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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
CHECK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2003
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.
(DEBTOR-IN-POSSESSION AS OF JULY 31, 2002)
(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 [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN EXCHANGE ACT RULE 12B-2).
YES [ ] NO [X]
16,397,389
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF MAY 12, 2003)
TOTAL NUMBER OF SEQUENTIALLY
NUMBERED PAGES IS 57
1
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
---------------------------------------------
(unaudited)
ASSETS
March 31, December 31,
2003 2002
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 21,715,000 $ 22,827,000
Restricted cash 67,000 67,000
Accounts receivable, less allowance for doubtful accounts of
$22,684,000 and $22,991,000, respectively 57,444,000 55,437,000
Inventories, net of inventory reserves of $570,000 and
$583,000, respectively 15,789,000 16,565,000
Prepaid expenses and other current assets 2,499,000 2,276,000
------------- -------------
Total current assets 97,514,000 97,172,000
------------- -------------
PROPERTY AND EQUIPMENT, at cost: 173,711,000 171,021,000
Less accumulated depreciation and amortization (122,103,000) (120,594,000)
------------- -------------
Property and equipment, net 51,608,000 50,427,000
------------- -------------
OTHER ASSETS:
Goodwill, net 121,214,000 121,214,000
Investment in joint ventures 9,658,000 9,815,000
Other assets 12,555,000 12,315,000
------------- -------------
Total other assets 143,427,000 143,344,000
------------- -------------
TOTAL ASSETS $ 292,549,000 $ 290,943,000
============= =============
(Continued)
2
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
---------------------------------------------
(unaudited)
(Continued)
LIABILITIES AND SHAREHOLDERS' DEFICIT
March 31, December 31,
2003 2002
------------- -------------
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Accounts payable $ 14,477,000 $ 13,267,000
Other payables 1,726,000 1,637,000
Accrued expenses:
Payroll and related benefits 8,017,000 7,759,000
Insurance, including self-insurance reserves 6,068,000 5,829,000
Other 2,993,000 1,625,000
------------- -------------
Total current liabilities 33,281,000 30,117,000
------------- -------------
NONCURRENT LIABILITIES:
Minority interest 491,000 470,000
Other noncurrent liabilities 113,000 121,000
------------- -------------
Total noncurrent liabilities 604,000 591,000
------------- -------------
LIABILITIES SUBJECT TO COMPROMISE 301,921,000 307,829,000
SHAREHOLDERS' 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 shares 164,000 164,000
Paid-in capital 173,985,000 173,985,000
Accumulated deficit (217,406,000) (221,743,000)
------------- -------------
Total shareholders' deficit (43,257,000) (47,594,000)
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 292,549,000 $ 290,943,000
============= =============
(Concluded)
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these consolidated financial statements.
3
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------
(unaudited)
Three Months Ended March 31,
-----------------------------------
2003 2002
------------- -------------
REVENUES:
Sales and related service revenues $ 36,401,000 $ 34,823,000
Rentals and other revenues 46,106,000 44,989,000
------------- -------------
Total revenues 82,507,000 79,812,000
------------- -------------
EXPENSES:
Cost of sales and related services 17,293,000 16,504,000
Cost of rentals and other revenues, including rental equipment
depreciation of $4,741,000 and $4,639,000, respectively 8,426,000 8,186,000
Operating, including bad debt expense of $3,117,000 and $4,170,000,
respectively 47,236,000 46,336,000
General and administrative 4,546,000 4,262,000
Earnings from joint ventures (1,230,000) (1,273,000)
Depreciation, excluding rental equipment, and amortization 925,000 1,033,000
Amortization of deferred financing costs -- 824,000
Interest (income) expense, net (excluding post-petition contractual
interest of $6,300,000 and $0, respectively) (72,000) 5,115,000
Other expense (income), net 94,000 (104,000)
Gain on sale of assets of center -- (667,000)
------------- -------------
Total expenses 77,218,000 80,216,000
------------- -------------
INCOME (LOSS) FROM OPERATIONS BEFORE REORGANIZATION ITEMS,
INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 5,289,000 (404,000)
REORGANIZATION ITEMS 852,000 --
------------- -------------
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 4,437,000 (404,000)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 100,000 (2,012,000)
------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 4,337,000 1,608,000
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE WITH NO
RELATED TAX EFFECT -- (68,485,000)
------------- -------------
NET INCOME (LOSS) $ 4,337,000 $ (66,877,000)
============= =============
INCOME PER COMMON SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE:
- Basic $ 0.26 $ 0.10
============= =============
- Diluted $ 0.24 $ 0.09
============= =============
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE PER
COMMON SHARE:
- Basic $ -- $ (4.20)
============= =============
- Diluted $ -- $ (3.66)
============= =============
NET INCOME (LOSS) PER COMMON SHARE:
- Basic $ 0.26 $ (4.10)
============= =============
- Diluted $ 0.24 $ (3.57)
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
- Basic 16,367,000 16,331,000
============= =============
- Diluted 18,323,000 18,729,000
============= =============
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these consolidated financial statements.
4
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------
(unaudited)
Three Months Ended March 31,
-----------------------------------
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,337,000 $ (66,877,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of change in accounting principle -- 68,485,000
Depreciation and amortization 5,666,000 5,672,000
Amortization of deferred financing costs -- 824,000
Provision for doubtful accounts (307,000) (988,000)
Provision for inventory (13,000) (171,000)
Equity in earnings of unconsolidated joint ventures (696,000) (769,000)
Minority interest 88,000 72,000
Gain on sale of assets of center -- (667,000)
Reorganization items 852,000 --
Reorganization items paid (1,063,000) --
Change in assets and liabilities net of dispositions:
Accounts receivable (1,700,000) 2,179,000
Inventories 789,000 551,000
Prepaid expenses and other current assets (223,000) (86,000)
Federal income tax receivable -- (2,112,000)
Accounts payable, other payables and accrued expenses 2,387,000 (1,954,000)
Other assets and liabilities (247,000) (69,000)
Other noncurrent liabilities (8,000) (12,000)
------------- -------------
Net cash provided by operating activities 9,862,000 4,078,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets of center -- 1,805,000
Additions to property and equipment, net (6,840,000) (5,750,000)
Distributions and loan payments from unconsolidated joint
ventures, net 853,000 1,142,000
------------- -------------
Net cash used in investing activities $ (5,987,000) $ (2,803,000)
------------- -------------
(Continued)
5
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------
(unaudited)
(Continued)
Three Months Ended March 31,
--------------------------------
2003 2002
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases (120,000) (4,287,000)
Adequate protection payments (4,800,000) --
Proceeds from employee stock purchase plan -- --
Proceeds from exercise of stock options -- 11,000
Deferred financing costs -- (8,000)
Distributions to minority interest owners (67,000) (55,000)
Restricted cash -- 212,000
------------ -----------
Net cash used in financing activities (4,987,000) (4,127,000)
------------ -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,112,000) (2,852,000)
CASH AND CASH EQUIVALENTS, beginning of period 22,827,000 9,129,000
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 21,715,000 $ 6,277,000
============ ===========
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 49,000 $ 4,813,000
============ ===========
Cash payments of income taxes $ 47,000 $ 49,000
============ ===========
(Concluded)
The accompanying notes to interim condensed consolidated financial statements
are an integral part of these consolidated financial statements.
6
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
-------------------------------------------
(DEBTOR-IN-POSSESSION)
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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 therapies, infusion therapies and the
rental and sale of home medical equipment and home health care supplies. For
the three months ended March 31, 2003, these services represented 68%, 13% and
19% of revenues, respectively. These services and products are paid for
primarily by Medicare, Medicaid and other third-party payors. As of March 31,
2003, the Company provided these services to patients primarily in the home
through 287 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 interim condensed consolidated financial statements of the Company for the
three months ended March 31, 2003 and 2002 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 accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management of the Company, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments (consisting of only
normally recurring accruals) necessary to present fairly the financial position
at March 31, 2003 and the results of operations and the cash flows for the
three months ended March 31, 2003 and 2002.
The results of operations for the three months ended March 31, 2003 and 2002
are not necessarily indicative of the operating results for the entire
respective years. These unaudited interim condensed 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.
Certain reclassifications have been made to the 2002 consolidated financial
statements to conform to the 2003 presentation.
2. HISTORY OF BANK CREDIT FACILITY
The Company is indebted to a syndicate of lenders (the "Lenders"), with Bank of
Montreal serving as agent for the Lenders. Prior to August 12, 2002, Deutsche
Bank Trust Company, successor to Bankers Trust Company, served as agent for the
Lenders. On August 12, 2002 the Company received written notice that Deutsche
Bank Trust Company intended to resign. Bank of Montreal was appointed by the
Lenders as the new agent. The indebtedness arose out of a credit agreement
entitled the Fifth Amended and Restated Credit Agreement (the "Amended Credit
Agreement"), which Amended Credit Agreement was entered into as of June 8, 2001.
The indebtedness owed to the Lenders as of July 31, 2002, the date of the
Company's Bankruptcy Filing (as defined in Note 3), totaled
7
approximately $275.4 million (excluding letters of credit totaling $3.4
million). Terms, including payment terms, for the indebtedness that arose out
of the Amended Credit Agreement will be established in connection with the
Chapter 11 Cases (as defined in Note 3).
The Amended Credit Agreement was the latest in a series of credit agreements in
connection with a credit facility (the "Bank Credit Facility") that dated back
to an initial credit agreement dated October 20, 1994. The Amended Credit
Agreement was entered into after the Company breached several of the financial
covenants in the Fourth Amended and Restated Credit Agreement.
The Amended Credit Agreement provided a new loan to the Company from which the
proceeds were used to pay off all existing loans under the Fourth Amended and
Restated Credit Agreement. The Amended Credit Agreement also included modified
financial covenants and a revised amortization schedule. In addition, the
Amended Credit Agreement no longer contained a revolving loan component; all
existing indebtedness was now in the form of a term loan which matured on
December 31, 2002.
The Amended Credit Agreement required principal payments of $750,000 on
September 30, 2001 and December 31, 2001; a principal payment of $11.6 million
on March 31, 2002; principal payments of $1.0 million on June 30, 2002 and
September 30, 2002; and a balloon payment of $281.5 million on December 31,
2002. The Amended Credit Agreement further provided for mandatory prepayments
of principal from the Company's excess cash flow and from the proceeds of the
Company's sales of securities, sales of assets, tax refunds or excess casualty
loss payments.
As of July 31, 2002, the Company had paid the $750,000 principal payment due on
September 30, 2001, the $750,000 principal payment due on December 31, 2001,
the $11.6 million principal payment due on March 31, 2002 as well as the $1.0
million principal payment due on June 30, 2002, the $1.0 million principal
payment due on September 30, 2002, and $6.1 million of the balloon payment due
on December 31, 2002. These early payments of 2002 principal were generated
from operational cash flows, from the sales of assets of centers, from the
sales of the Company's wholly-owned real estate and from the collection of
patient receivables associated with the asset sales. The Bankruptcy Filing
stayed all remaining payments required by the Amended Credit Agreement.
Substantially all of the Company's assets were pledged as security for
borrowings under the Bank Credit Facility.
The Amended Credit Agreement further provided for the payment to the Lenders of
certain fees. These fees included a restructuring fee of $1.2 million (paid on
the effective date of the Amended Credit Agreement), and $200,000 paid on
December 31, 2001, March 31, 2002 and June 30, 2002. A restructuring fee of
$459,000 payable on September 30, 2002 is currently classified as a liability
subject to compromise in the accompanying consolidated balance sheet as of
March 31, 2003. In addition, the Company had an obligation to pay the agent an
annual administrative fee of $75,000 and an annual fee of 0.50% of the average
monthly outstanding indebtedness on each anniversary of the Amended Credit
Agreement. The last such payment of annual fees was made by the Company in June
2002.
The Amended Credit Agreement contained various financial covenants, the most
restrictive of which relate to measurements of EBITDA (as defined in the
Amended Credit Agreement), leverage, interest coverage ratios, and collections
of accounts receivable. The Amended Credit Agreement also contained provisions
for periodic reporting.
8
The Amended Credit Agreement also contained restrictions which, among other
things, imposed certain limitations or prohibitions on the Company with respect
to the incurrence of indebtedness, the creation of liens, the payment of
dividends, the redemption or repurchase of securities, investments,
acquisitions, capital expenditures, sales of assets and transactions with
affiliates. The Company was not permitted to make acquisitions or investments
in joint ventures without the consent of Lenders holding a majority of the
lending commitments under the Bank Credit Facility. In addition, proceeds of
all of the Company's accounts receivable were transferred daily into a bank
account at PNC Bank, N.A. which, under the terms of a Concentration Bank
Agreement, required that all amounts in excess of $3.0 million be transferred
to an account at Deutsche Bank Trust Company (predecessor agent for the
Lenders) in the Company's name. Upon occurrence of an event of default under
the Amended Credit Agreement, the Lenders had the right to instruct PNC Bank,
N.A. and Deutsche Bank Trust Company to cease honoring any drafts under the
accounts and apply all amounts in the bank accounts against the indebtedness
owed to the Lenders.
Interest was payable on the unpaid principal amount under the Amended Credit
Agreement, at the election of the Company, at either a Base Lending Rate or an
Adjusted Eurodollar Rate (each as defined in the Amended Credit Agreement),
plus an applicable margin of 2.75% and 3.50%, respectively. The Company was
also required to pay additional interest in the amount of 4.50% per annum on
that principal portion outstanding of the Amended Credit Agreement that is in
excess of four times adjusted EBITDA, as defined by the Amended Credit
Agreement. For the seven months ended with the Bankruptcy Filing, the weighted
average borrowing rate was 7.3%. Upon the occurrence and continuation of an
event of default under the Amended Credit Agreement, interest would have been
payable upon demand at a rate that is 2.00% per annum in excess of the interest
rate otherwise payable under the Amended Credit Agreement and the Company no
longer would have had the right to designate the Adjusted Eurodollar Rate plus
the applicable margin as the applicable interest rate.
The Company was required to issue warrants to the Lenders representing 19.999%
of the common stock of the Company issued and outstanding as of March 31, 2001,
pursuant to the terms of the Second Amendment to the Fourth Amended and
Restated Credit Agreement (which amendment was entered into on April 14, 1999).
To fulfill these obligations, warrants to purchase 3,265,315 shares of common
stock were issued to the Lenders on June 8, 2001. Fifty percent of these
warrants are exercisable until May 31, 2011, and the remaining fifty percent
are exercisable until September 29, 2011. The exercise price of the warrants is
$0.01 per share. The Company accounted for the fair value of these warrants
during the fourth quarter of 2000 as the issuance of these warrants was
determined to be probable. As such, the Company increased deferred financing
costs by $686,000 to recognize the estimated fair value of the warrants as of
December 31, 2000. As of May 14, 2003 these warrants have not been exercised.
9
3. PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
The Amended Credit Agreement was due to mature on December 31, 2002. Because of
the impending maturity and the Company's inability to reach an agreement with
its Lenders to restructure the Bank Credit Facility, 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"). The Bankruptcy
Filing stayed all payments and enforcement actions under the Amended Credit
Agreement.
These cases (the "Chapter 11 Cases") have been consolidated for the purpose of
joint administration under Case Number 02-08915-GP3-11. On January 2, 2003, the
Debtors filed their Second Amended Joint Plan of Reorganization (the "Proposed
Plan"), proposed by the Debtors 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 Proposed Plan to make an informed decision before
exercising their right to vote, accompanied the Proposed Plan and was also
filed on January 2, 2003. After certain amendments, a Disclosure Statement
filed on February 24, 2003, was approved by the Bankruptcy Court. The hearing
before the Bankruptcy Court on confirmation of the Proposed Plan was held on
April 23-25 and 28-29, 2003. At the conclusion of the hearing, the Bankruptcy
Court took the matter under advisement. As of May 14, 2003, the Court had not
yet ruled as to whether the Proposed Plan would be confirmed.
The Debtors operate their business as a debtor-in-possession in accordance with
the applicable provisions 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. Prior to the hearing, the Company did not seek to obtain
debtor-in-possession secured financing ("DIP Financing"). After the hearing,
the Company does not intend to obtain DIP Financing. Rather, the Company has
used 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 March 31, 2003 the Company had cash and cash equivalents of approximately
$21.7 million. 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.
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,
10
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 $1,600,000 per month beginning with the
month of August 2002, subject to maintaining a required minimum cash balance of
$12,000,000 plus the amount necessary to fund incentive bonuses through March
31, 2003, as well as any amounts necessary to replace or increase letters of
credit. An initial payment totaling $3,200,000 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 April 15, 2003. The
application of such payments is subject to further order of the Bankruptcy
Court. The Bankruptcy Court may recharacterize the application of any payment
regardless of how characterized by the Company or the Lenders.
The accompanying unaudited condensed consolidated interim 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 interim 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 unaudited condensed consolidated balance 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 unaudited condensed consolidated
balance sheets. Revenues, expenses, realized gains and losses, and provisions
for losses and expenses resulting from the reorganization are reported
separately as reorganization items. Cash used for reorganization items is
disclosed separately in the unaudited condensed consolidated statements of cash
flows. Post-petition interest excluded from the statements of operations for
the three months ended March 31, 2003, of $6,300,000, represents the default
rate of interest pursuant to the terms described in the Amended Credit
Agreement.
4. 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
(see Note 7), capital leases, and also includes 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
11
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:
Pre-petition accounts payable $ 20,246,000
State income taxes payable 394,000
Other accruals 5,004,000
Accrued interest 1,249,000
Accrued professional fees related to reorganization 1,607,000
Accrual for future lease rejection damages 1,317,000
Other long-term debt and liabilities 1,953,000
Government settlement, including interest 4,246,000
Bank credit facility 278,705,000
Adequate protection payments (12,800,000)
------------
Total liabilities subject to compromise $301,921,000
============
Reorganization items represent expenses that are incurred by the Company as a
result of reorganization under Chapter 11 of the Federal Bankruptcy Code.
Reorganization items for the quarter ended March 31, 2003 were $852,000 and are
comprised primarily of professional fees.
5. 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 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 three months ended March 31,
2003:
12
American HomePatient, Inc. and Subsidiaries
Condensed Combining Balance Sheets as of March 31, 2003
Debtors Non-Debtors Combined
------------- ------------ -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,679,000 $ 36,000 $ 21,715,000
Restricted cash 67,000 -- 67,000
Accounts receivable, less allowance for doubtful accounts 57,007,000 437,000 57,444,000
Inventories, net of inventory reserves 15,697,000 92,000 15,789,000
Prepaid expenses and other current assets 2,498,000 1,000 2,499,000
------------- ------------ -------------
Total current assets 96,948,000 566,000 97,514,000
------------- ------------ -------------
PROPERTY AND EQUIPMENT, at cost: 172,284,000 1,427,000 173,711,000
Less accumulated depreciation and amortization (121,256,000) (847,000) (122,103,000)
------------- ------------ -------------
Property and equipment, net 51,028,000 580,000 51,608,000
------------- ------------ -------------
OTHER ASSETS:
Goodwill, net 121,214,000 -- 121,214,000
Investment in joint ventures (135,000) 9,793,000 9,658,000
Other assets 12,554,000 1,000 12,555,000
------------- ------------ -------------
Total other assets 133,633,000 9,794,000 143,427,000
------------- ------------ -------------
TOTAL ASSETS $ 281,609,000 $ 10,940,000 $ 292,549,000
============= ============ =============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable $ 14,477,000 $ -- $ 14,477,000
Other payables 1,726,000 -- 1,726,000
Accrued expenses:
Payroll and related benefits 8,000,000 17,000 8,017,000
Insurance, including self-insurance reserves 6,068,000 -- 6,068,000
Other 2,988,000 5,000 2,993,000
------------- ------------ -------------
Total current liabilities 33,259,000 22,000 33,281,000
------------- ------------ -------------
NONCURRENT LIABILITIES:
Minority interest -- 491,000 491,000
Other noncurrent liabilities 113,000 -- 113,000
------------- ------------ -------------
Total noncurrent liabilities 113,000 491,000 604,000
------------- ------------ -------------
LIABILITIES SUBJECT TO COMPROMISE: 301,921,000 -- 301,921,000
SHAREHOLDERS' (DEFICIT) EQUITY (53,684,000) 10,427,000 (43,257,000)
------------- ------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY $ 281,609,000 $ 10,940,000 $ 292,549,000
============= ============ =============
13
American HomePatient, Inc. and Subsidiaries
Condensed Combining Statements of Operations
for the Three Months Ended March 31, 2003
Debtors Non-Debtors Combined
-------------- -------------- --------------
REVENUES:
Sales and related service revenues $ 36,185,000 $ 216,000 $ 36,401,000
Rentals and other revenues 45,545,000 561,000 46,106,000
-------------- -------------- --------------
Total revenues 81,730,000 777,000 82,507,000
-------------- -------------- --------------
EXPENSES:
Cost of sales and related services 17,174,000 119,000 17,293,000
Cost of rentals and other revenues, including rental equipment
depreciation 8,340,000 86,000 8,426,000
Operating, including bad debt expense 46,867,000 369,000 47,236,000
General and administrative 4,546,000 - 4,546,000
Earnings from joint ventures (534,000) (696,000) (1,230,000)
Depreciation, excluding rental equipment, and amortization 924,000 1,000 925,000
Interest income, net (72,000) - (72,000)
Other expense, net 94,000 - 94,000
-------------- -------------- --------------
Total expenses (income) 77,339,000 (121,000) 77,218,000
-------------- -------------- --------------
INCOME FROM OPERATIONS BEFORE REORGANIZATION ITEMS AND INCOME TAXES 4,391,000 898,000 5,289,000
REORGANIZATION ITEMS 852,000 - 852,000
-------------- -------------- --------------
INCOME FROM OPERATIONS BEFORE INCOME TAXES 3,539,000 898,000 4,437,000
PROVISION FOR INCOME TAXES 100,000 - 100,000
-------------- -------------- --------------
NET INCOME $ 3,439,000 $ 898,000 $ 4,337,000
============== ============== ==============
14
American HomePatient, Inc. and Subsidiaries
Condensed Combining Statements of Cash Flows
for the Three Months Ended March 31, 2003
Debtors Non-Debtors Combined
------------ --------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,439,000 $ 898,000 $ 4,337,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 5,606,000 60,000 5,666,000
Provision for doubtful accounts (311,000) 4,000 (307,000)
Provision for inventory (13,000) -- (13,000)
Equity in earnings of unconsolidated joint ventures -- (696,000) (696,000)
Minority interest -- 88,000 88,000
Reorganization items 852,000 -- 852,000
Reorganization items paid (1,063,000) -- (1,063,000)
Change in assets and liabilities:
Accounts receivable (1,664,000) (36,000) (1,700,000)
Inventories 782,000 7,000 789,000
Prepaid expenses and other current assets (222,000) (1,000) (223,000)
Accounts payable, other payables and accrued expenses 2,405,000 (18,000) 2,387,000
Other assets and liabilities (246,000) (1,000) (247,000)
Other noncurrent liabilities (8,000) -- (8,000)
------------ --------- ------------
Net cash provided by operating activities 9,557,000 305,000 9,862,000
------------ --------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net (6,776,000) (64,000) (6,840,000)
Distributions and loan payments from (advances to) unconsolidated
joint ventures, net 1,051,000 (198,000) 853,000
------------ --------- ------------
Net cash used in investing activities (5,725,000) (262,000) (5,987,000)
------------ --------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases (120,000) -- (120,000)
Adequate protection payments (4,800,000) -- (4,800,000)
Distributions to minority interest owners (3,000) (64,000) (67,000)
------------ --------- ------------
Net cash used in financing activities (4,923,000) (64,000) (4,987,000)
------------ --------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,091,000) (21,000) (1,112,000)
CASH AND CASH EQUIVALENTS, beginning of period 22,770,000 57,000 22,827,000
------------ --------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 21,679,000 $ 36,000 $ 21,715,000
============ ========= ============
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 49,000 $ -- $ 49,000
============ ========= ============
Cash payments of income taxes $ 47,000 $ -- $ 47,000
============ ========= ============
15
6. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company had net income of
$4,337,000 for the three months ended March 31, 2003 and incurred a net loss of
$61,154,000 for the year ended December 31, 2002. The Company has a
shareholders' deficit of $43,257,000 at March 31, 2003. The Company has
substantial debt balances related to the Amended Credit Agreement, of which
$278,705,000 was due on or before December 31, 2002. This amount is included in
liabilities subject to compromise as of March 31, 2003. See Note 3 for further
information related to the Bankruptcy Filing. These matters among others raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments of
recorded asset carrying amounts or the amounts and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
The Company's Proposed Plan provides for the extension of the maturity on the
Bank Credit Facility, a reduction of the related interest cost on such debt,
and the payment of all of its reported liabilities. Under the Proposed Plan,
the Company will continue to be highly leveraged and subject to substantial
interest costs. In addition, the Company intends to improve financial
performance through consolidating operations, stabilizing and increasing
profitable revenues, decreasing and controlling operating expenses and
improving accounts receivable performance. The Company is unable to predict
whether the Proposed Plan will be confirmed by the Bankruptcy Court, or whether
it will be able to successfully execute the operational results contemplated by
the Proposed Plan following its bankruptcy. If the Company is unable to
successfully emerge from bankruptcy and continue to improve its operations, its
financial position, results of operations and cash flows would be impacted
adversely.
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. The Company has operated in this
manner since the Bankruptcy Filing. 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. The Company has taken a number of 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,
establishing an employee communication program regarding the Bankruptcy Filing
and related issues, and communicating with referral sources and patients as
needed. The uncertainty regarding the outcome of the Bankruptcy Filing may
impair the Company's ability to receive trade credit from its vendors and could
have a material adverse effect on the Company's business, financial condition,
results of operations and cash flows.
7. GOVERNMENT INVESTIGATION AND LITIGATION
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 Office of
Inspector General of the Department of Health and Human Services ("OIG") and
the TRICARE Management Activity, and a former Company employee, as relator. The
Government Settlement was approved by the United States District Court for the
16
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 $3,000,000 in the second quarter of 2001 and agreed to make
additional payments in the principal amount of $4,000,000, together with
interest on this amount, in installments due at various times until March 2006.
The Company also agreed to pay the relator's attorneys fees and expenses. The
Company's Proposed Plan 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 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 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 other
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
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 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 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 $4,246,000 reserve for future
obligations pursuant to the Government Settlement, the Company has not recorded
any reserves
17
related to the unsettled government investigations. The outcome of any pending
lawsuits or future settlements could have a material adverse effect on the
Company.
The Company is a party to other legal proceedings incidental to its business.
In the opinion of management, any ultimate liability with respect to these
other actions will not have a material adverse effect on its financial position
or results of operations.
8. RELATED PARTY TRANSACTIONS
A partner in the law firm of Harwell Howard Hyne Gabbert & Manner, P.C.
("H3GM"), which the Company engaged during 2003 and 2002 to render legal advice
in a variety of activities, was a director of the Company until July 2002. The
Company paid H3GM $115,000 and $196,000 during the three months ended March 31,
2003 and 2002, respectively.
The Company maintains an employee benefit trust for the purpose of paying
health insurance claims for its employees. The trust was established in June
2002 and was funded with an initial deposit of $0.5 million in July 2002.
Disbursements from the trust began in late July 2002. The Company deposits
funds into the trust on an as needed basis to pay claims.
9. 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
business and nursing agency (collectively , the "Center"). Effective March 19,
2002 substantially all of the assets of the Center were sold for approximately
$1.3 million in cash. During the three months ended March 31, 2002, the Center
generated approximately $1.9 million in total revenues. The proceeds of this
sale were used to pay down debt under the Company's Bank Credit Facility.
10. EARNINGS PER SHARE
Under the standards established by Statement of Financial Accounting Standards
No. 128, "Earnings Per Share," 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. For the three months ended
March 31, 2003 and 2002, approximately 2,007,000 and 3,789,000 shares,
respectively, were attributable to the exercise of outstanding options and were
excluded from the calculation of diluted earnings per share because the effect
was antidilutive.
18
The following information is necessary to calculate earnings per share for the
periods presented:
Three Months Ended March 31,
-----------------------------------
2003 2002
------------ ---------------
Income before cumulative effect of change in
accounting principle $ 4,337,000 $ 1,608,000
Cumulative effect of change in accounting
principle -- (68,485,000)
------------ ---------------
Net income (loss) $ 4,337,000 $ (66,877,000)
============ ===============
Weighted average common shares outstanding 16,367,000 16,331,000
Effect of dilutive options and warrants 1,956,000 2,398,000
------------ ---------------
Adjusted diluted common shares outstanding 18,323,000 18,729,000
============ ===============
Income per common share before
cumulative effect of change in accounting
principle
- Basic $ 0.26 $ 0.10
============ ===============
- Diluted $ 0.24 $ 0.09
============ ===============
Cumulative effect of change in accounting principle per
common share
- Basic $ -- $ (4.20)
============ ===============
- Diluted $ -- $ (3.66)
============ ===============
Net income (loss) per common share
- Basic $ 0.26 $ (4.10)
============ ===============
- Diluted $ 0.24 $ (3.57)
============ ===============
11. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") 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. The Company adopted SFAS No.
141 effective July 1, 2001. See Note 12 "Adoption of SFAS No. 142" for
disclosure of the impact of SFAS No. 142. The Company adopted SFAS No. 142 on
January 1, 2002.
In June 2001, the FASB issued Statement of Financial Accounting 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's January 1, 2003 adoption of SFAS No. 143 did not have a material
impact on its financial position or results of operations.
19
In August 2001, the FASB 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 did not
have a material impact on its financial position or results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statement 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, "Extinguishment 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.
The provisions of this Statement related to the rescission of SFAS No. 4 are
effective for fiscal years beginning after May 15, 2002. The provisions of this
Statement related to SFAS No. 13 are effective for transactions occurring after
May 15, 2002. All other provisions of this Statement are effective for
financial statements issued on or after May 15, 2002. The Company's adoption of
the provisions of SFAS No. 145 which were effective for transactions after May
15, 2002 did not have a material effect on its financial statements. The
Company's January 1, 2003 adoption of the remaining provisions of SFAS No. 145
did not have a material impact on its financial position or results of
operations.
In June 2002, the FASB 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 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)"("Issue 94-3"). 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's January 1,
2003 adoption of SFAS No. 146 did not have a material impact on its financial
position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123" ("SFAS No. 148"), which amends SFAS No.
123, "Accounting for Stock-Based Compensation", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in
20
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The disclosure provisions of this Statement are effective for
financial statements for annual and interim periods beginning after December
15, 2002. The Company is currently assessing the three alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation included in this Statement. See Note 13
for further discussion.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN No. 45").
This Interpretation requires guarantors to account at fair value for and
disclose certain types of guarantees. The Interpretation's disclosure
requirements were effective for the Company's year ended December 31, 2002; the
Interpretation's accounting requirements are effective for guarantees issued or
modified after December 31, 2002. The Company's adoption of this
Interpretation's accounting requirements did not have a material impact on its
financial position or results of operations.
In January, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). This Interpretation requires
consolidation of variable interest entities ("VIE") (formerly referred to as
"special purpose entities") if certain conditions are met. The Interpretation
applies immediately to VIE's created after January 31, 2003, and to variable
interests obtained in VIE's after January 31, 2003. Effective with the quarter
beginning July 1, 2003, the Interpretation applies also to VIE's created or
variable interests obtained in VIE's before January 31, 2003. The Company's
adoption of the applicable provisions of this Interpretation did not have a
material impact on its financial position or results of operations. The Company
does not expect the adoption of the remaining provisions of this Interpretation
to have a material impact on its financial position or results of operations.
12. 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. Goodwill was tested for
impairment by comparing the fair value of goodwill to the carrying value of
goodwill. Fair value was determined using projected operating results and a
combination of analyses which included discounted cash flow calculations,
market multiples and other market information. Key assumptions used in these
estimates include projected operating results, discount rates and peer market
multiples. 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.
There was no tax effect on the impairment loss due to the fact that the
majority of the related goodwill was non-tax deductible and because of the
Company's federal net operating loss position. The Company is required to
conduct annual impairment tests hereafter, unless specific events arise which
warrant more immediate testing. To date there have been no events warranting
impairment testing since the Company
21
completed its 2002 annual impairment test in September 2002. Any subsequent
impairment loss will be recognized as an operating expense in the Company's
consolidated statements of operations.
The change in the carrying amount of goodwill for the three months ended March
31, 2003 and 2002 is as follows:
Three Months Ended March 31,
----------------------------------
2003 2002
------------- -------------
Goodwill, net of accumulated amortization, beginning of period $ 121,214,000 $ 189,699,000
Transitional impairment loss -- (68,485,000)
------------- -------------
Goodwill, net of accumulated amortization, end of period $ 121,214,000 $ 121,214,000
============= =============
13. STOCK BASED COMPENSATION
Prior to the issuance of SFAS No. 148, SFAS No. 123 encouraged, but did not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. Historically, the Company has chosen to
account for stock option plans using the intrinsic value method as prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25"), and related Interpretations. Under APB
Opinion No. 25, no compensation cost related to stock options has been
recognized because all options are issued with exercise prices equal to the
fair market value at the date of grant.
The Company is assessing the three alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation included in SFAS No. 148. To date, the Company has
adopted the disclosure provisions of SFAS No. 123. Accordingly, no compensation
cost has been recognized for the option plans. Had compensation cost for the
Company's stock option and employee stock purchase plans been determined based
on the fair value at the grant date of awards for the three months ended March
31, 2003 and 2002 consistent with the provisions of SFAS No. 123, the Company's
net income (loss) and net income (loss) per common share would have been
decreased or increased to the pro forma amounts indicated below:
22
Three Months Ended March 31,
---------------------------------
2003 2002
------------ ------------
Net income (loss) - as reported $ 4,337,000 $(66,877,000)
Additional compensation expense (4,000) (69,000)
------------ ------------
Net income (loss) - pro forma $ 4,333,000 $(66,946,000)
============ ============
Net income (loss) per common share - as reported
Basic $ 0.26 $ (4.10)
Diluted $ 0.24 $ (3.57)
Net income (loss) per common share - pro forma
Basic $ 0.26 $ (4.10)
Diluted $ 0.24 $ (3.57)
14. SUBSEQUENT EVENT
The hearing before the Bankruptcy Court on confirmation of the Proposed Plan
was held on April 23-25 and 28-29, 2003. At the hearing, testimony of numerous
witnesses from both the Company and the Company's secured creditors was
presented regarding the Company's efforts to have the Proposed Plan confirmed.
The Bankruptcy Court must determine whether to confirm or reject the Proposed
Plan. At the conclusion of the hearing, no ruling was issued and the Bankruptcy
Court took the matter under advisement. As of May 14, 2003 the Court had not
yet ruled as to whether the Proposed Plan would be confirmed. Once a ruling is
issued, the ruling does not become final until a ten-day appeal period has
passed without any appeals being filed. See Note 3 for a discussion of the
Company's proceedings under Chapter 11 of the Bankruptcy Code.
23
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 PROPOSED PLAN OF REORGANIZATION, OTHER EFFECTS AND CONSEQUENCES OF
THE BANKRUPTCY FILING, FORECASTS UPON WHICH THE PROPOSED 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 NOT GUARANTEES OF FUTURE PERFORMANCE AND 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.
BANKRUPTCY FILING
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"). See Note 3 "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."
GENERAL
The Company provides home health care services and products to patients through
its 287 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.
24
The following table sets forth the percentage of the Company's revenues
represented by each line of business for the periods presented:
Three Months Ended March 31,
----------------------------
2003 2002
---------- ----------
Home respiratory therapy services 68% 65%
Home infusion therapy services 13 15
Home medical equipment and medical supplies 19 20
--- ---
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. 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 $1.9 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 2003 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 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
25
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 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 effective between
October 1, 1999 and September 30, 2002, and February 1, 2002 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% to 34% from the current fee schedules
(the Company participated to some extent in both pilot
26
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.
In April 2003, the OIG issued a special advisory bulletin addressing certain
contractual arrangements that would not be included in a "safe harbor" as
defined under the federal anti-kickback statutes. This bulletin specifically
focuses on contractual arrangements where a health care provider in one line of
business expands into a related health care business by contracting with an
existing provider of a related item or service. The Company is a party to
several contracts that could potentially be impacted by this special advisory
bulletin. Management is in the process of assessing its compliance with the
provisions of this bulletin. As of May 14, 2003, management has not determined
the financial impact, if any, of complying with these provisions.
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
27
from various government agencies concerning plans to audit the Company, or
requesting information regarding certain aspects of the Company's business. The
Company cooperates with the various agencies in responding to such subpoenas
and requests. The Company expects to incur additional legal expenses in the
future in connection with existing and future investigations.
The government has broad authority and discretion in enforcing applicable laws
and regulations; therefore, the scope and outcome of any such investigations,
inquiries, or legal actions cannot be predicted. There can be no assurance that
federal, state or local governments will not impose additional regulations upon
the Company's 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. 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 $3,000,000 in the second quarter of 2001 and agreed
to make additional payments in the principal amount of $4,000,000, together
with interest on this amount, in installments due at various times until March,
2006. The Company also agreed to pay the relator's attorneys fees and expenses.
The Company's Proposed Plan (as defined in Note 3) 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 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 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 other
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
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
28
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 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 $4,246,000
reserve discussed above which relates to the Government Settlement, 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 a significant part 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"). There have been no
significant increases since this law was passed. 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, effective
February 11, 2003, CMS also has "inherent reasonableness" authority to modify
payment rates for all Medicare Part B items and services by as much as 15% per
year without industry consultation, publication or public comment, if the rates
are determined to be "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 Operations - Significant Accounting Policies" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Government Regulation."
29
CRITICAL 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
accounting principles generally accepted in the United States of America
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. See Note
11 "Recent Accounting Pronouncements."
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 62% of the Company's year to date
2003 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 reimbursements as
a result of such reviews 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.
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
30
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 market 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. A reserve established by
management for the valuation of inventory consisting of reserves for incorrect
cost of sales percentage estimates, inaccurate counts, obsolete and slow moving
items and reserves for specific inventory. The reserves are based on a
percentage of gross sales, a percentage of inventory or an amount for
specifically identified inventory items. Management believes the current
reserve is adequate to absorb estimated reductions in the account balance. 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 accordance with Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), management evaluates
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. Management
utilizes estimated undiscounted future cash flows to determine if an impairment
exists. When this analysis indicates an impairment exists, the amount of loss
is determined based upon a comparison of estimated fair value with the carrying
value of the asset. While management believes that the estimates of future cash
flows are reasonable, different assumptions regarding such cash flows could
materially affect the evaluations.
Valuation of Goodwill and Other Intangible Assets. Goodwill represents
the excess of cost over the fair value of net assets acquired. In June 2001,
the Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 142, "Goodwill and
31
Other Intangible Assets" ("SFAS No. 142"). The Company was required to adopt
the provisions of this statement 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.
Instead, goodwill and intangible assets with indefinite lives are required to
be tested for impairment on an annual basis and when an event occurs or
circumstances change such that it is reasonably possible that an impairment may
exist. The Company selected September 30 as its annual testing date.
Upon adoption of SFAS No. 142, goodwill was tested for impairment by comparing
the fair value of goodwill to the carrying value of goodwill. The fair value
was determined using a combination of analyses which included discounted cash
flow calculations, market multiples and other market information. Key
assumptions used in these estimates include projected operating results,
discount rates and peer market multiples. The implied fair value of goodwill
did not support the carrying value of goodwill primarily due to the Company's
highly leveraged capital structure, which resulted in impairment of $68.5
million. This impairment charge was recorded as a cumulative effect of change
in accounting principle in the first quarter of 2002. There was no tax effect
on the impairment loss due to the fact that the majority of the related
goodwill was non-tax deductible and because of the Company's federal net
operating loss position.
Self Insurance. Self-insurance reserves primarily represent the
accrual for self-insurance or large deductible risks associated with employee
health insurance and workers' compensation insurance. The Company is insured
for workers' compensation but retains the first $250,000 of each claim. The
Company is not maintaining annual aggregate stop loss coverage for 2003 and did
not maintain annual aggregate stop loss coverage for 2002, as such coverage was
not available. Judgments used in determining the reserves related to workers'
compensation include loss development factors, frequency of claims and severity
of claims. The estimated liability for workers' compensation claims totaled
approximately $3.6 million and $3.3 million as of March 31, 2003 and December
31, 2002, 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 maintains
annual aggregate stop loss coverage. The health insurance policies are limited
to maximum lifetime reimbursements of $2.0 million per person for 2003 and
2002. The estimated liability for health insurance claims totaled approximately
$1.5 million and $1.8 million as of March 31, 2003 and December 31, 2002,
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. Judgments include
assessing historical paid claims, average lags between the claims' incurred
dates, reported dates and paid dates, the frequency of claims and the severity
of 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
32
between actual settlement amounts and recorded reserves, and any resulting
adjustments are included in expense once a probable amount is known.
RESULTS OF OPERATIONS
The Company reports its revenues as follows: (i) sales and related services and
(ii) rentals and other revenues. 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.
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 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.
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.
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 business and nursing agency (collectively, the "Center").
Effective March 19, 2002, substantially all of the assets of the Center were
sold for approximately $1.3 million in cash. During the three months ended
March 31, 2002 the Center generated approximately $1.9 million in total
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. 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, with no related tax effect, in
the quarter ended March 31, 2002, recognized as a cumulative effect of change
in accounting principle. There was no tax effect on the impairment loss due to
the fact that the majority of the related goodwill was non-tax deductible and
because of the Company's federal net operating loss position. The Company
conducts annual impairment tests on September 30 of each year unless specific
events arise
33
which warrant more immediate testing. Any subsequent impairment losses will be
recognized as an operating expense in the Company's consolidated statements of
operations.
Reorganization Items. The Company has incurred reorganization expenses
as a result of reorganization under Chapter 11 of the Federal Bankruptcy Code.
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" ("SOP 90-7"), all revenues, expenses, realized gains
and losses, and provisions for losses and expenses resulting from the
reorganization are reported separately as Reorganization Items. These items
include, but are not limited to, professional fees and other expenses incurred
related to the Chapter 11 proceedings, write-off of deferred financing costs,
and provision for damages from future lease rejections.
The following table and discussion sets forth items from the Company's
consolidated statements of operations as a percentage of revenues for the
periods indicated:
PERCENTAGE OF REVENUES
Three Months Ended March 31,
----------------------------
2003 2002
------- -------
Revenues 100.0% 100.0%
Cost of sales and related services 21.0 20.6
Cost of rentals and other revenues, including rental
equipment depreciation expense 10.2 10.3
Operating expenses, including bad debt expense 57.3 58.1
General and administrative 5.5 5.3
Earnings from joint ventures (1.5) (1.6)
Depreciation, excluding rental equipment, and
amortization expense 1.1 1.3
Amortization of deferred financing costs - 1.0
Interest (income) expense, net (0.1) 6.4
Other expense (income), net 0.1 (0.1)
Gain on sale of assets of center - (0.8)
----- -----
Total expenses 93.6% 100.5%
----- -----
Income (loss) from operations before reorganization
items, income taxes and cumulative effect of change
in accounting principle 6.4 (0.5)
Reorganization items 1.0 -
Provision for (benefit from) income taxes 0.1 (2.5)
Cumulative effect of change in accounting principle - (85.8)
----- -----
Net income (loss) 5.3% (83.8)%
===== =====
34
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
REVENUES. Revenues increased from $79.8 million for the quarter ended March 31,
2002 to $82.5 million for the same period in 2003, an increase of $2.7 million,
or 3.4%. In March of 2002, the Company sold substantially all of the assets of
an infusion center, which contributed $1.9 million in revenue during the first
quarter of 2002. Excluding the revenues of the sold center in the first quarter
of 2002, same-location revenues in the first quarter of 2003 increased $4.6
million, or 5.9%. The increase in revenues is attributable to the Company's
sales and marketing efforts. Following is a discussion of the components of
revenues:
Sales and Related Services Revenues. Sales and related services
revenues increased from $34.8 million for the quarter ended March 31,
2002 to $36.4 million for the same period of 2003, an increase of $1.6
million, or 4.6%. Excluding $1.9 million of sales and related services
revenues of the sold center in the first quarter of 2002,
same-location sales and related services revenues in the first quarter
of 2003 increased $3.5 million, or 10.6%.
Rentals and Other Revenues. Rentals and other revenues increased from
$45.0 million for the quarter ended March 31, 2002 to $46.1 million
for the same period in 2003, an increase of $1.1 million, or 2.4%.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services
increased from $16.5 million for the quarter ended March 31, 2002 to $17.3
million for the same period in 2003, an increase of $0.8 million, or 4.8%. As a
percentage of sales and related services revenues, cost of sales and related
services increased slightly from 47.4% for the quarter ended March 31, 2002 to
47.5% for the same period in 2003.
COST OF RENTALS AND OTHER REVENUES. Cost of rentals and other revenues
increased from $8.2 million for the quarter ended March 31, 2002 to $8.4
million for the same period in 2003, an increase of $0.2 million, or 2.4%. As a
percentage of rentals and other revenue, cost of rentals and other revenues
were 18.3% and 18.2% for the quarters ended March 31, 2003 and 2002,
respectively.
OPERATING EXPENSES. Operating expenses increased from $46.3 million for the
quarter ended March 31, 2002 to $47.2 million for the same period in 2003, an
increase of $0.9 million, or 1.9%. This increase is primarily the result of
higher personnel-related expenses in the current year quarter associated with
the hiring of additional account executives during the latter half of 2002 and
increased insurance expenses, offset by a $1.1 million reduction in bad debt
expense. Bad debt expense was 5.2% of revenues for the quarter ended March 31,
2002 compared to 3.8% for the same quarter of 2003. The decrease primarily is
the result of operational improvements and processing efficiencies at the
Company's billing centers. As a percentage of revenues, operating expenses
decreased from 58.1% to 57.3% for the quarters ended March 31, 2002 and 2003,
respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $4.3 million for the quarter ended March 31, 2002, to $4.5
million for the same period in 2003, an increase of $0.2 million, or 4.7%. As a
percentage of revenues, general and administrative expenses were 5.5% and 5.3%
for the quarters ended March 31, 2003 and 2002, respectively. This
35
increase primarily is attributable to an increase in professional services fees
in the first quarter of 2003.
EARNINGS FROM HOSPITAL JOINT VENTURES. Earnings from hospital joint ventures
decreased slightly from $1.3 million for the quarter ended March 31, 2002 to
$1.2 million for the quarter ended March 31, 2003.
DEPRECIATION AND AMORTIZATION. Depreciation (excluding rental equipment) and
amortization expenses decreased from $1.0 million for the quarter ended March
31, 2002 to $0.9 million for the same period in 2003, a decrease of $0.1
million, or 10%. This decrease primarily is attributable to certain property
and equipment becoming fully depreciated.
AMORTIZATION OF DEFERRED FINANCING COSTS. There was no amortization of deferred
financing costs in the quarter ended March 31, 2003 compared to $0.8 million in
the same quarter of 2002. This primarily is attributable to the cessation of
finance cost amortization and the accelerated write-off of deferred financing
costs to reorganization items as of July 31, 2002 as a result of the Bankruptcy
Filing on July 31, 2002.
INTEREST (INCOME) EXPENSE, NET. Interest (income) expense, net changed from
$5.1 million for the quarter ended March 31, 2002 to $(0.1) million for the
same period in 2003. This change is attributable to the Company ceasing to
record interest expense as a result of the Bankruptcy Filing on July 31, 2002.
Post-petition interest excluded from the statements of operations for the three
months ended March 31, 2003, of $6.3 million, represents the default rate of
interest pursuant to the terms described in the Amended Credit Agreement.
OTHER EXPENSE (INCOME), NET. Other expense (income), net primarily relates to
investment losses or gains associated with split dollar life insurance
policies. Income of $(0.1) million was recorded in the quarter ended March 31,
2002 compared to expense of $0.1 million for the same period of 2003.
GAIN ON SALES OF ASSETS OF CENTERS. In the first quarter of 2002, the Company
recorded a gain of $0.7 million on the sale of the assets of an infusion
center.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The provision for (benefit from)
income taxes changed from $(2.0) million for the quarter ended March 31, 2002
to $0.1 million for the same period in 2003. The benefit of $2.1 million
recorded in 2002 was the result of the enactment of the Job Creation and
Workers Assistance Act of 2002.
HISTORY OF BANK CREDIT FACILITY
The Company is indebted to a syndicate of lenders (the "Lenders"), with Bank of
Montreal serving as agent for the Lenders. Prior to August 12, 2002, Deutsche
Bank Trust Company, successor to Bankers Trust Company, served as agent for the
Lenders. On August 12, 2002 the Company received written notice that Deutsche
Bank Trust Company intended to resign. Bank of Montreal was appointed by the
Lenders as the new agent. The indebtedness arises out of a credit agreement
entitled the Fifth Amended and Restated Credit Agreement (the "Amended Credit
Agreement"), which Amended Credit Agreement was entered into as of June 8, 2001.
The indebtedness owed to the Lenders as of July 31, 2002, the date of the
Company's Bankruptcy Filing, totaled approximately $275.4 million (excluding
letters of credit totaling $3.4 million).
36
The Amended Credit Agreement was the latest in a series of credit agreements in
connection with a credit facility (the "Bank Credit Facility") that dated back
to an initial credit agreement dated October 20, 1994. The Amended Credit
Agreement was entered into after the Company breached several of the financial
covenants in the Fourth Amended and Restated Credit Agreement.
The Amended Credit Agreement provided a new loan to the Company from which the
proceeds were used to pay off all existing loans under the Fourth Amended and
Restated Credit Agreement. The Amended Credit Agreement also included modified
financial covenants and a revised amortization schedule. In addition, the
Amended Credit Agreement no longer contained a revolving loan component; all
existing indebtedness was now in the form of a term loan which matured on
December 31, 2002.
The Amended Credit Agreement that provided a new loan to the Company from which
the proceeds were used to pay off all existing loans under the Fourth Amended
and Restated Credit Agreement. The Amended Credit Agreement also included
modified financial covenants and a revised amortization schedule. In addition,
the Amended Credit Agreement no longer contained a revolving loan component;
all existing indebtedness was now in the form of a term loan which matured on
December 31, 2002.
The Amended Credit Agreement required principal payments of $750,000 on
September 30, 2001 and December 31, 2001; a principal payment of $11.6 million
on March 31, 2002; principal payments of $1.0 million on June 30, 2002 and
September 30, 2002; and a balloon payment of $281.5 million on December 31,
2002. The Amended Credit Agreement further provided for mandatory prepayments
of principal from the Company's excess cash flow and from the proceeds of the
Company's sales of securities, sales of assets, tax refunds or excess casualty
loss payments.
As of July 31, 2002, (the Bankruptcy Filing date as defined in Note 2) the
Company had paid the $750,000 principal payment due on September 30, 2001, the
$750,000 principal payment due on December 31, 2001, the $11.6 million
principal payment due on March 31, 2002 as well as the $1.0 million principal
payment due on June 30, 2002, the $1.0 million principal payment due on
September 30, 2002, and $6.1 million of the balloon payment due on December 31,
2002. These early payments of 2002 principal were generated from operational
cash flows, from the sales of assets of centers, from the sales of the
Company's wholly-owned real estate and from the collection of patient
receivables associated with the asset sales. The Bankruptcy Filing stayed all
remaining payments required by the Amended Credit Agreement. Substantially all
of the Company's assets were pledged as security for borrowings under the Bank
Credit Facility.
The Amended Credit Agreement further provided for the payment to the Lenders of
certain fees. These fees included a restructuring fee of $1.2 million (paid on
the effective date of the Amended Credit Agreement), and $200,000 paid on
December 31, 2001, March 31, 2002 and June 30, 2002. A restructuring fee of
$459,000 payable on September 30, 2002 is currently classified as a liability
subject to compromise in the accompanying consolidated balance sheet as of
March 31, 2003. In addition, the Company had an obligation to pay the agent an
annual administrative fee of $75,000 and an annual fee of 0.50% of the average
monthly outstanding indebtedness on each anniversary of the Amended Credit
Agreement. The last such payment of annual fees was made by the Company in June
2002.
37
The Amended Credit Agreement contained various financial covenants, the most
restrictive of which relate to measurements of EBITDA (as defined in the
Amended Credit Agreement), leverage, interest coverage ratios, and collections
of accounts receivable. The Amended Credit Agreement also contained provisions
for periodic reporting.
The Amended Credit Agreement also contained restrictions which, among other
things, imposed certain limitations or prohibitions on the Company with respect
to the incurrence of indebtedness, the creation of liens, the payment of
dividends, the redemption or repurchase of securities, investments,
acquisitions, capital expenditures, sales of assets and transactions with
affiliates. The Company was not permitted to make acquisitions or investments
in joint ventures without the consent of Lenders holding a majority of the
lending commitments under the Bank Credit Facility. In addition, proceeds of
all of the Company's accounts receivable were transferred daily into a bank
account at PNC Bank, N.A. which, under the terms of a Concentration Bank
Agreement, required that all amounts in excess of $3.0 million be transferred
to an account at Deutsche Bank Trust Company in the Company's name. Upon
occurrence of an event of default under the Amended Credit Agreement, the
Lenders had the right to instruct PNC Bank, N.A. and Deutsche Bank Trust
Company to cease honoring any drafts under the accounts and apply all amounts
in the bank accounts against the indebtedness owed to the Lenders.
Interest was payable on the unpaid principal amount under the Amended Credit
Agreement, at the election of the Company, at either a Base Lending Rate or an
Adjusted Eurodollar Rate (each as defined in the Amended Credit Agreement),
plus an applicable margin of 2.75% and 3.50%, respectively. The Company was
also required to pay additional interest in the amount of 4.50% per annum on
that principal portion outstanding of the Amended Credit Agreement that is in
excess of four times adjusted EBITDA, as defined by the Amended Credit
Agreement. For the seven months ended with the Bankruptcy Filing, the weighted
average borrowing rate was 7.3%. Upon the occurrence and continuation of an
event of default under the Amended Credit Agreement, interest would have been
payable upon demand at a rate that is 2.00% per annum in excess of the interest
rate otherwise payable under the Amended Credit Agreement and the Company no
longer would have had the right to designate the Adjusted Eurodollar Rate plus
the applicable margin as the applicable interest rate.
As discussed below, the Company was required to issue warrants to the Lenders
pursuant to the terms of the Second Amendment to the Fourth Amended and
Restated Credit Agreement.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company had current assets of $97.5 million and current
liabilities of $33.3 million, resulting in working capital of $64.2 million and
current ratio of 2.9x as compared to a working capital of $67.1 million and a
current ratio of 3.2x at December 31, 2002. See Note 3 for a discussion of the
Company's proceedings under Chapter 11 of the Bankruptcy Code.
The Company was required to issue warrants to the Lenders representing 19.999%
of the common stock of the Company issued and outstanding as of March 31, 2001,
pursuant to the terms of the Second Amendment to the Fourth Amended and
Restated Credit Agreement (which amendment was entered into on April 14, 1999).
To fulfill these obligations, warrants to purchase 3,265,315 shares of common
stock were issued to the Lenders on June 8, 2001. Fifty percent of these
warrants are exercisable until May 31, 2011, and the remaining fifty percent
are
38
exercisable until September 29, 2011. The exercise price of the warrants is
$0.01 per share. The Company accounted for the fair value of these warrants
during the fourth quarter of 2000 as the issuance of these warrants was
determined to be probable. As such, the Company increased deferred financing
costs by $686,000 to recognize the estimated fair value of the warrants as of
December 31, 2000. As of May 14, 2003 these warrants have not been exercised.
The accompanying condensed consolidated interim financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business, and in
accordance with SOP 90-7. Accordingly, these consolidated interim financial
statements do not reflect any adjustments that might result if the Company is
unable to continue as a going concern. The Company had net income of $4,337,000
for the three months ended March 31, 2003 and incurred a net loss of
$61,154,000 for the year ended December 31, 2002. The Company has a
shareholders' deficit of $43,257,000 at March 31, 2003. The accompanying
financial statements do not include any adjustments of recorded asset carrying
amounts or the amounts and classification of liabilities that might result
should the Company be unable to continue as a going concern. All pre-petition
liabilities subject to compromise have been segregated in the condensed
consolidated balance 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 condensed consolidated balance sheets. Revenues, expenses, realized gains
and losses, and provisions for losses and expenses resulting from the
reorganization are reported separately as Reorganization Items. Cash used for
reorganization items is disclosed separately in the condensed consolidated
statements of cash flows.
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,
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
vendors providing critical goods and services provided these amounts do not
exceed a predetermined target. 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 are treated as general unsecured claims in the reorganization.
39
The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are as follows:
Pre-petition accounts payable $ 20,246,000
State income taxes payable 394,000
Other accruals 5,004,000
Accrued interest 1,249,000
Accrued professional fees related to reorganization 1,607,000
Accrual for future lease rejection damages 1,317,000
Other long-term debt and liabilities 1,953,000
Government settlement, including interest 4,246,000
Bank credit facility 278,705,000
Adequate protection payments (12,800,000)
---------------
Total liabilities subject to compromise $ 301,921,000
===============
Reorganization items represent expenses that are incurred by the Company as a
result of reorganization under Chapter 11 of the Federal Bankruptcy Code.
Reorganization items for the quarter ended March 31, 2003 were $852,000 and are
comprised primarily of professional fees.
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.
Management intends to improve financial performance through stabilizing and
increasing profitable revenues, decreasing and controlling expenses and
improving accounts receivable performance. 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. The Company has operated in this manner since the Bankruptcy Filing.
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 steps designed to
minimize any such disruptions including requesting from the Bankruptcy Court
critical vendor status for certain vendors, and permission to assume certain
executory contracts, as well as communicating with other vendors regarding
ongoing operations, establishing an employee communication program regarding
the Bankruptcy Filing and related issues, and communicating with referral
sources and patients as needed. The consolidated financial statements do not
include any adjustments related to the recoverability of asset carrying amounts
or the amounts of liabilities that might result should the Company be unable to
continue as a going concern. The uncertainty regarding the outcome of the
Bankruptcy Filing may impair the Company's ability to receive trade credit from
its vendors and could have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.
40
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 $57.4 million and $55.4 million at March
31, 2003 and December 31, 2002, respectively. Average days' sales in accounts
receivable ("DSO") was approximately 64 and 61 days at March 31, 2003 and
December 31, 2002, respectively. The Company calculates DSO 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's level of DSO and net patient receivables is affected
by the extended time required to obtain necessary billing documentation.
The accompanying condensed financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company had
net income of $4,337,000 for the three months ended March 31, 2003 and incurred
a net loss of $61,154,000 for the year ended December 31, 2002. The Company has
a shareholders' deficit of $43,257,000 million at March 31, 2003. As discussed
above, the Company has substantial debt balances, which, pursuant to the
Amended Credit Agreement were due on December 31, 2002. These factors among
others raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments related to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
Net cash provided by operating activities was $9.9 million and $4.1 million for
the three months ended March 31, 2003 and 2002, respectively. This increase of
$5.8 million is primarily due to an increase in income before cumulative effect
of change in accounting principle. Income before cumulative effect of change in
accounting principle increased from $1.6 million for the three months ended
March 31, 2002 to $4.3 million for the three months ended March 31, 2003. This
increase of $2.7 million is primarily the result of increased revenue and lower
bad debt, amortization, and interest expenses. In addition, changes in accounts
receivable; inventories; prepaid expenses and other current assets; accounts
payable, other payables and accrued expenses; other assets and liabilities; and
other noncurrent liabilities increased cash provided by operating activities.
These items provided cash of $1.0 million for the three months ended March 31,
2003, while these same items used cash of $0.6 million for the same period in
2002. Net cash used for reorganization items totaled $1.1 million for the 3
months ended March 31, 2003 and consists primarily of professional fees. Net
cash used in investing activities was $6.0 million and $2.8 million for the
three months ended March 31, 2003 and 2002, respectively. Additions to property
and equipment, net were $6.8 million for the three months ended March 31, 2003
compared to $5.8 million for the same period in 2002, and proceeds from the
sales of assets of centers contributed $1.8 million for the three months ended
March 31, 2002. Net cash
41
used in financing activities was $5.0 million and $4.1 million for the three
months ended March 31, 2003 and 2002, respectively. The cash used in financing
activities for the three months ended March 31, 2003 primarily relates to
adequate protection payments of $4.8 million. For the three months ended March
31, 2002 cash used in financing activities primarily relates to principal
payments on debt. At March 31, 2003 the Company had cash and cash equivalents
of approximately $21.7 million.
RISK FACTORS
This section summarizes certain risks, among others, that should be considered
by stockholders and prospective investors in the Company.
BANKRUPTCY PROCEEDING. The Debtors filed the Bankruptcy Filing on July
31, 2002. The Debtors are operating as a debtor-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 (the "Proposed Plan") 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. Although the hearing before the
Bankruptcy Court on confirmation of the Proposed Plan has been held, as of May
14, 2003 the Court had not yet ruled as to whether the Proposed Plan would be
confirmed and 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 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 3
"Proceedings Under Chapter 11 of the Bankruptcy Code."
BUSINESS RISKS
Substantial Leverage. The Company maintains a significant amount of
debt. Indebtedness under the Bank Credit Facility totaled approximately $275.4
million (which excludes letters of credit totaling $3.4 million) as of July 31,
2002, the Bankruptcy Filing date. 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 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 Proposed Plan is approved, a
substantial portion of its cash flow from operations will be dedicated to
repaying debt. If the Company is unable to generate sufficient cash flow to
meet its obligations, it likely would 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 Note 3 "Proceedings Under Chapter 11 of the Bankruptcy Code."
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
42
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 three
months ended March 31, 2003, 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."
Collectibility of Accounts Receivable. The Company has substantial
accounts receivable, as well as DSO of 64 days as of March 31, 2003. 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,
43
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, though no new
lawsuits may be filed during the pendency of the Company's bankruptcy. Possible
outcomes include, among other things, the repayment of reimbursements
previously received by the Company related to billed claims 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. 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. The liquidity of the Company's common
stock and its price have been adversely affected by the trading status of its
common stock, 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, unless the Company also decreases its cost
for providing services and increases higher margin services, it will experience
declining profitability.
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
44
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.
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) recently
published Security Standards that have an implementation date of April 21,
2004. 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 these 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 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
45
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS No. 141") and 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. The Company adopted SFAS No. 141 effective July
1, 2001. See Footnote 12 "Adoption of SFAS No. 142" for disclosure of the
impact of SFAS No. 142. The Company adopted SFAS No. 142 on January 1, 2002.
In June 2001, the FASB issued Statement of Financial Accounting 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's January 1, 2003 adoption of SFAS No. 143 did not have a material
impact on its financial position or results of operations.
In August 2001, the FASB 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 did not
have a material impact on its financial position or results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statement 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, "Extinguishment 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.
The provisions of this Statement related to the rescission of SFAS No. 4 are
effective for fiscal years beginning after May 15, 2002. The provisions of this
Statement related to SFAS No. 13 are effective for transactions occurring after
May 15, 2002. All other provisions of this Statement are effective for
financial statements issued on or after May 15, 2002. The Company's adoption of
the provisions of SFAS No. 145 which were effective for transactions after May
15, 2002 has not had a material effect on its financial statements. The
Company's January 1, 2003 adoption of the remaining provisions of SFAS No. 145
did not have a material impact on its financial position or results of
operations.
46
In June 2002, the FASB 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 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)"("Issue 94-3"). 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's January 1,
2003 adoption of SFAS No. 146 did not have a material impact on its financial
position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123" ("SFAS No. 148"), which amends SFAS No.
123, "Accounting for Stock-Based Compensation", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The disclosure provisions of this Statement are
effective for financial statements for annual and interim periods beginning
after December 15, 2002. The Company is currently assessing the three
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation included in
this Statement. See Note 13 "Stock Based Compensation."
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN No. 45").
This Interpretation requires guarantors to account at fair value for and
disclose certain types of guarantees. The Interpretation's disclosure
requirements are effective for the Company's year ended December 31, 2002; the
Interpretation's accounting requirements are effective for guarantees issued or
modified after December 31, 2002. The Company's adoption of this
Interpretation's accounting requirements did not have a material impact on its
financial position or results of operations.
In January, 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). This Interpretation requires
consolidation of variable interest entities ("VIE") (formerly referred to as
"special purpose entities") if certain conditions are met. The Interpretation
applies immediately to VIE's created after January 31, 2003, and to variable
interests obtained in VIE's after January 31, 2003. Effective with the quarter
beginning July 1, 2003, the Interpretation applies also to VIE's created or
variable interests obtained in VIE's before January 31, 2003. The Company's
adoption of the applicable provisions of this Interpretation did not have a
material impact on its financial position or results of operations. The Company
does not
47
expect the adoption of the remaining provisions of this Interpretation to have
a material impact on its financial position or results of operations.
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. The Proposed Plan provides for
a fixed interest rate. As of March 31, 2003, the Company had outstanding
borrowings of approximately $278.7 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 $1.2 million (excluding the effects of the
stay on interest payments in connection with the Bankruptcy Filing) for the 12
months in the period ending March 31, 2004. 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 is required to make adequate protection payments and is
authorized to use cash collateral during the course of the bankruptcy. See Note
3, "Proceedings Under Chapter 11 of the Bankruptcy Code."
ITEM 4 - CONTROLS AND PROCEDURES
Based on their evaluation of the Company's disclosure controls and procedures
as of a date within 90 days of the filing of this Report, the Chief Executive
Officer and Chief Financial Officer have concluded that such controls and
procedures are adequate.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their evaluation.
48
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
A description of the Chapter 11 Cases is set forth in Note 3 to the Company's
condensed consolidated financial statements contained in this Report and is
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."
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
A discussion of defaults and certain matters of non-compliance with certain
covenants contained in the Company's principal debt agreements is set forth in
Note 2 to the Company's condensed consolidated financial statements contained
in this Report and is incorporated herein by reference.
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. On March 27, 2003, the Company filed a report on
Form 8-K describing certain events relating to the Bankruptcy Filing.
49
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.
May 14, 2003 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
50
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Joseph F. Furlong, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
American HomePatient, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) Designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of the date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
(c) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) All significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
51
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
/s/ Joseph F. Furlong
- ------------------------------------
Joseph F. Furlong
Chief Executive Officer
52
CERTIFICATION
I, Marilyn O'Hara, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
American HomePatient, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) Designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of the date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
(c) Presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) All significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant
changes in internal controls or in other factors that
53
could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Marilyn O'Hara
- -----------------------
Marilyn O'Hara
Chief Financial Officer
54
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).
99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002-- Chief Executive
Officer.
99.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002-- Chief Financial
Officer.
55