash proceeds of $1.0 million which were remitted as payment on the Bank Credit Facility. The Company also sold its 75% interest in unimproved property in Columbia, South Carolina (which consisted of approximately one acre) in the second quarter of 2002. This transaction generated cash proceeds of $0.2 million which were remitted as payment on the Bank Credit Facility. The Company is attempting to sell its property in Waterloo, Iowa.

      The Company leases the operating space required for its remaining home health care centers. A typical center occupies between 2,000 and 6,000 square feet and generally combines showroom, office and warehouse space, with approximately two-thirds of the square footage consisting of warehouse space. Lease terms on most of the leased centers range from three to five years. Management believes that the Company’s owned and leased properties are adequate for its present needs and that suitable additional or replacement space will be available as required.

ITEM 3.      LEGAL PROCEEDINGS

      A description of the Chapter 11 cases is set forth in Note 2 to the Company’s condensed consolidated financial statements contained in this Report and are incorporated herein by reference. All of the civil legal proceedings against the Company were stayed by the Bankruptcy Filing. A summary of the Company’s material legal proceedings that existed as of the Bankruptcy Filing is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Government Regulation – Legal Proceedings.”

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ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

      None.

PART II

ITEM 5.      MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

      The common stock of the Company was traded on the Nasdaq National Market System under the designation AHOM until September 1, 1999. Effective 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 was conducted on the over-the-counter market (“OTC”) or, on application by broker-dealers, in the NASD’s Electronic Bulletin Board using the trading symbol, AHOM, until the Company was unable to timely file its Form 10-Q for the quarter ended September 30, 2002. Since then, the Company’s common stock has traded in the “pink sheets” under the trading symbol AHOM. While the Company intends to seek to have its common stock again traded on the OTC, there can be no assurance that it will be able to obtain that result. The following table sets forth representative bid quotations of the common stock for each quarter of calendar years 2002 and 2001. The following bid quotations reflect interdealer prices without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. See “Business — Risk Factors – Liquidity.”

      On March 24, 2003, there were 1,759 holders of record of the common stock and the closing bid quotation for the common stock was $0.28 per share.

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      The Company has not paid cash dividends on its common stock and anticipates that, for the foreseeable future, any earnings will be retained for use in its business and no cash dividends will be paid. See –“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

      Information regarding the Company’s equity compensation plans is incorporated by reference to the Company’s definitive proxy statement (“Proxy Statement”) for its 2003 annual meeting of stockholders.

ITEM 6.      SELECTED CONSOLIDATED FINANCIAL DATA

Financial Statements Presented and Derivation of Information

      As discussed in Note 15 of the consolidated financial statements, the 2001 consolidated financial statements have been restated. The following selected financial data below is derived from the audited financial statements of the Company and should be read in conjunction with those statements, including the related notes thereto. The addition of new operations through acquisitions in 1998, the dissolution of joint ventures in 1999 and 2000, the sales of non-core assets in 2001 and 2002, the bankruptcy filing in 2002, and the cumulative effect of change in accounting principle in 2002 affect the comparability of the financial data presented.

      See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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