UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2004
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___. |
Commission file number 0-19532
AMERICAN HOMEPATIENT, INC.
Delaware
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62-1474680 | |||
(State or other jurisdiction of
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(I.R.S. Employer | |||
Incorporation or organization)
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Identification No.) | |||
5200 Maryland Way, Suite 400
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37027-5018 | |||
Brentwood TN
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(Zip Code) | |||
(Address of principal executive offices) |
Registrants telephone number, including area code: (615) 221-8884
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes o No þ
The aggregate market value of registrants voting stock held by non-affiliates of the registrant, computed by reference to the price at which the stock was sold, or average of the closing bid and asked prices, as of June 30, 2004 was $13,819,254.
On March 23, 2005, 17,097,389 shares of the registrants $0.01 par value Common Stock were outstanding.
Documents Incorporated by Reference
The following documents are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K: Portions of the Registrants definitive proxy statement for its 2005 Annual Meeting of Stockholders.
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Table of Contents
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This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements containing the words believes, anticipates, intends, expects, estimates, may, will, likely, could and words of similar import. Such statements include statements concerning the Companys business strategy, operations, cost savings initiatives, future compliance with accounting standards, industry, economic performance, financial condition, liquidity and capital resources, existing government regulations and changes in, or the failure to comply with, governmental regulations, the appeal of rulings in the bankruptcy proceeding, legislative proposals for health care 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 Companys actual results may differ materially from the results discussed in such forward-looking statements because of a number of factors, including those identified in the Risk Factors section and elsewhere in this Annual Report on Form 10-K. The forward-looking statements are made as of the date of this Annual Report on Form 10-K 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.
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PART I
ITEM 1. BUSINESS
Introduction
American HomePatient, Inc. and its subsidiaries (collectively, the Company) provide home health care services and products consisting primarily of respiratory and infusion therapies and the rental and sale of home medical equipment and home health care supplies. These services and products are paid for primarily by Medicare, Medicaid and other third-party payors. As of December 31, 2004, the Company provided these services to patients primarily in the home through 276 centers in 35 states.
American HomePatient, Inc. was incorporated in Delaware in September 1991. From its inception through 1997, the Company experienced substantial growth primarily as a result of its strategy of acquiring and operating home health care businesses. Beginning in 1998, the Companys strategy shifted from acquiring new businesses to focusing more on internal growth, integrating its acquired operations and achieving operating efficiencies.
On July 31, 2002, American HomePatient, Inc. and 24 of its subsidiaries 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). On July 1, 2003, American HomePatient, Inc. emerged from bankruptcy pursuant to a 100% pay plan (the Approved Plan) whereby the Companys shareholders retained their equity interest and all of the Companys creditors and vendors will be paid 100% of all amounts they are owed, either immediately or over time with interest. See Managements Discussion and Analysis of Financial Conditions and Results of Operations Liquidity and Capital Resources.
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.
Recent Developments
On March 30, 2005, the Office of Inspector General of the Department of Health and Human Services issued a report with the final oxygen fee schedule for 2005. These fee schedule amounts will be implemented as soon as possible but not later than April 8, 2005. Claims received after implementation will be paid at these rates, and claims received prior to implementation that were paid using the 2004 fee schedule amounts will not be adjusted retroactively. Management currently is assessing, but had not determined as of the date hereof, the magnitude of this impact, although it is anticipated that the impact on earnings will be material. The Company estimates that 23% of its 2004 revenue represented home oxygen reimbursed by Medicare. See Managements Discussion and Analysis of Financial Condition and Results of Operations Trends, Events, and Uncertainties Reimbursement Changes and the Companys Response and Risk Factors Medicare Reimbursement Reductions.
Business
The Company provides home health care services and products consisting primarily of respiratory therapy services, home infusion therapy services and the rental and sale of home medical equipment and home health care supplies. For the year ended December 31, 2004, such services and products represented 71%, 12% and 17% of revenues, respectively. These services and products are paid for primarily by Medicare, Medicaid and other third-party payors. The Companys objective is to be a leading provider of home health care products and services in the markets in which it operates. The Companys centers are strategically located to achieve the market penetration necessary for the Company to be a cost-effective provider of comprehensive home health care services to managed care and other third-party payors.
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As of December 31, 2004 the Company provided services to patients primarily in the home through 276 centers in the following 35 states: Alabama, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, West Virginia, and Wisconsin.
As of December 31, 2004 the Company was an investor in and a manager of eleven joint ventures.
The Company does not anticipate pursuing acquisition or joint venture development activities during 2005 as it continues to focus its efforts on internal operations.
Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, (SFAS No. 131) establishes standards for the way that public business enterprises or other enterprises that are required to file financial statements with the Securities and Exchange Commission (SEC) report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company manages its business as one reporting segment.
Services and Products
The Company provides a diversified range of home health care services and products. The following table sets forth the percentage of revenues represented by each line of business for the periods presented:
Year Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Home respiratory therapy services |
71 | % | 69 | % | 66 | % | ||||||
Home infusion therapy services |
12 | 13 | 14 | |||||||||
Home medical equipment and home health supplies |
17 | 18 | 20 | |||||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
Home Respiratory Therapy Services. The Company provides a wide variety of home respiratory services primarily to patients with severe and chronic pulmonary diseases. Patients are referred to a Company center most often by primary care and pulmonary physicians as well as by hospital discharge planners and case managers. After reviewing pertinent medical records on the patient and confirming insurance coverage information, a Company respiratory therapist or technician visits the patients home to deliver and to prepare the prescribed therapy or equipment. Company representatives coordinate the prescribed therapy with the patients physician and train the patient and caregiver in the correct use of the equipment. For patients renting equipment,
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Company representatives also make periodic follow-up visits to the home to provide additional instructions, required equipment maintenance and deliver oxygen and other supplies.
The primary respiratory services that the Company provides are:
| Oxygen systems to assist patients with breathing. There are three types of oxygen systems: (i) oxygen concentrators, which are stationary units that filter ordinary room air to provide a continuous flow of oxygen; (ii) liquid oxygen systems, which are portable, thermally-insulated containers of liquid oxygen which can be used as stationary units and/or as portable options for patients; and (iii) high pressure oxygen cylinders, which are used primarily for portability as an adjunct to oxygen concentrators. Oxygen systems are prescribed by physicians for patients with chronic obstructive pulmonary disease, cystic fibrosis and neurologically-related respiratory problems. | |||
| Nebulizers and related inhalation drugs to assist patients with breathing. Nebulizer compressors are used to administer aerosolized medications (such as albuterol) to patients with asthma, bronchitis, chronic obstructive pulmonary disease, and cystic fibrosis. AerMeds is the Companys registered marketing name for its aerosol medications program. | |||
| Respiratory assist devices to force air through respiratory passage-ways during sleep. These treatments, which utilize continuous positive airway pressure (CPAP) or bi-level positive airway pressure therapy, are used on adults with obstructive sleep apnea (OSA), a condition in which a patients normal breathing patterns are disturbed during sleep. |
The other respiratory services that the Company provides include:
| Home ventilators to sustain a patients respiratory function mechanically in cases of severe respiratory failure when a patient can no longer breathe independently. | |||
| Non-invasive positive pressure ventilation (NPPV) to provide ventilation support via a face mask for patients with chronic respiratory failure and neuromuscular diseases. This therapy enables patients to receive positive pressure ventilation without the invasive procedure of intubation. | |||
| Apnea monitors to monitor and to warn parents of apnea episodes in newborn infants as a preventive measure against sudden infant death syndrome. | |||
| Home sleep screenings and related diagnostic equipment to detect sleep disorders and the magnitude of such disorders. | |||
| Home respiratory evaluations and related diagnostic equipment to assist physicians in identifying, monitoring and managing their respiratory patients. |
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Oxygen systems comprised approximately 36% of the Companys total 2004 revenues. Inhalation drugs and nebulizers comprised approximately 12% and 2%, respectively, of the Companys total 2004 revenues. Respiratory assist devices comprised approximately 16% of 2004 revenues. All other respiratory products and services comprised approximately 5% of the Companys total 2004 revenues. The Company provides respiratory therapy services at all but six of its 276 centers.
Home Infusion Therapy Services. The Company provides a wide range of home infusion therapy services. Patients are referred to a Company center most often by primary care and specialist physicians (such as infectious disease physicians and oncologists) as well as by hospital discharge planners and case managers. After confirming the patients treatment plan with the physician, the pharmacist mixes the medications and coordinates with the nurse the delivery of necessary equipment, medication and supplies to the patients home. The Company provides the patient and caregiver with detailed instructions on the patients prescribed medication, therapy, pump and supplies. For patients renting equipment, the Company also schedules follow-up visits and deliveries in accordance with physicians orders.
Home infusion therapy involves the administration of nutrients, antibiotics and other medications intravenously (into the vein), subcutaneously (under the skin), intramuscularly (into the muscle), intrathecally (via spinal routes), epidurally (also via spinal routes) or through feeding tubes into the digestive tract. The primary infusion therapy services that the Company provides include the following:
| Enteral nutrition is the infusion of nutrients through a feeding tube inserted directly into the functioning portion of a patients digestive tract. This long-term therapy is often prescribed for patients who are unable to eat or to drink normally as a result of a neurological impairment such as a stroke or a neoplasm (tumor). | |||
| Anti-infective therapy is the infusion of anti-infective medications into a patients bloodstream typically for 5 to 14 days to treat a variety of serious bacterial and viral infections and diseases. | |||
| Total parenteral nutrition (TPN) is the long-term provision of nutrients through central vein catheters that are surgically implanted into patients who cannot absorb adequate nutrients enterally due to a chronic gastrointestinal condition. | |||
| Pain management involves the infusion of certain drugs into the bloodstream of patients, primarily terminally or chronically ill patients, suffering from acute or chronic pain. | |||
| Other infusion therapies include chemotherapy, hydration, growth hormone and immune globulin therapies. |
Enteral nutrition services account for approximately 6% of the Companys total revenues in 2004. Antibiotic therapy, TPN, and pain management and other infusion revenues accounted for approximately 6% of the Companys total revenues in 2004. Enteral nutrition services are provided
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at most of the Companys centers, and the Company currently provides other infusion therapies in 45 of its 276 centers.
Home Medical Equipment and Medical Supplies. The Company provides a comprehensive line of equipment and supplies to serve the needs of home care patients. Revenues from home equipment and supplies are derived principally from the rental and sale of wheelchairs, hospital beds, ambulatory aids, bathroom aids and safety equipment, and rehabilitation equipment. Sales of home medical equipment and medical supplies account for 17% of the Companys revenues in 2004. The Company sells home equipment and supplies at all but seven of its 276 centers.
Operations
Organization. Currently, the Companys operations are divided into two geographic divisions, each headed by a division vice president. Each division is further divided into geographic areas with each area headed by an area vice president. There are a total of 11 geographic areas within the Company. Each area vice president oversees the operations of approximately 17 - 35 centers. Management believes this field organizational structure enhances management flexibility and facilitates communication by enabling a greater focus on local market operations. Area vice presidents focus on revenue development, cost control and assist local management with decision-making to improve responsiveness in local markets. The Companys billing centers report directly to the corporate reimbursement department under the leadership of the Sr. Vice President of Revenue Management and four directors of compliance and reimbursement. This organizational structure adds specialized knowledge and focused management resources to the billing, compliance and reimbursement functions.
The Companys centers are typically staffed with a general manager, a business office manager, a director of patient services (who is usually a registered nurse or respiratory therapist), registered nurses, clinical coordinators, respiratory therapists, service technicians and customer service representatives. In most of its markets the Company employs account executives who are responsible for local sales efforts. Effective in the fourth quarter of 2004, account executives began reporting to their respective area director of sales, rather than to the general manager of the operating center. This change is a part of the Companys initiative to improve the Companys sales and marketing efforts (See Business Sales and Marketing). In addition, the Company employs a licensed pharmacist in all centers that provide a significant amount of infusion therapy.
The Company tries to appropriately balance between centralized and decentralized management. Operating managers are encouraged to promptly and effectively respond to local market demands, while the Company provides through its corporate office management support, compliance oversight and training, marketing and managed care expertise, sales training and support, product development, and financial and information systems. The Company retains centralized control over those functions necessary to monitor quality of patient care and to maximize operational efficiency. Services performed at the corporate office include financial and accounting functions, treasury, corporate compliance, human resources, reimbursement oversight, sales and marketing support, clinical policy and procedure development, regulatory affairs and licensure, and information system design. Management regularly analyzes the Companys structure for opportunities to improve operations.
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Commitment to Quality. The Company maintains quality and performance improvement programs related to the proper implementation of its service standards. Management believes that the Company has developed and implemented service policies and procedures that comply with the standards required by the Joint Commission on Accreditation of Health Care Organizations (JCAHO). All of the Companys centers are JCAHO-accredited or are in the process of becoming accredited by JCAHO. The Company has Quality Improvement Advisory Boards at many of its centers, and center general managers conduct quarterly quality improvement reviews. Area quality improvement (AQI) specialists conduct quality compliance audits at each center in an effort to ensure compliance with state and federal regulations, JCAHO, FDA and internal standards. The AQI specialists also help train all new clinical personnel on the Companys policies and procedures.
Training and Retention of Quality Personnel. Management recognizes that the Companys business depends on its personnel. The Company attempts to recruit knowledgeable talent for all positions including account executives that are capable of gaining new business from the local medical community. In addition, the Company provides sales training and orientation to general managers and account executives.
Management Information Systems. Management believes that periodic refinement and upgrading of its management information systems, which permit management to closely monitor the activities of the Companys centers, is important to the Companys business. The Companys financial systems provide, among other things, monthly budget analyses, trended financial data, financial comparisons to prior periods, and comparisons among Company centers. These systems also provide a means for management to monitor key statistical data for each center, such as accounts receivable, payor mix, cash collections, revenue mix and expense trends. Additionally, Medicare and other third party claims are billed electronically through the Companys systems thereby facilitating and improving the timeliness of accounts receivable collections. The Company also maintains a communication network that provides company-wide access to email and the Internet. The Company maintains a proprietary intranet, which is a productivity-driven, secure website focused on reducing paperwork, disseminating information throughout the Company, and facilitating communication among the Companys employees.
Corporate Compliance. The Companys goal is to operate its business with honesty and integrity and in compliance with the numerous laws and regulations that govern its operations. The Companys corporate compliance program is designed to help accomplish these goals through employee training and education, a confidential disclosure program, written policy guidelines, periodic reviews, compliance audits and other programs. The Companys corporate compliance program is monitored by its Vice President of Compliance and Government Affairs, Assistant Compliance Officer and Compliance Committee. The Compliance Committee, which meets quarterly, is comprised of the Companys President and CEO, Chief Operating Officer, Chief Financial Officer, Sr. Vice President of Revenue Management, and both division vice presidents. The Compliance Committee is advised by the Companys legal counsel. There can be no assurance that the Companys compliance activities will prevent or detect violations of the governing laws and regulations. See Business Government Regulation.
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Hospital Joint Ventures
The Company owns 50% of nine home health care businesses, and 70% of two other home health care businesses that were operational as of December 31, 2004. The remaining ownership percentage of each business is owned by local hospitals. The Company is solely responsible for the management of these businesses and receives fixed monthly management fees or monthly management fees based upon a percentage of net revenues, net income or cash collections. The operations of the 70%-owned joint ventures are consolidated with the operations of the Company. The operations of the 50%-owned joint ventures are not consolidated with the operations of the Company and are instead accounted for by the Company under the equity method. The Company has not invested in any new joint ventures since 1998.
The Companys joint ventures typically are 50/50 equity partnerships with an initial term of between three and ten years and with the following typical provisions: (i) the Company contributes assets of an existing business in the designated market or contributes cash to fund half of the initial working capital required for the hospital joint venture to commence operations; (ii) the hospital partner contributes similar assets and/or an amount of cash equal in the aggregate to the fair market value of the Companys net contribution; (iii) the Company is the managing partner for the hospital joint venture and receives a monthly management and administrative fee; and (iv) distributions, to the extent made, are generally made on a quarterly basis and are consistent with each partners capital contributions. Within the hospital joint ventures designated market all services provided within the geographic market are deemed to be revenues of the hospital joint venture including revenues from sources other than the hospital joint venture partner.
The following table lists the Companys hospital joint venture partners and locations for all joint ventures as of December 31, 2004:
Hospital Joint Venture Partner | Locations | |||
Baptist Medical Center (5 hospitals)
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Montgomery, AL | |||
Baptist Medical System (3 hospitals)
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Benton, Conway, Little Rock, North Little Rock, AR | |||
Central Carolina Hospital
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Sanford, NC | |||
Conway Hospital
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Conway, Myrtle Beach, SC * | |||
Frye Regional Medical Center/Caldwell Memorial
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Hickory, Lenoir, Maiden, NC | |||
Midlands Health Resources (12 hospitals)
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Beatrice, Hastings, Lincoln, Norfolk, Omaha, NE; Atlantic, IA | |||
Peninsula Regional Medical Center
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Salisbury, MD; Onancock, VA | |||
Piedmont Medical Center
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Rock Hill, SC | |||
Spruce Pine Community Hospital
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Asheville, Marion, Spruce Pine, NC | |||
West Branch Medical Center
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West Branch, MI | |||
Wallace Thompson Hospital
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Union, SC * |
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Revenues
The Company derives substantially all of its revenues from third-party payors including Medicare, private insurers and Medicaid. Medicare is a federally-funded and administered health insurance program that provides coverage for beneficiaries who require certain medical services and products. Medicaid is a state-administered reimbursement program that provides reimbursement for certain medical services and products. Amounts paid under these programs are generally based upon a fixed rate. Revenues are recorded at the expected reimbursement rates when the services are provided, merchandise is delivered, or equipment is rented to patients. Revenues are recorded net of estimated adjustment for billing errors or other reimbursement adjustments. Although amounts earned under the Medicare and Medicaid programs are subject to review by such third-party payors, subsequent adjustments to such reimbursements are historically insignificant as these reimbursements are based on fixed fee schedules. In the opinion of management, adequate provision has been made for any adjustment that may result from such reviews. Any differences between estimated settlements and final determinations are reflected in operations in the year finalized.
Sales revenues include all product sales to patients and are derived from the provision of infusion therapies, the sale of home health care equipment and medical supplies, the sale of aerosol medications and respiratory therapy equipment, and the sale of supplies and the provision of 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 when the Company has obtained the properly completed Certificate for Medical Necessity (CMN) from the health care provider, when applicable. 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 and recorded as revenue using fixed monthly fee schedules based upon the type of rental and the payor when the Company has obtained the properly completed CMN from the health care provider, when applicable. The fixed monthly fee encompasses the rental of the product, delivery, set-up, instruction, maintenance, repairs, providing backup systems when needed, and providing periodic home visits.
The following table sets forth the percentage of the Companys revenues from each source indicated for the years presented:
Year Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Medicare |
53 | % | 53 | % | 52 | % | ||||||
Private pay, primarily
private insurance |
38 | 38 | 38 | |||||||||
Medicaid |
9 | 9 | 10 | |||||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
Because the Company derives a significant portion of its revenues from Medicare and Medicaid reimbursement, material changes in reimbursement have a material impact on its revenues and, consequently, on its business operations and financial results. Reimbursement levels
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typically are subject to downward pressure as the federal and state governments seek to reduce expenditures under the Medicare and Medicaid programs. Thus, since its inception the Company has experienced numerous reductions related to its products and services and regularly learns of proposals for other reductions, some of which are subsequently implemented as proposed or in a modified form. The Company anticipates that future reductions will occur whether through administrative action, legislative changes, or otherwise.
In the fourth quarter of 2003 Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the MMA). The MMA reduced Medicare reimbursement levels for a variety of the Companys products and services, with some reductions beginning in January 2004 and others beginning in January 2005.
The reimbursement reductions contained in the MMA have negatively impacted and will continue to negatively impact the Companys operating results, liquidity and capital resources. A provision in the MMA required that, effective January 1, 2004, the reimbursement rate for inhalation drugs used with a nebulizer be reduced from 95% of the average wholesale price (AWP) to 80% of AWP. Revenues for 2004 were reduced by approximately $7.4 million as result of the reduced reimbursement rates for inhalation drugs that became effective January 1, 2004. Effective January 1, 2005, the MMA specifies that the reimbursement for inhalation drugs will be further reduced to the average manufacturers sales price plus six percent (ASP + 6%). In the fourth quarter of 2004, the Centers for Medicare and Medicaid Services (CMS) set a monthly dispensing fee of $57 for a 30 day supply and $80 for a 90 day supply of these drugs for the 2005 calendar year. Management expects that the reimbursement reductions that went into effect on January 1, 2005 with respect to the Companys inhalation drug business (which constitutes approximately 12% of the Companys 2004 revenues) will have a greater negative impact on the Companys revenues than the inhalation drug reductions that went into effect in 2004. Management estimates that if the 2005 reimbursement reductions for inhalation drugs had gone into effect on January 1, 2004, the Companys revenues for 2004 would have been further reduced by approximately $22.0 million, based on the Companys inhalation drug product mix in effect for 2004. As a result of the dispensing fees set by CMS for 2005, the Company intends to continue to provide inhalation drugs to Medicare beneficiaries in 2005. The ability of the Company to continue to provide inhalation drugs after 2005 will depend on the reimbursement schedule to be determined by CMS for 2006 and beyond. Any further reductions in the reimbursement schedule could force providers to exit the inhalation drug business.
The MMA also froze reimbursement rates for certain durable medical equipment (DME) at those rates in effect on October 1, 2003. These reimbursement rates will remain in effect until the start of a competitive bidding process which is scheduled to begin in 2007. At this time, the Company does not know which of its locations will be included in the competitive bidding process.
In addition, the MMA specified that effective January 1, 2005, the reimbursement for 16 durable medical equipment items and home oxygen would be reduced to the median Federal Employee Health Benefit Plan (FEHBP) rates. The reimbursement reductions for the 16 DME items went into effect as scheduled on January 1, 2005. Management estimates that if the 2005 reimbursement reductions for the 16 DME items had gone into effect on January 1, 2004, the
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Companys revenues for 2004 would have been reduced by approximately $2.3 million, based on the Companys DME product mix in effect for 2004. The reimbursement changes for home oxygen that were scheduled to go into effect on January 1, 2005 have not yet occurred. As mandated by the MMA, the Office of Inspector General of the Department of Health and Human Services (OIG) conducted a study to determine the median FEHBP rates for home oxygen. This study, which was published on March 30, 2005, indicated the median FEHBP rate for stationary home oxygen equipment was $201.60 compared to a median Medicare rate of $230.17. For portable home oxygen equipment, the median FEHBP rate was $32.27 compared to a median Medicare rate of $36.19. Also on March 30, 2005 the 2005 fee schedule for home oxygen was issued by CMS. These fee schedule amounts will be implemented by the Medicare contractors as soon as possible and by no later than April 8, 2005. All claims for home oxygen furnished on or after January 1, 2005, that are received after the fees are implemented will be paid using the 2005 fee schedule amounts. Claims with dates of service on or after January 1, 2005, that were previously paid using the 2004 fee schedule amounts will not be retroactively adjusted. Management is currently in the process of assessing the magnitude of the financial impact of the 2005 fee schedule for home oxygen, however it is expected that this fee schedule will materially and adversely impact the Companys operating results and financial condition. The Company estimates that 23% of its 2004 revenues represented home oxygen reimbursed by Medicare. Management is working to counter the impact of the 2005 reimbursement reductions contained in the MMA, including initiatives to grow revenues, improve productivity, and reduce costs.
The magnitude of the adverse impact that the MMAs reimbursement reductions will have on the Companys future operating results and financial condition will depend upon the success of the Companys revenue growth and cost reduction initiatives as well as the final oxygen reimbursement rates; nevertheless, the adverse impact will be material in 2005 and beyond. To improve revenue growth, management took a number of actions in the fourth quarter of 2004 including revisions to the sales commission plans for account executives and a restructuring of the sales organization. Additionally, a senior vice president of sales and marketing was hired in February 2005. (See Business Sales and Marketing). Management also took a number of actions during 2004 to improve productivity and reduce costs in the Companys operating centers and billing centers. (See Managements Discussion and Analysis of Financial Condition General Productivity and Profitability.) Management estimates that as a result of these cost reduction initiatives, operating expenses were reduced on an annualized run rate basis by approximately $16.4 million as of December 31, 2004 compared to the annualized run rate in effect one year earlier. Management intends to continue to improve productivity and reduce costs during 2005 through a number of initiatives including centralization of certain customer service functions currently residing at the operating center level, consolidation of certain billing center functions, and continued productivity improvements in operating centers and billing centers.
Collections
The Company has four key initiatives in place to maintain and/or improve collections of accounts receivable: (i) proper staffing and training; (ii) process redesign and standardization; (iii) consolidation of billing center activities; and (iv) billing center specific goals geared toward improved cash collections and reduced accounts receivable.
Net patient accounts receivable at December 31, 2004 was $50.9 million compared to net patient accounts receivable of $56.9 million at December 31, 2003.
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An important indicator of the Companys accounts receivable collection efforts is the monitoring of the days sales outstanding (DSO). The Company monitors DSO trends for each of its branches and billing centers and for the Company in total as part of the management of the billing and collections process. An increase in DSO usually indicates a breakdown in processes at the billing centers and/or branches. A decline in DSO usually results from process improvements and improved cash collections. Management uses DSO trends to monitor, evaluate and improve the performance of the billing centers. The table below shows the Companys DSO for the periods indicated and is calculated by dividing the previous 90 days of revenue (excluding dispositions and acquisitions), net of bad debt expense, into net patient accounts receivable and multiplying the ratio by 90 days:
Year Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
DSO |
55 days | 60 days | 61 days |
The Company attempts to minimize DSO by screening new patient cases for adequate sources of reimbursement and by providing complete and accurate claims data to relevant payor sources. The Companys level of DSO and net patient receivables is affected by the extended time required to obtain necessary billing documentation.
Another key indicator of the Companys receivable collection efforts is the amount of unbilled revenue (the amount of sales and rental revenues which have not yet been billed to the payors due to incomplete documentation or the receipt of the CMN). The amount of unbilled revenue was $10.8 million and $10.2 million for December 31, 2004 and December 31, 2003, respectively, net of valuation allowances.
During 2004 the Company closed three of its stand-alone billing centers. These centers were closed to gain efficiencies by the consolidation of billing activity into existing billing centers that have a history of higher performance. The closure of these billing centers allowed the Company to increase productivity and gain efficiency in its billing and collection processes which in turn improved the Companys DSO, reduced bad debt expense as a percentage of revenue, and reduced the cost to bill and collect patient revenue. As of December 31, 2004 the Company operated 16 stand-alone billing centers.
Sales and Marketing
Relatively few barriers exist to entry into local markets served by the Company which could result in competition from new market entrants. Additionally, in larger markets, regional and national providers account for a significant portion of the Companys competition. Furthermore, some of the Companys present and potential competitors are significantly larger than the Company and have, or may obtain, greater financial and marketing resources than the Company. With this in mind, the Company has increased its focus on sales and marketing efforts over the past three years in an effort to improve revenues. The sales and marketing efforts did not produce satisfactory results in 2004. As a result, in the fourth quarter of 2004, management implemented several changes designed to improve the effectiveness of the Companys selling efforts. These include revisions to the account executive commission plans and a restructuring of
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the sales organization. After this restructuring, each area was assigned an area director of sales who reports to the respective area vice president. All account executives within a given area report to their respective area director of sales. Previously, account executives reported to the general manager of the operating center. Additionally, in February 2005, a senior vice president of sales and marketing was hired. Management believes these actions will result in a more focused sales management team. Improvement in the Companys ability to grow revenues will be critical to the Companys success in 2005 and beyond. Management will continue to review and monitor progress with its sales and marketing efforts.
Competition
The home health care industry is consolidating but remains highly fragmented and competition varies significantly from market to market. In the small and mid-size markets in which the Company primarily operates, the majority of its competition comes from local independent operators or hospital-based facilities, whose primary competitive advantage is market familiarity. There are still relatively few barriers to entry in the local markets served by the Company, and it could encounter competition from new market entrants. In the larger markets, regional and national providers account for a significant portion of competition. Management believes that the competitive factors most important in the Companys lines of business are quality of care and service, reputation with referral sources, ease of doing business with the provider, ability to develop and to maintain relationships with referral sources, and the range of services offered.
Third-party payors and their case managers actively monitor and direct the care delivered to their beneficiaries. Accordingly, relationships with such payors and their case managers and inclusion within preferred provider and other networks of approved or accredited providers has become a prerequisite in many cases to the Companys ability to serve many of the patients it treats. Similarly, the ability of the Company and its competitors to align themselves with other healthcare service providers may increase in importance as managed care providers and provider networks seek out providers who offer a broad range of services, substantially discounted prices, and geographic coverage.
15
Branch Locations
Following is a list of the Companys 276 home health care centers as of December 31, 2004.
Alabama
|
Florida | Kentucky | Nebraska | Ohio | South Dakota | Virginia | ||||||
Alexander City
|
Crawfordville | Bowling Green | Beatrice1 | Berea | Sioux Falls | Charlottesville | ||||||
Andalusia
|
Daytona Beach | Danville | Hastings1 | Bryan | Chesapeake | |||||||
Birmingham
|
Ft. Myers | Jackson | Lincoln1 | Chillicothe | Tennessee | Farmville | ||||||
Dothan
|
Ft. Walton Beach | Lexington | Norfolk1 | Cincinnati | Ashland City | Harrisonburg | ||||||
Florence
|
Gainesville | London | Omaha1 | Dayton | Chattanooga | Newport News | ||||||
Foley
|
Jacksonville | Louisville | Heath | Clarksville | Onancock1 | |||||||
Huntsville
|
Leesburg | Paducah | Nevada | Mansfield | Cookeville | Richmond | ||||||
Mobile
|
Longwood | Pineville | Las Vegas | Maumee | Dayton | Salem | ||||||
Montgomery1
|
Panama City | Somerset | Springfield | Dickson | ||||||||
Russellville
|
Pensacola | New Jersey | Twinsburg | Erin | Washington | |||||||
Sylacauga
|
Port St. Lucie | Maine | Cedar Grove | Worthington | Huntingdon | Lakewood | ||||||
Tuscaloosa
|
Rockledge | Auburn | Zanesville | Jackson | Yakima | |||||||
St. Augustine | Bangor | New Mexico | Johnson City | |||||||||
Tallahassee (2) | Rumford | Alamogordo | Oklahoma | Kingsport | West Virginia | |||||||
Arizona
|
Tampa | Albuquerque | Claremore | Knoxville | Lewisburg | |||||||
Globe
|
Maryland | Clovis | Tulsa | Murfreesboro | Rainelle | |||||||
Phoenix
|
Cumberland | Farmington | Nashville | Wheeling | ||||||||
Georgia | Salisbury1 | Grants | Oneida | |||||||||
Arkansas
|
Albany | Las Cruces | Pennsylvania | Tullahoma | ||||||||
Batesville
|
Brunswick | Michigan | Roswell | Brookville | Union City | Wisconsin | ||||||
Benton1
|
Dublin | West Branch1 | Camp Hill | Burlington | ||||||||
Conway1
|
Eastman | New York | Chambersburg | Eau Claire | ||||||||
El Dorado
|
Evans | Minnesota | Albany | Clearfield | Texas | Madison | ||||||
Ft. Smith (2)
|
Rossville | Albert Lea | Auburn | Danville | Austin | Marshfield | ||||||
Harrison
|
Savannah | Red Wing | Corning | Erie | Bay City | Milwaukee | ||||||
Hot Springs
|
Valdosta | Rochester | Depew | Harrisburg | Brownwood | Minocqua | ||||||
Jonesboro (2)
|
Waycross | Geneva | Johnstown | Bryan | Onalaska | |||||||
Little Rock1 (2)
|
Mississippi | Hurley | Kane | Conroe | Racine | |||||||
Lowell
|
Illinois | Tupelo | Marcy | Lewistown | Corpus Christi | |||||||
Mena
|
Collinsville | Oneonta | Mill Hall | Dallas | ||||||||
Mtn. Home
|
Mt. Vernon | Missouri | Poughkeepsie | Mt. Pleasant | Harlingen | |||||||
N. Little Rock1
|
Peoria | Berkeley | Watertown | Philipsburg | Hereford | |||||||
Paragould
|
Springfield | Cameron | Webster | Pittsburgh | Houston | |||||||
Pine Bluff
|
Columbia | Pottsville | Lake Jackson | |||||||||
Russellville
|
Iowa | Festus | State College | Laredo | ||||||||
Searcy
|
Atlantic1 | Hannibal | North Carolina | Titusville | Longview | |||||||
Warren
|
Cedar Rapids | Ironton | Asheboro | Trevose | Lubbock | |||||||
Coralville | Kansas City | Asheville1 | Waynesboro | Lufkin | ||||||||
Davenport | Kirksville | Charlotte | Wilkes-Barre | McAllen | ||||||||
Colorado
|
Decorah | Mountain Grove | Concord | York | Mount Pleasant | |||||||
Cortez
|
Des Moines | Osage Beach | Gastonia | Nacogdoches | ||||||||
Denver
|
Dubuque | Perryville | Hickory1 | Paris | ||||||||
Durango
|
Fort Dodge | Potosi | Lenoir1 | South Carolina | Plainview | |||||||
Pagosa Springs
|
Marshalltown | Rolla | Maiden1 | Columbia | San Angelo | |||||||
Mason City | Springfield | Marion1 | Conway1 | San Antonio | ||||||||
Connecticut
|
Ottumwa | St. Louis | Monroe | Florence | Temple | |||||||
New Britain
|
Sioux City | St. Peters | Newland | Greenville | Tyler | |||||||
Waterbury
|
Spencer | St. Robert | Salisbury | Lancaster | Victoria | |||||||
Waterloo | Warrensburg | Sanford1 | Myrtle Beach1 | Waco | ||||||||
Delaware
|
West Burlington | Spruce Pine1 | N. Charleston | |||||||||
Dover
|
Whiteville | Rock Hill1 | ||||||||||
Newark
|
Wilmington | Union1 | ||||||||||
Kansas | Winston-Salem | |||||||||||
Pittsburg |
1 | Owned by a joint venture. | |
2 | City has multiple locations. |
16
Supplies and Equipment
The Company centrally purchases home medical and respiratory equipment, prescription drugs, solutions and other materials and products required in connection with the Companys business from select suppliers.
Insurance
The Company maintains a commercial general liability policy which is on a claims-made basis. This insurance is renewed annually and includes product liability coverage on the medical equipment that it sells or rents with per claim coverage limits of up to $1.0 million per claim with a $5.0 million product liability annual aggregate and a $5.0 million general liability annual aggregate. The Companys professional liability policy is on a claims-made basis and is renewable annually with per claim coverage limits of up to $1.0 million per claim and $5.0 million in the aggregate. The Company retains the first $100,000 of each professional or general liability claim subject to $500,000 in the aggregate. The defense costs are included within the limits of insurance. The Company also maintains excess liability coverage with limits of $20.0 million per claim and $20.0 million in the aggregate. Management believes the manufacturers of the equipment it sells or rents currently maintain their own insurance, and in some cases the Company has received evidence of such coverage and has been added by endorsement as an additional insured; however, there can be no assurance that such manufacturers will continue to do so, that such insurance will be adequate or available to protect the Company, or that the Company will not have liability independent of that of such manufacturers and/or their insurance coverage. Liabilities in excess of these aggregate amounts are the responsibility of the insurer.
The Company is insured for auto liability coverage for $1.0 million per accident. The Company retains the first $250,000 of each claim. The Company is insured for workers compensation. The Company retains the first $250,000 of each claim. The Company provides accruals for the settlement of outstanding claims and claims incurred but not reported at amounts believed to be adequate. The differences between actual settlements and accruals are included in expense once a probable amount is known. The Company did not maintain annual aggregate stop-loss coverage for the years 2004, 2003 and 2002, as such coverage was not available.
The Company is self-insured for health insurance for substantially all employees for the first $150,000 on a per person, per year basis and maintains annual aggregate stop-loss coverage of $14.4 million for 2004. The health insurance policies are limited to maximum lifetime reimbursements of $2.0 million per person for 2004, 2003 and 2002. Liabilities in excess of these aggregate amounts are the responsibility of the insurer. The Company provides reserves for the settlement of outstanding claims and claims incurred but not reported at amounts believed to be adequate. The differences between actual settlements and accruals are included in expense once a probable amount is known.
See Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies.
17
The Company has purchased insurance protecting its directors and officers for a limit of $20.0 million.
There can be no assurance that any of the Companys insurance will be sufficient to cover any judgments, settlements or costs relating to any pending or future legal proceedings or that any such insurance will be available to the Company in the future on satisfactory terms, if at all. If the insurance carried by the Company is not sufficient to cover any judgments, settlements or costs relating to pending or future legal proceedings, the Companys business and financial condition could be materially adversely affected.
Employees
At December 31, 2004, the Company had approximately 2,700 full-time employees, 122 part-time employees and 174 employees used on an as needed basis only. Approximately 115 individuals were employed at the corporate office in Brentwood, Tennessee. None of the employees work under a union contract.
Trademarks
The Company owns and uses a variety of marks, including American HomePatient®, AerMeds®; Redi asm; EnterCaresm; Resourcesm; EnSpiresm; OPUSsm; SLEEPsm; Go Paperlesssm; Personal Caring Servicesm; CHF Heart Matterssm; and Breathe, Nourish, Move, Thrivesm, which have either been registered at the federal or state level or are being used pursuant to common law rights.
Government Regulation
General. The Company, as a participant in the health care industry, is subject to extensive federal, state and local regulation. In addition to the Federal False Claims Act (False Claims Act) and other federal and state anti-kickback and self-referral laws applicable to all of the Companys operations (discussed more fully below), the operations of the Companys 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 Companys operations are also subject to a series of laws and regulations dating back to 1987 that apply to the Companys operations. Changes have occurred from time to time since 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, the Company is subject to the federal statute known as the anti-kickback
18
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 is also subject to the federal physician self-referral prohibition, known as the Stark Law, which, with certain exceptions, prohibits physicians from referring patients to entities with which they have a financial relationship. Many states in which the Company operates have adopted similar fraud and abuse and self-referral laws, as well as laws that prohibit certain direct or indirect payments or fee-splitting arrangements between health care providers, under the theory that such arrangements are designed to induce or to encourage the referral of patients to a particular provider. In many states these laws apply to services reimbursed by all payor sources.
In 1996 the Health Insurance Portability and Accountability Act (HIPAA) introduced a new category of federal criminal health care fraud offenses. If a violation of a federal criminal law relates to a health care benefit, then an individual is guilty of committing a Federal Health Care Offense. The specific offenses are: health care fraud, theft or embezzlement, false statements, obstruction of an investigation, and money laundering. These crimes can apply to claims submitted not only to government reimbursement programs such as Medicare, Medicaid, and TRICARE but also to claims submitted to any third-party payor, and carry penalties including fines and imprisonment. HIPAA has mandated an extensive set of regulations to protect the privacy of individually identifiable health information. See Managements Discussion and Analysis of Financial Condition and Results of Operations Trends, Events, and Uncertainties HIPAA.
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 CMN signed by a physician. In January 1999 the OIG published a draft Model Compliance Plan for the Durable Medical Equipment, Prosthetics, Orthotics, and Supply Industry. The OIG has stressed the importance for all health care providers to have an effective compliance plan. The Company has created and implemented a compliance program which it believes meets the elements of the OIGs Model Plan for the industry. As part of its compliance program, the Company performs internal audits of the adequacy of billing documentation. The Companys 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 Companys business and its billing practices.
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. Many of the Companys employees must maintain licenses to provide some of the services offered by the Company. Additionally, certain of the Companys employees are subject to state laws and regulations governing the professional practice of respiratory therapy, pharmacy and nursing.
19
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 in order to avoid contracting with an excluded provider. The entity cannot bill government programs for services or supplies provided by an excluded provider, and the federal government may also impose sanctions, including financial penalties, on companies that contract with excluded providers.
Health care law is an area of extensive and dynamic regulatory oversight. Changes in laws or regulations or new interpretations of existing laws or regulations can have a dramatic effect on permissible activities, the relative costs associated with doing business, and the amount and availability of reimbursement from government and other third-party payors. There can be no assurance that federal, state, or local governments will not impose additional standards or change existing standards or interpretations.
Enforcement Activities. In recent years, various state and federal regulatory agencies have stepped up investigative and enforcement activities with respect to the health care industry, and many health care providers, including the Company and other durable medical equipment suppliers, have received subpoenas and other requests for information in connection with their business operations and practices. From time to time, the Company also receives notices and subpoenas from various government agencies concerning plans to audit the Company, or requesting information regarding certain aspects of the Companys 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 Companys activities nor that the Companys 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 Companys business and financial position, and could even result in the exclusion of the Company from participating in Medicare, Medicaid, and other contracts for goods or services reimbursed by the government.
Legal Proceedings
The following is a summary of the Companys material legal proceedings:
On July 1, 2003, the Approved Plan became effective and the Company successfully emerged from bankruptcy protection. The holders of the Companys senior debt (the Lenders) filed an appeal of the order confirming the Approved Plan to the United States District Court. That court affirmed the order confirming the Approved Plan on September 12, 2003. On October 14, 2003, the Lenders filed a notice of appeal to the United States Court of Appeals for the Sixth Circuit under Case Number 03-6500. That appeal is pending. If the appeal is successful, it could
20
have a material adverse effect on the Company. See also Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
The Bankruptcy Court issued an opinion ruling in favor of the Companys request to reject warrants originally issued to the Companys Lenders to purchase 3,265,315 shares of the Companys common stock for $.01 per share. As a result of the ruling, the warrants, which represented approximately 20% of the Companys outstanding common stock, were rejected by the Company. The Bankruptcy Court determined the damages stemming from rejection of the warrants were $846,000, which is payable by the Company to the warrant holders as an unsecured debt. The warrant holders have appealed the damages determination in this ruling in the United States Court of Appeals for the Sixth Circuit, Case Number 04-00188. The outcome of the appeal cannot be predicted, and an adverse ruling could have a material adverse effect on the Company. These adverse effects could include, without limitation, adverse changes in the interest rate related to its secured and unsecured debt, a change in the proportion of debt treated as secured debt, issuance of equity securities or an adverse change in the capitalization of the Company to the detriment of equity holders. There can be no assurance as to the extent or nature of the adverse effects of a successful Lenders appeal. See also Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
On June 11, 2001, a settlement agreement (the OIG Settlement or 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 relators 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 aggregate principal amount of $4,000,000, together with interest on this amount, in installments due at various times until March 2006. An installment of $529,000, including interest of $29,000, was due and paid on January 11, 2005. As of December 31, 2004, the Company has liabilities of $3,529,000 for its obligations pursuant to the Government Settlement, of which $1,529,000 is classified as a current liability and $2,000,000 is included in other noncurrent liabilities. See also Managements Discussion and Analysis of Financial Condition and Results of Operations Trends, Events, and Uncertainties Approved Plan.
Risk Factors
This section summarizes certain risks, among others, that should be considered by stockholders and prospective investors in the Company. Many of these risks are also discussed in other sections of this report.
Medicare Reimbursement Reductions. In the last quarter of 2003, Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the MMA). The MMA reduces Medicare reimbursement levels for a variety of the Companys products and
21
services, with some reductions beginning in 2004 and others beginning in 2005. See Business - Revenues. These reductions will have a material adverse effect on the Companys revenues, net income, cash flows and capital resources. See Managements Discussion and Analysis of Financial Condition and Results of Operations.
Dependence on Reimbursement by Third-Party Payors. For the year ended December 31, 2004 the percentage of the Companys revenues derived from Medicare, Medicaid and private pay was 53%, 9% 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 delaying payments, 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 Companys revenues and net income. Changes in the mix of the Companys patients among Medicare, Medicaid and private pay categories and among different types of private pay sources may also affect the Companys revenues and profitability. There can be no assurance that the Company will continue to maintain its current payor or revenue mix. See Managements Discussion and Analysis of Financial Condition and Results of Operations.
Substantial Leverage. The Company maintains a significant amount of debt. The secured claim of the Lenders as of December 31, 2004 was $250.0 million. The unsecured claim of the Lenders as of December 31, 2004 was approximately $1.0 million. The amount of general unsecured debt (excluding the Government Settlement) due to other creditors at December 31, 2004 was $0.5 million. Required payments to the Lenders and general unsecured creditors are detailed in Managements Discussion and Analysis Liquidity and Capital Resources. Due to the amount of debt, a substantial portion of the Companys cash flow from operations will be dedicated to servicing debt. The substantial leverage could adversely affect the Companys ability to grow its business or to withstand adverse economic conditions or competitive pressures and the inability to pay debt would have a material adverse effect on the Company. See Managements Discussion and Analysis Liquidity and Capital Resources.
Bankruptcy Appeal. On July 1, 2003, the Approved Plan became effective and the Company successfully emerged from bankruptcy protection. The Companys Lenders filed an appeal of the order confirming the Approved Plan to the United States District Court. That court affirmed the order confirming the Approved Plan on September 12, 2003. On October 14, 2003, the Lenders filed a notice of appeal to the United States Court of Appeals for the Sixth Circuit. That appeal is pending. If the appeal is successful, it could have a material adverse effect on the Company. See Business Legal Proceedings.
Warrant Rejection Appeal. The Bankruptcy Court issued an opinion ruling in favor of the Companys request to reject warrants originally issued to the Companys Lenders to purchase 3,265,315 shares of the Companys common stock for $.01 per share. As a result of the ruling, the warrants, which represented approximately 20% of the Companys outstanding common stock, were rejected by the Company. The Bankruptcy Court determined the damages stemming from rejection of the warrants were $846,000, which is payable by the Company to the warrant holders as an unsecured debt. The warrant holders have appealed the damages calculation
22
determined in this ruling. If the appeal is successful, the amount owed to the warrant holders could substantially increase which could materially adversely affect the Companys cash flow and results from operations. See Business Legal Proceedings.
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 Companys operations, financial condition, business, or prospects. See Business Government Regulation.
Collectibility of Accounts Receivable. The Company has substantial accounts receivable as evidenced by DSO of 55 days as of December 31, 2004. 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 Companys 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 Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies Revenue Recognition and Allowance for Doubtful Accounts.
Health Care Initiatives. The health care industry continues to undergo dramatic changes influenced in large part by federal legislative initiatives. It is likely new federal health care initiatives will continue to arise. There can be no assurance that these or other federal legislative and regulatory initiatives will not be adopted in the future. One or more of these initiatives could limit patient access to, or the Companys reimbursement for, products and services provided by the Company. Some states are adopting health care programs and initiatives as a replacement for Medicaid. There can be no assurance that the adoption of such legislation or other changes in the administration or interpretation of government health care programs or initiatives will not have a material adverse effect on the Company.
Role of Managed Care. As managed care plays a significant role in markets in which the Company operates, the Companys 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, by increasing retrospective payment audits, and by negotiating reduced contract pricing. Therefore, even if the Company is successful in retaining and obtaining managed care contracts, it will experience declining profitability unless the Company also decreases its cost for providing services and increases higher margin services.
23
Liquidity. Trading of the Companys common stock under its current trading symbol, AHOM, is conducted on the over-the-counter bulletin board which may limit the Companys ability to raise additional capital and the ability of shareholders to sell their shares.
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:
| Privacy Standards had a compliance date of April 14, 2003 the Company was materially compliant by this date; | |||
| 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 the Company was materially compliant by the final compliance date; and | |||
| Security Standards which were published in final form on February 2, 2003 and have a compliance date of April 20, 2005 the Company expects to be materially compliant by this date. |
The Companys implementation of mandated HIPAA Transaction and Code Sets has previously resulted in temporary disruptions to cash collections, and additional disruptions may occur in the future. Further, the Company cannot predict whether all payors and clearinghouses will be fully HIPAA Transaction-compliant and able to process electronic claims by the final implementation deadline. Alternative methods of claims submission may be required, possibly resulting in delay in payment, which could have a material adverse effect on the Companys result of operations, cash flow, and financial condition.
Ability to Attract and Retain Management. The Company is highly dependent upon its senior management, and competition for qualified management personnel is intense. The Companys historical financial results and reimbursement environment, among other factors, may limit the Companys 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. There are relatively few barriers to entry in the local markets served by the Company, and it could encounter competition from new market entrants. In the larger markets, regional and national providers account for a significant portion of competition. Some of the Companys present and potential competitors are significantly larger than the Company and have, or may obtain, greater financial and marketing resources than the Company.
24
Liability and Adequacy of Insurance. The provision of healthcare services entails an inherent risk of liability. Certain participants in the home healthcare 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 Companys insurance coverage will not arise. A successful claim against the Company in excess of the Companys insurance coverage could have a material adverse effect upon the 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 Companys 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.
Available Information
The Company files reports with the Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Copies of the Companys reports filed with the SEC may be obtained by the public at the SECs Public Reference Room at 450 Fifth Street NW, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. The Company files such reports with the SEC electronically, and the SEC maintains an Internet site at www.sec.gov that contains the Companys periodic and current reports, proxy and information statements, and other information filed electronically. The Companys website address is www.ahom.com. The Company also makes available, free of charge through the Companys website, a direct link to its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other materials filed with the SEC electronically. The information provided on the Companys website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.
ITEM 2. PROPERTIES
As of December 31, 2004, the Company leased space for its corporate headquarters in the Parklane Building, Maryland Farms Office Park, Brentwood, Tennessee. The Company entered into an amended lease effective January 1, 2003 that provided for 29,000 square feet of leased space. The amended lease has a base monthly rent of $42,000 and expires in January 2009.
The Company owns a facility in Waterloo, Iowa, which consists of approximately 35,000 square feet and owns a 50% interest in its center in Little Rock, Arkansas, which consists of approximately 15,000 square feet.
25
The Company leases the operating space required for its remaining home health care and billing centers. A typical center occupies between 2,000 and 6,000 square feet and generally combines showroom, office, and warehouse space. Approximately two-thirds of the square footage consisting of a typical center consists of warehouse space. Lease terms on most of the leased centers range from three to five years. Management believes that the Companys owned and leased properties are adequate for its present needs and that suitable additional or replacement space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
A summary of the Companys material legal proceedings is set forth in The Business Legal Proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
26
PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Companys common stock is currently traded in the over-the-counter market or, on application by broker-dealers, in the NASDs Electronic Bulletin Board under the symbol AHOM or AHOM.OB. The following table sets forth representative bid quotations of the common stock for each quarter of calendar years 2004 and 2003. The following bid quotations reflect interdealer prices without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. See Business - Risk Factors Liquidity.
Bid Quotations | ||||||||
Fiscal Period |
High | Low | ||||||
2004 1st Quarter |
$ | 2.07 | $ | 1.14 | ||||
2004 2nd Quarter |
$ | 1.70 | $ | 1.00 | ||||
2004 3rd Quarter |
$ | 1.15 | $ | 0.50 | ||||
2004 4th Quarter |
$ | 4.10 | $ | 0.46 | ||||
2003 1st Quarter |
$ | 0.29 | $ | 0.12 | ||||
2003 2nd Quarter |
$ | 1.60 | $ | 0.20 | ||||
2003 3rd Quarter |
$ | 2.95 | $ | 1.30 | ||||
2003 4th Quarter |
$ | 2.75 | $ | 1.15 |
On March 23, 2005, there were 1,613 holders of record of the common stock and the closing sale price for the common stock was $4.25 per share.
The Company has not paid cash dividends on its common stock and anticipates that, for the foreseeable future, any earnings will be retained for use in its business or for debt service and no cash dividends will be paid. See Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
Information regarding the Companys equity compensation plans is incorporated by reference to the Companys definitive proxy statement (Proxy Statement) for its 2005 annual meeting of stockholders.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data below is derived from the audited financial statements of the Company and should be read in conjunction with those statements, thereto. The dissolution of joint ventures in 2000, the sales of non-core assets in 2001 and 2002, the bankruptcy filing in 2002, and the cumulative effect of a change in accounting principle in 2002 affect the comparability of the financial data presented.
See Managements Discussion and Analysis of Financial Condition and Results of Operations.
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Year Ended December 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
(dollars in thousands, except per share data) | ||||||||||||||||||||
Income Statement Data: |
||||||||||||||||||||
Revenues |
$ | 335,823 | $ | 336,181 | $ | 319,632 | $ | 347,047 | $ | 356,670 | ||||||||||
Cost of sales and related services |
71,934 | 69,494 | 63,528 | 78,884 | 85,473 | |||||||||||||||
Cost of rentals and other revenues, including rental
equipment depreciation expense |
38,779 | 36,265 | 34,976 | 35,239 | 39,146 | |||||||||||||||
Operating expenses |
167,285 | 177,167 | 169,417 | 177,049 | 177,121 | |||||||||||||||
Bad debt expense |
10,671 | 10,437 | 11,437 | 15,813 | 23,449 | |||||||||||||||
General and administrative expenses |
16,597 | 17,212 | 16,239 | 15,693 | 15,823 | |||||||||||||||
Earnings from joint ventures |
(4,751 | ) | (4,778 | ) | (4,590 | ) | (4,759 | ) | (5,301 | ) | ||||||||||
Depreciation, excluding rental equipment, and
amortization expense |
3,423 | 3,640 | 4,075 | 10,776 | 11,480 | |||||||||||||||
Amortization of deferred financing costs |
| 160 | 1,779 | 3,082 | 2,517 | |||||||||||||||
Interest expense (excluding post-petition
interest), net |
18,290 | 8,785 | 11,461 | 27,772 | 30,207 | |||||||||||||||
Other (income) expense, net |
(344 | ) | (708 | ) | 243 | (115 | ) | 321 | ||||||||||||
(Gain) loss on sales of assets of centers |
| | (667 | ) | 55 | | ||||||||||||||
Provision for litigation settlement |
| | | | 7,500 | |||||||||||||||
Chapter 11 financial advisory expenses incurred
prior to filing bankruptcy |
| | 818 | | | |||||||||||||||
Total expenses |
321,884 | 317,674 | 308,716 | 359,489 | 387,736 | |||||||||||||||
Income (loss) from operations before reorganization
items, income taxes and cumulative effect of change
in accounting principle |
13,939 | 18,507 | 10,916 | (12,442 | ) | (31,066 | ) | |||||||||||||
Reorganization items |
658 | 4,082 | 5,497 | | | |||||||||||||||
Provision for (benefit from) income taxes |
50 | 400 | (1,912 | ) | 450 | 600 | ||||||||||||||
Income (loss) from operations before cumulative
effect of change in principle |
13,231 | 14,025 | 7,331 | (12,892 | ) | (31,666 | ) | |||||||||||||
Cumulative effect of change in accounting principle |
| | (68,485 | ) | | | ||||||||||||||
Net income (loss) |
$ | 13,231 | $ | 14,025 | $ | (61,154 | ) | $ | (12,892 | ) | $ | (31,666 | ) | |||||||
Income (loss) from operations before cumulative
effect of change in accounting principle per share
- - basic |
$ | 0.80 | $ | 0.86 | $ | 0.45 | $ | (0.79 | ) | $ | (2.01 | ) | ||||||||
Income (loss) from operations before cumulative
effect of change in accounting principle per share
- - diluted |
$ | 0.78 | $ | 0.74 | $ | 0.39 | $ | (0.79 | ) | $ | (2.01 | ) | ||||||||
Net income (loss) per share basic |
$ | 0.80 | $ | 0.86 | $ | (3.74 | ) | $ | (0.79 | ) | $ | (2.01 | ) | |||||||
Net income (loss) per share diluted |
$ | 0.78 | $ | 0.74 | $ | (3.29 | ) | $ | (0.79 | ) | $ | (2.01 | ) | |||||||
Weighted average shares outstanding basic |
16,481,000 | 16,368,000 | 16,358,000 | 16,251,000 | 15,783,000 | |||||||||||||||
Weighted average shares outstanding diluted |
17,066,000 | 19,000,000 | 18,607,000 | 16,251,000 | 15,783,000 | |||||||||||||||
Year Ended December 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Working capital (deficit) |
$ | 31,569 | $ | 20,117 | $ | 67,055 | $ | (240,436 | ) | $ | (240,437 | ) | ||||||||
Total assets |
283,064 | 284,040 | 290,943 | 347,040 | 378,514 | |||||||||||||||
Total debt and capital leases,
including current portion |
251,918 | 262,914 | 280,765 | (1) | 283,696 | 299,152 | ||||||||||||||
Liabilities subject to compromise |
| | 307,829 | | | |||||||||||||||
Shareholders (deficit) equity |
(20,729 | ) | (34,249 | ) | (47,594 | ) | 13,549 | 26,239 |
(1) | Excluding adequate protection payments of $8.0 million. |
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company provides home health care services and products to patients through its 276 centers in 35 states. These services and products are primarily paid for by Medicare, Medicaid and other third-party payors. As a result, prices for the Companys products and services are set by the payors and not by the Company. Since the Company cannot affect pricing, it can improve operating results primarily by increasing revenues and controlling expenses. It can improve cash flow by limiting the amount of time that it takes to collect payment after delivering products and services. Key indicators of performance include:
Sales and Rentals. Operating in an industry with pre-set prices subject to reimbursement reductions makes it crucial to increase revenues by increasing the volume of sales and rentals. Over the past three years the Company has increased its focus on sales and marketing efforts in an effort to improve revenues with mixed results. Improving these efforts will be critical to the Companys success. Management closely tracks overall increases and decreases in sales and rentals as well as increases and decreases by product-line and branch location and region. Managements intent is to identify geographic or product line weaknesses and take corrective actions. Reductions in reimbursement levels can more than offset an increased volume of sales and rentals. See Trends, Events, and Uncertainties Reimbursement Changes and the Companys Response.
Bad Debt Expense. Billing and collecting in the healthcare industry is extremely complex. Rigorous substantive and procedural standards are set by each third party payor, and failure to adhere to these standards can lead to non-payment, which can have a significant impact on the Companys net income and cash flow. The Company measures bad debt as a percent of net sales and rentals, and management considers this percentage a key indicator in monitoring its billing and collection function. Bad debt expense as a percentage of net revenue decreased from 3.6% for 2002 to 3.1% for 2003. In 2004 bad debt expense as a percentage of net revenue increased slightly to 3.2%. Managements goal is to further lower this percentage in 2005.
Cash Flow. The Companys funding of day-to-day operations and all payments required under the Approved Plan will rely on cash flow and cash on hand. The Company currently does not have access to a revolving line of credit. The Approved Plan also obligates the Company to pay Excess Cash Flow (defined in the Approved Plan as cash and equivalents in excess of $7.0 million at the end of the Companys fiscal year) to creditors to reduce the Companys debt. The nature of the Companys business requires substantial capital expenditures in order to buy the equipment used to generate revenues. As a result, management views cash flow as particularly critical to the Companys operations. The Companys 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). Management attempts to monitor and improve cash flow in a number of ways, including inventory utilization analysis, cash flow forecasting, and accounts receivable collection. In that regard, the
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length of time that it takes to collect receivables can have a significant impact on the Companys liquidity as described below in Days Sales Outstanding.
Days Sales Outstanding. DSO is a tool used by management to assess collections and the consequent impact on cash flow. 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 attempts to minimize DSO by screening new patient cases for adequate sources of reimbursement and by providing complete and accurate claims data to relevant payor sources. The Company monitors DSO trends for each of its branches and billing centers and for the Company in total as part of the management of the billing and collections process. An increase in DSO usually indicates a breakdown in processes at the billing centers resulting in a disruption in cash collections. A decline in DSO usually results from process improvements and improved cash collections. Management uses DSO trends to monitor, evaluate and improve the performance of the billing centers resulting in a disruption in cash collections. The decrease in DSO in the past three years from 61 in 2002 to 60 in 2003 to 55 in 2004 is due to improved collection results on current billings and improved timeliness in obtaining necessary billing documentation. Managements goal is to lower DSO in 2005.
Unbilled Revenues. Another key indicator of the Companys receivable collection efforts is the amount of unbilled revenue which represents the amount of sales and rental revenues that have not yet been billed to the respective payors, due to incomplete documentation or the non-receipt of the CMN. At December 31, 2004 and 2003, the amount of unbilled revenue, net of valuation allowances, was $10.8 million and $10.2 million, respectively.
Productivity and Profitability. As discussed above, the fixed price reimbursement in the Companys industry makes it particularly important to control expenses. Management considers many of the Companys expenses to be either fixed costs or cost of goods sold, which are difficult to reduce or eliminate. As a result, managements primary areas of focus for expense reduction and containment are productivity analysis and profitability analysis. For instance, management analyzes billing center productivity using measures such as monthly revenue processed per full time equivalent (FTE) and monthly claims processed per FTE, with the goal of increasing productivity and eliminating the resulting excess capacity. Additionally, the Company monitors productivity of its operating centers by measuring each centers personnel costs against a predetermined productivity standard. This measurement highlights opportunities for improved productivity and reductions in personnel expenses on a branch and area basis. These analyses have enabled the Company to consolidate billing centers, improve productivity at operating centers and reduce expenses. Moreover, they help identify and standardize best practices and identify and correct deficiencies. Similarly, the Company monitors its business on an operating center and product basis to identify opportunities to target growth or contraction. These analyses have led to the closure or consolidation of locations and to the emphasis on products and new sales initiatives. During 2004, the Company closed or consolidated sixteen operating centers, opened six operating centers and closed three billing centers. Management anticipates that further productivity improvements, cost reductions, closures, and consolidations will occur in light of the Medicare reimbursement reductions recently implemented. See Trends, Events, and Uncertainties Reimbursement Changes and the Companys Response.
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Trends, Events, and Uncertainties
From time to time changes occur in the Companys industry or its business that make it reasonably likely that aspects of its future operating results will be materially different than its historical operating results. Sometimes these matters have not occurred, but their existence is sufficient to raise doubt regarding the likelihood that historical operating results are an accurate gauge of future performance. The Company attempts to identify and describe these trends, events, and uncertainties to assist investors in assessing the likely future performance of the Company. Investors should understand that these matters typically are new, sometimes unforeseen, and often are fluid in nature. Moreover, the matters described below are not the only issues that can result in variances between past and future performance nor are they necessarily the only material trends, events, and uncertainties that will affect the Company. As a result, investors are encouraged to use this and other information to ascertain for themselves the likelihood that past performance is indicative of future performance.
The trends, events, and uncertainties set out in the remainder of this section have been identified by the Company as reasonably likely to materially affect the comparison of historical operating results reported herein to either other past period results or to future operating results.
Reimbursement Changes and the Companys Response. The reimbursement reductions contained in the MMA have negatively impacted and will continue to negatively impact the Companys operating results, liquidity and capital resources. A provision in the MMA required that, effective January 1, 2004, the reimbursement rate for inhalation drugs used with a nebulizer be reduced from 95% of the average wholesale price (AWP) to 80% of AWP. Revenues for 2004 were reduced by approximately $7.4 million as result of the reduced reimbursement rates for inhalation drugs that became effective January 1, 2004. Effective January 1, 2005, the MMA specifies that the reimbursement for inhalation drugs will be further reduced to the average manufacturers sales price plus six percent (ASP + 6%). In the fourth quarter of 2004, the Centers for Medicare and Medicaid Services (CMS) set a monthly dispensing fee of $57 for a 30 day supply and $80 for a 90 day supply of these drugs for the 2005 calendar year. Management expects that the reimbursement reductions that went into effect on January 1, 2005 with respect to the Companys inhalation drug business (which constitutes approximately 12% of the Companys 2004 revenues) will have a greater negative impact on the Companys revenues than the inhalation drug reductions that went into effect in 2004. Management estimates that if the 2005 reimbursement reductions for inhalation drugs had gone into effect on January 1, 2004, the Companys revenues for 2004 would have been further reduced by approximately $22.0 million, based on the Companys inhalation drug product mix in effect for 2004. As a result of the dispensing fees set by CMS for 2005, the Company intends to continue to provide inhalation drugs to Medicare beneficiaries in 2005. The ability of the Company to continue to provide inhalation drugs after 2005 will depend on the reimbursement schedule to be determined by CMS for 2006 and beyond. Any further reductions in the reimbursement schedule could force providers to exit the inhalation drug business.
The MMA also froze reimbursement rates for certain durable medical equipment (DME) at those rates in effect on October 1, 2003. These reimbursement rates will remain in effect until the start of a competitive bidding process which is scheduled to begin in 2007. At
32
this time, the Company does not know which of its locations will be included in the competitive bidding process.
In addition, the MMA specified that effective January 1, 2005, the reimbursement for 16 DME items and home oxygen would be reduced to the median Federal Employee Health Benefit Plan (FEHBP) rates. The reimbursement reductions for the 16 DME items went into effect as scheduled on January 1, 2005. Management estimates that if the 2005 reimbursement reductions for the 16 DME items had gone into effect on January 1, 2004, the Companys revenues for 2004 would have been reduced by approximately $2.3 million, based on the Companys DME product mix in effect for 2004. The reimbursement reductions for home oxygen that were scheduled to go into effect on January 1, 2005 have not yet occurred. As mandated by the MMA, the Office of Inspector General of the Department of Health and Human Services (OIG) conducted a study to determine the median FEHBP rates for home oxygen. This study, which was published on March 30, 2005, indicated the median FEHBP rate for stationary home oxygen equipment was $201.60 compared to a median Medicare rate of $230.17. For portable home oxygen equipment, the median FEHBP rate was $32.27 compared to a median Medicare rate of $36.19. Also on March 30, 2005 the 2005 fee schedule for home oxygen was issued by CMS. These fee schedule amounts will be implemented by the Medicare contractors as soon as possible and by no later than April 8, 2005. All claims for home oxygen furnished on or after January 1, 2005, that are received after the fees are implemented will be paid using the 2005 fee schedule amounts. Claims with dates of service on or after January 1, 2005, that were previously paid using the 2004 fee schedule amounts will not be retroactively adjusted. Management is currently in the process of assessing the magnitude of the financial impact of the 2005 fee schedule for home oxygen, however it is expected that this fee schedule will materially and adversely impact the Companys operating results and financial condition. The Company estimates that 23% of its 2004 revenues represented home oxygen reimbursed by Medicare. Management is working to counter the impact of the 2005 reimbursement reductions contained in the MMA, including initiatives to grow revenues, improve productivity, and reduce costs.
The magnitude of the adverse impact that the MMAs reimbursement reductions will have on the Companys future operating results and financial condition will depend upon the success of the Companys revenue growth and cost reduction initiatives as well as the final oxygen reimbursement rates; nevertheless, the adverse impact will be material in 2005 and beyond. To improve revenue growth, management took a number of actions in the fourth quarter of 2004 including revisions to the sales commission plans for account executives and a restructuring of the sales organization. Additionally, a senior vice president of sales and marketing was hired in February 2005. (See Business Sales and Marketing). Management also took a number of actions during 2004 to improve productivity and reduce costs in the Companys operating centers and billing centers. (See Managements Discussion and Analysis of Financial Condition General Productivity and Profitability.) Management estimates that as a result of these cost reduction initiatives, operating expenses were reduced on an annualized run rate basis by approximately $16.4 million as of December 31, 2004 compared to the annualized run rate in effect one year earlier. Management intends to continue to improve productivity and reduce costs during 2005 through a number of initiatives including centralization of certain customer service functions currently residing at the operating center level, consolidation of certain billing center functions, and continued productivity improvements in operating centers and billing centers.
HIPAA. 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:
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| Privacy Standards had a compliance date of April 14, 2003 the Company was materially compliant by this date; | |||
| 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 the Company was materially compliant by the final compliance date; and | |||
| Security Standards which were published in final form on February 2, 2003 and have a compliance date of April 20, 2005 the Company expects to be materially compliant by this date. |
The Companys implementation of mandated HIPAA Transaction and Code Sets has previously resulted in temporary disruptions to cash collections, and additional disruptions may occur in the future. Further, the Company cannot predict when all payors and clearinghouses will be fully HIPAA Transaction-compliant and able to process electronic claims. Alternative methods of claims submission may be required, possibly resulting in delay in payment, which could have a material adverse effect on the Companys result of operations, cash flow, and financial condition.
Medicaid. The Company has experienced delays in reimbursement from several state Medicaid programs. These delays are primarily the result of the state budgetary concerns and state programs becoming compliant with the HIPAA Transaction and Code Sets and/or changing the intermediary contracted by the state to process claims submitted by the providers. Some states have renewed processing claims, however, there has been a delay in cash collections by the Company as these states address the processing of backlog claims. There can be no assurance that these delays will not continue.
Approved Plan. On July 1, 2003, American HomePatient, Inc. and 24 of its subsidiaries (collectively, the Debtors) emerged from bankruptcy pursuant to a 100% pay plan (the Approved Plan) whereby shareholders retained their equity interest and the Companys creditors and vendors will be paid 100% of amounts they are owed, either immediately or over time with interest. The Approved Plan fixed the interest on the Companys debt at 6.785% for the secured debt and 8.3675% for the unsecured debt thus eliminating all material interest rate risk for the Company. The Approved Plan set terms for repayment of the Companys outstanding debt and other terms, all as described in more detail in Managements Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.
The Lenders have filed an appeal of the order confirming the Approved Plan with the United States Court of Appeals for the Sixth Circuit appealing both the Bankruptcy Courts determination of the amount of their secured claim and the interest rates on both the secured and unsecured portions of their claims. The Case Number for this appeal, which is still pending, is 03-6500. The Company intends to vigorously defend the Confirmation Order entered by the Bankruptcy Court and upheld by the District Court, and the Company anticipates additional professional and other fees will be incurred in 2005 in connection with the appeal process. The
34
outcome of the appeal cannot be predicted, and an adverse ruling could have a material adverse effect on the Company. These adverse effects could include, without limitation, adverse changes in the interest rate related to its secured and unsecured debt, a change in the proportion of debt treated as secured debt, issuance of equity securities or an adverse change in the capitalization of the Company to the detriment of equity holders. There can be no assurance as to the extent or nature of the adverse effects of a successful Lenders appeal. See Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
Pursuant to a motion filed by the Company, the Bankruptcy Court issued an opinion ruling in favor of the Companys request to reject warrants held by the Lenders that represented approximately 20% of the Companys outstanding common stock. The Lenders now are entitled to an additional unsecured claim of approximately $846,000, which is the judicially determined damages stemming from rejection of the warrants as of July 30, 2002, the date immediately prior to the Companys bankruptcy filing. The warrant holders have appealed the damages determination in this ruling in the United States Court of Appeals for the Sixth Circuit, Case Number 04-00188. If the appeal is successful, the amount owed to the warrant holders could substantially increase which could materially adversely affect the Companys cash flow and results from operations.
Product Mix. The Companys strategy for 2004 was to maintain a diversified offering of home health care services reflective of its current business mix. For 2005, respiratory services will remain a primary focus along with home medical equipment rental and enteral nutrition products and services.
Critical Accounting Policies and Estimates
Managements Discussion and Analysis of Financial Condition and Results of Operations are based upon the Companys consolidated financial statements. The preparation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis management evaluates its critical accounting policies and estimates.
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 managements most difficult, subjective, or complex judgments, and often requires management 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 creditworthiness and collectibility of amounts due from its patients. Approximately 62% of the Companys 2004 revenues are derived from participation in Medicare and state Medicaid programs. Amounts paid under these programs are generally based upon a fixed rate. Revenues
35
are recorded at the expected reimbursement rates when the services are provided or when merchandise or equipment is delivered to patients. Revenues are recorded net of estimated adjustments for billing errors or other reimbursement adjustments. 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 as an adjustment to revenue 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 using fixed fee schedules based upon the type of product and the payor and are billed when the Company has obtained the properly completed CMN from the healthcare provider, where applicable. 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 product and the payor when the Company has obtained the properly completed CMN from the healthcare provider, where applicable. The fixed monthly fee encompasses the rental of the product, delivery, set-up, instruction, maintenance, repairs, providing backup systems when needed, and providing periodic home visits.
The Company recognizes revenues at the time services are performed or products are delivered. As such, a portion of patient receivables consists of unbilled revenue for which the Company has not obtained all of the necessary medical documentation required to produce a bill, but has provided the service or equipment. The Company calculates its allowance for doubtful accounts based upon the type of receivable (billed or unbilled) as well as the age of the receivable. As a receivable balance ages, an increasingly larger allowance is recorded for the receivable. All billed receivables over one year old and all unbilled receivables over 180 days old are fully reserved. Management believes that the recorded allowance for doubtful accounts is adequate, and that historical collections substantiate the percentages used in the allowance valuation process. However, the Company is subject to further 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 Companys allowance for doubtful accounts and bad debt expense would likely increase from current levels. Conversely, an improvement in the Companys 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.
The Companys allowance for doubtful accounts totaled approximately $16.9 million and $17.5 million as of December 31, 2004 and 2003, respectively.
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Inventory Valuation and Cost of Sales Recognition. Inventories represent equipment 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 on an interim basis at a standard rate, based upon the type of product sold and payor mix, and performs physical counts of inventory at each center on an annual basis. The Company records a valuation allowance for its estimated count adjustments and the difference between inventory actual costs and standard costs. The Company is subject to loss for inventory adjustments in excess of the recorded inventory valuation allowance. The inventory valuation allowance was $0.4 million and $0.6 million at December 31, 2004 and 2003, respectively.
Rental Equipment Valuation. Rental equipment is rented to patients on a month-to-month basis for use in their homes and is depreciated over the equipments 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, damaged, or obsolete equipment is charged to rental equipment depreciation expense. Since rental equipment is maintained in the patients home, the Company is subject to loss resulting from lost equipment as well as losses for damaged, outdated, or obsolete equipment. Management records a valuation allowance for its estimated lost, damaged, outdated, or obsolete rental equipment based upon historical adjustment amounts and believes the recorded rental allowance is adequate. The Company is subject to loss for adjustments in excess of its recorded rental equipment valuation allowance. The Companys rental equipment valuation allowance totaled $1.0 and $0.9 million at December 31, 2004 and 2003, respectively.
Valuation of Long-lived Assets. Management evaluates the Companys 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 the 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.
Accounting for Leases. In recent months, numerous companies have announced accounting restatements to correct prior errors in their accounting for leases. In response, the Company has examined its prior and current lease accounting policies and practices. The following three issues were addressed the recognition of lease expense over the lease term, the length of time over which the Company amortizes leasehold improvements and accounting for tenant improvement allowances or other incentives provided by lessors at the inception of a lease.
Prior to the fourth quarter of 2004, the Company did not recognize rent expense on leases with escalating rent payments under the straight-line method. With regard to leasehold improvements, prior to the fourth quarter of 2004, the Companys policy has been to depreciate leasehold improvements over a five-year period. Generally, the Companys leases have initial terms ranging from 3 to 10 years. The Companys analysis identified several leasehold improvements, which were being depreciated over a period in excess of the initial lease term.
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The Company does not receive tenant improvement allowances or other incentives from its lessors.
Although the Companys past practices regarding the accounting for leases with escalating rent payments and depreciation of certain leasehold improvements was not in compliance with lease accounting standards and related interpretations, the Company has determined that the resulting errors were immaterial to all prior period consolidated financial statements and restatement was not necessary. During the fourth quarter of 2004, the Company recognized the cumulative impact to all prior period consolidated financial statements as additional lease and depreciation expense totaling approximately $368,000.
Valuation of Goodwill and Other Intangible Assets. Goodwill represents the excess of cost over the fair value of net assets acquired. 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. Goodwill is tested for impairment by comparing the fair value of goodwill to the carrying value of goodwill. The fair value is determined using a combination of analyses which include 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.
There was no impairment recognized as a result of the Companys annual impairment testing in September 2004.
Self Insurance. Self-insurance accruals primarily represent managements loss estimate for self-insurance or large deductible risks associated with workers compensation insurance. The Company is insured for workers compensation, but retains the first $250,000 of risk exposure for each claim. The Company is not maintaining annual aggregate stop loss coverage for claims made in 2004, 2003 and 2002, as such coverage was not available. Judgments used in determining the accruals related to workers compensation include loss development factors, frequency of claims, and severity of claims. The Companys liability includes known claims and an estimate of claims incurred but not yet reported. The liability for estimated workers compensation claims totaled approximately $3.6 million and $2.9 million as of December 31, 2004 and 2003, respectively. The Company utilizes analyses prepared by a third-party administrator based on historical claims information to support the required liability 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 the 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. The Company maintained annual aggregate stop loss coverage of $14.4 million for 2004. The health insurance policies are limited to maximum lifetime reimbursements of $2.0 million per person for 2004, 2003 and 2002. The estimated liability for health insurance claims totaled approximately $2.6 million and $2.0 million as of December 31, 2004 and 2003, respectively. The Company reviews health insurance trends and payment history and maintains an accrual for incurred but unpaid reported claims and
38
for incurred but not yet reported claims based upon its assessment of the 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.
The Company is required to maintain cash collateral accounts with the insurance companies related to its self-insurance obligations. The Company maintained cash collateral balances of $4.1 million at December 31, 2004, related to its self-insured obligations, which is included in other assets.
Management continually analyzes its accrued liabilities for incurred but not reported claims, and for reported but not paid claims related to its self-insurance programs and believes these accruals to be adequate. However, significant judgment is involved in assessing these accruals, and the Company is at risk for differences between actual settlement amounts and recorded accruals. Any resulting adjustments are included in expense once a probable amount is known.
RESULTS OF OPERATIONS
Summary of Statement of Operations Reporting
The Company reports its revenues as follows: (i) sales and related services revenues; 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 medical supplies, the sale of aerosol medications 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 and 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 cylinders, 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 and other operating costs. General and administrative expenses include corporate and senior management expenses. The majority of the Companys joint ventures are not consolidated for financial statement reporting purposes. Earnings from joint ventures with hospitals represent the Companys equity in earnings from unconsolidated joint ventures and management and administrative fees from unconsolidated joint ventures.
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The following table and related discussion set forth items from the Companys consolidated statements of operations as a percentage of revenues for the periods indicated:
Year Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Revenues |
100 | % | 100 | % | 100 | % | ||||||
Cost of sales and related services |
21 | 21 | 20 | |||||||||
Cost of rentals and other revenues, including rental equipment
depreciation |
12 | 11 | 11 | |||||||||
Operating expenses |
50 | 52 | 53 | |||||||||
Bad debt expense |
3 | 3 | 4 | |||||||||
General and administrative expense |
5 | 5 | 5 | |||||||||
Earnings from joint ventures |
(1 | ) | (1 | ) | (1 | ) | ||||||
Depreciation, excluding rental equipment, and amortization |
1 | 1 | 1 | |||||||||
Amortization of deferred financing costs |
| | 1 | |||||||||
Interest expense, net |
5 | 3 | 3 | |||||||||
Other expense (income), net |
| | | |||||||||
Gain on sales of assets of centers |
| | | |||||||||
Chapter 11 financial advisory expenses incurred prior to
filing bankruptcy |
| | | |||||||||
Total expenses |
96 | 95 | 97 | |||||||||
Income (loss) from operations before reorganization items,
income taxes and cumulative effect of change in accounting
principle |
4 | 5 | 3 | |||||||||
Reorganization items |
| 1 | 2 | |||||||||
Provision for (benefit from) income taxes |
| | (1 | ) | ||||||||
Cumulative effect of change in accounting principle |
| | 21 | |||||||||
Net income (loss) |
4 | % | 4 | % | (19 | )% | ||||||
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Revenues. Revenues decreased from $336.2 million in 2003 to $335.8 million in 2004, a decrease of $0.4 million, or 0.1%. Effective January 1, 2004, Medicare reduced the reimbursement rate for inhalation drugs by approximately 15.8%, which reduced revenues in 2004 by approximately $7.4 million. Without the inhalation drug reimbursement reduction, revenues would have increased $7.0 million, or 2.1%. Following is a discussion of the components of revenues:
Sales and Related Services Revenues. Sales and related services revenues decreased from $148.1 million in 2003 to $145.2 million in 2004, a decrease of $2.9 million, or 2.0%. Without the inhalation drug reimbursement reduction, sales and related services revenues would have increased $4.5 million, or 3.0%, compared to the prior year.
Rentals and Other Revenues. Rentals and other revenues increased from $188.1 million in 2003 to $190.6 million in 2004, an increase of $2.5 million, or 1.3%. The increase in rental revenues is primarily the result of increased rentals in oxygen equipment and respiratory assist devices, which is the result of the Companys sales and marketing efforts.
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Cost of Sales and Related Services. Cost of sales and related services increased from $69.5 million in 2003 to $71.9 million in 2004, an increase of $2.4 million, or 3.5%. As a percentage of sales and related services revenues, cost of sales and related services increased from 46.9% for 2003 to 49.8% for 2004. This increase is primarily attributable to lower gross margins in the Companys inhalation drug sales in 2004, due to lower reimbursements as a result of the Medicare Prescription Drug, Improvement and Modernization Act of 2003.
Cost of Rentals and Other Revenues. Cost of rentals and other revenues increased from $36.3 million in 2003 to $38.8 million in 2004, an increase of $2.5 million, or 6.9%. Due to growth in the Companys home respiratory therapy services, the Company purchased additional oxygen equipment and respiratory assist devices resulting in a higher level of rental equipment depreciation in 2004. The Company also incurred a higher level of purchases of oxygen associated with the Companys growth in oxygen rentals. As a percentage of rentals and other revenues, cost of rentals and other revenues increased from 19.3% in 2003 to 20.4% in 2004.
Operating Expenses. Operating expenses decreased from $177.2 million in 2003 to $167.3 million in 2004, a decrease of $9.9 million, or 5.6%. The decrease is the result of the Companys initiatives to improve productivity and reduce personnel and other costs in operating centers. Additionally, billing center costs decreased in 2004 due to productivity improvements resulting from the full year impact of eight billing center closures and consolidations in 2003 and the partial year impact of three billing center closures and consolidations in 2004.
Bad Debt Expense. Bad debt expense increased from $10.4 million in 2003 to $10.7 million in 2004, an increase of $0.3 million, or 2.9%. As a percentage of revenues, bad debt expense was 3.1% and 3.2% for 2003 and 2004, respectively.
General and Administrative Expenses. General and administrative expenses decreased from $17.2 million in 2003 to $16.6 million in 2004, a decrease of $0.6 million, or 3.5%. This decrease is primarily attributable to decreased salary and professional services expenses. As a percentage of revenues, general and administrative expenses decreased from 5.1% for 2003 to 4.9% for 2004.
Earnings from Joint Ventures. Earnings from joint ventures remained unchanged at $4.8 million for 2003 and 2004.
Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization expenses decreased from $3.6 million in 2003 to $3.4 million in 2004, a decrease of $0.2 million, or 5.6%. The decrease is attributable to certain property and equipment becoming fully depreciated.
Amortization of Deferred Financing Costs. Amortization of deferred financing costs decreased from $0.2 million in 2003 to $0.0 million in 2004, a decrease of $0.2 million, or 100%. The amortization of deferred financing costs in 2003 relates to a 2003 ruling by the Bankruptcy Court regarding the valuation of warrants, which resulted in the write-off of all deferred financing costs.
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Interest Expense, Net. Interest expense increased from $8.8 million in 2003 to $18.3 million in 2004, an increase of $9.5 million, or 108.0%. The increase is the result of the timing of the Companys filing for and emergence from bankruptcy protection. During the period the Company was in bankruptcy, from July 31, 2002, through July 1, 2003, the Company was not required to accrue or pay interest on the Lender debt.
Other Income, Net. Other (income) expense, net primarily relates to investment gains or losses associated with collateral interest in split dollar life insurance policies. Other income was $0.7 million for 2003 compared to $0.3 million for 2004.
Reorganization Items. During 2003 and 2004, the Company incurred certain expenses totaling $4.1 million and $0.7 million, respectively as a result of reorganization under Chapter 11 of the Federal Bankruptcy Code. These expenses are comprised of professional and other fees.
Provision for Income Taxes. The provision for income taxes decreased from $0.4 million in 2003 to $0.1 million in 2004, a decrease of $0.3 million, or 75%. The provision for income taxes recorded in 2003 and 2004 is for state and local taxes.
2004 Fourth Quarter Results. The Companys net income for the fourth quarter of 2004 was favorably impacted by approximately $1.1 million in certain items, the most significant of which were adjustments to the Companys valuation of inventory, accrual for income taxes and accrual for cash bonuses. The Company revised it valuation of inventory to reflect favorable results from recent inventory observations and changes in estimates of standard costs. These revisions totaled approximately $0.5 million. Additionally, the Company revised its estimate of potential income tax exposure items and reduced the accrual for income taxes by approximately $0.4 million. The Company determined that it would not achieve certain pre-established incentive targets and reduced its estimated accrual for cash bonuses by approximately $1.0 million.
The fourth quarter also includes the full impact of cost reductions implemented in the third quarter as well as further reductions achieved in the fourth quarter (see Managements Discussion and Analysis of Financial Condition and Results of Operations General Productivity and Profitability). Additionally, bad debt expense for the fourth quarter of 2004 reflects a reduction in the allowance for doubtful accounts resulting from improved cash collections in the quarter. Bad debt expense in the fourth quarter of 2004 was 1.8% of revenues versus 3.2% for the full year. The Company does not anticipate the fourth quarters bad debt expense of 1.8% of revenue to be indicative of future performance. Also, the fourth quarter benefited from higher interest income, higher miscellaneous income, and higher earnings from joint ventures, none of which represents expected future trends.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues. Revenues increased from $319.6 million in 2002 to $336.2 million in 2003, an increase of $16.6 million, or 5.2%. During the first quarter of 2002, the Company sold the assets of an infusion business and nursing agency. Excluding the revenues recorded in the first quarter of 2002 associated with the asset sale, revenue for the current year would have increased $18.4 million or 5.8% compared to last year. The increase in revenue is the result of the
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Companys 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 $137.7 million in 2002 to $148.1 million in 2003, an increase of $10.4 million, or 7.6%. Excluding the revenue recorded in the first quarter of 2002 associated with the asset sale, sales revenue for the current year would have increased $12.3 million or 9.1%. The increase in sales revenues is primarily the result of increased sales in aerosol medications and respiratory assist devices, due to the Companys addition of sales personnel and an increase in selling costs in a focused effort to increase this line of business.
Rentals and Other Revenues. Rentals and other revenues increased from $182.0 million in 2002 to $188.1 million in 2003, an increase of $6.1 million, or 3.4%. The increase in rental revenues is primarily the result of increased rentals in oxygen equipment and respiratory assist devices, which is the result of the Companys sales and marketing efforts.
Cost of Sales and Related Services. Cost of sales and related services increased from $63.5 million in 2002 to $69.5 million in 2003, an increase of $6.0 million, or 9.5%. As a percentage of sales and related services revenues, cost of sales and related services increased from 46.1% for 2002 to 46.9% for 2003. This increase is primarily attributable to a greater level of rental equipment items converted to sales transactions in the current year.
Cost of Rentals and Other Revenues. Cost of rentals and other revenues increased from $35.0 million in 2002 to $36.3 million in 2003, an increase of $1.3 million, or 3.7%. This increase is primarily the result of a higher level of rental equipment depreciation and a higher level of purchases of oxygen and rental supplies associated with the Companys growth in oxygen rentals and respiratory assist devices. As a percentage of rentals and other revenues, cost of rentals and other revenues increased from 19.2% in 2002 to 19.3% in 2003.
Operating Expenses. Operating expenses increased from $169.4 million in 2002 to $177.2 million in 2003, an increase of $7.8 million, or 4.6%. This increase is attributable to higher personnel-related expenses and increased liability and workers compensation insurance costs.
Bad Debt Expense. Bad debt expense decreased from $11.4 million in 2002 to $10.4 million in 2003, a decrease of $1.0 million, or 8.8%. As a percentage of revenues, bad debt expense was 3.6% and 3.1% for 2002 and 2003, respectively.
General and Administrative Expenses. General and administrative expenses increased from $16.2 million in 2002 to $17.2 million in 2003, an increase of $1.0 million, or 6.2%. This increase is attributable to higher personnel expenses and professional fees. As a percentage of revenues, general and administrative expenses remained constant at 5.1% for 2002 and 2003.
Earnings from Joint Ventures. Earnings from joint ventures increased slightly from $4.6 million in 2002 to $4.8 million in 2003, an increase of $0.2 million, or 4.4%.
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Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization expenses decreased from $4.1 million in 2002 to $3.6 million in 2003, a decrease of $0.5 million, or 12.2%. The decrease is attributable to certain property and equipment becoming fully depreciated. Effective January 1, 2002 the Company adopted the provisions of SFAS No. 142 and accordingly, ceased the amortization of its goodwill.
Amortization of Deferred Financing Costs. Amortization of deferred financing costs decreased from $1.8 million in 2002 to $0.2 million in 2003, a decrease of $1.6 million, or 88.9%. This decrease is mainly 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. The amortization of deferred financing costs in 2003 relates to a 2003 ruling by the Bankruptcy Court regarding the valuation of warrants, which resulted in the write-off of all deferred financing costs.
Interest Expense, Net. Interest expense decreased from $11.5 million in 2002 to $8.8 million in 2003, a decrease of $2.7 million, or 23.5%. The decrease is the result of the timing of the Companys filing for and emergence from bankruptcy protection. During the period the Company was in bankruptcy, from July 31, 2002, through July 1, 2003, the Company was not required to accrue or pay interest on the Lender debt.
Other (Income) Expense, Net. Other (income) expense, net primarily relates to investment gains or losses associated with collateral interest in split dollar life insurance policies. Other expense was $0.2 million for 2002 compared to $0.7 million of other income for 2003.
Chapter 11 Financial Advisory Expenses Incurred Prior to Filing Bankruptcy. During 2002, the Company incurred $0.8 million related to financial advisory and legal services in preparation of the bankruptcy filing due to the Companys December 2002 debt maturity. All bankruptcy related fees incurred during the period the Company was in bankruptcy are included in reorganization items.
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 business and nursing agency. The Company did not sell assets of centers in 2003.
Reorganization Items. During 2002 and 2003, the Company incurred certain expenses totaling $5.5 million and $4.1 million, respectively as a result of reorganization under Chapter 11 of the Federal Bankruptcy Code. These expenses are comprised of the write-off of deferred financing costs, provision for future lease rejection damages, and professional and other fees.
Provision for (Benefit from) Income Taxes. The provision for (benefit from) income taxes increased from $(1.9) million in 2002 to $0.4 million in 2003, an increase of $2.3 million, or 121.1%. The benefit recorded in 2002 was the result of the enactment of the Job Creation and Workers Assistance Act of 2002. This act provides the Company with the ability to carryback additional net operating losses. The provision for income taxes recorded in 2003 is primarily for state and local taxes.
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Liquidity and Capital Resources
At December 31, 2004 the Company had current assets of $81.2 million and current liabilities of $49.7 million, resulting in working capital of $31.6 million and current ratio of 1.6x as compared to a working capital of $20.1 million and a current ratio of 1.3x at December 31, 2003.
On July 31, 2002, the Company and 24 of its subsidiaries (collectively, the Debtors) filed for bankruptcy due to its inability to meet significant debt maturities due in December 2002. On July 1, 2003, the Debtors emerged from bankruptcy pursuant to a 100% pay plan (the Approved Plan) whereby shareholders retained their equity interest and creditors and vendors will be paid 100% of all amounts they are owed, either immediately or over time with interest.
The Approved Plan allows the Company to continue its business operations uninterrupted, led by its current management team, and accomplishes the Companys primary goal of restructuring its long-term debt obligations to its Lenders. The Approved Plan provides for the treatment of all of the claims subject to compromise in the bankruptcy filing. The Approved Plan provides for the extension of the maturity on the debt to the Lenders, a reduction of the related interest cost on such debt, and the payment of all of the Companys reported liabilities. The Lenders retained their liens on substantially all of the assets of the Company.
Pursuant to the Approved Plan, the Companys secured debt to the Lenders is $250.0 million and is evidenced by a promissory note in that amount and is secured by various security agreements. To the Companys knowledge, the Lenders have not executed the agreements as of the date of this filing. The Company is no longer a party to a credit agreement. The remainder of the amounts due to the Lenders at July 1, 2003 over and above the $250 million and amounts that were due to other creditors is treated as unsecured.
The Approved Plan provides that the $250.0 million secured debt matures on July 1, 2009. The Approved Plan provides that interest is payable monthly on the $250.0 million secured debt at a rate of 6.785% per annum. Payments of principal are payable annually on March 31 of each year, beginning March 31, 2005, in the amount of one-third of the Companys Excess Cash Flow (defined in the Approved Plan as cash and equivalents in excess of $7.0 million at the end of the Companys fiscal year) for the previous fiscal year end. No payment is due March 31, based on the Companys Excess Cash Flow as of December 31, 2004. After the unsecured debt of the Lenders and the general unsecured debt is paid in full, 100% of the Companys Excess Cash Flow is paid as a principal payment on the $250.0 million secured debt on March 31 of each year, with an estimated prepayment due on each previous September 30 in an amount equal to one-half of the anticipated March payment.
The Approved Plan provides that the general unsecured debt and the unsecured debt of the Lenders matures on June 30, 2006. The Approved Plan provides that interest is payable monthly on the general unsecured debt and the unsecured debt of the Lenders at a rate of 8.3675% per annum. Principal is payable in six equal semi-annual installments on June 30 and December 31 of each year beginning December 31, 2003. The Approved Plan also provides that principal was payable effective on the general unsecured debt and the unsecured debt of the Lenders on March 31, 2004 in the amount of 100% of the Companys Excess Cash Flow for
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fiscal 2003 and on March 31 of each year thereafter in the amount of two-thirds of the Companys Excess Cash Flow for the previous fiscal year end. An estimated prepayment of the Companys Excess Cash Flow payment is due on September 30 of each year in an amount equal to one-half of the anticipated March payment.
The Approved Plan allows the Company to make prepayments to holders of unsecured debt, either in whole or in part, at any time without penalty, which prepayments reduce and are a credit against any subsequent mandatory payments.
The Company has made all payments due under the Approved Plan as of December 31, 2004, and has also prepaid some of its obligations thereunder. As of December 31, 2004, the Lenders were owed approximately $251.0 million, comprised of $250.0 million of secured debt and $1.0 million of unsecured debt. The remaining general unsecured claims (excluding the Government Settlement and the amounts due to the warrant holders) as of December 31, 2004 were approximately $0.5 million.
The Lenders have filed an appeal of the order confirming the Approved Plan with the United States Court of Appeals for the Sixth Circuit appealing both the Bankruptcy Courts determination of the amount of their secured claim and the interest rates on both the secured and unsecured portions of their claims. The Case Number for this appeal, which is still pending, is 03-6500. The Company intends to vigorously defend the Confirmation Order entered by the Bankruptcy Court and upheld by the District Court, and the Company anticipates additional professional and other fees will be incurred in 2005 in connection with the appeal process. The outcome of the appeal cannot be predicted, and an adverse ruling could have a material adverse effect on the Company. These adverse effects could include, without limitation, adverse changes in the interest rate related to its secured and unsecured debt, a change in the proportion of debt treated as secured debt, issuance of equity securities or an adverse change in the capitalization of the Company to the detriment of equity holders. There can be no assurance as to the extent or nature of the adverse effects of a successful Lenders appeal.
The Bankruptcy Court issued an opinion ruling in favor of the Companys request to reject warrants originally issued to the Lenders to purchase 3,265,315 shares of the Companys common stock for $.01 per share. As a result of the ruling, the warrants, which represented approximately 20% of the Companys outstanding common stock, were rejected by the Company. The Bankruptcy Court determined the damages stemming from rejection of the warrants were $846,000, which is payable by the Company to the warrant holders as an unsecured claim and is recorded as a component of other accrued expenses on the consolidated balance sheets at December 31, 2004 and 2003. The warrant holders have appealed the damages determination in this ruling in the United States Court of Appeals for the Sixth Circuit, Case Number 04-00188. If the Lenders are unsuccessful in their appeal, they will be entitled to receive payment from the Company for damages in the amount of $846,000, which will be treated as a general unsecured claim. If the Lenders appeal is successful, the amount owed to the warrant holders could substantially increase, which could materially adversely affect the Companys cash flow and results from operations. The Company intends to vigorously defend the damages calculation determined by the Bankruptcy Court, but no assurances can be given as to the outcome of the Lenders appeal.
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The Companys funding of day-to-day operations going forward and all payments required under the Approved Plan will rely on cash flow and cash on hand as it has since the Company currently does not have access to a revolving line of credit. At December 31, 2004 the Company had cash and cash equivalents of approximately $5.8 million.
The Companys 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. Managements goal is to generate sufficient cash to meet these requirements by increasing profitable revenues, decreasing and controlling expenses, increasing productivity, and improving accounts receivable collections.
Managements 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 the Approved Plan through 2005. Further Medicare reimbursement reductions could have a material adverse impact on the Companys ability to meet its debt service requirements, required capital expenditures, or working capital requirements. As with all projections, there can be no guarantee that existing cash and cash flow will be sufficient. There can be no assurance that in such event the Company will be able to obtain additional funds from other sources on terms acceptable to the Company or at all.
The Companys 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 Companys liquidity. The Company has various types of accounts receivable, such as receivables from patients, contracts, and former owners of acquired businesses. The majority of the Companys 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 $50.9 million and $56.9 million at December 31, 2004 and December 31, 2003, respectively. Average days sales in accounts receivable (DSO) was approximately 55 and 60 days at December 31, 2004 and December 31, 2003, 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 Companys level of DSO and net patient receivables is affected by the extended time required to obtain necessary billing documentation.
The Companys future liquidity and capital resources will be materially adversely impacted by the Medicare reimbursement reductions contained in the Medicare Prescription Drug, Improvement and Modernization Act of 2003. See Trends, Events, and Uncertainties Reimbursement changes and the Companys response.
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Net cash provided by operating activities increased from $17.2 million in 2003 to $33.0 million in 2004, an increase of $15.8 million. The primary sources of cash in 2004 were the decrease in accounts receivable and the reduction in reorganization costs. Net cash used in investing activities decreased from $27.8 million in 2003 to $22.3 million in 2004, a decrease of $5.5 million, and primarily relates to net borrowing activities between the Company and its unconsolidated joint ventures. Additions to property and equipment, decreased from $29.9 million in 2003 to $27.6 million in 2004, a decrease of $2.3 million. Net cash used in financing activities decreased from $9.7 million in 2003 to $7.5 million in 2004, a decrease of $2.2 million. The cash used in financing activities for 2004 primarily relates to principal payments on long-term debt and capital leases and for 2003, adequate protection payments under the bankruptcy plan. At December 31, 2004, the Company had cash and cash equivalents of approximately $5.8 million.
Contractual Obligations and Commercial Commitments
The following is a tabular disclosure of all contractual obligations and commitments, including all off-balance sheet arrangements of the Company as of December 31, 2004:
2009 & | ||||||||||||||||||||||||
Total | 2005 | 2006 | 2007 | 2008 | thereafter | |||||||||||||||||||
Long-term debt and
capital leases |
$ | 251,918,000 | $ | 885,000 | $ | 1,033,000 | $ | | $ | | $ | 250,000,000 | ||||||||||||
Accrued interest on
long-term debt |
1,461,000 | 1,461,000 | | | | | ||||||||||||||||||
Pre-petition
accounts payable |
477,000 | | 477,000 | | | | ||||||||||||||||||
OIG settlement |
3,500,000 | 1,500,000 | 2,000,000 | | | | ||||||||||||||||||
Accrued interest on
OIG settlement |
29,000 | 29,000 | | | | | ||||||||||||||||||
Operating lease
obligations |
28,228,000 | 10,988,000 | 7,649,000 | 5,468,000 | 2,890,000 | 1,233,000 | ||||||||||||||||||
Total contractual
cash obligations |
$ | 285,613,000 | $ | 14,863,000 | $ | 11,159,000 | $ | 5,468,000 | $ | 2,890,000 | $ | 251,233,000 | ||||||||||||
In addition to the scheduled cash payments above, the Company is obligated to make Excess Cash Flow payments on the Lenders secured and unsecured debt as well as the pre-petition accounts payable as defined by the Approved Plan. As these payments will be based on excess cash at future dates, the Company is not able to project the amounts of these payments. As such, the $250.0 million secured debt, which is all classified in the 2009 and thereafter column per the table above, could require principal payments in years 2005, 2006, 2007 and 2008. In addition, the Approved Plan allows the Company to use prepayments to reduce and be a credit against any subsequent mandatory payments.
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Long-term debt is comprised entirely of amounts owed to the Lenders. See Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
Capital leases consist primarily of leases of office equipment.
Operating leases are noncancelable leases on certain vehicles, buildings and equipment.
The OIG Settlement represents the settlement regarding the alleged billing improprieties by the Company during the period from January 1, 1995 through December 31, 1998. See Business-Government Regulation Enforcement Activities.
At December 31, 2004, the Company has no off-balance sheet commitments or guarantees outstanding.
At December 31, 2004, the Company had two letters of credit totaling $650,000, of which $400,000 and $250,000 expire in May 2005 and January 2006, respectively, in place securing its obligations with respect to the Companys professional liability insurance. The letters of credit are secured by a certificate of deposit, which is included in restricted cash.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R). This statement requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements. Compensation cost is to be measured based on the estimated fair value of the equity-based compensation awards issued as of the grant date. The related compensation expense will be based on the estimated number of awards expected to vest and will be recognized over the requisite service period for each grant. The statement requires the use of assumptions and judgments about future events and input to valuation models, which will require considerable judgment by management. SFAS No. 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation, rescinds SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, an amendment to FASB Statement No. 123, and supersedes Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees (APB Opinion No. 25). The provisions of SFAS No. 123R are required to be applied by public companies as of the first interim or annual reporting period that begins after June 15, 2005. The Company continued applying APB Opinion No. 25 to equity-based compensation awards through December 31, 2004. At the effective date of SFAS No. 123R, the Company expects to use the modified prospective application transition method without restatement of prior interim periods in the year of adoption. This will result in the Company recognizing compensation cost based on the requirements of SFAS No. 123R for all equity-based compensation awards issued after July 1, 2005. For all equity-based compensation awards that are unvested as of July 1, 2005, compensation cost will be recognized. The Company is currently evaluating the impact that adoption of the SFAS No. 123R may have on its results of operations or financial position.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not subject to material interest rate sensitivity since the Approved Plan provides for a fixed interest rate for both the $250 million secured debt and the Companys unsecured debt. Interest expense associated with other debts would not materially impact the Company as most interest rates are fixed. The Company does not own and is not a party to any market risk sensitive instruments.
We have not experienced large increases in either the cost of supplies or operating expenses due to inflation. With reductions in reimbursement by government and private medical insurance programs and pressure to contain the costs of such programs, we bear the risk that reimbursement rates set by such programs will not keep pace with inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements are contained on pages F-55 through F-98 of this Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The information required by Regulation S-K, Item 304(a) has previously been reported by the Company.
ITEM 9A. CONTROLS AND PROCEDURES
In an effort to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported on a timely basis, the Companys chief executive officer and chief financial officer have evaluated the effectiveness of the Companys disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of December 31, 2004. Based on such evaluation, such officers have concluded that, as of December 31, 2004, the Companys disclosure controls and procedures were effective in timely alerting them to information relating to the Company required to be disclosed in the Companys periodic reports filed with the SEC. There has been no change in the Companys internal control over financial reporting during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers of the Company is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2005 annual meeting of stockholders of the Company.
ITEM 11. EXECUTIVE COMPENSATION
Executive compensation information is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2005 annual meeting of stockholders of the Company.
The equity compensation plan information and the security ownership of certain beneficial owners and management information are incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2005 annual meeting of stockholders of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions of the Company is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2005 annual meeting of stockholders of the Company.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning the Companys principal accountant fees and services is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2005 annual meeting of stockholders of the Company.
51
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial statements and schedules of the Company required to be included in Part II, Item 8 are listed below.
Financial Statements |
||
Form 10-K Pages | ||
F-55 | ||
F-56 F-57 | ||
F-58 F-59 | ||
F-60 F-61 | ||
F-62 | ||
F-63 F-64 | ||
F-65 F-98 | ||
Financial Statement Schedules |
||
Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP |
S-1 | |
Schedule I Condensed Financial Information of Registrant(1) |
||
Schedule II Valuation and Qualifying Accounts |
S-2 | |
Schedule III Real Estate and Accumulated Depreciation(2) |
||
Schedule IV Mortgage Loans on Real Estate(2) |
||
Schedule V Supplemental Information Concerning Property-Casualty Insurance Operations(2) |
(1) | Omitted because test for inclusion was not met. |
|
(2) | Omitted because schedule not applicable to Company. |
Exhibits
The Exhibits filed as part of the Report on Form 10-K are listed in the Index to Exhibits immediately following the financial statement schedules.
52
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN HOMEPATIENT, INC. | ||||
/s/ JOSEPH F. FURLONG, III | ||||
Joseph F. Furlong, III, President, | ||||
Chief Executive Officer and Director |
Date: March 30, 2005
53
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Henry T. Blackstock
|
Director | March 30, 2005 | ||
Henry T. Blackstock |
||||
/s/ Joseph F. Furlong, III
|
Director, President, | March 30, 2005 | ||
and Chief Executive | ||||
Joseph F. Furlong, III
|
Officer | |||
/s/ Donald R. Millard
|
Director | March 30, 2005 | ||
Donald R. Millard |
||||
/s/ William C. ONeil
|
Director | March 30, 2005 | ||
William C. ONeil |
||||
/s/ W. Wayne Woody
|
Director | March 30, 2005 | ||
W. Wayne Woody |
||||
/s/ Stephen L. Clanton
|
Chief Financial | March 30, 2005 | ||
Officer | ||||
Stephen L. Clanton |
||||
/s/ Robert L. Fringer
|
Principal Accounting | March 30, 2005 | ||
Officer | ||||
Robert L. Fringer |
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
American HomePatient, Inc.:
We have audited the accompanying consolidated balance sheets of American HomePatient, Inc. and subsidiaries, as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders (deficit) equity and comprehensive income (loss), and cash flows for the years then ended. In connection with our audits of the consolidated financial statements, we have also audited financial statement Schedule II Valuation and Qualifying Accounts as of December 31, 2004 and 2003 and for the years then ended. These consolidated financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American HomePatient, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Nashville, Tennessee
March 30, 2005
F-55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
American HomePatient, Inc.
Brentwood, Tennessee
We have audited the consolidated statements of operations, shareholders (deficit) equity and comprehensive income (loss) and cash flows of American HomePatient, Inc. and subsidiaries (the Company) (Debtor-in-Possession from July 31, 2002 to July 1, 2003) for the year ended December 31, 2002. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit of these financial statements provides a reasonable basis for our opinion.
In our opinion, the 2002 financial statements present fairly, in all material respects, the results of American HomePatient, Inc. and subsidiaries operations and their cash flows for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002.
As discussed in Note 3, the Company has filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to shareholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business.
F-56
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4, the Companys recurring net losses, shareholders deficit and its inability to satisfy its obligations under the Amended Credit Agreement raise substantial doubt about its ability to continue as a going concern. Managements plans concerning these matters are also discussed in Note 4. The financial statements do not include adjustments that might result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
March 20, 2003
F-57
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION FROM JULY 31, 2002 TO JULY 1, 2003)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS | 2004 | 2003 | ||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 5,772,000 | $ | 2,571,000 | ||||
Restricted cash |
650,000 | 400,000 | ||||||
Accounts receivable, less allowance for
doubtful accounts of $16,912,000 and
$17,486,000, respectively |
52,517,000 | 58,875,000 | ||||||
Inventories, net of inventory valuation
allowances of $468,000 and $558,000,
respectively |
15,947,000 | 16,475,000 | ||||||
Prepaid expenses and other current assets |
6,361,000 | 4,131,000 | ||||||
Total current assets |
81,247,000 | 82,452,000 | ||||||
Property and equipment |
174,761,000 | 170,901,000 | ||||||
Less accumulated depreciation and amortization |
(116,756,000 | ) | (114,070,000 | ) | ||||
Property and equipment, net |
58,005,000 | 56,831,000 | ||||||
Goodwill |
121,834,000 | 121,834,000 | ||||||
Investments in joint ventures |
6,698,000 | 9,206,000 | ||||||
Other assets |
15,280,000 | 13,717,000 | ||||||
Total other assets |
143,812,000 | 144,757,000 | ||||||
TOTAL ASSETS |
$ | 283,064,000 | $ | 284,040,000 | ||||
(Continued)
F-58
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION FROM JULY 31, 2002 TO JULY 1, 2003)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(Continued)
LIABILITIES AND SHAREHOLDERS DEFICIT | 2004 | 2003 | ||||||
CURRENT LIABILITIES: |
||||||||
Current portion of long-term debt and capital leases |
$ | 885,000 | $ | 11,720,000 | ||||
Accounts payable |
17,842,000 | 17,518,000 | ||||||
Other payables |
1,751,000 | 2,485,000 | ||||||
Current portion of pre-petition accounts payable |
| 5,624,000 | ||||||
Short term note payable |
3,663,000 | | ||||||
Accrued expenses: |
||||||||
Payroll and related benefits |
8,655,000 | 10,155,000 | ||||||
Insurance, including self-insurance accruals |
8,213,000 | 6,378,000 | ||||||
Other |
8,669,000 | 8,455,000 | ||||||
Total current liabilities |
49,678,000 | 62,335,000 | ||||||
NONCURRENT LIABILITIES: |
||||||||
Long-term debt and capital leases, less current portion |
251,033,000 | 251,194,000 | ||||||
Pre-petition accounts payable |
477,000 | 661,000 | ||||||
Other noncurrent liabilities |
2,071,000 | 3,601,000 | ||||||
Total noncurrent liabilities |
253,581,000 | 255,456,000 | ||||||
Total liabilities |
303,259,000 | 317,791,000 | ||||||
MINORITY INTEREST |
534,000 | 498,000 | ||||||
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, 17,047,000 and
16,377,000 shares, respectively |
170,000 | 164,000 | ||||||
Additional paid-in capital |
173,588,000 | 173,305,000 | ||||||
Accumulated deficit |
(194,487,000 | ) | (207,718,000 | ) | ||||
Total shareholders deficit |
(20,729,000 | ) | (34,249,000 | ) | ||||
TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT |
$ | 283,064,000 | $ | 284,040,000 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-59
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION FROM JULY 31, 2002 TO JULY 1, 2003)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 | 2003 | 2002 | ||||||||||
REVENUES: |
||||||||||||
Sales and related service revenues, net |
$ | 145,203,000 | $ | 148,051,000 | $ | 137,679,000 | ||||||
Rentals and other revenues, net |
190,620,000 | 188,130,000 | 181,953,000 | |||||||||
Total revenues, net |
335,823,000 | 336,181,000 | 319,632,000 | |||||||||
EXPENSES: |
||||||||||||
Cost of sales and related services |
71,934,000 | 69,494,000 | 63,528,000 | |||||||||
Cost of rentals and other revenues, including rental
equipment depreciation of $23,502,000, $20,241,000, and
$19,687,000, respectively |
38,779,000 | 36,265,000 | 34,976,000 | |||||||||
Operating expenses |
167,285,000 | 177,167,000 | 169,417,000 | |||||||||
Bad debt expense |
10,671,000 | 10,437,000 | 11,437,000 | |||||||||
General and administrative |
16,597,000 | 17,212,000 | 16,239,000 | |||||||||
Earnings from unconsolidated joint ventures |
(4,751,000 | ) | (4,778,000 | ) | (4,590,000 | ) | ||||||
Depreciation, excluding rental equipment, and amortization |
3,423,000 | 3,640,000 | 4,075,000 | |||||||||
Amortization of deferred financing costs |
| 160,000 | 1,779,000 | |||||||||
Interest
expense, net (excluding post-petition contractual interest of $0, $12,510,000 and $12,836,000,
respectively) |
18,290,000 | 8,785,000 | 11,461,000 | |||||||||
Other (income) expense, net |
(344,000 | ) | (708,000 | ) | 243,000 | |||||||
Gain on sales of assets of centers |
| | (667,000 | ) | ||||||||
Chapter 11 financial advisory expenses incurred prior to
filing bankruptcy |
| | 818,000 | |||||||||
Total expenses |
321,884,000 | 317,674,000 | 308,716,000 | |||||||||
INCOME FROM OPERATIONS BEFORE REORGANIZATION ITEMS, INCOME
TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE |
13,939,000 | 18,507,000 | 10,916,000 | |||||||||
Reorganization items |
658,000 | 4,082,000 | 5,497,000 | |||||||||
INCOME FROM OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE |
13,281,000 | 14,425,000 | 5,419,000 | |||||||||
Provision for (benefit from) income taxes |
50,000 | 400,000 | (1,912,000 | ) | ||||||||
INCOME FROM OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE |
13,231,000 | 14,025,000 | 7,331,000 | |||||||||
Cumulative effect of change in accounting principle with
no related tax effect |
| | (68,485,000 | ) | ||||||||
NET INCOME (LOSS) |
$ | 13,231,000 | $ | 14,025,000 | $ | (61,154,000 | ) | |||||
(Continued)
F-60
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION FROM JULY 31, 2002 TO JULY 1, 2003)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Continued)
2004 | 2003 | 2002 | ||||||||||
INCOME PER COMMON SHARE FROM OPERATIONS
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE: |
||||||||||||
-Basic |
$ | 0.80 | $ | 0.86 | $ | 0.45 | ||||||
-Diluted |
$ | 0.78 | $ | 0.74 | $ | 0.39 | ||||||
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE PER COMMON SHARE: |
||||||||||||
-Basic |
$ | | $ | | $ | (4.19 | ) | |||||
-Diluted |
$ | | $ | | $ | (3.68 | ) | |||||
NET INCOME (LOSS) PER COMMON SHARE: |
||||||||||||
-Basic |
$ | 0.80 | $ | 0.86 | $ | (3.74 | ) | |||||
-Diluted |
$ | 0.78 | $ | 0.74 | $ | (3.29 | ) | |||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
||||||||||||
-Basic |
16,481,000 | 16,368,000 | 16,358,000 | |||||||||
-Diluted |
17,066,000 | 19,000,000 | 18,607,000 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-61
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION FROM JULY 31, 2002 TO JULY 1, 2003)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS (DEFICIT) EQUITY AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Additional | ||||||||||||||||||||
Common Stock | paid-in | Accumulated | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
BALANCE, December 31, 2001 |
16,327,000 | $ | 163,000 | $ | 173,975,000 | $ | (160,589,000 | ) | $ | 13,549,000 | ||||||||||
Issuance of shares through
exercise of employee stock
options |
40,000 | 1,000 | 10,000 | | 11,000 | |||||||||||||||
Net loss |
| | | (61,154,000 | ) | (61,154,000 | ) | |||||||||||||
BALANCE, December 31, 2002 |
16,367,000 | 164,000 | 173,985,000 | (221,743,000 | ) | (47,594,000 | ) | |||||||||||||
Cancellation of warrant to Lenders |
| | (686,000 | ) | | (686,000 | ) | |||||||||||||
Issuance of shares through
exercise of employee stock
options including tax benefits |
10,000 | | 6,000 | | 6,000 | |||||||||||||||
Net income |
| | | 14,025,000 | 14,025,000 | |||||||||||||||
BALANCE, December 31, 2003 |
16,377,000 | 164,000 | 173,305,000 | (207,718,000 | ) | (34,249,000 | ) | |||||||||||||
Issuance of shares through
exercise of employee stock
options including tax benefits |
670,000 | 6,000 | 232,000 | | 238,000 | |||||||||||||||
Non-cash compensation expense
resulting from early vesting of
stock options |
| | 51,000 | | 51,000 | |||||||||||||||
Net income |
| | | 13,231,000 | 13,231,000 | |||||||||||||||
BALANCE, December 31, 2004 |
17,047,000 | $ | 170,000 | $ | 173,588,000 | $ | (194,487,000 | ) | $ | (20,729,000 | ) | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-62
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION FROM JULY 31, 2002 TO JULY 1, 2003)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 | 2003 | 2002 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income (loss)
|
$ | 13,231,000 | $ | 14,025,000 | $ | (61,154,000 | ) | |||||
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 |
26,925,000 | 23,881,000 | 23,762,000 | |||||||||
Amortization of deferred financing costs |
| 160,000 | 1,779,000 | |||||||||
Non-cash interest income on adequate protection
payments |
| (832,000 | ) | | ||||||||
Equity in earnings of unconsolidated joint ventures |
(2,800,000 | ) | (2,561,000 | ) | (2,597,000 | ) | ||||||
Minority interest |
226,000 | 350,000 | 309,000 | |||||||||
Gain on dissolution of joint venture |
| (93,000 | ) | | ||||||||
Gain on sales of assets of centers |
| | (667,000 | ) | ||||||||
Reorganization items |
658,000 | 4,082,000 | 5,497,000 | |||||||||
Reorganization items paid |
(1,378,000 | ) | (6,439,000 | ) | (747,000 | ) | ||||||
Change in assets and liabilities, net of dispositions: |
||||||||||||
Accounts receivable, net |
6,358,000 | (3,086,000 | ) | 6,212,000 | ||||||||
Inventories |
528,000 | 195,000 | (2,835,000 | ) | ||||||||
Prepaid expenses and other current assets |
(2,230,000 | ) | (1,855,000 | ) | (727,000 | ) | ||||||
Accounts payable, other payables and accrued
expenses |
(4,949,000 | ) | (12,757,000 | ) | 16,063,000 | |||||||
Other assets and liabilities |
(3,597,000 | ) | 2,168,000 | (2,247,000 | ) | |||||||
Net cash provided by operating activities |
32,972,000 | 17,238,000 | 51,133,000 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Proceeds from sales of assets of centers |
| | 1,805,000 | |||||||||
Additions to property and equipment, net |
(27,595,000 | ) | (29,916,000 | ) | (27,132,000 | ) | ||||||
Distributions and loan payments from unconsolidated joint
ventures, net |
5,308,000 | 1,186,000 | 2,232,000 | |||||||||
Proceeds from joint venture dissolution |
| 908,000 | | |||||||||
Net cash used in investing activities |
(22,287,000 | ) | (27,822,000 | ) | (23,095,000 | ) | ||||||
(Continued)
F-63
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION FROM JULY 31, 2002 TO JULY 1, 2003)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Continued)
2004 | 2003 | 2002 | |||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||||||||||||||
Distributions to minority interest owners |
(190,000 | ) | (322,000 | ) | (297,000 | ) | |||||||||
Deferred financing costs |
| | (11,000 | ) | |||||||||||
Principal
payments on long-term debt and capital leases |
(10,996,000 | ) | (1,158,000 | ) | (6,241,000 | ) | |||||||||
Proceeds from exercise of employee stock options |
238,000 | 2,000 | 11,000 | ||||||||||||
Proceeds from short term note payable, net |
3,663,000 | | | ||||||||||||
Non-cash compensation expense |
51,000 | | | ||||||||||||
Adequate protection payments |
| (7,794,000 | ) | (8,000,000 | ) | ||||||||||
Restricted cash |
(250,000 | ) | (400,000 | ) | 198,000 | ||||||||||
Net cash used in financing activities |
(7,484,000 | ) | (9,672,000 | ) | (14,340,000 | ) | |||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
3,201,000 | (20,256,000 | ) | 13,698,000 | |||||||||||
CASH AND CASH EQUIVALENTS, beginning of year |
2,571,000 | 22,827,000 | 9,129,000 | ||||||||||||
CASH AND CASH EQUIVALENTS, end of year |
$ | 5,772,000 | $ | 2,571,000 | $ | 22,827,000 | |||||||||
SUPPLEMENTAL INFORMATION: |
|||||||||||||||
Cash payments of interest |
$ | 18,836,000 | $ | 7,318,000 | $ | 12,568,000 | |||||||||
Cash payments of income taxes |
$ | 567,000 | $ | 421,000 | $ | 542,000 | |||||||||
NON-CASH FINANCING ACTIVITIES: |
|||||||||||||||
Draws made on Bank Credit Facility to fund expired
letters of credit |
$ | | $ | | $ | 3,310,000 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-64
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION FROM JULY 31, 2002 TO JULY 1, 2003)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
1. | ORGANIZATION AND BACKGROUND | |||
American HomePatient, Inc. and subsidiaries (the Company or American HomePatient) provide home health care services and products consisting primarily of respiratory and infusion therapies and the rental and sale of home medical equipment and home health care supplies. These services and products are paid for primarily by Medicare, Medicaid, and other third-party payors. As of December 31, 2004, the Company provides these services to patients, primarily in the home, through 276 centers in 35 states. | ||||
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |||
Consolidation | ||||
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in 50% owned joint ventures are accounted for using the equity method, and the results of 70% owned joint ventures are consolidated in the accompanying consolidated financial statements. | ||||
Revenues | ||||
The Companys principal business is to provide home health care services and products to patients, primarily in the home. Approximately 62% of the Companys revenues in 2004, 2003 and 2002 are 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. Revenues are recorded net of estimated adjustments for billing errors or other reimbursement adjustments. 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 as a reduction to revenue in the period 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 when the Company has obtained the necessary medical documentation including the Certification of Medical Necessity from the healthcare provider, where applicable, 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 when the Company has obtained the necessary medical documentation including the Certification of Medical Necessity from the healthcare provider, where applicable, using fixed monthly fee schedules based upon the type of product and the payor. The fixed monthly fee encompasses the rental of the product, delivery, set-up, instruction, maintenance, repairs, providing backup systems when needed, and providing periodic home visits. |
F-65
The following table sets forth the percentage of revenues represented by each line of business for the periods presented: |
Year Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Home respiratory therapy services |
71 | % | 69 | % | 66 | % | ||||||
Home infusion therapy services |
12 | 13 | 14 | |||||||||
Home medical equipment and home health supplies |
17 | 18 | 20 | |||||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
Cash Equivalents | ||||
Cash equivalents at December 31, 2004 and 2003 consist of overnight repurchase agreements with an original term of less than three months. For the purpose of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. | ||||
Restricted Cash | ||||
Restricted cash at December 31, 2004 and 2003 consist of certificates of deposit, which are used as collateral for a letter of credit associated with the Companys professional liability insurance. | ||||
Accounts Receivable | ||||
The Company provides credit for a substantial portion of its non third-party reimbursed revenues and continually monitors the credit worthiness and collectibility of amounts due from its patients. The Company recognizes revenues at the time services are performed or products delivered. 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 determines its allowance for doubtful accounts based upon the type of receivable (billed or unbilled) as well as the age of the receivable. As a receivable balance ages, an increasingly larger allowance is recorded for the receivable. A valuation allowance is provided for all billed receivables over one year old and all unbilled receivables over 180 days old. Historical collections substantiate the percentages of aged receivables for which an allowance is established. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. | ||||
Inventories | ||||
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. The allowance established by management for the valuation of inventory consists of allowances for incorrect cost of sales percentage estimates, inaccurate counts, obsolete and slow moving items and for specific inventory. The valuation allowance is based on a percentage of gross sales, a percentage of inventory or an amount for specifically identified inventory items. |
F-66
Prepaid Expenses and Other Current Assets | ||||
Prepaid expenses and other current assets at December 31, 2004 and 2003 are primarily comprised of prepaid insurance premiums and include other deposits from which the Company expects to benefit within the next year. At December 31, 2004, prepaid insurance premiums comprised $4,695,000 of prepaid expenses and other current assets. | ||||
Property and Equipment | ||||
Property and equipment are stated at cost and are depreciated or amortized primarily using the straight-line method over the estimated useful lives of the assets for financial reporting purposes and the accelerated cost recovery method for income tax reporting purposes. Assets under capital leases and leasehold improvements under operating leases are amortized and depreciated over the lesser of their estimated useful life or the base term of the lease for financial reporting purposes. The estimated useful lives are as follows: buildings and improvements, 25 years; rental equipment, 3-7 years; furniture, fixtures and equipment, 4-7 years; leasehold improvements, 3-5 years; and delivery equipment, 3 years. | ||||
Rental equipment is rented to patients for use in their homes. 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 equipment is charged to rental equipment depreciation expense. Since rental equipment is maintained in the patients home, the Company is subject to loss resulting from lost equipment as well as losses for damaged, outdated, or obsolete equipment. Management records a valuation allowance for potentially lost, damaged, outdated, or obsolete rental equipment based upon historical adjustment amounts. | ||||
Maintenance and repairs are charged to expense as incurred, and major betterments and improvements are capitalized. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed and the resulting gain or loss is reflected in the consolidated statements of operations. | ||||
Property and equipment obtained through purchase acquisitions are stated at their estimated fair value determined on their respective dates of acquisition. | ||||
Impairment of Long-Lived Assets | ||||
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount in which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. | ||||
Goodwill and Other Intangible Assets | ||||
Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets as of 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 at the same time every year and when an event occurs or circumstances change such that it is reasonably possible that impairment may exist. The Company selected September 30 as its annual testing date. The Company will conduct annual impairment tests hereafter, unless specific events arise which warrant more immediate testing. |
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Goodwill is tested annually for impairment and more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the assets fair value. This determination is made at the reporting unit level and consists of two steps. The Company operates as one reporting unit. First, the Company determines the fair value of the reporting unit and compares it to its carrying amount. Second, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the units goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. | ||||
Upon adoption of SFAS No. 142 in 2002, the Company performed an initial impairment review of goodwill. Goodwill was tested for impairment by comparing the fair value of the reporting unit to the carrying value of goodwill. The fair value was determined using projected operating results and a combination of analyses which included discounted cash flow calculations, equity market multiples and other market information. Key assumptions used in these estimates include projected operating results, discount rates and peer market equity multiples. The implied fair value of goodwill did not support the carrying value of goodwill. | ||||
Based upon the results of the Companys initial impairment tests, the Company recorded an impairment loss of $68,485,000 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 because the majority of the related goodwill was non-tax deductible and because of the Companys federal net operating loss position. The Company also conducted annual impairment tests as of September 2004, 2003 and 2002 and concluded that the carrying value of the reporting unit did not exceed its fair value. Additionally, as a result of the potential impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (note 10), which was enacted in December 2003, the Company performed an impairment test of goodwill at December 31, 2003 and concluded that the carrying value of the reporting unit did not exceed its fair value. Any subsequent impairment loss will be recognized as an operating expense in the Companys consolidated statements of operations. | ||||
In October 2003, the Company and its partner in an unconsolidated joint venture dissolved the joint venture. The Company assumed two locations from the dissolution of the joint venture. The Company increased goodwill by approximately $620,000 for the goodwill acquired at the joint venture dissolution. | ||||
Changes in the carrying amount of goodwill for the years ended December 31, 2004 and 2003 are as follows: |
2004 | 2003 | |||||||
Goodwill, beginning of year |
$ | 121,834,000 | $ | 121,214,000 | ||||
Acquisition of dissolved joint venture locations |
| 620,000 | ||||||
Goodwill, end of year |
$ | 121,834,000 | $ | 121,834,000 | ||||
Deferred Financing Costs | ||||
Deferred financing costs are amortized using methods which approximate the effective interest method over the periods of the related indebtedness. In connection with the Bankruptcy Filing (as defined in Note 3) and in accordance with SOP 90-7, all unamortized deferred financing costs were written off to reorganization items in 2002. | ||||
Investments in Unconsolidated Joint Ventures | ||||
Investments in unconsolidated joint ventures of nine companies are accounted for by the equity method. The Company would recognize a loss when there is a loss in value in the equity method investment which is other than a temporary decline. |
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Other Assets | ||||
Investments under split dollar value life insurance arrangements of $5,638,000 and $5,486,000 at December 31, 2004 and 2003, respectively, were recorded in connection with the prior acquisitions of certain home health care businesses and in connection with bonuses for employees. These policies are valued at the cash surrender value of the policy discounted over the remaining life expectancy of the insured. These amounts are reflected in other assets in the accompanying consolidated balance sheets. All split dollar life insurance premiums are fully funded. | ||||
The Company also has deposits with vendors and lessors which total $7,384,000 and $5,847,000 as of December 31, 2004 and 2003, respectively. | ||||
Short Term Note Payable | ||||
Short term note payable of $3,663,000 at December 31, 2004 is comprised of borrowings to finance the Companys insurance premiums for its general insurance policies for the policy year. | ||||
Income Taxes | ||||
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and the tax credit carryforwards. Deferred tax assets and liabilities are measured using the expected tax rates that will be in effect when the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. | ||||
Stock Based Compensation | ||||
The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and related interpretations including Financial Accounting Standards Board (FASB) Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this method, compensation expense is recorded only if the current market price of the underlying stock exceeds the exercise price on the date of grant. SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), and SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, an amendment to FASB Statement No. 123 (SFAS No. 148), established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, as amended. The following table illustrates the effect on net income (loss) if the fair-value-based method had been applied to all outstanding and unvested awards in each period. |
F-69
2004 | 2003 | 2002 | ||||||||||
Net income (loss) as reported |
$ | 13,231,000 | $ | 14,025,000 | $ | (61,154,000 | ) | |||||
Additional compensation expense |
$ | (601,000 | ) | $ | (80,000 | ) | $ | (274,000 | ) | |||
Net income (loss) pro forma |
$ | 12,630,000 | $ | 13,945,000 | $ | (61,428,000 | ) | |||||
Net income (loss) per common
share as reported |
||||||||||||
Basic |
$ | 0.80 | $ | 0.86 | $ | (3.74 | ) | |||||
Diluted |
0.78 | $ | 0.74 | $ | (3.29 | ) | ||||||
Net income (loss) per common
share pro forma |
||||||||||||
Basic |
$ | 0.77 | $ | 0.85 | $ | (3.76 | ) | |||||
Diluted |
$ | 0.74 | $ | 0.73 | $ | (3.30 | ) |
Segment Disclosures | ||||
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for the way that public business enterprises or other enterprises that are required to file financial statements with the Securities and Exchange Commission (SEC) report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company manages its business as one reporting segment. | ||||
Comprehensive Income | ||||
The Company did not have any components of comprehensive income (loss) other than net income (loss) in all periods presented. | ||||
Use of Estimates | ||||
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the valuation of accounts receivable, inventory, goodwill and deferred tax assets; the carrying amount of property and equipment; and the amount of self insurance accruals for healthcare, auto, and workers compensation claims. Actual results could differ from those estimates. | ||||
Fair Value of Financial Instruments | ||||
Management utilizes quoted market prices or pricing information of similar instruments to estimate the fair value of financial instruments. The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximate fair value because of the short-term nature of these items. | ||||
Because the interest rates of the secured and unsecured debt due to the Lender and the general unsecured debt under the Approved Plan (as defined in Note 3) were established by the Bankruptcy Court (as defined in Note 3) in 2003, management believes that the carrying amount of long-term debt at December 31, 2004 and 2003 approximates its fair value. |
F-70
Recent Accounting Pronouncements | ||||
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R). This statement requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements. Compensation cost is to be measured based on the estimated fair value of the equity-based compensation awards issued as of the grant date. The related compensation expense will be based on the estimated number of awards expected to vest and will be recognized over the requisite service period for each grant. The statement requires the use of assumptions and judgments about future events and input to valuation models, which will require considerable judgment by management. SFAS No. 123R replaces SFAS No. 123, rescinds SFAS No. 148 and supersedes APB Opinion No. 25. The provisions of SFAS No. 123R are required to be applied by public companies as of the first interim or annual reporting period that begins after June 15, 2005. The Company continued applying APB Opinion No. 25 to equity-based compensation awards through December 31, 2004. At the effective date of SFAS No. 123R, the Company expects to use the modified prospective application transition method without restatement of prior interim periods in the year of adoption. This will result in the Company recognizing compensation cost based on the requirements of SFAS No. 123R for all equity-based compensation awards issued after July 1, 2005. For all equity-based compensation awards that are unvested as of July 1, 2005, compensation cost will be recognized. The Company is currently evaluating the impact that adoption of the SFAS No. 123R may have on its results of operations or financial position. | ||||
Reclassifications | ||||
Certain amounts presented in the 2003 and 2002 consolidated financial statements have been reclassified to conform to the current year presentation. | ||||
3. | PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE | |||
American HomePatient, Inc. and 24 of its subsidiaries (collectively, the Debtors) filed voluntary petitions on July 31, 2002 for relief to reorganize under Chapter 11 of the U.S. Bankruptcy Code (the Bankruptcy Filing) in the United States Bankruptcy Court for the Middle District of Tennessee (the Bankruptcy Court). | ||||
These cases (the Chapter 11 Cases) were 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. The holders of the Companys senior debt (the Lenders) objected to the Proposed Plan. On May 15, 2003, the Bankruptcy Court entered a memorandum opinion overruling the Lenders objections to the Proposed Plan. On May 27, 2003, the Bankruptcy Court entered an Order confirming the Proposed Plan (Confirmation Order) (hereafter referred to as the Approved Plan). On June 30, 2003, the United States District Court for the Middle District of Tennessee (the District Court) rejected the Lenders request to stay the effective date of the Approved Plan. | ||||
On July 1, 2003, the Companys Approved Plan became effective and the Company successfully emerged from bankruptcy protection. | ||||
The Approved Plan allows the Company to continue its business operations uninterrupted, led by its current management team, and accomplishes the Companys primary goal of restructuring its long-term debt obligations to its Lenders. In addition, the Approved Plan provides that the Companys shareholders retain their equity interest in the Company and that all of the Companys creditors and vendors will be paid 100% of all amounts they are owed, either immediately or over time with interest. | ||||
The Approved Plan provides for the treatment of all of the claims subject to compromise in the Bankruptcy Filing. The Approved Plan provides for the extension of the maturity on the debt to the Lenders, a reduction of the related interest cost on such debt, and the payment of all of the Companys reported liabilities. The Lenders retained their liens on substantially all of the assets of the Company. |
F-71
Pursuant to the Approved Plan, the Companys secured debt to the Lenders is quantified at $250.0 million and is evidenced by a promissory note in that amount and is secured by various security agreements. To the Companys knowledge, the Lenders have not executed the agreements. The Company is no longer a party to a credit agreement. The remainder of the amounts due to the Lenders at July 1, 2003 over and above the $250.0 million is treated as unsecured. | ||||
The Approved Plan provides that principal is payable annually on the $250.0 million secured debt on March 31 of each year, beginning March 31, 2005, in the amount of one-third of the Companys Excess Cash Flow (defined in the Approved Plan as cash and equivalents in excess of $7.0 million at the end of the Companys fiscal year) for the previous fiscal year. After the unsecured debt of the Lenders and the general unsecured debt is paid in full, 100% of the Companys Excess Cash Flow is paid as a principal payment on the $250.0 million secured debt on March 31 of each year, with an estimated prepayment due on each previous September 30 in an amount equal to one-half of the anticipated March payment. Thus an estimated prepayment was due on September 30, 2004 in an amount equal to one-half of the anticipated payment due on March 31, 2005, however no payment was made as the Company did not anticipate having excess cash flow for fiscal 2004. The maturity date of the $250.0 million secured debt is July 1, 2009. The Approved Plan provides that interest is payable monthly on the $250.0 million secured debt at a rate of 6.785% per annum. | ||||
The Approved Plan treats the general unsecured debt and the Lenders unsecured debt in the same manner. Principal and accrued interest is payable semi-annually in six equal installments (on June 30 and December 31 of each year) beginning December 31, 2003. Interest accrues on this unsecured debt at an annual rate of 8.3675%. In addition to the six scheduled payments, the holders of the unsecured debt also received an estimated prepayment of the Pro Rata Payment (as defined in the Approved Plan) on September 30, 2003. The Company was to make a payment on March 31, 2004 in the amount of 100% of the Companys Excess Cash Flow for fiscal year 2003, however no payment was made as the Company did not have excess cash flow for fiscal 2003. The Company is required to make payments each March 31 in the amount of two thirds of the Companys Excess Cash Flow for the previous fiscal year, if any. Additionally, an estimated prepayment was due on September 30, 2004 in an amount equal to one-half of the anticipated March 2005 payment, however no payment was made as the Company did not anticipate having excess cash flow for fiscal 2004. | ||||
The Approved Plan allows the Company to make prepayments to the group of holders of unsecured debt, either in whole or in part, at any time without penalty, which prepayments reduce and are a credit against any subsequent mandatory payments. | ||||
Prior to emergence from bankruptcy protection, the Company made adequate protection payments to the Lenders totaling approximately $15.8 million. Pursuant to the Approved Plan all of the adequate protection payments have been applied to the Lenders unsecured debt during 2003 as part of the 2003 scheduled payments. | ||||
The Company has made all payments due under the Approved Plan as of December 31, 2004, and has also prepaid some of its obligations thereunder. As of December 31, 2004, the Lenders were owed approximately $251.0 million, comprised of $250.0 million of secured debt and $1.0 million of unsecured debt. The remaining general unsecured claims (excluding the Government Settlement) as of December 31, 2004 were approximately $0.5 million. | ||||
On July 1, 2003, the Company paid, in full, unsecured claims that individually totaled $10,000 or less, according to the provisions of the Approved Plan. The total of these payments was $3.3 million. | ||||
The Bankruptcy Court issued an opinion ruling in favor of the Companys request to reject warrants originally issued to the Companys Lenders to purchase 3,265,315 shares of the Companys common stock for $.01 per share. As a result of the ruling, the warrants, which represented approximately 20% of the Companys outstanding common stock, were rejected by the Company. The Bankruptcy Court determined the damages stemming from rejection of the warrants were $846,000, which is payable by the Company to the warrant holders as an unsecured debt and is recorded as a component of other accrued expenses on the consolidated balance sheets at December 31, 2004 and 2003. The warrant holders have appealed the damages calculation determined in this ruling. This liability will be paid to the warrant holders if they are unsuccessful in their appeal. If the appeal is successful, the amount owed to the warrant holders could |
F-72
substantially increase, which could materially adversely affect the Companys cash flow and results from operations. | ||||
The Lenders also filed an appeal to the District Court of the order confirming the Approved Plan. On September 12, 2003 the District Court issued an opinion affirming in all respects the Confirmation Order. The Lenders have filed an appeal to the order confirming the Approved Plan with the United States Court of Appeals for the Sixth Circuit. The Company intends to vigorously defend the Confirmation Order entered by the Bankruptcy Court and upheld by the District Court. The outcome of the appeal cannot be predicted, and an adverse ruling could have a material adverse effect on the Company. These adverse effects could include, without limitation, adverse changes in the interest rate related to its secured and unsecured debt, a change in the proportion of debt treated as secured debt, issuance of equity securities or an adverse change in the capitalization of the Company to the detriment of equity holders. There can be no assurance as to the extent or nature of the adverse effects of a successful Lenders appeal. | ||||
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 consisted primarily of amounts outstanding under the Fifth Amended and Restated Credit Agreements credit facility (the Bank Credit Facility), the Government Settlement (as defined in Note 10), and capital leases, and also include accounts payable, accrued interest, amounts accrued for future lease rejections, professional fees related to the reorganization, and other accrued expenses. Such claims were 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 were established in connection with the Approved Plan. | ||||
During the time the Company was in bankruptcy, the Company had 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 was also authorized to pay pre-petition liabilities to certain vendors providing critical goods and services, provided these payments did not exceed a predetermined amount. As a debtor-in-possession, the Company also had 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 could file claims with the Bankruptcy Court in accordance with bankruptcy procedures. Any such damages resulting from lease rejections were treated as general unsecured claims in the reorganization in accordance with the Approved Plan. | ||||
During 2003 and in connection with the Approved Plan, amounts which were included in liabilities subject to compromise as of December 31, 2002 were reclassified and reported in the December 31, 2003 consolidated balance sheet as current portion of long-term debt, current portion of pre-petition accounts payable, accrued expenses, long-term debt, pre-petition accounts payable and other noncurrent liabilities. | ||||
Reorganization items represent expenses that were incurred by the Company as a result of reorganization under Chapter 11 of the Federal Bankruptcy Code. These items are comprised of the following during the years ended December 31, 2004, 2003 and 2002: |
Year Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Write-off of deferred financing costs |
$ | | $ | | $ | 1,615,000 | ||||||
Provision for future lease rejection damages |
| | 1,353,000 | |||||||||
Professional and other fees |
658,000 | 4,082,000 | 2,529,000 | |||||||||
Total reorganization items |
$ | 658,000 | $ | 4,082,000 | $ | 5,497,000 | ||||||
Debtor and Non-Debtor 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) were not part of the Bankruptcy Filing. The Company |
F-73
operated as a debtor-in-possession while in bankruptcy from July 31, 2002 to emergence from bankruptcy on July 1, 2003. | ||||
In accordance with the American Institute of Certified Public Accountants Statement of Position (SOP) 90-7, the Company is presenting the following condensed combining financial statements for the year ended December 31, 2002: |
F-74
American HomePatient, Inc. and Subsidiaries
Condensed Combining Statements of Operations
for the Year Ended December 31, 2002
(unaudited)
Debtors | Non-Debtors | Combined | ||||||||||
REVENUES: |
||||||||||||
Sales and related service revenues, net |
$ | 136,884,000 | $ | 795,000 | $ | 137,679,000 | ||||||
Rentals and other revenues, net |
179,796,000 | 2,157,000 | 181,953,000 | |||||||||
Total revenues, net |
316,680,000 | 2,952,000 | 319,632,000 | |||||||||
EXPENSES: |
||||||||||||
Cost of sales and related services |
63,127,000 | 401,000 | 63,528,000 | |||||||||
Cost or rentals and other revenues, including rental
equipment depreciation |
34,613,000 | 363,000 | 34,976,000 | |||||||||
Operating, including bad debt expense |
179,394,000 | 1,460,000 | 180,854,000 | |||||||||
General and administrative |
16,239,000 | | 16,239,000 | |||||||||
Earnings from unconsolidated joint ventures |
(2,831,000 | ) | (1,759,000 | ) | (4,590,000 | ) | ||||||
Depreciation, excluding rental equipment, and amortization |
4,069,000 | 6,000 | 4,075,000 | |||||||||
Amortization of deferred financing costs |
1,779,000 | | 1,779,000 | |||||||||
Interest (excluding post petition interest), net |
11,461,000 | | 11,461,000 | |||||||||
Other expense, net |
243,000 | | 243,000 | |||||||||
Gain on sales of assets of center |
(667,000 | ) | | (667,000 | ) | |||||||
Chapter 11 financial advisory expenses incurred prior to
filing bankruptcy |
818,000 | | 818,000 | |||||||||
Total expenses |
308,245,000 | 471,000 | 308,716,000 | |||||||||
INCOME FROM OPERATIONS BEFORE REORGANIZATION ITEMS, INCOME
TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE |
8,435,000 | 2,481,000 | 10,916,000 | |||||||||
REORGANIZATION ITEMS |
5,497,000 | | 5,497,000 | |||||||||
INCOME FROM OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE |
2,938,000 | 2,481,000 | 5,419,000 | |||||||||
BENEFIT FROM INCOME TAXES |
1,912,000 | | 1,912,000 | |||||||||
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE |
4,850,000 | 2,481,000 | 7,331,000 | |||||||||
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE WITH NO
RELATED TAX EFFECT |
(68,485,000 | ) | | (68,485,000 | ) | |||||||
NET (LOSS) INCOME |
$ | (63,635,000 | ) | $ | 2,481,000 | $ | (61,154,000 | ) | ||||
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American HomePatient, Inc. and Subsidiaries
Condensed Combining Statements of Cash Flows
for the Year Ended December 31, 2002
(unaudited)
Debtors | Non-Debtors | Combined | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net (loss) income |
$ | (63,635,000 | ) | $ | 2,481,000 | $ | (61,154,000 | ) | ||||
Adjustments to reconcile net (loss) income before cumulative
effect of change in accounting principle to net cash
provided by operating activities: |
||||||||||||
Cumulative effect of changes in accounting principle |
68,485,000 | | 68,485,000 | |||||||||
Depreciation and amortization |
23,523,000 | 239,000 | 23,762,000 | |||||||||
Amortization of deferred financing costs |
1,779,000 | | 1,779,000 | |||||||||
Equity in earnings of unconsolidated joint ventures |
(838,000 | ) | (1,759,000 | ) | (2,597,000 | ) | ||||||
Minority interest |
| 309,000 | 309,000 | |||||||||
Gain on sale of assets of center |
(667,000 | ) | | (667,000 | ) | |||||||
Reorganization items |
5,497,000 | | 5,497,000 | |||||||||
Reorganization items paid |
(747,000 | ) | | (747,000 | ) | |||||||
Change in assets and liabilities, net of dispositions: |
||||||||||||
Accounts receivable, net |
6,215,000 | (3,000 | ) | 6,212,000 | ||||||||
Inventories, net |
(2,819,000 | ) | (16,000 | ) | (2,835,000 | ) | ||||||
Prepaid expenses and other current assets |
(728,000 | ) | 1,000 | (727,000 | ) | |||||||
Accounts payable, other payables and accrued expenses |
16,054,000 | 9,000 | 16,063,000 | |||||||||
Other assets and liabilities |
(2,247,000 | ) | | (2,247,000 | ) | |||||||
Net cash provided by operating activities |
49,872,000 | 1,261,000 | 51,133,000 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Proceeds from sale of assets of center |
1,805,000 | | 1,805,000 | |||||||||
Additions to property and equipment, net |
(26,918,000 | ) | (214,000 | ) | (27,132,000 | ) | ||||||
Distributions and loan payments from (advances to)
unconsolidated joint ventures, net |
2,964,000 | (732,000 | ) | 2,232,000 | ||||||||
Net cash used in investing activities |
(22,149,000 | ) | (946,000 | ) | (23,095,000 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Deferred financing costs |
(11,000 | ) | | (11,000 | ) | |||||||
Distributions to minority interest owners |
| (297,000 | ) | (297,000 | ) | |||||||
Principal payments on long-term debt and capital leases |
(6,241,000 | ) | | (6,241,000 | ) | |||||||
Adequate protection payments |
(8,000,000 | ) | | (8,000,000 | ) | |||||||
Proceeds from exercise of employee stock options |
11,000 | | 11,000 | |||||||||
Restricted cash |
198,000 | | 198,000 | |||||||||
Net cash used in financing activities |
(14,043,000 | ) | (297,000 | ) | (14,340,000 | ) | ||||||
INCREASE IN CASH AND CASH EQUIVALENTS |
13,680,000 | 18,000 | 13,698,000 | |||||||||
CASH AND CASH EQUIVALENTS, beginning of year |
9,090,000 | 39,000 | 9,129,000 | |||||||||
CASH AND CASH EQUIVALENTS, end of year |
$ | 22,770,000 | $ | 57,000 | $ | 22,827,000 | ||||||
SUPPLEMENTAL INFORMATION: |
||||||||||||
Cash payments of interest |
$ | 12,568,000 | $ | | $ | 12,568,000 | ||||||
Cash payments of income taxes |
$ | 542,000 | $ | | $ | 542,000 | ||||||
NON-CASH FINANCING ACTIVITIES: |
||||||||||||
Draws made on Bank Credit Facility to fund expired letters of
credit |
$ | 3,310,000 | $ | | $ | 3,310,000 | ||||||
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4. | LIQUIDITY | |||
The Company incurred a net loss of $61,154,000 for the year ended December 31, 2002 and had a shareholders deficit of $47,594,000 at December 31, 2002. At December 31, 2002, the Company had substantial borrowings under a bank credit facility evidenced by a Fifth Amended and Restated Credit Agreement (the Amended Credit Agreement). Indebtedness under the Amended Credit Agreement as of December 31, 2002, aggregated $278,705,000, which was due on or before December 31, 2002, not taking into consideration adequate protection payments of $8,000,000 made through such date. The 2002 consolidated financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At December 31, 2002, there was considerable uncertainty regarding how the outcome of the Bankruptcy Filing would impact the Companys ability to receive trade credit from its vendors and whether it would have a material adverse effect on the Companys business, financial condition, results of operations and cash flows. | ||||
As discussed in Note 3, on May 27, 2003, the Bankruptcy Court entered the Approved Plan and on July 1, 2003, the Companys Approved Plan became effective and the Company emerged from bankruptcy protection. In connection with the Approved Plan, the Amended Credit Agreement was terminated. Pursuant to the Approved Plan, the Company had secured debt to the Lenders of $250,000,000 and unsecured debt of $30,100,000, at July 1, 2003. The secured debt is evidenced by a promissory note in that amount and is secured by various security agreements. | ||||
During the year ended December 31, 2003 the Company achieved net income of $14,025,000 and improved operating results from the prior years. The 2003 results were favorably impacted by the exclusion of $12,510,000 in post-petition contractual interest expense while the Company was in bankruptcy in 2003. The Company is focused on generating positive cash flow from operating activities, primarily through improvements in its operating results. For the year ended December 31, 2004, net income was $13,231,000 and net cash provided by operating activities was $32,972,000. | ||||
Total long-term debt and capital leases have decreased $10,996,000 from $262,914,000 to $251,918,000 at December 31, 2003 and 2004, respectively. In addition, the Company paid down $5,808,000 of pre-petition accounts payable in 2004. All of the Companys debts have fixed interest rates, which on a weighted average was 6.8% at December 31, 2004. | ||||
The Company has scheduled current debt principal payments of $885,000 and minimum rental obligations of $10,988,000 under long-term operating leases due during the twelve months ending December 31, 2005. The Company is also obligated to make excess cash payments on the Lenders secured and unsecured debt as well as the pre-petition accounts payable as defined by the Approved Plan. During 2003, the Company made pre-payments on the Lenders secured and unsecured debt, as well as the pre-petition accounts payable totaling $26.9 million. The Company has the option to apply these pre-payments against the required 2005 payments; however, the Company currently intends to make payments to the Lenders and general unsecured creditors (as defined in the Approved Plan) if it has excess cash. | ||||
As of December 31, 2004, the Company had approximately $5,772,000 in unrestricted cash and cash equivalents and $31,569,000 of working capital. The Companys consolidated cash flows from operations for the year ended December 31, 2004 were sufficient to meet 2004 debt and lease obligations. The Company believes that its current cash and cash equivalents and expected cash flow from operations will be sufficient to fund its operating requirements, capital expenditure requirements, debt service requirements, and lease obligations during 2005. | ||||
In order to meet its future payment obligations, the Company must continue to improve its cash flow from operations. There can be no assurance that the Companys operations will improve as rapidly as anticipated. The failure to make its periodic debt, lease and other financial obligations, or the failure to extend, refinance or repay any of its debt obligations as they become due would have a material adverse effect upon the Company. | ||||
The Companys 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 |
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accrued expenses). In that regard, the level and quality of accounts receivable can have a significant impact on the Companys liquidity. The Company has various types of accounts receivable, such as receivables from patients, contracts, and former owners of businesses acquired. The majority of the Companys 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 $50,851,000 and $56,940,000 at December 31, 2004 and December 31, 2003, respectively. Average days sales in accounts receivable (DSO) was approximately 55 and 60 days at December 31, 2004 and December 31, 2003, 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 Companys level of DSO and net patient receivables is affected by the extended time required to obtain necessary billing documentation. | ||||
The Companys future liquidity and capital resources will be materially adversely impacted by the Medicare reimbursement reductions contained in the Medicare Prescription Drug, Improvement and Modernization Act of 2003. See Note 10. | ||||
In accordance with the Approved Plan, none of the Companys current debt and lease agreements contain financial and other restrictive covenants. However, any non-payment, or other default with respect to the Companys debt obligations could cause the Companys lenders to attempt to declare defaults, accelerate payment obligations or foreclose upon the assets securing such indebtedness or exercise their remedies with respect to such assets, which, if successful, would have a material adverse impact on the Company. | ||||
5. | INVESTMENT IN JOINT VENTURES | |||
The Company owns 50% of nine home health care businesses, and 70% of two home health care businesses that are operational as of December 31, 2004 (the Joint Ventures). The remaining ownership percentage of each joint venture is owned by local hospitals or other investors within the same community. The Company is solely responsible for the management of these businesses and receives fixed monthly management fees or monthly management fees based upon a percentage of net revenues, net income or cash collections. The operations of the two 70% owned joint ventures are consolidated with the operations of the Company. The operations of the nine 50% owned joint ventures are not consolidated with the operations of the Company and are accounted for by the Company under the equity method of accounting. | ||||
During 2003, the Company dissolved one of its previously owned 50% joint ventures as a result of the withdrawal of the hospital partners from the Partnership. At the time the joint venture was dissolved, the Company assumed two branches previously owned by the joint venture. As a result of these transactions, the results of operations of these assumed joint venture branches have been consolidated into the financial results of the Company beginning on the date of the conversions to wholly-owned operations. Previously, these joint ventures were accounted for under the equity method. The Company has not invested in any new joint ventures since 1998. | ||||
The Company provides accounting and receivable billing services to the joint ventures. The joint ventures are charged for their share of such costs based on contract terms. The Companys earnings from unconsolidated joint ventures include equity in earnings of 50% owned joint ventures, management fees and fees for accounting and receivable billing services. The Companys investment in unconsolidated joint ventures includes receivables from joint ventures of $0 and $187,000 at December 31, 2004 and 2003, respectively, as well as promissory notes receivable from joint ventures, totaling $2,640,000 and $0 as of December 31, 2004 and 2003, respectively. Minority interest represents the outside partners 30% ownership interests in the consolidated joint ventures, and totals $534,000 and $498,000 as of December 31, 2004 and 2003, respectively. |
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Summarized financial information of all 50% owned joint ventures at December 31, 2004 and 2003 and for the years then ended is as follows: |
2004 | 2003 | |||||||
(unaudited) | (unaudited) | |||||||
Cash |
$ | 1,339,000 | $ | 2,928,000 | ||||
Accounts receivable, net |
5,226,000 | 5,305,000 | ||||||
Property and equipment, net |
6,621,000 | 6,966,000 | ||||||
Other assets |
5,800,000 | 3,422,000 | ||||||
Total assets |
$ | 18,986,000 | $ | 18,621,000 | ||||
Accounts payable and accrued expenses |
$ | 576,000 | $ | 835,000 | ||||
Partners capital |
18,410,000 | 17,786,000 | ||||||
Total liabilities and partners capital |
$ | 18,986,000 | $ | 18,621,000 | ||||
Net sales and rental revenues |
$ | 33,429,000 | $ | 32,165,000 | ||||
Cost of sales and rentals, including rental depreciation |
8,277,000 | 9,569,000 | ||||||
Operating and management fees |
19,307,000 | 16,973,000 | ||||||
Depreciation, excluding rental equipment, amortization
and interest expense |
185,000 | 187,000 | ||||||
Total expenses |
27,769,000 | 26,729,000 | ||||||
Pre-tax income |
$ | 5,660,000 | $ | 5,436,000 | ||||
6. | SALES OF CERTAIN NON-CORE ASSETS | |||
In the quarter ended March 31, 2002 the Company recorded a pre-tax gain of approximately $0.7 million related to the sales 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 2002, the Center generated approximately $2.0 million in total revenues. | ||||
7. | ACCOUNTS RECEIVABLE | |||
The Companys accounts receivable consist of the following components: |
December 31, | ||||||||
2004 | 2003 | |||||||
Patient receivables: |
||||||||
Medicare and related copay portions |
$ | 19,347,000 | $ | 26,073,000 | ||||
All other, principally commercial
insurance companies, and related
copay portions |
48,416,000 | 48,353,000 | ||||||
67,763,000 | 74,426,000 | |||||||
Other receivables, principally due
from vendors and former owners of
acquired businesses |
1,666,000 | 1,935,000 | ||||||
Total accounts receivable |
69,429,000 | 76,361,000 | ||||||
Less: Allowance for doubtful accounts |
16,912,000 | 17,486,000 | ||||||
Accounts Receivable, net |
$ | 52,517,000 | $ | 58,875,000 | ||||
Of the patient receivables, $14.7 and $13.8 million are unbilled as of December 31, 2004 and 2003, respectively. |
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8. | PROPERTY AND EQUIPMENT | |||
Property and equipment, at cost, consist of the following: |
December 31, | ||||||||
2004 | 2003 | |||||||
Land |
$ | 51,000 | $ | 51,000 | ||||
Buildings and improvements |
5,209,000 | 5,474,000 | ||||||
Rental equipment |
134,094,000 | 130,361,000 | ||||||
Furniture, fixtures and equipment |
34,410,000 | 33,327,000 | ||||||
Delivery equipment |
997,000 | 1,688,000 | ||||||
$ | 174,761,000 | $ | 170,901,000 | |||||
Property and equipment under capital leases are included under the various equipment categories. As of December 31, 2004 and 2003, gross property held under capital leases totals $1,258,000 and $1,329,000, respectively. | ||||
Rental equipment is net of valuation allowances of $1.0 million and $0.9 million at December 31, 2004 and 2003, respectively. | ||||
As of December 31, 2004 and 2003, respectively, accumulated depreciation includes $82,673,000 and $80,565,000 of accumulated depreciation related to rental equipment. | ||||
Prior to the fourth quarter of 2004, the Companys policy has been to depreciate leasehold improvements over a five-year period. Generally, the Companys leases have initial terms ranging from 3 to 10 years. The Companys analysis identified several leasehold improvements, which were being depreciated over a period in excess of the initial lease term. The Company does not receive tenant improvement allowances or other incentives from its lessors. | ||||
Although the Companys past practices regarding depreciation of certain leasehold improvements was not in compliance with lease accounting standards and related interpretations, the Company has determined that the resulting errors were immaterial to all prior period consolidated financial statements and restatement was not necessary. During the fourth quarter of 2004, the Company corrected these errors by recognizing the cumulative impact to all prior period consolidated financial statements as depreciation expense totaling approximately $118,000. |
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9. | LONG-TERM DEBT AND CAPITAL LEASES | |||
At December 31, 2004 and 2003 long-term debt and capital lease obligations consist of the following: |
December 31, | ||||||||
2004 | 2003 | |||||||
Long-term debt, of which $250,000,000 is secured by
substantially all assets of the Company and is due July 1,
2009. As a result of the Approved Plan, the secured debt
bears interest at 6.785%, payable monthly and the
unsecured debt bears interest at 8.3675%, payable
semi-annually. |
$ | 251,025,000 | $ | 261,218,000 | ||||
Note payable, interest at 6.8%, paid in full in 2004 |
| 683,000 | ||||||
Notes payable, primarily secured with acquired assets |
874,000 | 884,000 | ||||||
Capital lease obligations, monthly payments until 2006 |
19,000 | 129,000 | ||||||
Total long-term debt and capital leases |
251,918,000 | 262,914,000 | ||||||
Less: current portion |
(885,000 | ) | (11,720,000 | ) | ||||
Long-term debt and capital leases, less current portion |
$ | 251,033,000 | $ | 251,194,000 | ||||
Pursuant to the Approved Plan, the Companys secured debt to the Lenders is $250.0 million is due July 1, 2009, and is evidenced by a promissory note in that amount and is secured by various security agreements. To the Companys knowledge, the Lenders have not executed the agreements. The Company is no longer a party to a credit agreement or formal covenant requirements. The Companys unsecured debt to the Lenders and general unsecured debt at December 31, 2004 is $1,025,000 and $477,000, respectively. | ||||
The Approved Plan provides that principal is payable annually on the $250.0 million secured debt on March 31 of each year, beginning March 31, 2005, in the amount of one-third of the Companys Excess Cash Flow (defined in the Approved Plan as cash and equivalents in excess of $7.0 million at the end of the Companys fiscal year) for the previous fiscal year. Additionally, an estimated prepayment was due on September 30, 2004 in an amount equal to one-half of the anticipated payment due on March 31, 2005, however no payment was made as the Company did not anticipate having excess cash flow for fiscal 2004. After the unsecured debt of the Lenders and the general unsecured debt is paid in full, 100% of the Companys Excess Cash Flow is paid on the $250.0 million secured debt on March 31 of each year and an estimated prepayment is due on each previous September 30 in an amount equal to one-half of the anticipated March payment. The maturity date of the $250.0 million secured debt is July 1, 2009. The Approved Plan provides that interest is payable monthly on the $250.0 million secured debt at a rate of 6.785% per annum. | ||||
The Approved Plan treats the general unsecured debt and the Lenders unsecured debt in the same manner. Principal and accrued interest is payable semi-annually in six equal installments (on June 30 and December 31 of each year) beginning December 31, 2003. The Company made payments totaling $10,193,000 against the Lenders unsecured debt in 2004. Interest accrues on this unsecured debt at an annual rate of 8.3675%. In addition to the six scheduled payments, the holders of the unsecured debt also receive a payment on March 31, 2005 in the amount of two-thirds of the Companys Excess Cash Flow for the previous fiscal year. Additionally, an estimated prepayment was due on September 30, 2004 in an amount equal to one-half of the anticipated March 2005 payment, however no payment was made as the Company did not anticipate having excess cash flows for fiscal 2004. On September 30, 2003 the Company made an estimated prepayment of approximately $11.4 million on the March 31, 2004 required payment for the general unsecured debt and the Lender unsecured debt. No additional payment was made at March 31, 2004, as the Company did not have excess cash flows for fiscal 2003. |
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The Approved Plan allows the Company to make prepayments to holders of unsecured debt, either in whole or in part, at any time without penalty, which reduce and are a credit against any subsequent mandatory payments. | ||||
Prior to emergence from bankruptcy protection, the Company made adequate protection payments to the Lenders totaling approximately $15.8 million, of which $7.8 million was made in 2003 and $8.0 million was made in 2002. Pursuant to the Approved Plan all of the adequate protection payments were applied to the Lenders unsecured debt during 2003 as part of the 2003 scheduled payments and prepayments. | ||||
On July 1, 2003, the Company paid, in full, unsecured claims that individually totaled $10,000 or less, according to the provisions of the Approved Plan. The total of these payments were $3.3 million. | ||||
The Company has made all payments due under the Approved Plan as of December 31, 2004, and has also pre-paid some of its obligations thereunder. The terms and payments are more fully described in the Approved Plan. | ||||
The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 2003 and thereafter are as follows: |
2005 |
$ | 885,000 | ||
2006 |
1,033,000 | |||
2007 |
| |||
2008 |
| |||
2009 |
250,000,000 | |||
$ | 251,918,000 | |||
In addition to the scheduled payments above, the Company is obligated to make excess cash payments on the Lenders secured and unsecured debt as well as the general unsecured debt as defined by the Approved Plan. As these payments will be based on Excess Cash Flow (defined in the Approved Plan as cash and equivalents in excess of $7.0 million at the end of the Companys fiscal year) at future dates, the Company is not able to project the amounts of these payments. As such, the $250.0 million secured debt, which is all classified as due in 2009 per the table above, could require principal payments in years 2005, 2006, 2007 and 2008. | ||||
Capital Leases | ||||
The Company leases certain equipment under capital leases. Future minimum rental payments required on capital leases beginning January 1, 2005 are as follows: |
2005 |
$ | 16,000 | ||
2006 |
8,000 | |||
24,000 | ||||
Less amounts representing interest at 8.3% interest |
(5,000 | ) | ||
$ | 19,000 | |||
10. | COMMITMENTS AND CONTINGENCIES | |||
Operating Lease Commitments | ||||
The Company has noncancelable operating leases on certain land, vehicles, buildings and equipment. Some of the leases contain renewal options and require the Company to pay all executory costs such as maintenance. The Company accounts for operating leases on a straight-line basis over the base term of the leases, with the difference between actual lease payments and straight-line expenses over the lease term |
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included in deferred rent. The minimum future rental commitments on the operating leases for the next five years and thereafter beginning January 1, 2005 are as follows: |
2005 |
$ | 10,988,000 | ||
2006 |
7,649,000 | |||
2007 |
5,468,000 | |||
2008 |
2,890,000 | |||
2009 |
813,000 | |||
Thereafter |
420,000 | |||
$ | 28,228,000 | |||
Rent expense for all operating leases was approximately $16,531,000, $16,031,000 and $15,368,000 in 2004, 2003 and 2002, respectively. | ||||
Prior to the fourth quarter of 2004, the Company did not recognize rent expense on leases with escalating rent payments under the straight-line method. Although the Companys past practices regarding the accounting for leases with escalating rent payments was not in compliance with lease accounting standards and related interpretations, the Company has determined that the resulting errors were immaterial to all prior period consolidated financial statements and restatement was not necessary. During the fourth quarter of 2004, the Company corrected these prior errors by recognizing the cumulative impact to all prior period consolidated financial statements as rent expense totaling approximately $250,000. | ||||
Litigation | ||||
The Company is subject to certain other known or possible litigation incidental to the Companys business, which, in managements opinion, will not have a material adverse effect on the Companys results of operations or financial condition. | ||||
The Company is also a party to litigation involving the Lenders appeals to the bankruptcy and warrant rulings. See Note 3. | ||||
The Company maintains insurance for general liability, director and officer liability and property. Certain policies are subject to deductibles. In addition to the insurance coverage provided, the Company indemnifies certain officers and directors for actions taken on behalf of the Company. | ||||
Employment and Consulting Agreements | ||||
The Company has employment agreements with certain members of management which provide for the payment to these members of amounts from one-half to three times their annual compensation in the event of a termination without cause, a constructive discharge (as defined in the employment agreements) or upon a change in control of the Company (as defined in the employment agreements). The terms of such agreements automatically renew for one year. The maximum contingent liability under these agreements at December 31, 2004 is approximately $5,339,000. | ||||
Self-Insurance | ||||
Self-insurance accruals primarily represent the accrual for self-insurance or large deductible risks associated with workers compensation insurance. The Company is insured for workers compensation but retains the first $250,000 of risk exposure for each claim. The Company did not maintain annual aggregate stop loss coverage for the years 2004, 2003 and 2002, as such coverage was not available. The Companys liability includes known claims and an estimate of claims incurred but not yet reported. The estimated liability for workers compensation claims totaled approximately $3,484,000 and $2,934,000 as of December 31, 2004 and 2003, respectively. The Company utilizes analyses prepared by a third-party administrator based on historical claims information to determine the required accrual and related expense associated with workers |
F-83
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 the 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 of $14.4 million for 2004 and 2003. The health insurance policies are limited to maximum lifetime reimbursements of $2,000,000 per person for 2004, 2003 and 2002. The estimated liability for health insurance claims totaled $2,551,000 and $1,928,000 as of December 31, 2004 and 2003, respectively. The Company reviews health insurance trends and payment history and maintains an accrual for unpaid reported claims and for incurred but not yet reported claims based upon its assessment of lag time in reporting and paying claims. | ||||
Management continually analyzes its accruals for reported and for incurred but not yet reported claims related to its self-insurance programs and believes these accruals to be adequate. However, significant judgment is involved in assessing these accruals, and the Company is at risk for differences between actual settlement amounts and recorded accruals, and any resulting adjustments are included in expense once a probable amount is known. | ||||
The Company is required to maintain cash collateral accounts with the insurance companies related to its self-insurance obligations. As of December 31, 2004, the Company maintained cash collateral balances of $4.1 million, which is included in other assets. | ||||
Letters of Credit | ||||
At December 31, 2004, the Company had two letters of credit totaling $650,000, of which $400,000 and $250,000 expire in May 2005 and January 2006, respectively, in place securing its obligations with respect to the Companys professional liability insurance. The letters of credit are secured by a certificate of deposit, which is included in restricted cash. | ||||
401K Retirement Savings Plan | ||||
The Company maintains a 401k Retirement Savings Plan (the 401k), administered by Massachusetts Mutual Life Insurance Company, to provide a tax deferred retirement savings plan to its employees. To qualify, employees must be at least 21 years of age, with twelve months of continuous employment and must work at least twenty hours per week. Employee contributions are limited to 1% to 15% of employee compensation. The Company matches 25% of the first 3% of employee contributions. For the years ended December 31, 2004, 2003, and 2002, expense of $289,000, $303,000 and $312,000, respectively, associated with the Companys matching is included in the consolidated statements of operations. | ||||
Government Regulation | ||||
The Company, as a participant in the health care industry, is subject to extensive federal, state and local regulation. In addition to the Federal False Claims Act (False Claims Act) and other federal and state anti-kickback and self-referral laws applicable to all of the Companys operations (discussed more fully below), the operations of the Companys 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 Companys operations are also subject to a series of laws and regulations dating back to 1987 that apply to the Companys operations. Changes have occurred from time to time since 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. |
F-84
As a provider of services under the federal reimbursement programs such as Medicare, Medicaid and TRICARE, the Company is subject to the federal statute known as the anti-kickback statute, also known as the fraud and abuse law. This law prohibits any bribe, kickback, rebate or remuneration of any kind in return for, or as an inducement for, the referral of patients for government-reimbursed health care services. | ||||
The Company may also be affected by the federal physician self-referral prohibition, known as the Stark Law, which, with certain exceptions, prohibits physicians from referring patients to entities with which they have a financial relationship. Many states in which the Company operates have adopted similar fraud and abuse and self-referral laws, as well as laws that prohibit certain direct or indirect payments or fee-splitting arrangements between health care providers, under the theory that such arrangements are designed to induce or to encourage the referral of patients to a particular provider. In many states, these laws apply to services reimbursed by all payor sources. | ||||
In 1996, the Health Insurance Portability and Accountability Act (HIPAA) introduced a new category of federal criminal health care fraud offenses. If a violation of a federal criminal law relates to a health care benefit, then an individual is guilty of committing a Federal Health Care Offense. The specific offenses are: health care fraud, theft or embezzlement, false statements, obstruction of an investigation, and money laundering. These crimes can apply to claims submitted not only to government reimbursement programs such as Medicare, Medicaid and TRICARE, but to any third-party payor, and carry penalties including fines and imprisonment. | ||||
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 had a compliance date of April 14, 2003; (2) Transactions and Code Sets Standards required compliance by October 16, 2002, except as extended by one year to October 16, 2003 for providers that filed a compliance extension form by October 15, 2002; and (3) Security Standards which were published in final form on February 2, 2003 and have a compliance date of April 20, 2005. | ||||
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 OIGs Model Plan for the industry. As part of its compliance program, the Company performs internal audits of the adequacy of billing documentation. The Companys 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 Companys business and its billing practices. | ||||
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 Companys employees must maintain licenses to provide some of the services offered by the Company. Additionally, certain of the Companys 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. |
F-85
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. | ||||
In the fourth quarter of 2003, Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act reduces Medicare reimbursement levels for a variety of the Companys products and services, with some reductions beginning in January 2004 and others beginning in January 2005. | ||||
Effective January 1, 2004, a provision in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 required that reimbursement for virtually all durable medical equipment (DME) and infusion drugs used with DME be frozen at the reimbursement level in effect on October 1, 2003. The freeze will remain in effect until the roll out of a national competitive bidding system scheduled to begin in 2007. The competitive bidding for DME will be required in the top ten (10) Metropolitan Statistical Areas (MSAs) in 2007 with the next 80 MSAs scheduled for roll out in 2009. In addition, in January 2005, the Medicare reimbursement for 16 durable medical equipment items was reduced to the median rate of Federal Employee Health Benefit Plan (FEHBP) fee schedule. Reimbursement for home oxygen was also scheduled to be reduced in January 2005 to the median rate of the FEHBP schedule, but this change has not occurred. As mandated by the Act, the OIG conducted a study to determine the median FEHBP rates for home oxygen. The 2005 fee schedule for home oxygen was issued by Centers for Medicare and Medicaid Services upon the finalization of this study and will be effective no later than April 8, 2005. Prior to the effective date of this modified fee schedule, home oxygen was reimbursed at the 2004 rates. Management is currently in the process of assessing the magnitude of the financial impact of the 2005 fee schedule for home oxygen, but anticipates the impact will materially and adversely impact the Companys operating results and condition. | ||||
Also effective January 1, 2004 a provision in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 required that the reimbursement rate for inhalation drugs used with a nebulizer be reduced from 95% of the average wholesale price (AWP) to 80% of AWP. Beginning January 1, 2005, the reimbursement for inhalation drugs will be further reduced to the average manufacturers sales price plus six percent (ASP + 6%) plus a dispensing fee of $57.00 per monthly prescription. | ||||
In recent years, various state and federal regulatory agencies have stepped up investigative and enforcement activities with respect to the health care industry, and many health care providers, including the Company and other durable medical equipment suppliers, have received subpoenas and other requests for information in connection with their business operations and practices. From time to time, the Company also receives notices and subpoenas from various government agencies concerning plans to audit the Company, or requesting information regarding certain aspects of the Companys 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 Companys activities nor that the Companys 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 Companys business and financial position, and could even result in the exclusion of the Company from participating in Medicare, Medicaid, and other contracts for goods or services reimbursed by the government. | ||||
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 relators 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 |
F-86
various times until March 2006. At December 31, 2004, the Company also paid the relators attorneys fees and expenses. Pursuant to the Approved Plan, the amounts owed pursuant to the Government Settlement will be paid in full in accordance with the Government Settlement. At December 31, 2004, the Company has liabilities of $3,529,000 for its future obligations pursuant to the Government Settlement of which $1,529,000 is classified as a current liability and $2,000,000 is included in other noncurrent liabilities on the accompanying consolidated balance sheet.
11. | SHAREHOLDERS EQUITY AND STOCK PLANS |
Nonqualified Stock Option Plans
Under the 1991 Nonqualified Stock Option Plan (the 1991 Plan), as amended as of November 8, 2000, 4,500,000 shares of the Companys common stock have been reserved for issuance upon exercise of options granted thereunder. The maximum term of any option granted pursuant to the 1991 Plan is ten years. Shares subject to options granted under the 1991 Plan which expire, terminate or are canceled without having been exercised in full become available again for future grants.
An analysis of stock options outstanding under the 1991 Plan is as follows:
Weighted Average | ||||||||
Options | Exercise Price | |||||||
Outstanding at December 31, 2001 |
2,579,339 | $ | 5.47 | |||||
Granted |
| | ||||||
Exercised |
(40,000 | ) | 0.27 | |||||
Canceled |
(23,200 | ) | 5.61 | |||||
Outstanding at December 31, 2002 |
2,516,139 | $ | 5.55 | |||||
Granted |
| | ||||||
Exercised |
(10,000 | ) | 0.17 | |||||
Canceled |
(112,401 | ) | 5.76 | |||||
Outstanding at December 31, 2003 |
2,393,738 | $ | 5.56 | |||||
Granted |
750,000 | 1.70 | ||||||
Exercised |
(650,000 | ) | 0.49 | |||||
Canceled |
(64,000 | ) | 10.73 | |||||
Outstanding at December 31, 2004 |
2,429,738 | $ | 5.59 | |||||
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Options granted under the 1991 Plan as of December 31, 2004 have the following characteristics:
Weighted Average | ||||||||||||||||||
Weighted Average | Exercise Price of | |||||||||||||||||
Remaining | Options Exercisable | Options Exercisable | ||||||||||||||||
Options | Weighted Average | Contractual Life in | at December 31, | at December 31, | ||||||||||||||
Outstanding | Exercise Prices | Exercise Price | Years | 2004 | 2004 | |||||||||||||
171,188 |
$ | 15.83 to $ 20.67 | $ | 16.54 | 0.05 | 171,188 | $ | 16.54 | ||||||||||
268,500 |
$ | 17.50 | $ | 17.50 | 1.04 | 268,500 | $ | 17.50 | ||||||||||
53,500 |
$ | 21.50 | $ | 21.50 | 2.16 | 53,500 | $ | 21.50 | ||||||||||
601,550 |
$ | 2.13 to $18.13 | $ | 5.63 | 3.78 | 601,550 | $ | 5.63 | ||||||||||
310,000 |
$ | 0.56 | $ | 0.56 | 4.86 | 310,000 | $ | 0.56 | ||||||||||
240,000 |
$ | 0.17 to $ 0.30 | $ | 0.18 | 5.85 | 240,000 | $ | 0.18 | ||||||||||
35,000 |
$ | 0.80 | $ | 0.80 | 6.87 | 35,000 | $ | 0.80 | ||||||||||
750,000 |
$ | 1.31 to $ 1.80 | $ | 1.70 | 9.30 | 337,500 | $ | 0.79 | ||||||||||
2,429,738 |
2,017,238 | |||||||||||||||||
Options granted during 1996 have a two year vesting period and expire in ten years. Options granted during 1997 have two and three year vesting periods and expire in ten years. Options granted during 1998 to all employees, except officers and directors, have one, two, three and four year vesting periods and expire in ten years. Options granted during 1999 vested upon grant or have a three year vesting period and expire in ten years. Options granted during 2000 and 2001 have a three year vesting period and expire in ten years. No options were granted during 2002 or 2003. As of December 31, 2004, shares available for future grants of options under the 1991 Plan total 141,371.
F-88
Options granted under the 1991 Plan as of December 31, 2003 have the following characteristics:
Weighted Average | ||||||||||||||||||
Weighted Average | Exercise Price of | |||||||||||||||||
Remaining | Options Exercisable | Options Exercisable | ||||||||||||||||
Options | Weighted Average | Contractual Life in | at December 31, | at December 31, | ||||||||||||||
Outstanding | Exercise Prices | Exercise Price | Years | 2003 | 2003 | |||||||||||||
30,000 |
$ | 10.04 | $ | 10.04 | .48 | 30,000 | $ | 10.04 | ||||||||||
174,188 |
$ | 15.83 to $20.67 | $ | 16.54 | 1.05 | 174,188 | $ | 16.54 | ||||||||||
273,000 |
$ | 17.50 | $ | 17.50 | 2.05 | 273,000 | $ | 17.50 | ||||||||||
58,500 |
$ | 21.50 | $ | 21.50 | 3.16 | 58,500 | $ | 21.50 | ||||||||||
708,050 |
$ | 2.13 to $ 18.13 | $ | 5.25 | 4.80 | 708,050 | $ | 5.25 | ||||||||||
407,000 |
$ | 0.56 | $ | 0.56 | 5.87 | 407,000 | $ | 0.56 | ||||||||||
708,000 |
$ | 0.17 to $ 0.54 | $ | 0.18 | 6.85 | 708,000 | $ | 0.18 | ||||||||||
35,000 |
$ | 0.80 | $ | 0.80 | 7.88 | 26,250 | $ | 0.80 | ||||||||||
2,393,738 |
2,384,988 | |||||||||||||||||
Options granted during 1996 have a two year vesting period and expire in ten years. Options granted during 1997 have two and three year vesting periods and expire in ten years. Options granted during 1998 to all employees, except officers and directors, have one, two, three and four year vesting periods and expire in ten years. Options granted during 1999 vested upon grant or have a three year vesting period and expire in ten years. Options granted during 2000 and 2001 have a three year vesting period and expire in ten years. No options were granted during 2002 or 2003. As of December 31, 2003, shares available for future grants of options under the 1991 Plan total 822,371.
F-89
Under the 1995 Nonqualified Stock Option Plan for Directors (the 1995 Plan), as amended as of February 10, 2000, 600,000 shares of the Companys common stock have been reserved for issuance upon exercise of options granted thereunder. The maximum term of any option granted pursuant to the 1995 Plan is ten years. Shares subject to options granted under the 1995 Plan which expire, terminate or are canceled without having been exercised in full become available for future grants.
An analysis of stock options outstanding under the 1995 Plan is as follows:
Weighted Average | ||||||||
Options | Exercise Price | |||||||
Outstanding at December 31, 2001 |
287,500 | 2.96 | ||||||
Granted |
15,000 | 0.15 | ||||||
Canceled |
(82,500 | ) | 4.64 | |||||
Outstanding at December 31, 2002 |
220,000 | 2.13 | ||||||
Granted |
80,000 | 1.29 | ||||||
Canceled |
| | ||||||
Outstanding at December 31, 2003 |
300,000 | $ | 1.91 | |||||
Granted |
100,000 | 2.32 | ||||||
Exercised |
(20,000 | ) | 0.30 | |||||
Outstanding at December 31, 2004 |
380,000 | $ | 2.11 | |||||
F-90
Options granted under the 1995 Plan as of December 31, 2004 have the following characteristics:
Weighted Average | ||||||||||||||||||
Weighted Average | Exercise Price of | |||||||||||||||||
Remaining | Options Exercisable | Options Exercisable | ||||||||||||||||
Options | Weighted Average | Contractual Life in | at December 31, | at December 31, | ||||||||||||||
Outstanding | Exercise Prices | Exercise Price | Years | 2004 | 2004 | |||||||||||||
6,000 |
$ | 19.67 | $ | 19.67 | 1.00 | 6,000 | $ | 19.67 | ||||||||||
6,000 |
$ | 26.25 | $ | 26.25 | 2.00 | 6,000 | $ | 26.25 | ||||||||||
6,000 |
$ | 21.06 | $ | 21.06 | 3.00 | 6,000 | $ | 21.06 | ||||||||||
6,000 |
$ | 1.69 | $ | 1.69 | 4.00 | 6,000 | $ | 1.69 | ||||||||||
6,000 |
$ | 0.53 | $ | 0.53 | 5.00 | 6,000 | $ | 0.53 | ||||||||||
140,000 |
$ | 0.20 to $ 0.30 | $ | 0.26 | 5.61 | 140,000 | $ | 0.26 | ||||||||||
15,000 |
$ | 0.75 | $ | 0.75 | 7.00 | 15,000 | $ | 0.75 | ||||||||||
15,000 |
$ | 0.15 | $ | 0.15 | 8.00 | 15,000 | $ | 0.15 | ||||||||||
80,000 |
$ | 1.29 | $ | 1.29 | 9.00 | 80,000 | $ | 1.29 | ||||||||||
100,000 |
$ | 1.18 to $ 3.46 | $ | 2.32 | 9.72 | 100,000 | $ | 2.32 | ||||||||||
380,000 |
380,000 | |||||||||||||||||
The options are fully vested upon issuance and expire ten years from date of issuance.
The Company has adopted the disclosure provisions of SFAS No. 123 as amended and SFAS No. 148. Accordingly, no compensation cost has been recognized for the stock option plans because no options have been issued with an exercise price different from the options fair value at the grant date.
The grant date weighted average fair value of options granted were $1.77, $1.29 and $0.12 for 2004, 2003, and 2002, respectively.
The fair value of each option issued under the 1991 Plan and the 1995 Plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2004, 2003 and 2002:
2004 | 2003 | 2002 | ||||||||||
Dividend yield |
0 | % | 0 | % | 0 | % | ||||||
Expected volatility |
154 | % | 153 | % | 132 | % | ||||||
Expected lives |
5 years | 5 years | 5 years | |||||||||
Risk-free interest rate range |
3.51 | % | 0.9 | % | 2.78 | % |
F-91
Options granted under the 1995 Plan as of December 31, 2003 have the following characteristics:
Weighted Average | ||||||||||||||||||
Weighted Average | Exercise Price of | |||||||||||||||||
Remaining | Options Exercisable | Options Exercisable | ||||||||||||||||
Options | Weighted Average | Contractual Life in | at December 31, | at December 31, | ||||||||||||||
Outstanding | Exercise Prices | Exercise Price | Years | 2003 | 2003 | |||||||||||||
6,000 |
$ | 19.67 | $ | 19.67 | 2.0 | 6,000 | $ | 19.67 | ||||||||||
6,000 |
$ | 26.25 | $ | 26.25 | 3.0 | 6,000 | $ | 26.25 | ||||||||||
6,000 |
$ | 21.06 | $ | 21.06 | 4.0 | 6,000 | $ | 21.06 | ||||||||||
6,000 |
$ | 1.69 | $ | 1.69 | 5.0 | 6,000 | $ | 1.69 | ||||||||||
6,000 |
$ | 0.53 | $ | 0.53 | 6.0 | 6,000 | $ | 0.53 | ||||||||||
160,000 |
$ | 0.17 to $ 0.30 | $ | 0.25 | 6.6 | 160,000 | $ | 0.25 | ||||||||||
15,000 |
$ | 0.75 | $ | 0.75 | 8.0 | 15,000 | $ | 0.75 | ||||||||||
15,000 |
$ | 0.15 | $ | 0.15 | 9.0 | 15,000 | $ | 0.15 | ||||||||||
80,000 |
$ | 1.29 | $ | 1.29 | 10.0 | 80,000 | $ | 1.29 | ||||||||||
300,000 |
300,000 | |||||||||||||||||
The options are fully vested upon issuance and expire ten years from date of issuance.
The Company has adopted the disclosure provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for the stock option plans because no options have been issued with an exercise price different from the options fair value at the grant date.
The grant date weighted average fair value of options granted were $1.29, $0.12, and $0.09 for 2003, 2002, and 2001, respectively.
The fair value of each option issued under the 1991 Plan and the 1995 Plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2003, 2002 and 2001:
F-92
Warrants
As part of the Second Amendment to the Fourth Amended and Restated Credit Agreement, the Company was required to issue, effective on March 31, 2001, warrants to the Lenders representing 19.999% of the common stock of the Company issued and outstanding as of March 31, 2001. To fulfill these obligations, warrants to purchase 3,265,315 shares of common stock were issued to the Lenders on June 8, 2001. Fifty percent of these warrants were exercisable during the period commencing June 1, 2001 and ending May 31, 2011, and the remaining fifty percent were exercisable during the period commencing September 30, 2001 and ending September 29, 2011. The exercise price of the warrants is $0.01 per common share. The Company accounted for the estimated 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 and recorded an increase to additional paid-in capital.
Pursuant to the Approved Plan, the Bankruptcy Court issued an opinion ruling in favor of the Companys request to reject the warrants held by the Lenders. The Lenders now are entitled to an additional unsecured claim of approximately $846,000, which is the judicially determined value of the warrants as of July 30, 2002, the date immediately prior to the Companys bankruptcy filing and is recorded as a component of other accrued expenses on the consolidated balance sheets at December 31, 2004 and 2003. The difference between the original amount recorded and the value of the warrants as determined by the Bankruptcy Court is recorded as an expense in the accompanying consolidated statement of operations for the year ended December 31, 2003. The warrant holders have appealed the value determined in this ruling. If the appeal is successful, the Companys unsecured debt could increase which could materially adversely affect the Companys cash flow and results from operations.
Preferred Stock
The Companys certificate of incorporation was amended in 1996 to authorize the issuance of up to 5,000,000 shares of preferred stock. The Companys Board of Directors is authorized to establish the terms and rights of each such series, including the voting powers, designations, preferences, and other special rights, qualifications, limitations or restrictions thereof. As of December 31, 2004, no preferred shares have been issued.
Income (Loss) Per Common Share
Income (loss) per share is measured at two levels: basic income (loss) per share and diluted income (loss) per share. Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares after considering the additional dilution related to stock options and warrants. In computing diluted income (loss) per share, the outstanding stock warrants and stock options are considered dilutive using the treasury stock method.
F-93
The following information is necessary to calculate income (loss) per share for the years ended December 31, 2004, 2003 and 2002:
2004 | 2003 | 2002 | ||||||||||
Income before cumulative effect of change in
accounting principle |
$ | 13,231,000 | $ | 14,025,000 | $ | 7,331,000 | ||||||
Cumulative effect of change in accounting
principle |
| | (68,485,000 | ) | ||||||||
Net income (loss) |
$ | 13,231,000 | $ | 14,025,000 | $ | (61,154,000 | ) | |||||
Weighted average common shares outstanding |
16,481,000 | 16,368,000 | 16,358,000 | |||||||||
Effect of dilutive options and warrants |
585,000 | 2,632,000 | 2,249,000 | |||||||||
Adjusted diluted common shares outstanding |
17,066,000 | 19,000,000 | 18,607,000 | |||||||||
Income per common share before
cumulative effect of change in accounting
principle |
||||||||||||
- Basic |
$ | 0.80 | $ | 0.86 | $ | 0.45 | ||||||
- Diluted |
$ | 0.78 | $ | 0.74 | $ | 0.39 | ||||||
Cumulative effect of change in accounting
principle per common share |
||||||||||||
- Basic |
$ | | $ | | $ | (4.19 | ) | |||||
- Diluted |
$ | | $ | | $ | (3.68 | ) | |||||
Net income (loss) per common share |
||||||||||||
- Basic |
$ | 0.80 | $ | 0.86 | $ | (3.74 | ) | |||||
- Diluted |
$ | 0.78 | $ | 0.74 | $ | (3.29 | ) | |||||
For the years ended December 31, 2004, 2003 and 2002, approximately 1,754,000, 1,268,000 and 1,823,000 shares, respectively, attributable to the exercise of outstanding options were excluded from the calculation of diluted earnings per share because their effect was antidilutive.
12. | INCOME TAXES |
The provision for (benefit from) income taxes are comprised of the following components:
For the Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Current |
||||||||||||
Federal |
$ | | $ | | $ | (2,112,000 | ) | |||||
State |
50,000 | 400,000 | 200,000 | |||||||||
50,000 | 400,000 | (1,912,000 | ) | |||||||||
Deferred |
||||||||||||
Federal |
| | | |||||||||
State |
| | | |||||||||
| | | ||||||||||
Provision
for
(benefit from)
income taxes |
$ | 50,000 | $ | 400,000 | $ | (1,912,000 | ) | |||||
F-94
The difference between the actual income tax provision (benefit) and the tax provision (benefit) computed by applying the statutory federal income tax rate to income (loss) from operations before income taxes and cumulative effect of change in accounting principle is attributable to the following:
For the Years Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Provision for federal income taxes at
statutory rate |
$ | 4,648,000 | $ | 5,049,000 | $ | 1,897,000 | ||||||
State income taxes, net of federal tax benefit |
33,000 | 260,000 | 582,000 | |||||||||
Valuation allowance |
(4,989,000 | ) | (6,657,000 | ) | (4,513,000 | ) | ||||||
Other, principally non-deductible goodwill
and other expenses |
358,000 | 1,748,000 | 122,000 | |||||||||
Provision for (benefit from) income taxes |
$ | 50,000 | $ | 400,000 | $ | (1,912,000 | ) | |||||
The net deferred tax assets and liabilities, at the respective income tax rates, are as follows:
December 31, | ||||||||
2004 | 2003 | |||||||
Current deferred tax assets: |
||||||||
Accrued restructuring liabilities |
$ | 702,000 | $ | 336,000 | ||||
Accounts receivable reserves |
6,531,000 | 6,809,000 | ||||||
Accrued liabilities and other |
4,699,000 | 4,893,000 | ||||||
11,932,000 | 12,038,000 | |||||||
Less valuation allowance |
(11,932,000 | ) | (12,038,000 | ) | ||||
Net current deferred tax assets |
$ | | $ | | ||||
Noncurrent deferred tax assets (liabilities): |
||||||||
Financial reporting amortization in excess of tax amortization |
$ | 13,708,000 | $ | 17,842,000 | ||||
Net operating loss carryforwards |
61,634,000 | 55,550,000 | ||||||
Noncurrent asset valuation reserves |
437,000 | 533,000 | ||||||
Other |
2,859,000 | 4,324,000 | ||||||
Acquisition costs |
(2,739,000 | ) | (2,739,000 | ) | ||||
Tax depreciation in excess of financial reporting depreciation |
(15,339,000 | ) | (12,447,000 | ) | ||||
60,560,000 | 63,063,000 | |||||||
Less valuation allowance |
(60,560,000 | ) | (63,063,000 | ) | ||||
Net noncurrent deferred tax assets |
$ | | $ | | ||||
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of approximately $131,744,000 prior to the expiration of the federal net operating loss carryforwards beginning in 2019. Taxable loss for the year ended December 31, 2004 is estimated to be $10,535,000, and taxable loss for the year ended December 31, 2003 was $12,697,000. Based upon the historical taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences; thus, the Company recorded a valuation allowance to fully reserve all net deferred tax assets as of December 31, 2004 and 2003.
F-95
At December 31, 2004 the Company had federal net operating loss carryforwards of approximately $131,744,000 available to offset future taxable income. These net operating loss carryforwards expire in varying amounts beginning in 2019.
The Company received a federal tax refund of $2.1 million during 2002. The refund resulted from the carry back of additional net operating losses as provided by the enactment of the Job Creation and Workers Assistance Act of 2002.
During 2004, the Company was notified by the Internal Revenue Service that the federal tax return for the year ended December 31, 2001, would be submitted to Joint Committee for review and determination of whether the return will be examined or accepted without examination. Management does not believe that the Joint Committee review or any potential future examination will result in additional material current tax liability.
13. | INSURANCE |
The Company maintains a commercial general liability policy which is on a claims-made basis. This insurance is renewed annually and includes product liability coverage on the medical equipment that it sells or rents with per claim coverage limits of up to $1.0 million per claim with a $5.0 million product liability annual aggregate and a $5.0 million general liability annual aggregate. The Company has a professional liability policy on a claims-made basis and is renewable annually with per claim coverage limits of up to $1.0 million per claim and $5.0 million in the aggregate. The Company retains the first $100,000 of risk exposure for each professional or general liability claim subject to $500,000 in the aggregate. The defense costs are included within the limits of insurance. The Company also maintains excess liability coverage with limits of $20.0 million per claim and $20.0 million in the aggregate. Management believes the manufacturers of the equipment it sells or rents currently maintain their own insurance, and in some cases the Company has received evidence of such coverage and has been added by endorsement as an additional insured. However, there can be no assurance that such manufacturers will continue to do so, that such insurance will be adequate or available to protect the Company, or that the Company will not have liability independent of that of such manufacturers and/or their insurance coverage. The Company is insured for auto liability coverage for $1.0 million per accident. The Company retains the first $250,000 of risk exposure for each claim.
There can be no assurance that any of the Companys insurance will be sufficient to cover any judgments, settlements or costs relating to any pending or future legal proceedings or that any such insurance will be available to the Company in the future on satisfactory terms, if at all. If the insurance carried by the Company is not sufficient to cover any judgments, settlements or costs relating to pending or future legal proceedings, the Companys business and financial condition could be materially adversely affected.
14. | RELATED PARTY TRANSACTIONS |
A partner in the law firm of Harwell Howard Hyne Gabbert & Manner, P.C. (H3GM), which the Company engages to render legal advice in a variety of activities, was a director of the Company until July 2002. The Company paid H3GM $852,000 during 2002.
The Company maintained 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. Effective December 31, 2003, the Company abolished the trust.
F-96
15. | QUARTERLY FINANCIAL INFORMATION (UNAUDITED) |
The following are the Companys 2004, 2003 and 2002 quarterly financial information (amounts in thousands, except per share data):
First | Second | Third | Fourth | Full | ||||||||||||||||
2004 | Quarter | Quarter | Quarter | Quarter | Year | |||||||||||||||
Revenues, net |
$ | 84,773 | $ | 83,312 | $ | 83,502 | $ | 84,236 | $ | 335,823 | ||||||||||
Income from operations before income taxes |
1,059 | 1,136 | 3,110 | 8,114 | 1,2 | 13,939 | ||||||||||||||
Provision for income taxes |
100 | 100 | 100 | (250 | ) | 50 | ||||||||||||||
Net income |
$ | 959 | $ | 1,036 | $ | 3,010 | $ | 8,226 | 1,2 | $ | 13,231 | |||||||||
Net income per common share |
||||||||||||||||||||
- Basic |
$ | 0.06 | $ | 0.06 | $ | 0.18 | $ | 0.49 | $ | 0.80 | ||||||||||
- Diluted |
$ | 0.06 | $ | 0.06 | $ | 0.18 | $ | 0.48 | $ | 0.78 | ||||||||||
1) | Includes reductions of the inventory valuation allowance of $546,000. | |||
2) | Includes reductions of the management incentive accrual of $952,000. |
First | Second | Third | Fourth | Full | ||||||||||||||||
2003 | Quarter | Quarter | Quarter | Quarter | Year | |||||||||||||||
Revenues, net |
$ | 82,507 | $ | 82,864 | $ | 83,893 | $ | 86,917 | $ | 336,181 | ||||||||||
Income from operations before income taxes |
4,437 | 4,620 | 526 | 4,842 | 1,2 | 14,425 | ||||||||||||||
Provision for income taxes |
100 | 100 | 100 | 100 | 400 | |||||||||||||||
Net income |
$ | 4,337 | $ | 4,520 | $ | 426 | $ | 4,742 | 1,2 | $ | 14,025 | |||||||||
Net income per common share |
||||||||||||||||||||
- Basic |
$ | 0.26 | $ | 0.28 | $ | 0.03 | $ | 0.29 | $ | 0.86 | ||||||||||
- Diluted |
$ | 0.24 | $ | 0.24 | $ | 0.02 | $ | 0.25 | $ | 0.74 | ||||||||||
1) | Includes changes in estimates resulting in reversals of accruals to income of $500,000 for pre-bankruptcy liabilities and $394,000 for self-insurance accruals. | |||
2) | Includes an accrual of $509,000 of expenses related to billing centers closed in 2003. |
(Continued)
F-97
First | Second | Third | Fourth | Full | ||||||||||||||||
2002 | Quarter | Quarter | Quarter | Quarter | Year | |||||||||||||||
Revenues |
$ | 79,812 | $ | 79,079 | $ | 79,028 | $ | 81,713 | $ | 319,632 | ||||||||||
Income (loss) from operations before income taxes
and cumulative effect of change in accounting
principle |
(404 | ) | 35 | (2,304 | ) | 8,092 | 5,419 | |||||||||||||
Provision for (benefit from) income taxes |
(2,012 | ) | 100 | 100 | (100 | ) | (1,912 | ) | ||||||||||||
Income (loss) before cumulative effect of change
in accounting principle |
1,608 | (65 | ) | (2,404 | ) | 8,192 | 7,331 | |||||||||||||
Cumulative effect of change in accounting principle |
(68,485 | ) | | | | (68,485 | ) | |||||||||||||
Net (loss) income |
$ | (66,877 | ) | $ | (65 | ) | $ | (2,404 | ) | $ | 8,192 | $ | (61,154 | ) | ||||||
Net income (loss) per common share before change
in accounting principle |
||||||||||||||||||||
- Basic |
$ | 0.10 | $ | | $ | (0.15 | ) | $ | 0.50 | $ | 0.45 | |||||||||
- Diluted |
$ | 0.09 | $ | | $ | (0.15 | ) | $ | 0.45 | $ | 0.39 | |||||||||
Cumulative effect of change in accounting
principle per common share |
||||||||||||||||||||
- Basic |
$ | (4.19 | ) | $ | | $ | | $ | | $ | (4.19 | ) | ||||||||
- Diluted |
$ | (3.66 | ) | $ | | $ | | $ | | $ | (3.68 | ) | ||||||||
Net income (loss) per common share |
||||||||||||||||||||
- Basic |
$ | (4.10 | ) | $ | | $ | (0.15 | ) | $ | 0.50 | $ | (3.74 | ) | |||||||
- Diluted |
$ | (3.57 | ) | $ | | $ | (0.15 | ) | $ | 0.45 | $ | (3.29 | ) | |||||||
F-98
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
We have audited the consolidated financial statements of American HomePatient, Inc. and subsidiaries (the Company) (Debtor-in-Possession from July 31, 2002 to July 1, 2003) as of December 31, 2002, and for the year ended December 31, 2002, and have issued our report thereon dated March 20, 2003 (which expresses an unqualified opinion and includes explanatory paragraphs (a) relating to the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002; (b) relating to the Companys filing for reorganization under Chapter 11 of the Federal Bankruptcy Code; and (c) relating to substantial doubt about the Companys ability to continue as a going concern); such report is included elsewhere in this Form 10-K for the year ended December 31, 2004. Our audit also included the 2002 financial statement schedules of the Company, listed in Item 15. These financial statement schedules are the responsibility of the Companys management. Our responsibility is to express an opinion based on our audit. In our opinion, the 2002 financial statement schedules, when considered in relation to the 2002 basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
March 20, 2003
S-1
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2004, 2003 and 2002
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Column A | Column B | Column C | Column D | Column E | ||||||||||||||||||||
Additions | Deductions | |||||||||||||||||||||||
Balance at | Write-offs | Balance at | ||||||||||||||||||||||
Beginning | Bad Debt | Net of | End of | |||||||||||||||||||||
Description | of Period | Expense | Other | Recoveries | Other | Period | ||||||||||||||||||
For the year ended December 31, 2004: |
$ | 17,486,000 | $ | 10,677,000 | $ | | $ | 11,251,000 | $ | | $ | 16,912,000 | ||||||||||||
For the year ended December 31, 2003: |
$ | 22,991,000 | $ | 10,437,000 | $ | | $ | 16,121,000 | $ | 179,000 | (1) | $ | 17,486,000 | |||||||||||
For the year ended December 31, 2002: |
$ | 32,152,000 | $ | 11,437,000 | $ | | $ | 20,598,000 | $ | | $ | 22,991,000 | ||||||||||||
(1) | Amounts represent reserves recorded as a result of consolidating previously 50% owned joint ventures. |
RETAIL INVENTORY RESERVES:
Column A | Column B | Column C | Column D | Column E | ||||||||||||||||||||
Additions | Deductions | |||||||||||||||||||||||
Balance at | Balance at | |||||||||||||||||||||||
Beginning | Cost of | End of | ||||||||||||||||||||||
Description | of Period | Sales | Other | Write-offs | Other | Period | ||||||||||||||||||
For the year ended December 31, 2004: |
$ | 558,000 | $ | 146,000 | $ | | $ | 236,000 | $ | | $ | 468,000 | ||||||||||||
For the year ended December 31, 2003: |
$ | 583,000 | $ | 101,000 | $ | | $ | 126,000 | $ | | $ | 558,000 | ||||||||||||
For the year ended December 31, 2002: |
$ | 1,191,000 | $ | 45,000 | $ | | $ | 123,000 | $ | 530,000 | (2) | $ | 583,000 | |||||||||||
(2) | Amounts represent favorable adjustments to cost of sales as a result of the Companys reassessment of required reserve levels due to reduced inventory exposure at the end of the period. |
RENTAL EQUIPMENT RESERVES:
Column A | Column B | Column C | Column D | Column E | ||||||||||||||||||||
Additions | Deductions | |||||||||||||||||||||||
Balance at | Balance at | |||||||||||||||||||||||
Beginning | Depreciation | End of | ||||||||||||||||||||||
Description | of Period | Expense | Other | Write-offs | Other | Period | ||||||||||||||||||
For the year ended December 31, 2004: |
$ | 925,000 | $ | 331,000 | $ | | $ | 220,000 | $ | | $ | 1,036,000 | ||||||||||||
For the year ended December 31, 2003: |
$ | 930,000 | $ | 238,000 | $ | | $ | 243,000 | $ | | $ | 925,000 | ||||||||||||
For the year ended December 31, 2002: |
$ | 1,152,000 | $ | 228,000 | $ | | $ | 450,000 | $ | | $ | 930,000 | ||||||||||||
S-2
INDEX TO EXHIBITS
Exhibit Number | Description of Exhibit | |||
2.1 | Second Amended Joint Plan of Reorganization Proposed by the Debtors and the Official Unsecured Creditors Committee dated January 2, 2003 (incorporated by reference to Exhibit 99.3 to the Companys Current Report on Form 8-K filed on March 27, 2003). | |||
3.1 | Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Companys 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 Companys Registration Statement No. 33-42777 on Form S-1). | |||
3.3 | Certificate of Amendment to the Certificate of Incorporation of the Company Dated May 14, 1992 (incorporated by reference to the Companys 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 Companys 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 Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2004). | |||
3.6 | Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.3 to the Companys Registration Statement No. 33-42777 on Form S-1). | |||
10.1 | Amended and Restated American HomePatient, Inc. 1991 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10 to the Companys Registration Statement on Form S-8 filed on April 5, 2004). | |||
10.2 | 1995 Nonqualified Stock Option Plan for Directors. | |||
10.3 | Amendment No. 1 to 1995 Nonqualified Stock Option Plan for Directors. | |||
10.4 | Agreement of Partnership of Homelink Home Healthcare Partnership dated February 28, 1985, by and between Med-E-Quip Rental and Leasing, Inc. and Homelink Home Health Care Services, Inc., as amended by First Amendment to Agreement of Partnership of Homelink Home Health Care Partnership dated February 28, 1988, by and between Med-E-Quip Rental and Leasing, Inc. and Homelink Home Healthcare Services, Inc. and Second Amendment to Agreement of Partnership of Homelink Home Health Care Partnership dated October 1, 1988, by and between Med-E-Quip Rental and Leasing, Inc. |
and Homelink Home Health Care Services, Inc. and Third Amendment to Agreement of Partnership of Homelink Healthcare Partnership dated October 1, 1991, by and between Med-E-Quip Rental and Leasing, Inc. and Homelink Home Health Care Services, Inc. (incorporated by reference to Exhibit 10.46 to the Companys Registration Statement No. 33-89568 on Form S-2). | ||||
10.5 | Lease and addendum as amended dated October 25, 1995, by and between Principal Mutual Life Insurance Company and American HomePatient, Inc. | |||
10.6 | Employment Agreement effective December 1, 2000 between the Company and Joseph F. Furlong, III. | |||
10.7 | Form of Promissory Note dated July 1, 2003, by American HomePatient, Inc. and certain of its direct and indirect subsidiaries (incorporated by reference to Exhibit 10.23 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003). | |||
10.8 | Second Amended and Restated Assignment and Borrower Security Agreement dated July 1, 2003, by and between American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.24 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003). | |||
10.9 | Second Amended and Restated Assignment and Subsidiary Security Agreement dated July 1, 2003, by and between certain direct and indirect subsidiaries of American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.25 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003). | |||
10.10 | Amended and Restated Borrower Partnership Security Agreement dated July 1, 2003, by and between American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.26 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003). | |||
10.11 | Amended and Restated Subsidiary Partnership Security Agreement dated July 1, 2003, by and between certain direct and indirect subsidiaries of American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.27 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003). | |||
10.12 | Second Amended and Restated Borrower Pledge Agreement dated July 1, 2003, by and between American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.28 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003). | |||
10.13 | Second Amended and Restated Subsidiary Pledge Agreement dated July 1, 2003, by and between certain direct and indirect subsidiaries of American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.29 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003). |
10.14 | Amended and Restated Concentration Bank Agreement dated July 1, 2003, by and between American HomePatient, Inc., PNC Bank, National Association, and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.30 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003). | |||
10.15 | Second Amended and Restated Collection Bank Agreement dated July 1, 2003, by and between American HomePatient, Inc., PNC Bank, National Association, and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.31 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003). | |||
10.16 | Amendment No. 1 to Amended and Restated American HomePatient, Inc. 1991 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated March 8, 2005). | |||
10.17 | Amendment No. 2 to 1995 Nonqualified Stock Option Plan for Directors (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K dated March 8, 2005). | |||
21 | Subsidiary List. | |||
23.1 | Consent of KPMG LLP. | |||
23.2 | Consent of Deloitte & Touche LLP. | |||
31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer. | |||
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Chief Financial Officer. | |||
32.1 | 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. | |||
32.2 | 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. |