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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
CHECK ONE:
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED EFFECTIVE OCTOBER 7, 1996]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ______
TO _____.
COMMISSION FILE NUMBER 0-19532
AMERICAN HOMEPATIENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1474680
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
5200 MARYLAND WAY, SUITE 400 37027-5018
BRENTWOOD TN (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 221-8884
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of registrant's voting stock held by non-affiliates
of the registrant, computed by reference to the price at which the stock was
sold, or average of the closing bid and asked prices, as of March 20, 1997 was
$324,458,310.
On March 20, 1997, 14,748,105 shares of the registrant's $0.01 par value Common
Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
The following documents are incorporated by reference into Part III, Items 10,
11, 12 and 13 of this Form 10-K: Portions of the Registrant's definitive proxy
materials for its 1997 Annual Meeting of Stockholders.
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PART I
ITEM 1. BUSINESS
INTRODUCTORY SUMMARY
American HomePatient, Inc. (the "Company" or the "Registrant"),
formerly Diversicare Inc., was incorporated in Delaware in September 1991. On
October 1, 1991, Counsel Corporation, a publicly traded Ontario, Canada
corporation (together with its subsidiaries, "Counsel"), transferred by capital
contribution to the Company various assets related to its long-term care
management business (the "Long-Term Care Management Business") and all of the
outstanding capital stock of its home health care services business subsidiary.
As of March 20, 1997, Counsel continued to have beneficial ownership of
3,843,625 common shares of the Company through an indirect wholly-owned
subsidiary, AHOM Holdings Inc. ("AHOM"), which is a 100% owned subsidiary of
DCAmerica Inc., a Delaware corporation. DCAmerica Inc. is a 100% owned
subsidiary of Counselcare Ltd., which is a 100% owned subsidiary of Counsel
Healthcare Assets, Inc., an Ontario, Canada corporation. Counsel Healthcare
Assets, Inc. is a 100% owned subsidiary of Counsel.
On May 10, 1994, the Company disposed of its Long-Term Care Management
Business in exchange for approximately $22.3 million. The Company used the sale
proceeds to expand its home health care services business. The Company changed
its name to American HomePatient, Inc. effective May 16, 1994 to reflect its
focus on home health care services. The Company's principal executive offices
are located at 5200 Maryland Way, Suite 400, Brentwood, Tennessee 37027-5018,
and its telephone number at that address is (615) 221-8884.
MATERIAL 1996 CORPORATE DEVELOPMENTS.
Changes to Bank Credit Facility. On May 1, 1996, the Company amended
and restated its Bank Credit Facility (the "Bank Credit Facility") to increase
commitments thereunder from $150.0 million to $225.0 million. The Facility
includes a $100.0 million five-year term loan and a $125.0 million five-year
revolving line of credit. Borrowings under the Bank Credit Facility may be used
to finance acquisitions and for other general corporate purposes, subject to the
terms and conditions of the credit and security agreements. Most of the
Company's operating assets have been pledged as security for borrowings under
the Bank Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".
Secondary Offering of Common Stock. In May 1996, the Company issued
1,650,000 shares of its common stock (on a pre-split basis) to the public (the
"Secondary Offering") at a price of $42.00 per share before underwriting
discounts and expenses. Net of discounts and expenses, the Company realized
approximately $66.0 million from the Secondary Offering. Of the
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Secondary Offering proceeds, approximately $59.0 million were applied to reduce
outstanding borrowings under the Bank Credit Facility and the remainder was used
to fund acquisitions.
Stock Split. In June 1996, the Company effectuated a 3-for-2 split of
its common stock. Distribution of shares pursuant to the stock split occurred in
July 1996 and resulted in 14,207,103 shares then outstanding.
Home Health Care Acquisitions. Effective in 1996, the Company acquired
40 home health care businesses consisting of 101 branches. The aggregate
purchase price included cash of $88.9 million, assumed liabilities of $12.5
million, notes payable to sellers of $22.4 million and 446,460 shares of the
Company's common stock. The cash amounts have been funded from operations, draws
on the Bank Credit Facility and the Secondary Offering. Of the 101 branches
acquired in 1996, the Company has consolidated 20 branches with other Company
locations.
BUSINESS
The Company is a health care services company engaged in the provision
of home health care services. The Company's home health care services are
comprised of the provision of respiratory therapy services, provision of
infusion therapy services and the rental and sale of home medical equipment and
home health care supplies. For the year ended December 31, 1996, such services
represented 49%, 18% and 33%, respectively, of net revenues. These services and
products are paid for primarily by Medicare, Medicaid and other third-party
payors. As of December 31, 1996, the Company provided these services to patients
primarily in the home through 300 centers in the following 32 states: Alabama,
Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois,
Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi,
Missouri, Nebraska, New Jersey, New Mexico, New York, North Carolina, Ohio,
Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West
Virginia, and Wisconsin. The Company had approximately 4,200 employees at
December 31, 1996.
The Company has significantly expanded its operations over the past
three years through a combination of acquisitions, joint ventures and strategic
alliances with integrated health care systems and same-store growth. During this
period, the Company generated a compound annual growth rate of approximately 64%
in net revenues, from $61.3 million in 1993 to $268.3 million in 1996, while
expanding from 76 centers in 13 states at December 31, 1993 to 300 centers in 32
states at December 31, 1996.
The acquisition of home health care companies in both existing and
contiguous markets has been a key component of the Company's growth strategy.
During 1996, the Company acquired 40 home health care companies, consisting of
101 centers with annualized net revenues of over $110 million , and entered 6
new states. Same-store growth in net revenues and operating income has been
achieved by expanding the range of services offered, implementing branch level
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cost controls and aggressively seeking to increase the sources of patient
referrals. Growth in same-store net revenues in 1994, 1995, and 1996 was 12%,
11%, and 9% respectively.
The Company's objective is to be a leading provider of diversified home
health care services in the markets in which it operates. Management seeks to
establish a regional concentration of centers in order to develop the market
penetration and critical mass necessary to position the Company as a
cost-effective provider of comprehensive home health care services to managed
care and other third-party payors. Management has placed particular emphasis on
preparing the Company to compete for managed care business and, as a result, has
developed a proprietary branch cost model that generates data to assist in
pricing and efficiently managing the delivery of services. In 1996, the Company
continued its strategy of developing joint venture relationships and strategic
contractual alliances with hospitals and hospital systems in order to position
the Company as a provider of home care services in integrated health care
delivery networks.
SERVICES AND PRODUCTS
The Company provides a diversified range of health care services and
products for use in the home environment. The following table sets forth the
percentage of net revenues represented by each line of business for the periods
presented:
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- ----
Home respiratory therapy services . . . . . . . . . . . . . 49% 53% 49%
Home infusion therapy services . . . . . . . . . . . . . . . 24 20 18
Home medical equipment and medical supplies. . . . . . . . . 27 27 33
---- ---- ----
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. Industry analysts estimate that the United States home
respiratory therapy market generated revenues of approximately $2.5 billion in
1995, or 9% of the total home health care market.
Patients are referred to a Company center most often by primary care
and pulmonary physicians as well as by hospital discharge planners and case
managers. After reviewing pertinent medical records on the patient and
confirming insurance coverage information, a Company respiratory therapist or
technician visits the patient's home to deliver and to prepare the prescribed
therapy or equipment. Company representatives coordinate the prescribed therapy
with the patient's physician, train the patient and caregiver in the correct use
of the equipment, and make periodic follow-up visits to the home to provide
additional instructions, required equipment maintenance and oxygen and other
supplies.
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The respiratory services that the Company provides include the
following:
-- Oxygen systems to assist patients with breathing. There are three
types of oxygen systems: (i) oxygen concentrators, which are
stationary units that filter ordinary air to provide a continuous
flow of oxygen; (ii) liquid oxygen systems, which are portable,
thermally-insulated containers of liquid oxygen; and (iii) high
pressure oxygen cylinders, which are used for portability with
oxygen concentrators. Oxygen systems are used to treat patients
with chronic obstructive pulmonary disease, cystic fibrosis and
neurologically-related respiratory problems.
-- Nebulizers to deliver aerosol medications to patients. Nebulizers
are used to treat patients with asthma, chronic obstructive
pulmonary disease, cystic fibrosis and neurologically-related
respiratory problems.
-- Home ventilators to sustain a patient's respiratory function
mechanically in cases of severe respiratory failure when a patient
can no longer breathe normally.
-- Non-invasive positive pressure ventilation ("NPPV") to provide
ventilation support via a face mask for patients with chronic
respiratory failure. This new therapy enables patients to receive
positive pressure ventilation without the invasive procedure of
intubation.
-- Continuous positive airway pressure ("CPAP") therapy to force air
through respiratory passage-ways during sleep. This treatment is
used on adults with sleep apnea, a condition in which a patient's
normal breathing patterns are disturbed during sleep.
-- Apnea monitors to monitor and to warn parents of apnea episodes
in newborn infants as a preventive measure against sudden infant
death syndrome.
-- Home sleep screenings and studies to detect sleep disorders and
the magnitude of such disorders.
The provision of oxygen-related services and systems comprised
approximately 64% of the Company's respiratory revenues with the balance
generated from nebulizers and related aerosol medication services, home
ventilators, CPAP therapy, home sleep studies and infant apnea monitors. The
Company provides respiratory therapy services at all but one of its centers,
and, until recently, has historically focused its acquisition strategy almost
entirely on home respiratory services companies. The Company will continue to
acquire home respiratory services companies but also expects to increasingly
evaluate the acquisition of home infusion services companies.
Home Infusion Therapy Services. The Company provides a wide range of
home infusion therapy services. The Company estimates that the United States
home infusion therapy market
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generated revenues of approximately $4.5 billion in 1995, or 16% of the total
home health care market.
Patients are referred to a Company center most often by primary care
and specialist physicians (such as infectious disease physicians and
oncologists) as well as by hospital discharge planners and case managers. After
confirming the patient's treatment plan with the physician, the pharmacist mixes
the medications and coordinates with the nurse the delivery of necessary
equipment, medication and supplies to the patient's home. The Company provides
the patient and caregiver with detailed instructions on the patient's prescribed
medication, therapy, pump and supplies. 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 or epidurally
(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
patient's digestive tract. This long-term therapy is often
prescribed for patients who are unable to eat or to drink
normally as a result of a neurological impairment such as a
stroke or a neoplasm (tumor).
-- Antibiotic therapy is the infusion of antibiotic medications into
a patient's bloodstream typically for two to four weeks to treat
a variety of serious 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 provided by the Company include chemotherapy,
hydration, growth hormone and immune globulin therapies. Enteral nutrition
services account for approximately 36% of the Company's infusion revenues, while
antibiotic therapy, TPN, and pain management and other medications accounted for
approximately 21%, 10% and 14%, respectively. The Company's remaining infusion
revenues were derived from the provision of infusion nursing services,
prescription drug sales and other miscellaneous infusion therapies.
Enteral nutrition services are provided at most of the Company's
centers, and the Company currently provides other infusion therapies in 90 of
its 300 centers. The Company added infusion services to nine of its existing
centers in 1996 and expects to continue to acquire
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home infusion services companies in 1997 in order to increase net revenues
attributable to infusion therapy services.
Home Medical Equipment and Supplies. The Company provides a full line
of equipment and supplies to serve the needs of home care patients. Revenues
from home equipment services are derived principally from the rental and sale of
wheelchairs, hospital beds, ambulatory aids, bathroom aids and safety equipment,
patient lifts and rehabilitation equipment. In many of the Company's markets,
the Company maintains a retail store and showroom where patients may purchase or
rent supplies and miscellaneous equipment.
The Company benefits from cross-selling opportunities to provide home
medical equipment to its customers who also are receiving respiratory therapy or
infusion therapy. Published reports estimate that home medical equipment market
revenues were approximately $1.9 billion in 1995, or 7% of the total home health
care market.
OPERATIONS
Organization. The Company's operations are divided into three
geographic areas, each headed by an area vice president. Each area vice
president manages six to eight regional vice presidents or regional managers who
each supervise the operations of six to ten centers. Management believes this
regional organizational structure gives the Company expanded management
flexibility and enables it to accommodate continued growth. Specifically, it
provides for a greater focus on local market operations and control at the
regional level, while enabling area vice presidents to concentrate on achieving
the Company's strategic goals. Area vice presidents focus on consolidating
certain cost control functions at the regional level, improving the Company's
ability to identify and integrate new acquisitions and decentralizing certain
management decisions to improve responsiveness in local markets.
Each of the Company's centers typically is staffed with a general
manager, a business office manager, a director of patient services (normally a
registered nurse or respiratory therapist), registered nurses, clinical
coordinators, respiratory therapists, service technicians and customer service
representatives. In addition, the Company employs a licensed pharmacist in all
centers that provide a significant amount of infusion therapy.
The Company has achieved what management believes is a successful
balance between centralized and decentralized management. Management believes
that home care is a local business dependent in large part on personal
relationships and, therefore, provides the Company's operating managers with a
significant degree of autonomy to encourage prompt and effective responses to
local market demands. In conjunction with this local operational authority, the
Company provides, through its corporate office (the "Support Center"),
sophisticated management support, marketing and managed care expertise, sales
training and support, product development and financial and information systems
that typically are not readily available to independent operators. The Company
retains centralized control over those functions necessary to monitor quality of
patient care and to maximize operational efficiency. Services performed at
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the corporate level include financial and accounting functions, clinical policy
and procedure development, system design and corporate acquisitions and
development.
The Company has recently regionalized certain functions previously
performed at the corporate or local level, such as quality improvement oversight
and billing and collections, in an effort to maximize efficiencies and
performance.
Commitment to Quality. The Company's quality improvement programs are
designed to ensure that its service standards are properly implemented.
Management believes that the Company has developed and implemented service and
procedure standards that not only comply with, but often exceed, the standards
required by the Joint Commission on Accreditation of Healthcare Organizations
("JCAHO"). All of the Company's centers are JCAHO-accredited or are in the
process of being reviewed for accreditation from the JCAHO. The Company's goal
is for all newly-acquired centers to become accredited within one year of
joining the Company. The Company has Quality Advisory Boards at many of its
centers, and center general managers conduct quarterly quality improvement
reviews. Regional quality improvement ("QI") specialists conduct quality
compliance audits at each center to ensure compliance with state, JCAHO, FDA and
internal standards. The QI specialist also helps train all new clinical
personnel on the Company's policies and procedures. The Company's corporate
philosophy for service excellence is its Personal Caring Service Promise, which
characterizes the Company's standards for quality care and customer service. The
Personal Caring Service Promise is as follows: We promise to serve our customers
with personal caring service. We do this by treating them with dignity and
respect, just like members of our own family, giving each of them the individual
attention they deserve.
Training and Retention of Quality Personnel. Management recognizes that
home health care is by nature a localized business. In addition to retaining its
existing management team, the Company also seeks to retain certain members of
management from its acquisitions. General managers recruit knowledgeable local
account executives capable of gaining new business from the local medical
community. In addition, the Company provides training to all new nurses,
respiratory therapists and pharmacy personnel as well as continuing education
for existing employees. In preparation for the expansion of managed care, the
Company also has implemented educational procedures designed to prepare
employees to compete in a managed care environment.
Management Information Systems. Management believes that an important
factor in the Company's continuing success will be the periodic refinement and
upgrading of its management information systems, which permit management to
monitor closely the activities of the Company's centers. These systems provide
monthly budget analyses, financial comparisons to prior periods and comparisons
among Company centers, thus enabling management to identify areas for
improvement. Medicare and many third-party payor claims are billed
electronically, thereby facilitating the collection of accounts receivable. In
addition, the Company's financial reporting system monitors certain key data for
each center, such as accounts receivable, payor mix, cash
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collections, net revenues and operating trends. The Company also has focused
upon quickly integrating the information systems of acquired centers as a part
of its overall integration efforts.
The Allowable Branch Cost Model (TM) is a productivity tool that allows
local and regional managers to track the cost of delivering a specific product
or service. This model is currently in use in 148 centers, which accounted for
approximately 67% of the Company's revenues. Because of the Company's rapid
growth, it is impractical to attempt to have all centers on the system, but it
is the Company's goal to have at least the number of centers that account for
70% of its revenue using the Allowable Branch Cost Model by the end of 1997.
HOSPITAL JOINT VENTURES AND STRATEGIC ALLIANCES
As of December 31, 1996, the Company had 18 home health care joint
ventures with hospitals or hospital systems. The Company intends to continue
forming joint ventures with hospitals and hospital systems in order to enter
larger markets with reduced financial risk and capitalize on the trend toward
integrated health care delivery networks that provide a full range of health
care services, including physician services, in-patient hospital care,
out-patient surgery, diagnostics and home health care.
The Company's joint ventures with hospitals set forth below 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 an amount of cash
equal to the Company's net contribution; (iii) the Company is the managing
partner for the hospital joint venture and receives a monthly management and
administrative fee; and (iv) distributions, to the extent made, are generally
made on a quarterly basis and are consistent with each partners capital
contributions. Within the hospital joint venture's designated market, all net
revenues generated by the Company from the provision of those services for which
the joint venture was formed are deemed to be net revenues of the hospital joint
venture, including revenues from sources other than the hospital joint venture
partner.
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The following table lists the Company's hospital joint venture partners and
locations:
HOSPITAL JOINT VENTURE PARTNER LOCATION
------------------------------ --------
Baptist Medical Center Montgomery, AL
Baptist Medical System (3 hospitals) Little Rock, AR
Baylor Health System (10 hospitals) Dallas, TX
Columbia/HCA Columbia, SC
Columbia/HCA Gainesville, FL
Columbia/HCA Jackson, TN
Columbia/HCA (11 hospitals) Nashville, TN
Columbia/HCA (5 hospitals) Richmond, VA
Columbia/HCA Roanoke, VA
Conway Hospital Conway, SC
Cooper Medical Center Camden, NJ
East Alabama Medical Center Opelika, AL
Fort Sanders Alliance (5 hospitals) Knoxville, TN
High Plains Baptist Hospital Amarillo, TX
Otsego Memorial Hospital Gaylord, MI
Piedmont Medical Center Rock Hill, SC
Spruce Pine Community Hospital Spruce Pine, NC
Tolfree Memorial Hospital West Branch, MI
To further its strategy of aligning with hospitals and hospital
systems, the Company also has developed numerous multi-year strategic alliance
contracts. These contracts enable the Company to be the preferred provider of
home respiratory services, home infusion services and home medical equipment and
supplies for certain hospitals in selected markets. Contracts developed in 1996
include Columbia/HCA North Florida Division (eight hospitals), Scottsdale,
Arizona Memorial (two hospitals), Columbia/HCA Jacksonville, Florida (three
hospitals), Columbia/HCA Treasure Coast, Florida (three hospitals), Columbia/HCA
Oklahoma (nine hospitals) and Lubbock Methodist Hospital System (three
hospitals).
REVENUES AND COLLECTIONS
The Company derives substantially all of its net 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. In 1990, changes were
made to Medicare Part B reimbursement, including a national standardization of
Medicare rates for certain equipment categories and reductions in amounts paid
for home medical equipment rentals.
Congress is expected to propose reductions in the Medicare
reimbursement rate for home oxygen in its 1997 budget. However, as of March,
1997, the budget reconciliation bill has not been passed. The Company is unable
to predict whether this or similar legislation will ultimately be adopted or, if
adopted, the effect it will have on the Company.
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The following table sets forth the percentage of the Company's net revenues from
each source indicated for the years presented:
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- ----
Medicare. . . . . . . . . . . . . . . . . . . . . . . . . . 50% 46% 46%
Private pay, primarily private insurance. . . . . . . . . . 39 42 41
Medicaid. . . . . . . . . . . . . . . . . . . . . . . . . . 11 12 13
---- ---- ----
Total 100% 100% 100%
==== ==== ====
Managed care has assumed an increasingly significant role in the health
care industry. The Company has implemented strategies designed to enable the
Company to compete effectively for managed care contracts.
The Company's significant growth in net revenues has been accompanied
by corresponding growth in net accounts receivable. Net accounts receivable at
December 31, 1996 were $79.5 million compared to net accounts receivable of
$47.3 million at December 31, 1995. The Company attempts to minimize days' sales
in outstanding net accounts receivable ("DSO") by screening new patient cases
for adequate sources of reimbursement and by providing complete and accurate
claims data to relevant payor sources. The table below shows the Company's DSO
for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- ----
Days' sales outstanding. . . . . . . . . 80 days 91 days 93 days
The increase in DSO between 1996 and 1995 is primarily attributable to
slightly extended collection time frames for Medicare receivables associated
with revised rules regarding physician completion of Certificates of Medical
Necessity. The increase in DSO between 1995 and 1994 is primarily attributable
to the accounts receivable acquired in the ConPharma acquisition. DSO for
ConPharma was 145 days at December 31, 1995 as compared to 82 days for the
Company without ConPharma. The Company maintained DSO at a relatively constant
level during the period from November 1993 to July 1994 when HCFA transitioned
from over 34 local carriers to four regional carriers to process all claims
under Medicare Part B reimbursement primarily by increasing collection efforts
with the Company's other payor sources.
SALES AND MARKETING
Sales. The Company has recorded strong same-store sales over the past
four years. However, in anticipation of the needs of a changing market, it
recently reorganized its field sales function to provide greater support for the
Company's marketing to its three key "trade channels"--traditional sources
(physicians, hospital discharge planners, nursing agencies), strategic
alliance/joint ventures and managed care. Several new sales positions have been
created including Vice President of Sales, Area Sales Directors and Senior
Account Executives. The Company's
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Vice President of Managed Care was promoted to Vice President of Sales and is
charged with leading the Company's strategic sales efforts.
Managed Care Sales. The Company's approach to managed care sales
utilizes its local operating and market strengths, supplemented by regional and
corporate managed care expertise. As a result of this strategy, the Company
increased the number of managed care contracts in 1996 from 200 to over 330. In
addition, in 1996, the Company began utilizing the CURE(TM) Report
(Comprehensive Utilization Report and Evaluation), the Company's managed care
reporting system that provides a detailed accounting of home care utilization
and cost indicators to keep managed care organizations informed of physician
home care related practice patterns and costs.
Hospital Joint Ventures and Strategic Alliances Development. In 1996,
the Company established a senior level, experienced operating team to lead its
efforts to develop additional hospital joint ventures and strategic alliances.
An executive officer of the Company assumed the responsibilities of Senior Vice
President -- Strategic Alliances in February 1996, and reports directly to the
Chief Executive Officer. The team also consists of two operations
vice-presidents and a financial analyst. In targeting hospital joint ventures
and strategic alliances, this team markets arrangements to regional and senior
executives in hospital systems and the chief executive and financial officers of
hospitals. See -- "Hospital Joint Ventures and Strategic Alliances."
Corporate Marketing Support. The Company's corporate marketing
department provides product and services planning and development, market
research, marketing communications, public and community relations and
educational program development for all of the Company's centers. The Company
has primarily expanded services by adding infusion, rehabilitation, pediatric
and other services as well as repackaging and marketing existing services as
branded products, such as the Company's Resource(TM), Aermeds(TM) and
EnterCare(TM) programs. In 1996, the Company introduced its new NPPV program
designed to treat chronic respiratory failure patients. This new therapy
provides patients an innovative method of treatment that helps reduce
hospitalization and improve the patients' quality of life. All marketing
programs introduced by the corporate marketing department are designed to meet
the needs of the Company's traditional referral sources as well as managed care
organizations and integrated health care delivery networks. Another market
initiative undertaken by the Company is the Professional Educational Series
("PES"), which provides support for local centers to conduct health care
seminars, lectures and in-service programs which offer clinician credit hours.
COMPETITION
In spite of the rapid consolidation occurring in the home health care
industry, it is highly fragmented and competition varies significantly from
market to market. In the small and mid-size markets in which the Company
primarily operates, the majority of its competition comes from local independent
operators or hospital-based facilities, whose primary competitive advantage is
market familiarity. In the larger markets, regional and national providers
account for a significant portion of competition. Management believes that the
competitive factors most important in the
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Company's lines of business are quality of care and service, reputation with
referring sources, ease of doing business with the provider, ability to develop
and to maintain relationships with referral sources, competitive prices, and the
range of services offered. In addition, there are still relatively few barriers
to entry in the local markets served by the Company, and it may encounter
substantial competition from new market entrants.
Competition within the industry has been affected by the decision of
third party payors and their case managers to become more active in monitoring
and directing the care delivered to their beneficiaries. Accordingly,
relationships with such payors and their case managers and inclusion within
preferred provider and other networks of approved or accredited providers has
become a prerequisite, in many cases, to the Company's ability to serve many of
the patients treated by it. Similarly, the ability of the Company and its
competitors to align themselves with other health care service providers may
increase in importance as managed care providers and provider networks seek out
providers who offer a broad range of services and geographic coverage.
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BRANCH LOCATIONS
Following is a list of the Company's 300 home health care centers as of
December 31, 1996.
ALABAMA FLORIDA Eddyville St. Louis Springfield Florence Virginia Beach
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Alexander City Crawfordville Elizabethtown St. Robert Twinsburg Greenville
Andalusia Daytona Beach Florence Warrensburg Wilmington N. Charleston WEST VIRGINIA
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Birmingham Ft. Meyers Glasgow Zanesville Rock Hill*** Bluefield
Dothan Ft. Walton Beach Hyden NEBRASKA Union***
--------------
Eufaula Gainesville Jackson Omaha OKLAHOMA WISCONSIN
------------- -------------
Fairhope Lake City Lexington Bartlesville TENNESSEE Eau Claire
---------
Fayette Naples London NEW JERSEY Claremore Chattanooga La Crosse
--------------
Florence Palatka Louisville Cranbury Grove Cookeville Marshfield
Foley Panama City (2) Mayfield Flemington Lawton Dayton Milwaukee
Huntsville Pensacola Middlesboro Princeton McAlester Jackson*** Minocqua
Mobile Port St. Lucie Paducah Oklahoma City Johnson City Monona
Montgomery*** Rockledge Pikeville NEW MEXICO Tulsa Kingsport Racine
--------------
Opelika*** St. Augustine Scottsville Alamogordo Wagoner Knoxville*** Wisconsin Rapids
Russellville Tallahassee Somerset Albuquerque Morristown
Sylacauga(2) Tampa Clovis PENNSYLVANIA Murfreesboro
-------------
Troy LOUISIANA Farmington Altoona Nashville***
-----------
Tuscaloosa GEORGIA Bogalusa Grants Bedford Oak Ridge***
--------
Albany Hammond Hobbs Blue Bell Oneida***
ARIZONA Americus Slidell Las Cruces Brookville Rogersville
-----------
Cottonwood Brunswick Roswell Carlisle Union City
Flagstaff Camilla MARYLAND Chambersburg
-----------
Globe Dalton Cumberland NEW YORK Clearfield TEXAS
-------------- ---------
Kingman Ft. Oglethorpe Frederick Albany Crafton Amarillo***
Phoenix Martinez/Augusta Oakland Buffalo Erie(2) Austin
Prescott Nashville Salisbury Corning Hamburg Bay City
Safford Savannah Geneva Harrisburg Borger***
Sierra Vista** Valdosta MICHIGAN Marcy Hazelton Conroe
----------
Tucson** Waycross Gaylord*** Oneonta Houtzdale Corpus Christi
Yuma** Lansing Rochester(2) Johnstown Dallas***
ILLINOIS West Branch*** Skanteateles Lehighton Early
--------
ARKANSAS Alsip Syracuse Levittown El Paso
-----------
Batesville Arlington Heights MINNESOTA Watertown Lewistown Ennis***
-----------
Berryville Peoria Rochester Lock Haven Grand Prairie
El Dorado*** Springfield NORTH CAROLINA McKees Rock Harlingen
--------------
Hot Springs MISSISSIPPI Asheboro Mt. Pleasant Houston
-----------
Jonesboro(2) IOWA Iuka Asheville Oil City Irving***
--------
Little Rock*** Cedar Rapids Tupelo Bakersville Palmerton Lake Jackson
Paragould Clarinda Charlotte Phillipsburg Laredo
Springdale Davenport MISSOURI Hickory Philadelphia* Longview
-----------
Decorah Cameron Maiden Pottsville Lubbock
COLORADO Des Moines Cape Girardeau Marion Reading McAllen
-----------
Cortez Dubuque Columbia Morehead City Sharon Mexia
Durango Iowa City Eldon Morganton Shamokin Pampa***
Pagosa Springs Marshalltown Festus Morrisville Shenandoah Paris
Mason City Hannibal Newland State College Plainview
CONNECTICUT Ottumwa Ironton Spruce Pine*** Tamaqua San Angelo
-----------
Brookfield Sioux City Joplin Sylva Titusville San Antonio
Danielson Waterloo Kansas City Wadesboro Trevose Temple
New Britain Macon Whiteville Warminster Victoria
New Milford KANSAS Mexico Winston-Salem Waynesboro Waco
--------
Waterbury Pittsburgh Mountain Grove Warren
Poplar Bluff OHIO York VIRGINIA
-------------- ---------
DELAWARE KENTUCKY Potosi Cambridge Farmville
------------ --------
Dover Bowling Green Rolla Athens SOUTH CAROLINA New Salem
--------------
Newark Corbin Salem Chillicothe Columbia Onley
Wilmington Danville Springfield Dayton Conway*** Richmond***
- -------------------------
* The Company owns an equity interest in a hospital joint venture in Camden,
New Jersey which is serviced out of Company's owned Philadelphia center.
** Managed but not owned by the Company.
*** Owned by a joint venture.
14
15
SUPPLIES AND EQUIPMENT
The Company purchases drugs, solutions and other materials and leases
certain equipment required in connection with the Company's business from many
suppliers. The Company has not experienced, and management does not anticipate
that the Company will experience, any significant difficulty in purchasing
supplies or leasing equipment from current suppliers. In the event that such
suppliers are unable or fail to sell supplies or lease equipment to the Company,
management believes that other suppliers are available to meet the Company's
needs at comparable prices.
INSURANCE
The Company's professional liability policies are on an occurrence
basis and are renewable annually with per claim coverage limits of up to
$1,000,000 per occurrence and $3,000,000 in the aggregate. The Company maintains
a commercial general liability policy which includes product liability coverage
on the medical equipment that it sells or rents with per claim coverage limits
of up to $1,000,000 per occurrence with a $1,000,000 product liability annual
aggregate and a $2,000,000 general liability annual aggregate. The Company also
maintains excess liability coverage with a limit of $25,000,000 per occurrence
and $25,000,000 in the aggregate. While 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 additional insured, 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. There
can be no assurance that any of the Company's insurance will be sufficient to
cover any judgments, settlements or cost 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 cost relating to
pending or future legal proceedings, the Company's business and financial
condition could be materially, adversely affected. Subsequent to December 31,
1996, the Company increased its excess liability coverage to $50,000,000 per
occurrence and $50,000,000 in the aggregate.
15
16
EMPLOYEES
The retention of qualified employees is a high priority for the
Company. At December 31, 1996, the Company employed approximately 3,067
full-time, 489 part-time and 594 PRN individuals. Of these individuals,
approximately 125 were employed at the corporate support center. Management
believes that the Company's employee relations are good. None of the Company's
employees are represented by a labor union.
16
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TRADEMARKS
The Company owns and uses a variety of marks, including American
HomePatient, AerMeds, EnterCare, Resource and Extracare, which have either been
registered at the federal or state level, are currently being considered for
such registration or are being used pursuant to common law rights. The Company
does not believe any of its marks to be material to the continuation of its
operations.
GOVERNMENT REGULATION
The Company's business is subject to extensive federal, state and local
regulation.
The operations of the Company's home health care centers are subject to
federal laws covering the repackaging and dispensing of drugs and regulating
interstate motor-carrier transportation. Such centers also are subject to state
laws governing pharmacies, nursing services and certain types of home health
agency activities. Certain of the Company's employees are subject to state laws
and regulations governing the professional practice of respiratory therapy,
pharmacy and nursing. Currently, the Company is licensed as a home health
agency in Florida and New York.
A series of laws and regulations dating back to the Omnibus Budget
Reconciliation Act of 1987 ("OBRA 1987") have been enacted and apply to the
Company's operation. Periodic changes have occurred from time to time since the
1987 Act including reimbursement reduction and changes to payment rules.
As a provider of services under the Medicare and Medicaid programs, the
Company is subject to the Medicare and Medicaid 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 Medicare or Medicaid patients. 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 in which they have a financial interest. Many states in which the
Company operates have adopted similar self-referral laws, as well as laws
that prohibit certain direct or indirect payments or fee-splitting arrangements
between health care providers, if such arrangements are designed to induce or to
encourage the referral of patients to a particular provider.
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18
Health care is an area of extensive and dynamic regulatory change.
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 by government and third-party payors. Furthermore, the Company
will be required to comply with applicable regulations in each new state in
which it desires to provide services.
Management believes that the Company operations are in material
compliance with applicable laws. The Company, however, is unable to predict
what additional government regulations, if any, affecting its business may be
enacted in the future, how existing or future laws and regulations might be
interpreted or whether the Company will be able to comply with such laws and
regulations either in the markets in which it presently conducts, or wishes to
commence, business. The Company also is subject to routine and periodic surveys
and audits by various governmental agencies.
In the fall of 1995, Congress proposed reductions in the Medicare
reimbursement rate for home oxygen therapy service and equipment, which
legislation was vetoed by President Clinton. Despite the presidential veto,
Congress continues to consider legislation affecting reimbursement of these
items, and President Clinton's proposed budget for 1998 includes a provision
that would require Medicare to obtain competitive bidding for all clinical
laboratory services, home medical equipment (including home oxygen) and
orthotics. Consequently, Medicare reimbursement rates for oxygen services and
equipment could be reduced. The Company cannot be certain of the timing or
level of reductions for Medicare oxygen and equipment reimbursement. Any such
reductions could have a material adverse effect on the operating results and
cash flows of the Company.
18
19
ITEM 2. PROPERTIES
The Company owns a 15,500 square foot office building in Franklin,
Tennessee, which served as the Company's executive offices through February,
1996. The Company also owns its center in Tallahassee, Florida, which consists
of approximately 15,000 square feet and owns a 50% interest in its center in
Little Rock, Arkansas, which consists of approximately 15,000 square feet. The
Company leases the operating space required for its remaining 298 home health
care centers. A typical center occupies between 2,000 and 6,000 square feet and
generally combines showroom, office and warehouse space, with approximately
two-thirds of the square footage consisting of warehouse space. Lease terms on
most of the leased centers range from three to five years. Management believes
that the Company's owned and leased properties are adequate for its present
needs and that suitable additional or replacement space will be available as
required.
In February 1996, the Company relocated its corporate headquarters from
the property owned in Franklin, Tennessee to leased space of approximately
29,000 square feet in the Parklane Building, Maryland Farms, Brentwood,
Tennessee. The lease has a seven year term with base monthly rent of $36,000,
compared to total costs paid in the Franklin facility of approximately $17,000
per month. The costs per square foot are comparable between the new leased
facility and the owned facility. The Company's rapid expansion necessitated the
need for additional space. The Company plans to sell the Franklin property.
19
20
ITEM 3. LEGAL PROCEEDINGS
While the Company is engaged in routine litigation incidental to its
business, there are no material legal proceedings to which the Company or any of
its subsidiaries is a party or to which any of their properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
20
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The common stock of the Company is traded on the Nasdaq National Market
System ("NASDAQ Stock Market") under the designation "AHOM". The following table
sets forth representative bid quotations of the common stock for each quarter of
calendar years 1995 and 1996 as provided by NASDAQ Stock Market. The following
bid quotations reflect interdealer prices without retail mark-ups, mark-downs or
commissions, and may not necessarily represent actual transactions. In June 1996
the Company effectuated a 3-for-2 split of its common stock.
BID QUOTATIONS
--------------
FISCAL PERIOD HIGH LOW
------------- ----- ---
1995 1st Quarter $19.08 $14.00
1995 2nd Quarter $21.50 $18.17
1995 3rd Quarter $23.50 $16.67
1995 4th Quarter $20.33 $13.33
1996 1st Quarter $26.17 $16.17
1996 2nd Quarter $31.83 $25.33
1996 3rd Quarter $30.38 $19.50
1996 4th Quarter $27.50 $20.00
The Company's common stock has been quoted on NASDAQ Stock Market since
November 8, 1991. On March 20, 1997, the closing bid quotation for the common
stock was $22.00 per share, as reported by NASDAQ Stock Market.
On March 20, 1997, there were 774 holders of record of the common
stock. Most of the Company's stockholders have their holdings in the street name
of their broker/dealer. The Company believes that the total number of
stockholders is approximately 3,000 individuals and entities.
The Company has not paid cash dividends on its common stock and
anticipates that, for the foreseeable future, any earnings will be retained for
use in its business and no cash dividends will be paid. The Company is
prohibited from issuing dividends under its Bank Credit Facility. See -"
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
A Stock Purchase Warrant dated August 1, 1994 was issued to Robert A.
Clasen granting him the right to purchase 15,000 shares of the Company's common
stock at an exercise price of $12 per share. The Stock Purchase Warrant is
exercisable in whole or in increments of 100 shares
21
22
or more and expires August 1, 1997. The Stock Purchase Warrant was issued in
connection with the Company's acquisition of the stock of Clasen Health
Services, Inc. from Robert Clasen and other individuals. The Stock Purchase
Warrant was issued in reliance upon Section 4(2) of the Securities Act of 1933,
as amended ("Securities Act") and upon Rule 505 of Regulation D.
A Stock Purchase Warrant dated August 11, 1994 was issued to Colman
Furlong & Co. granting it the right to purchase 40,017 shares of the Company's
common stock at an exercise price of $7.33 per share. The Stock Purchase Warrant
is exercisable in whole or in increments of 100 shares or more and expires
August 11, 1999. The Stock Purchase Warrant was issued as compensation for
broker services performed by Colman Furlong & Co. in connection with the
Company's acquisition of the stock of Clasen Health Services, Inc. The Stock
Purchase Warrant was issued in reliance upon Section 4(2) of the Securities Act
and upon Rule 505 of Regulation D.
A Stock Purchase Warrant dated March 31, 1994 was issued to Medical
Environment Development Corp. granting it the right to purchase 41,250 shares of
the Company's common stock at an exercise price of $10.33 per share. The Stock
Purchase Warrant is exercisable in whole or in part and expires March 30, 1999.
The Stock Purchase Warrant was issued in connection with the Company's
acquisition of the assets of Health Star Medical, Inc. and its affiliates. The
Stock Purchase Warrant was issued in reliance upon Section 4(2) of the
Securities Act and upon Rule 505 of Regulation D.
In each of the foregoing transactions the Stock Purchase Warrant was
exercisable for less than $5,000,000 of the Company's common stock and no
general solicitation or advertising was made. The Company determined that each
investor, alone or with a purchaser representative, was sophisticated and had no
present intention to resell the securities.
On July 19, 1996, 446,460 shares of the Company's common stock were
issued in connection with the merger of Miller Medical, Inc. with and into a
wholly owned subsidiary of the Company. 94,828 shares of the Company's common
stock were issued to each of Blaine Miller, Douglas Miller, John Miller and
Richard Hanna. The remaining 67,148 shares of the Company's common stock were
issued to the Miller Medical, Inc. Employee Stock Ownership Plan and Trust. The
stock was issued in reliance upon Section 4(2) of the Securities Act and upon
Rule 506 of Regulation D. No general solicitation or advertising was made and
the Company determined that each non-accredited investor, alone or with a
purchaser representative, was sophisticated and had no present intention to
resell the securities.
22
23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FINANCIAL STATEMENTS PRESENTED AND DERIVATION OF INFORMATION
The following selected financial data of the Company for each of the
five years ended December 31, 1992, 1993, 1994, 1995 and 1996 has been derived
from the audited financial statements of the Company and should be read in
conjunction with those statements, including the related notes thereto. The
addition of new operations through acquisitions during 1992, 1993, 1994, 1995
and 1996 materially affects the comparability of the financial data presented.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The historical operating data reflects the operations of the Company's
home health care business as continuing operations and its long-term care
management business as discontinued operations.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Net revenues $ 45,833 $ 61,315 $ 90,185 $ 162,371 $ 268,348
Cost of sales and related services, excluding
depreciation and amortization expense 10,702 13,677 17,445 34,031 58,575
Operating expenses 22,876 31,307 47,081 81,718 135,813
General and administrative expenses 5,617 5,520 7,829 12,594 17,064
Depreciation and amortization expense 3,174 4,532 6,656 14,081 23,845
Interest expense 178 542 2,132 4,829 8,294
--------- --------- --------- -------- --------
Total expenses 42,547 55,578 81,143 147,253 243,591
--------- --------- --------- -------- --------
Income from continuing operations before taxes 3,286 5,737 9,042 15,118 24,757
Provision for income taxes 1,272 2,254 3,476 6,029 9,556
--------- --------- --------- -------- --------
Income from continuing operations $ 2,014 $ 3,483 $ 5,566 $ 9,089 $ 15,201
========= ========= ========= ========= =======
Income from continuing operations per share $ 0.27 $ 0.46 $ 0.67 $ 0.84 $ 1.10
========= ========= ========= ========= =======
Weighted average shares outstanding 7,569,000 7,622,000 8,352,000 10,842,000 13,761,000
DECEMBER 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital $ 14,855 $ 14,961 $ 20,848 $ 46,272 $ 84,012
Total assets 37,647 60,065 110,965 232,516 395,611
Total debt and capital leases, including 1,778 17,472 35,908 93,606 149,703
current portion
Shareholders' equity 31,488 36,950 58,096 119,431 215,642
23
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RISK FACTORS - IN CONNECTION WITH THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THE COMPANY HEREBY MAKES
REFERENCE TO ITEMS SET FORTH UNDER THE HEADING "RISK FACTORS" IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-2, AS AMENDED (REGISTRATION NO. 33-89568). SUCH
CAUTIONARY STATEMENTS IDENTIFY IMPORTANT FACTS THAT COULD CAUSE THE COMPANY'S
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN FORWARD LOOKING
STATEMENTS MADE BY OR ON BEHALF OF THE COMPANY IN THIS OR ANY OTHER SECTION OF
THIS ANNUAL REPORT ON FORM 10-K.
The Company has three principal services or product lines: home
respiratory services, home infusion services and home medical equipment and
supplies. Home respiratory services include oxygen systems, nebulizers and home
ventilators and are provided primarily to patients with severe and chronic
pulmonary diseases. Home infusion services are used to administer nutrients,
antibiotics and other medications to patients with medical conditions such as
neurological impairments, infectious diseases or cancer. The Company also sells
and rents a variety of home medical equipment and supplies, including
wheelchairs, hospital beds and ambulatory aids. The following table sets forth
the percentage of the Company's net revenues represented by each line of
business for the periods presented:
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
---- ---- ----
Home respiratory therapy services 49% 53% 49%
Home infusion therapy services 24 20 18
Home medical equipment and medical supplies 27 27 33
--- --- ---
Total 100% 100% 100%
=== === ===
The foregoing table reflects changes in the Company's business mix over
the periods indicated, primarily resulting from the increase in medical
equipment and medical supplies revenues generated by acquired operations. From
1992 through 1996, the Company acquired 76 home health care companies (2, 5, 12,
17 and 40 companies in 1992, 1993, 1994, 1995 and 1996, respectively). The
Company's goal is to maintain a diversified offering of home health care
services, including a higher percentage of infusion therapy services than it has
currently in order to provide the comprehensive array of services that managed
care organizations are likely to require.
In conjunction with the foregoing, management continuously evaluates
new products and services in an effort to diversify its business mix. For
example, the Company added infusion services to nine of its existing centers in
1996 and expects to continue adding infusion services to additional centers. The
Company also expects to begin evaluating the acquisition of home infusion
service companies in 1997 in order to increase net revenues attributable to
infusion therapy services. In addition, the Company continues to implement a
variety of initiatives designed to lower its costs. The Company is currently
focused upon: (i) leveraging corporate purchasing agreements to reduce supply
and equipment costs; (ii) consolidating same-market and
24
25
overlapping centers; (iii) decreasing collection periods and associated billing
costs; and (iv) regionalizing certain functions.
The Company reports its net revenues as follows: (i) sales and related
services; (ii) rentals and other; and (iii) earnings from joint ventures. Sales
and related services revenues are derived from the provision of infusion
therapies, the sale of home health care equipment and supplies, the sale of
aerosol and respiratory therapy equipment and supplies and services related to
the delivery of these products. Rentals and other revenues are derived from the
rental of home health care equipment, enteral pumps and equipment related to the
provision of respiratory therapies. Earnings from joint ventures include equity
in earnings and management and administrative fees for unconsolidated joint
ventures. Cost of sales and related services includes the cost of equipment,
drugs and related supplies sold to patients. Operating expenses include center
labor costs, delivery expenses, occupancy costs, costs related to rentals other
than depreciation, billing center costs, provision for doubtful accounts and
other operating costs. General and administrative expenses include corporate,
area and regional management expenses and costs.
The Company annually evaluates the realizability of goodwill by
utilizing an operating income realization test for the applicable businesses
acquired. In addition, the Company considers the effects of external changes to
the Company's business environment, including competitive pressures, market
erosion and technological and regulatory changes. The Company believes its
estimated goodwill life is reasonable given the continuing movement of patient
care to noninstitutional settings, expanding demand due to demographic trends,
the emphasis of the Company on establishing significant coverage in each local
and regional market, the goodwill life recognized by other home care companies
and other factors.
RESULTS OF OPERATIONS
The Company's net revenues from continuing operations have grown at a
compound annual growth rate of approximately 64% during the period from January
1, 1993 through December 31, 1996. In addition, since 1991, the Company has
expanded its operations from 24 home health care centers in four states to 300
home health care centers in 32 states. This growth has been achieved through a
combination of same-store growth, acquisitions, start-up operations, hospital
joint ventures and strategic alliances. Growth in same-store net revenues
(approximately 14%, 12%, 11% and 9% in 1993, 1994, 1995 and 1996, respectively)
resulted from the expansion of the range of services offered at the Company's
centers and the increase in the Company's sources of patient referrals. The
Company acquired 81 centers and 101 centers during 1995 and 1996, respectively.
Throughout this expansion, the Company's earnings before interest, taxes,
depreciation, and amortization ("EBITDA") margin has increased from 18% in 1993
to 21% in 1996.
25
26
The following table sets forth, for the periods indicated, the
percentage of net revenues represented by the respective financial items:
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
---- ---- ----
Net revenues 100% 100% 100%
Cost of sales and related services, excluding depreciation and
amortization expense 20 21 22
Operating expenses 52 50 51
General and administrative expense 9 8 6
Depreciation and amortization expense 7 9 9
Interest expense 2 3 3
------- ------- -------
Total expenses 90 91 91
------- ------- -------
Income from continuing operations before taxes 10 9 9
Provision for income taxes 4 3 3
------- ------- -------
Income from continuing operations 6 6 6
======= ======= =======
OTHER DATA:
EBITDA 20% 21% 21%
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
During 1996, the Company converted three previously wholly-owned
centers to hospital joint ventures accounted for under the equity method. The
effect of these transactions in the comparison of the 1996 period to the 1995
period is referred to as "dissolutions."
NET REVENUES. Net revenues increased from $162.4 million in 1995 to
$268.3 million in 1996, an increase of $105.9 million, or 65%. Same-store net
revenues grew 11% in 1995 compared to 9% in 1996, including net revenue growth
generated by the Company's 50%-owned joint ventures. This 2% decrease in
same-store net revenue growth is attributable to the ConPharma centers acquired
in May 1995. Excluding the ConPharma centers, same-store net revenue growth was
11% for 1996. Following is a discussion of the components of net revenues:
Sales and Related Services Revenues. Sales and
related services revenues increased from $70.2 million in 1995
to $119.3 million in 1996, an increase of $49.1 million, or 70%. Of
this increase, $47.4 million was attributable to acquisitions, net of
dissolutions, and $1.7 million was attributable to net revenue growth
in the Company's existing centers (excluding same-store joint ventures
accounted for under the equity method). Increases in sales and related
services revenues in the Company's existing centers were
attributable primarily to growth in net revenues from the sale of home
medical equipment and supplies.
Rentals and Other Revenues. Rentals and other
revenues increased from $88.2 million in 1995 to $142.7 million in
1996, an increase of $54.5 million, or 62%. Of this increase, $49.5
million was attributable to acquisitions, net of dissolutions, and $5.0
26
27
million was attributable to net revenue growth in the Company's
existing centers (excluding same-store joint ventures accounted for
under the equity method). Increases in rentals and other revenues in
the Company's existing centers were attributable primarily to growth
in net revenues from the provision of respiratory therapies.
Earnings from Joint Ventures. Earnings from joint
ventures increased from $4.0 million in 1995 to $6.4 million in 1996,
an increase of $2.4 million. Of this increase, $1.2 million was
attributable to acquired and newly-formed joint ventures, net of
dissolutions, and $1.2 million was attributable to growth in the
Company's existing joint ventures. On a same-store basis, net revenue
of joint ventures grew 37% in 1996 compared to 1995, increasing the
Company's total same-store growth rate by 4%.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services
increased from $34.0 million in 1995 to $58.6 million in 1996, an increase of
$24.6 million, or 72%. This increase was attributable primarily to acquisitions,
net of dissolutions. As a percentage of sales and related services revenues,
cost of sales and related services increased from 48% in 1995 to 49% in 1996.
This percentage increase was attributable primarily to the change in mix of
sales and related service revenues of acquisitions made during 1996.
OPERATING EXPENSES. Operating expenses increased from $81.7 million in
1995 to $135.8 million in 1996, an increase of $54.1 million, or 66%. This
increase was attributable primarily to increased costs associated with the
Company's increased net revenues. As a percentage of net revenues, operating
expenses increased from 50% in 1995 to 51% in 1996. Even though field operating
expenses remained constant as a percentage of net revenues, slightly higher bad
debt expense as a percentage of net revenue was the primary factor contributing
to the overall operating expense percentage increase.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased from $12.6 million in 1995 to $17.1 million in 1996, an
increase of $4.5 million, or 36%. This increase was attributable primarily to
increases in personnel expenses associated with providing support for
acquisitions and continued growth. As a percentage of net revenues, general and
administrative expenses decreased from 8% in 1995 to 6% in 1996.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased from $14.1 million in 1995 to $23.8 million in 1996, an
increase of $9.7 million, or 69%. This increase was attributable primarily to
depreciation expense and the amortization of goodwill recorded in connection
with acquisitions.
INTEREST EXPENSE. Interest expense increased from $4.8 million in 1995
to $8.3 million in 1996, an increase of $3.5 million. This increase was due
primarily to interest expense on borrowings used under the Bank Credit Facility
to fund acquisitions of home health care companies during 1995 and 1996.
27
28
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
During 1995, the Company converted three previously wholly-owned
centers to hospital joint ventures accounted for under the equity method. The
effect of these transactions in the comparison of the 1995 period to the 1994
period is referred to as "dissolutions."
NET REVENUES. Net revenues increased from $90.2 million in 1994 to
$162.4 million in 1995, an increase of $72.2 million, or 80%. Same-store net
revenues grew 11% in 1995 compared to 12% in 1994, including net revenue growth
generated by the Company's 50%-owned joint ventures. Following is a discussion
of the components of net revenues:
Sales and Related Services Revenues. Sales and
related services revenues increased from $38.7 million in 1994 to $70.2
million in 1995, an increase of $31.5 million, or 81%. Of this
increase, $28.6 million was attributable to acquisitions, net of
dissolutions, and $2.9 million was attributable to net revenue growth
in the Company's existing centers (excluding same-store joint ventures
accounted for under the equity method). Increases in sales and related
services revenues in the Company's existing centers were attributable
primarily to growth in net revenues from the provision of respiratory
therapies and the sale of home medical equipment and supplies.
Rentals and Other Revenues. Rentals and other
revenues increased from $47.9 million in 1994 to $88.2 million in 1995,
an increase of $40.3 million, or 84%. Of this increase, $35.9 million
was attributable to acquisitions, net of dissolutions, and $4.4 million
was attributable to net revenue growth in the Company's existing
centers (excluding same-store joint ventures accounted for under the
equity method). Increases in rentals and other revenues in the
Company's existing centers were attributable primarily to growth in net
revenues from the provision of respiratory therapies, which increased
11% over the prior year.
Earnings from Joint Ventures. Earnings from joint
ventures increased from $3.5 million in 1994 to $4.0 million in 1995,
an increase of $500,000, which was attributable primarily to acquired
and newly-formed joint ventures, net of dissolutions. On a same-store
basis, net revenue of joint ventures grew 23% in 1995 compared to 1994,
increasing the Company's total same-store growth rate by 2%.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services
increased from $17.4 million in 1994 to $34.0 million in 1995, an increase of
$16.6 million, or 95%. Of this increase, $15 million was attributable primarily
to acquisitions, net of dissolutions. As a percentage of sales and related
services revenues, cost of sales and related services increased from 45% in 1994
to 48% in 1995. This percentage increase was attributable primarily to the
change in the mix of sales and related service revenues of acquisitions made
during 1995.
OPERATING EXPENSES. Operating expenses increased from $47.1 million in
1994 to $81.7 million in 1995, an increase of $34.6 million, or 73%. This
increase was attributable primarily to
28
29
increased costs associated with the Company's increased net revenues. As a
percentage of net revenues, operating expenses decreased from 52% in 1994 to 50%
in 1995. This decrease is attributable primarily to lower operating expense
levels of same-store centers and acquired businesses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased from $7.8 million in 1994 to $12.6 million in 1995, an
increase of $4.8 million, or 62%. This increase was attributable primarily to
increases in personnel expenses associated with providing support for
acquisitions and continued growth. Approximately $700,000 of the increase is a
result of the relocation of the corporate headquarters from Franklin, Tennessee
to Brentwood, Tennessee due to the Company's rapid expansion and need for
additional space. As a percentage of net revenues, general and administrative
expenses decreased from 9% in 1994 to 8% in 1995.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased from $6.7 million in 1994 to $14.1 million in 1995, an
increase of $7.4 million. This increase was attributable primarily to
depreciation expense and the amortization of goodwill recorded in connection
with acquisitions.
INTEREST EXPENSE. Interest expense increased from $2.1 million in 1994
to $4.8 million in 1995, an increase of $2.7 million. This increase was
attributable primarily to interest expense on borrowings under the Bank Credit
Facility to fund acquisitions of home health care companies during 1994 and
1995.
DISCONTINUED OPERATIONS
Sale of Long-Term Care Management Business. Prior to May 1994, the
Company's long-term care management subsidiary, Diversicare Management Services
Co. ("DMS"), provided management services to nursing homes and retirement
centers in the United States and Canada (the "Long-Term Care Management
Business"). As compensation for its services, the Company received a base
management fee typically ranging from 3.5% to 7.0% of the net revenues of the
facilities. In May 1994, the Company transferred the capital stock of DMS to
Advocat Inc. ("Advocat"), a newly formed company, in exchange for proceeds of
approximately $22.3 million before certain expenses and income taxes (all of the
foregoing is herein referred to as the "Advocat Transaction"). The Advocat
Transaction was approved by an independent committee of the Company's Board of
Directors, which determined that the terms of the transaction and the proceeds
the Company received were fair to the minority shareholders of the Company. The
Company reported a gain of $7.9 million, net of income taxes, in connection with
the Advocat Transaction.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had current assets of $118.8 million
and current liabilities of $34.8 million, resulting in working capital of $84.0
million and a current ratio of 3.4x.
29
30
This compares to working capital of $45.8 million and a current ratio of 2.8x at
December 31, 1995.
The Company's future liquidity will continue to be dependent upon the
relative amounts of current assets (principally cash, accounts receivable and
inventories) and current liabilities (principally accounts payable and accrued
expenses). In that regard, accounts receivable can have a significant impact on
the Company's liquidity. The Company has various types of accounts receivable,
such as receivables from patients, contracts, and former owners of acquisitions.
The majority of the Company's accounts receivables 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
$47.3 million and $79.5 million at December 31, 1995 and December 31, 1996,
respectively. This increase is attributable primarily to the acquisitions of
home health care businesses during 1996. Average days' sales in accounts
receivable was approximately 91 and 93 days' sales outstanding at December 31,
1995, and December 31, 1996, respectively. This increase is attributable
primarily to slightly extended collection time frames for Medicare receivables
associated with revised rules regarding physician completion of Certificates of
Medical Necessity.
Net cash provided by continuing operating activities increased from
$5.1 million in 1995 to $13.2 million in 1996, an increase of $8.1 million. This
increase was attributable primarily to a $6.1 million increase in net income.
Net cash used in continuing investing activities increased from $108.2 million
in 1995 to $116.2 million in 1996, an increase of $8.0 million. Acquisition
expenditures decreased from $94.4 million in 1995 to $93.8 million in 1996, a
decrease of $600,000. Capital expenditures increased from $14.0 million in 1995
to $21.2 million in 1996, an increase of $7.2 million. Net cash provided from
continuing financing activities increased from $103.6 million in 1995 to $106.1
million in 1996, an increase of $2.5 million. This increase was attributable
primarily to proceeds from the sale of stock from the Secondary Offering in May,
1996. Discontinued operations provided net cash of $20.0 million in 1994,
principally from the sale of the Company's Long-Term Care Management Business.
See - "Discontinued Operations."
The Company budgeted capital expenditures of approximately $24.5
million for 1996, primarily for purchases of home health care rental equipment
and routine capital purchases at its corporate office. Capital expenditures of
$21.2 million were incurred in 1996.
The Company's principal capital requirements are for acquisitions of
additional home health care companies and expansion of the services provided
through its existing home health care centers. The Company has financed and
intends to continue to finance these requirements, its net revenue growth, and
working capital needs with net cash provided by operations and with borrowings
under the Bank Credit Facility. On May 1, 1996, the Company amended and restated
30
31
its Bank Credit Facility to increase commitments thereunder from $150.0 million
to $225.0 million. The Facility includes a $100.0 million five-year term loan
and a $125.0 million five-year revolving line of credit. Borrowings under the
Bank Credit Facility may be used to finance acquisitions and for other general
corporate purposes, subject to the terms and conditions of the credit and
security agreements. Most of the Company's operating assets have been pledged as
security for borrowings under the Bank Credit Facility. Interest is payable on
borrowings under the Bank Credit Facility, at the election of the Company, at
either a "Base Lending Rate" or an "Adjusted Eurodollar Rate" (each as defined
in the Bank Credit Facility), plus a margin from 0% to 1.00% and from 0.5% to
2.00%, respectively. The Company's ability to borrow under the Bank Credit
Facility terminates on May 1, 2001, subject to exceptions set forth therein. As
of December 31, 1996, the total loans outstanding under the Bank Credit Facility
were approximately $136.8 million and the weighted average borrowing rate was
6.845%. A commitment fee of up to .375% per annum (.25% as of December 31, 1996)
is payable by the Company on the undrawn balance. The interest rate and
commitment fee vary depending on the Company's leverage ratio, as defined in the
Bank Credit Facility.
The Bank Credit Facility contains various financial covenants, the most
restrictive of which relate to measurements of leverage, shareholders' equity,
debt-to-equity ratios and interest coverage ratios. The Bank Credit Facility
also contains certain covenants which, among other things, impose certain
limitations or prohibitions on the Company with respect to the incurrence of
certain indebtedness, the creation of security interests on the assets of the
Company, the payment of dividends on and the redemption or repurchase of
securities of the Company, investments, acquisitions, investments in joint
ventures, capital expenditures and sales of Company assets. The Company must
generally obtain bank consent for any single acquisition with an aggregate
purchase price of $20.0 million or more, and any acquisition which, when
combined with all acquisitions completed in the prior 12 months, exceeds $80.0
million and certain other transactions. The Company was in compliance with the
covenants at December 31, 1996.
IMPLEMENTATION OF FINANCIAL ACCOUNTING STANDARDS
In 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." Adoption of SFAS 121 is required for fiscal years beginning after December
15, 1995. The Company adopted SFAS 121 in 1996 resulting in no material effect
on the Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method as prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25"), and related Interpretations. Under APB
Opinion No. 25,
31
32
no compensation cost related to stock options has been recognized because all
options are issued with exercise prices equal to the fair market value at the
date of grant.
Statement of Financial Accounting Standards, "Earnings per Share"
("SFAS 128") has been issued effective for fiscal periods ending after December
15, 1997. SFAS No. 128 establishes standards for computing and presenting
earnings per share. The Company is required to adopt the provisions of SFAS No.
128 in the fourth quarter of 1997 and does not expect adoption thereof to have a
material effect on the Company's financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements are contained on pages 38 through 69 of this
Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
32
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers of the Company
is incorporated by reference to the Company's definitive proxy statement dated
April 18, 1997 for the annual meeting of stockholders to be held on May 14,
1997.
ITEM 11. EXECUTIVE COMPENSATION
Executive compensation information is incorporated by reference to the
Company's definitive proxy statement dated April 18, 1997 for the annual meeting
of stockholders to be held on May 14, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners and management
information is incorporated by reference to the Company's definitive proxy
statement dated April 18, 1997 for the annual meeting of stockholders to be held
on May 14, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
of the Company is incorporated by reference to the Company's definitive proxy
statement dated April 18, 1997 for the annual meeting of stockholders to be held
on May 14, 1997.
33
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
Financial statements and schedules of the Company and its subsidiaries
required to be included in Part II, Item 8 are listed below.
FINANCIAL STATEMENTS
FORM 10-K PAGES
---------------
Report of Independent Public Accountants 38
Consolidated Balance Sheets, December 31, 1996 and 1995 39 AND 40
Consolidated Statements of Income for the Years Ended December 31, 1996, 41 AND 42
1995, and 1994
Consolidated Statements of Shareholders' Equity for the Years Ended 43 AND 44
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 45 THRU 48
1995, and 1994
Notes to Consolidated Financial Statements, December 31, 1996 49 THRU 69
FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants S-1
Schedule II -- Valuation and Qualifying Accounts S-2
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.
REPORTS ON FORM 8-K DURING THE LAST QUARTER OF THE YEAR ENDED DECEMBER 31, 1996.
A Form 8-K dated July 31, 1996 was filed with respect to the acquisition of
Miller Medical Services, Inc. by merger, a related Form 8-K/A1 dated August 9,
1996 was filed with respect to such transaction to correct a typographical error
and a related Form 8-K/A2 dated October 15, 1996 was filed with respect to such
transaction to include financial statements.
34
35
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/EDWARD K. WISSING
------------------------------------
Edward K. Wissing, President and
Chief Executive Officer and Director
/s/MARY ELLEN RODGERS
-----------------------------------
Mary Ellen Rodgers
Chief Financial Officer
Date: March 21, 1997
35
36
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/Morris Perlis Chairman March 21, 1997
- ---------------------------------
Morris A. Perlis
/s/Allan Silber Director March 21, 1997
- ---------------------------------
Allan C. Silber
/s/Henry T. Blackstock Director March 21, 1997
- ---------------------------------
Henry T. Blackstock
/s/Joseph Furlong III Director March 21, 1997
- ---------------------------------
Joseph Furlong III
/s/Thomas Dattilo Director March 21, 1997
- ---------------------------------
Thomas Dattilo
/s/Edward Sonshine Director March 21, 1997
- ---------------------------------
Edward Sonshine
/s/Mark Manner Director March 21, 1997
- ---------------------------------
Mark Manner
/s/Edward K. Wissing Chief Executive March 21, 1997
- --------------------------------- Officer
Edward K. Wissing
/s/Mary Ellen Rodgers Chief Financial March 21, 1997
- --------------------------------- Officer and
Mary Ellen Rodgers Chief Accounting
Officer
36
37
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
37
38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American HomePatient, Inc.:
We have audited the accompanying consolidated balance sheets of AMERICAN
HOMEPATIENT, INC. (a Delaware corporation), and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of American HomePatient, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Nashville, Tennessee
February 19, 1997
38
39
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
- ------------------------------------------- ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 7,299,000 $ 4,224,000
Restricted cash 425,000 375,000
Accounts receivable, less allowance for doubtful
accounts of $18,755,000 and $12,383,000,
respectively
79,460,000 47,251,000
Inventories 21,921,000 12,974,000
Prepaid expenses and other assets 1,353,000 1,630,000
Income tax receivable 872,000 --
Deferred tax asset 7,470,000 5,000,000
------------- -------------
Total current assets 118,800,000 71,454,000
------------- -------------
PROPERTY AND EQUIPMENT, at cost: 95,254,000 62,258,000
Less accumulated depreciation and amortization (38,384,000) (21,597,000)
------------- -------------
Net property and equipment 56,870,000 40,661,000
------------- -------------
OTHER ASSETS:
Excess of cost over fair value of net assets
acquired, net 198,193,000 107,234,000
Investment in joint ventures 12,405,000 7,245,000
Deferred financing costs, net 2,761,000 2,074,000
Other assets 6,582,000 3,848,000
------------- -------------
Total other assets 219,941,000 120,401,000
------------- -------------
$ 395,611,000 $ 232,516,000
============= =============
(Continued)
39
40
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------------------------------ ------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt and capital leases $ 10,245,000 $ 8,999,000
Trade accounts payable 8,698,000 4,815,000
Income taxes payable -- 1,459,000
Other payables 775,000 767,000
Accrued expenses:
Payroll and related benefits 6,672,000 4,722,000
Other 8,398,000 4,879,000
------------ ------------
Total current liabilities 34,788,000 25,641,000
------------ ------------
NONCURRENT LIABILITIES:
Long-term debt and capital leases, less current portion 139,458,000 84,607,000
Deferred tax liabilities 4,578,000 2,049,000
Other noncurrent liabilities 1,145,000 788,000
------------ ------------
Total noncurrent liabilities 145,181,000 87,444,000
------------ ------------
COMMITMENTS, CONTINGENCIES AND GUARANTEES
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized, 5,000,000 shares;
none issued and outstanding -- --
Common stock, $.01 par value; authorized, 35,000,000 shares; issued and
outstanding, 14,677,000 and 11,487,000 shares,
respectively 147,000 115,000
Paid-in capital 166,780,000 85,802,000
Retained earnings 48,715,000 33,514,000
------------ ------------
Total shareholders' equity 215,642,000 119,431,000
------------ ------------
$395,611,000 $232,516,000
============ ============
The accompanying notes are an integral part of these consolidated balance
sheets.
40
41
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------- ------------
REVENUES:
Sales and related service revenues $119,266,000 $ 70,240,000 $ 38,747,000
Rentals and other revenues 142,660,000 88,170,000 47,900,000
Earnings from joint ventures 6,422,000 3,961,000 3,538,000
------------ ------------- ------------
Total revenues 268,348,000 162,371,000 90,185,000
------------ ------------- ------------
EXPENSES:
Cost of sales and related services, excluding
depreciation and amortization 58,575,000 34,031,000 17,445,000
Operating 135,813,000 81,718,000 47,081,000
General and administrative 17,064,000 12,594,000 7,829,000
Depreciation and amortization 23,845,000 14,081,000 6,656,000
Interest 8,294,000 4,829,000 2,132,000
------------ ------------- ------------
Total expenses 243,591,000 147,253,000 81,143,000
------------ ------------- ------------
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES
24,757,000 15,118,000 9,042,000
------------ ------------- ------------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 8,866,000 7,378,000 4,481,000
Deferred 690,000 (1,349,000) (1,005,000)
------------ ------------- ------------
9,556,000 6,029,000 3,476,000
------------ ------------- ------------
INCOME FROM CONTINUING OPERATIONS 15,201,000 9,089,000 5,566,000
------------ ------------- ------------
(Continued)
41
42
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Continued)
1996 1995 1994
------------ ------------ ------------
GAIN ON SALE OF DISCONTINUED OPERATIONS, net of income
tax provision of $5,216,627 in 1994 $ - $ - $ 7,927,000
INCOME FROM DISCONTINUED OPERATIONS, net of income tax
provision of $443,425 in 1994
- - 694,000
------------ ------------ ------------
NET INCOME $ 15,201,000 $ 9,089,000 $ 14,187,000
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 13,761,000 10,842,000 8,352,000
------------ ------------ ------------
NET INCOME PER SHARE:
Continuing operations $ 1.10 $ .84 $ .67
Gain on sale of discontinued operations - - .95
Discontinued operations - - .08
------------ ------------ ------------
$ 1.10 $ .84 $ 1.70
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
42
43
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK PAID-IN NOTES
------------------------
SHARES AMOUNT CAPITAL RECEIVABLE
---------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1993 7,690,125 $ 77,000 $27,157,000 $ (521,000)
---------- ---------- ----------- ----------
Issuance of shares through exercise of
employee stock options 468,750 4,000 2,814,000 --
Issuance of shares through employee stock
purchase plan 42,980 -- 200,000 --
Issuance of shares in connection with sale of
discontinued operations 22,609 -- 237,000 --
Issuance of shares in connection with an
acquisition 150,740 2,000 2,039,000 --
Tax benefit of stock options exercised -- -- 1,141,000 --
Collections of notes receivable -- -- -- 521,000
Net income -- -- -- --
---------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1994 8,375,204 83,000 33,588,000 --
---------- ---------- ----------- ----------
Issuance of shares through exercise of
employee stock options 362,475 3,000 3,468,000 --
Issuance of shares through employee stock
purchase plan 26,486 2,000 245,000 --
Tax benefit of stock options exercised -- -- 1,297,000 --
Issuance of shares, net of issuance costs 2,722,500 27,000 47,204,000 --
Net income -- -- -- --
---------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1995 11,486,665 115,000 85,802,000 --
---------- ---------- ----------- ----------
RETAINED
EARNINGS TOTAL
----------- ------------
BALANCE, DECEMBER 31, 1993 $10,238,000 $ 36,951,000
----------- ------------
Issuance of shares through exercise of
employee stock options -- 2,818,000
Issuance of shares through employee stock
purchase plan -- 200,000
Issuance of shares in connection with sale of
discontinued operations -- 237,000
Issuance of shares in connection with an
acquisition -- 2,041,000
Tax benefit of stock options exercised -- 1,141,000
Collections of notes receivable -- 521,000
Net income 14,187,000 14,187,000
----------- ------------
BALANCE, DECEMBER 31, 1994 24,425,000 58,096,000
----------- ------------
Issuance of shares through exercise of
employee stock options -- 3,471,000
Issuance of shares through employee stock
purchase plan -- 247,000
Tax benefit of stock options exercised -- 1,297,000
Issuance of shares, net of issuance costs
-- 47,231,000
Net income 9,089,000 9,089,000
----------- ------------
BALANCE, DECEMBER 31, 1995 33,514,000 119,431,000
----------- ------------
(Continued)
43
44
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Continued)
COMMON STOCK PAID-IN NOTES
-----------------------
SHARES AMOUNT CAPITAL RECEIVABLE
--------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1995 11,486,665 $115,000 $ 85,802,000 $ --
---------- -------- ------------ ----------
Issuance of shares through exercise of
employee stock options 168,004 2,000 1,981,000 --
Issuance of shares through employee stock
purchase plan 34,007 -- 423,000 --
Issuance of shares through exercise of stock
warrants 66,600 -- 516,000 --
Issuance of shares in connection with an
acquisition 446,460 5,000 11,603,000 --
Tax benefit of stock options exercised -- -- 450,000 --
Issuance of shares, net of issuance cost 2,475,000 25,000 66,005,000 --
Net income -- -- -- --
---------- -------- ------------ ----------
BALANCE, DECEMBER 31, 1996 14,676,736 $147,000 $166,780,000 $ --
========== ======== ============ ==========
RETAINED
EARNINGS TOTAL
------------ -------------
BALANCE, DECEMBER 31, 1995 $ 33,514,000 $ 119,431,000
------------ -------------
Issuance of shares through exercise of
employee stock options - 1,983,000
Issuance of shares through employee stock
purchase plan - 423,000
Issuance of shares through exercise of stock
warrants - 516,000
Issuance of shares in connection with an
acquisition - 11,608,000
Tax benefit of stock options exercised - 450,000
Issuance of shares, net of issuance cost
- 66,030,000
Net income 15,201,000 15,201,000
------------ -------------
BALANCE, DECEMBER 31, 1996 $ 48,715,000 $ 215,642,000
============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
44
45
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ -----------
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Income from continuing operations $ 15,201,000 $ 9,089,000 $ 5,566,000
Adjustments to reconcile income from continuing operations
to net cash provided from continuing operating
activities:
Depreciation and amortization 23,845,000 14,081,000 6,656,000
Equity in earnings of unconsolidated joint ventures (3,375,000) (2,138,000) (1,683,000)
Deferred income taxes 690,000 (1,349,000) (1,005,000)
Gain on sale of joint venture interest -- -- (170,000)
Minority interest 161,000 135,000 83,000
Change in assets and liabilities, net of acquisitions:
Restricted cash (50,000) -- (175,000)
Accounts receivable, net (14,920,000) (5,956,000) 115,000
Inventories (2,303,000) (1,370,000) 251,000
Prepaid expenses and other assets 348,000 (573,000) 271,000
Trade accounts payable, accrued expenses and
other current liabilities (4,264,000) (6,889,000) (2,726,000)
Deferred costs (30,000) (55,000) (48,000)
Net change in affiliate accounts -- -- (158,000)
Other assets and liabilities (2,153,000) 158,000 (136,000)
------------ ------------ -----------
Net cash provided from continuing operating activities 13,150,000 5,133,000 6,841,000
------------ ------------ -----------
(Continued)
45
46
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Continued)
1996 1995 1994
------------- ------------- ------------
CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES:
Acquisitions, net of cash acquired $ (93,800,000) $ (94,353,000) $(31,876,000)
Additions to property and equipment, net (21,157,000) (13,964,000) (8,328,000)
Distributions to minority interest owners (65,000) (135,000) (51,000)
Distributions from (advances to) unconsolidated
joint ventures, net (1,193,000) 240,000 824,000
Proceeds from sale of joint venture interest -- -- 589,000
------------- ------------- ------------
Net cash used in continuing investing activities (116,215,000) (108,212,000) (38,842,000)
------------- ------------- ------------
CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES:
Deferred financing costs (1,299,000) (1,255,000) (1,034,000)
Proceeds from long-term debt 47,196,000 56,765,000 33,328,000
Principal payments on debt and capital leases (8,286,000) (2,614,000) (22,196,000)
Proceeds from sale of stock, net of issuance costs 68,529,000 50,703,000 3,540,000
------------- ------------- ------------
Net cash provided from continuing financing activities 106,140,000 103,599,000 13,638,000
------------- ------------- ------------
(Continued)
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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Continued)
1996 1995 1994
------------ ------------ ------------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Operating activities -- -- 234,000
Investing activities -- -- (185,000)
Financing activities -- -- --
Proceeds from sale of discontinued operations -- -- 19,621,000
Increase in cash balance, included in net assets of discontinued
operations -- -- 331,000
---------- ----------- ------------
Net cash flows provided from discontinued operations -- -- 20,001,000
---------- ----------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS 3,075,000 520,000 1,638,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,224,000 3,704,000 2,066,000
---------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $7,299,000 $ 4,224,000 $ 3,704,000
========== =========== ============
SUPPLEMENTAL INFORMATION:
Cash payments of interest $8,042,000 $ 4,171,000 $ 2,055,000
========== =========== ============
Cash payments of income taxes, including amounts related to $9,866,000 $ 9,573,000 $ 3,307,000
discontinued operations ========== =========== ============
(Continued)
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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Continued)
The Company accrued benefit plan liabilities of $259,000, $241,000, and $97,000,
in 1996, 1995 and 1994, respectively.
The Company refinanced notes payable to banks of $5.0 million in 1994. The
Company refinanced a line of credit of $17.6 million in 1994.
In connection with the acquisitions of home health care businesses, the Company
issued 446,460 and 150,740 shares of common stock in 1996 and 1994,
respectively, and debt of $22.4 million, $13.5 million and $13.4 million in
1996, 1995 and 1994, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
48
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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND BACKGROUND
American HomePatient, Inc. and subsidiaries (the "Company" or "American
HomePatient") is a health care services company engaged in the
provision of home health care services. The Company's home health care
services are comprised of the rental and sale of home medical equipment
and home health care supplies, and the provision of infusion therapies
and respiratory therapies. As of December 31, 1996, the Company
provides these services to patients in the home through 300 branches in
32 states.
2. DISCONTINUED OPERATIONS
SALE OF LONG-TERM CARE BUSINESS
On May 10, 1994, and effective for accounting purposes on April 30,
1994, the Company sold its long-term care management business through
the sale of its interest in Advocat Inc. ("Advocat"). The Company sold
its 2,398,000 shares of Advocat stock at a price of $9.50 per share
(before deduction of offering expenses and underwriting discounts).
The gross proceeds received by the Company from the sale of its Advocat
stock and the repayment of the note from Advocat was approximately
$22,300,000. The Company recorded a net gain of approximately
$7,927,000 related to the sale after deduction of the cost of net
assets sold, offering expenses, expenses related to the disposition of
Diversicare Management Services, Co. ("DMS"), and income taxes.
The accompanying financial statements reflect the results of operations
of DMS as discontinued operations.
The following summarizes certain selected financial data of DMS:
FOUR MONTHS
ENDED
APRIL 30, 1994
--------------
Total revenues $3,480,000
==========
Income before taxes $1,137,000
==========
Net income $ 694,000
==========
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3. 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. The results of operations of companies and other
entities acquired in purchase transactions are included from the
effective dates of their respective acquisitions. Investments in 50%
owned joint ventures are accounted for using the equity method.
REVENUES
The Company's principal continuing business is the operation of home
health care centers. Approximately 59%, 58% and 61% of the Company's
net revenues in 1996, 1995 and 1994, respectively, are from
participation in Medicare and state Medicaid programs. Amounts paid
under these programs are generally based on a fixed rate. Revenues are
recorded at the expected reimbursement rates when the services are
provided, merchandise delivered or equipment rented to patients.
Amounts earned under the Medicare and Medicaid programs are subject to
review by such third party payors. In the opinion of management,
adequate provision has been made for any adjustment that may result
from such reviews. Any differences between estimated settlements and
final determinations are reflected in operations in the year finalized.
Sales and related service revenues 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. 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.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments that have a
maturity of less than three months.
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ACCOUNTS RECEIVABLE
The Company's accounts receivable, before allowances, consists of the
following components:
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
Patient receivables:
Medicare $ 31,388,000 $ 20,666,000
All other, principally commercial insurance 63,439,000 36,066,000
------------ -------------
94,827,000 56,732,000
Other receivables, principally due from vendors and
former owners 3,388,000 2,902,000
------------ ------------
Total $ 98,215,000 $ 59,634,000
============ ============
The Company provides credit for a substantial portion of its non-third
party reimbursed revenues and continually monitors the creditworthiness
and collectibility of amounts due from its clients. The Company is
subject to accounting losses from uncollectible receivables in excess
of its reserves.
PROVISION FOR DOUBTFUL ACCOUNTS
The Company includes provisions for doubtful accounts in operating
expenses in the accompanying consolidated statements of income. The
provisions for doubtful accounts included in continuing operations were
$11,450,000, $5,934,000 and $2,658,000 in 1996, 1995 and 1994,
respectively.
INVENTORIES
All inventories represent goods or supplies and are priced at the lower
of cost (on a first-in, first-out basis) or net realizable value.
PROPERTY AND EQUIPMENT
Property and equipment 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 are
amortized over the term of the lease for financial reporting purposes.
The estimated useful lives are as follows: buildings and improvements,
18-30 years; rental equipment, 3-7 years; furniture, fixtures and
equipment, 4-5 years; leasehold improvements, 5 years; and delivery
equipment, 3-5 years. The provision for depreciation includes the
amortization of equipment and vehicles under capital leases.
In 1996, 1995 and 1994, depreciation expense includes $15,059,000,
$9,645,000 and $4,723,000, respectively, related to the depreciation of
rental equipment.
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Maintenance and repairs are charged against income as incurred, and
major betterments and improvements are capitalized. The cost and
accumulated depreciation of assets sold or otherwise disposed of are
removed from the accounts and the resulting gain or loss is reflected
in the consolidated statements of income.
Property and equipment obtained through purchase acquisitions are
stated at their estimated fair value determined on their respective
dates of acquisition.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of cost over fair value of net assets acquired ("goodwill")
is amortized over 40 years using the straight-line method. Accumulated
amortization related to goodwill totaled $6,876,000 and $2,877,000, as
of December 31, 1996 and 1995, respectively. The Company annually
evaluates the realizability of goodwill by utilizing an operating
income realization test for the applicable businesses acquired and by
instituting plans and strategies to improve performance and
realization. In addition, the Company considers the effects of external
changes to the Company's business environment, including competitive
pressures, market erosion and technological and regulatory changes. The
Company believes its estimated goodwill life is reasonable given the
continuing movement of patient care to noninstitutional settings,
expanding demand due to demographic trends, the emphasis of the Company
on establishing significant coverage in each local and regional market,
the consistent practice with other home care companies and other
factors.
DEFERRED FINANCING COSTS
Financing costs are amortized primarily using the straight-line method
over the periods of the related indebtedness.
OTHER ASSETS
Non-compete agreements, net of accumulated amortization of $1,504,000
and $1,171,000 as of December 31, 1996 and 1995, respectively, are
amortized over the lives of the agreements, generally periods of up to
seven years. As of December 31, 1996 and 1995, the net amounts of
non-compete agreements of $1,056,000 and $1,129,000, respectively, are
reflected in other assets in the accompanying consolidated balance
sheets.
Other intangibles are amortized over their expected benefit period of
two to three years. The net balance at December 31, 1996 and 1995 is
$1,791,000 and $924,000, respectively, and is reflected in other assets
in the accompanying consolidated balance sheets.
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LONG-LIVED ASSETS
In 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Adoption of SFAS 121 is required for fiscal
years beginning after December 15, 1995. The Company adopted SFAS 121
in 1996 with no material effect on the Company's financial position or
results of operations.
INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No.
109 which requires an asset and liability approach for financial
accounting and reporting for income taxes. Deferred income taxes are
provided for differences between financial reporting and tax bases of
assets and liabilities, with the primary differences related to the
allowance for doubtful accounts and liability reserves, depreciation
methods and periods and deferred cost amortization methods. See Note 9
for additional information related to the provisions for income taxes.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method
as prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), and
related Interpretations. Under APB Opinion No. 25, no compensation cost
related to stock options has been recognized because all options are
issued with exercise prices equal to the fair market value at the date
of grant. See Note 8 for further discussion.
NET INCOME PER SHARE
The computation of net income per share is based on the weighted
average number of common shares and common equivalent shares
outstanding during the period. Common equivalent shares include stock
options and warrants, and are determined using the treasury stock
method.
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"), has been issued effective for fiscal periods
ending after December 15, 1997. SFAS No. 128 establishes standards for
computing and presenting earnings per share. The Company is required to
adopt the provisions of SFAS No. 128 in the fourth quarter of 1997 and
does not expect adoption thereof to have a material effect on the
Company's financial position or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that
53
54
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accruals approximate fair value because of the
short-term nature of these items. Based on the current market rates
offered for similar debt of the same maturities, the carrying amount of
the Company's long-term debt, including current portion, also
approximates fair value at December 31, 1996.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1995
consolidated financial statements to conform to the 1996 presentation.
4. INVESTMENT IN JOINT VENTURE PARTNERSHIPS
The Company owns 50% of fifteen home health care businesses (the
"Partnerships"). The remaining 50% of each business is owned by local
hospitals within the same community as the joint ventures. The Company
is solely responsible for the management of these businesses and
receives management fees ranging from 3% to 15% based on revenues or
cash collections.
The Company provides accounting and receivable billing services to the
Partnerships. The Partnerships are charged for their share of such
costs based on contract terms. The Company's earnings from joint
ventures include equity in earnings, management fees and fees for
accounting and receivable billing services. The Company's investment in
unconsolidated joint ventures includes receivables from joint ventures
of $1,939,000 and $304,000 at December 31, 1996 and 1995, respectively.
The Company guarantees a mortgage payable of one of the Partnerships.
The balance of the guaranteed debt at December 31, 1996 is $485,000.
54
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Summarized financial information of the Partnerships from the
respective effective dates on a combined basis is as follows:
DECEMBER 31, DECEMBER 31,
1996 1995
-------------- --------------
Accounts receivable, net $ 10,112,000 $ 5,970,000
Other current assets 1,682,000 3,033,000
Property and equipment, net 9,351,000 6,526,000
Other assets 813,000 437,000
------------ ------------
Total assets $ 21,958,000 $ 15,966,000
============ ============
Accounts payable $ 740,000 $ 1,315,000
Accrued payroll and other 1,084,000 1,379,000
Partners' capital 20,134,000 13,272,000
------------ ------------
Total liabilities and partners' capital $ 21,958,000 $ 15,966,000
============ ============
Net sales and rental revenues $ 34,756,000 $ 23,128,000
------------ ------------
Cost of sales 7,696,000 4,980,000
Operating and management fees 17,519,000 11,682,000
Depreciation, amortization and interest expense 2,793,000 2,057,000
------------ ------------
Total expenses 28,008,000 18,719,000
------------ ------------
Net income $ 6,748,000 $ 4,409,000
=========== ============
The Company's ownership percentage of undistributed earnings of the
Partnerships at December 31, 1996 and December 31, 1995 is $4,823,000
and $2,209,000, respectively. For federal and state income tax
reporting purposes, each partner reports their share of the profits and
losses of the Partnerships.
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5. ACQUISITIONS
1996 ACQUISITIONS
Effective in 1996, the Company acquired 40 home health care businesses
consisting of 101 branches. The aggregate purchase price included cash
of $88.9 million, assumed liabilities of $12.5 million, notes payable
to sellers of $22.4 million and 446,460 shares of the Company's common
stock. The cash amounts have been funded from operations, draws on the
Bank Credit Facility (see discussion at Note 7) and the public offering
of common shares (see discussion at Note 8). Of the 101 branches
acquired in 1996, the Company has consolidated 20 branches with other
Company locations.
1995 ACQUISITIONS
Effective January 1, 1995, the Company agreed to manage three home
health care branches in Arizona, with an option to buy such branches
from the current owner as well as an option for such owner to require
the Company to purchase such managed branches at negotiated amounts
through 1998. The Company also must reimburse the current owner for
certain amounts of net losses, as defined. In return, the Company
receives a management fee based on annual net profits, as defined, with
a minimum monthly fee of $5,000.
Effective in May 1995, the Company acquired the stock of ConPharma Home
Healthcare, Inc. ("ConPharma") for $35.8 million in cash, funded
primarily from the proceeds of the Company's public offering of common
stock during 1995, and assumed liabilities of $3.1 million. ConPharma
consisted of 32 branches, and of these branches, the Company
consolidated one branch with another Company location.
Additionally, effective in 1995, the Company acquired 16 other home
health care businesses consisting of 49 branches. The aggregate
purchase price included cash of $48.4 million, assumed liabilities of
$5.2 million and notes payable to sellers of $13.5 million. The cash
amounts were funded from operations and draws on the Secured Revolving
Line of Credit (see discussion at Note 7). Of the 49 branches acquired
in 1995, the Company has consolidated 5 branches with other Company
locations.
The allocation of the aggregate purchase price of the 1996 and 1995
acquisitions is summarized as follows:
1996 1995
------------ ------------
Net current and other assets $ 25,959,000 $ 23,937,000
Fixed assets 16,750,000 12,435,000
Goodwill, noncompete agreements and other
intangibles 92,795,000 72,010,000
------------ ------------
$135,504,000 $108,382,000
============ ============
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The purchase prices for the above acquisitions were allocated to the
underlying assets based on their estimated relative fair values.
Certain of the assets acquired in 1996 are currently being evaluated
and final allocations of the purchase prices will be made in 1997.
Management believes that the final allocations will not materially
affect the Company's results of operations. The consolidated statements
of income include the results of operations of the acquired businesses
from the respective dates of acquisition of the controlling interests.
The following unaudited pro forma information assumes the acquisitions
described above had occurred as of the beginning of the respective
periods:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
--------------- ---------------
(in thousands except share data)
Net revenues $ 319,561 $ 299,063
=========== ==========
Net income from continuing operations $ 16,476 $ 12,980
=========== ==========
Net income from continuing operations per common $ 1.17 $ 1.15
share =========== ==========
Weighted average common shares outstanding 14,060 11,288
=========== ==========
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
--------------- ---------------
Land $ 902,000 $ 873,000
Buildings and improvements 6,207,000 4,702,000
Rental equipment 74,234,000 48,158,000
Furniture, fixtures and equipment 11,053,000 6,406,000
Delivery vehicles 2,858,000 2,119,000
----------- -----------
$95,254,000 $62,258,000
=========== ===========
Property and equipment under capital leases are included under the
various equipment categories.
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7. LONG-TERM DEBT AND LEASE COMMITMENTS
LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital lease obligations consist of the following:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
--------------- ---------------
Secured Revolving Line of Credit $ 36,755,000 $ 79,991,000
Secured Term Loan 100,000,000 --
First mortgage note payable, interest at 8.5%,
principal and interest due monthly through
2003, with call provisions beginning in 1998 481,000 539,000
Notes payable, primarily secured with acquired assets, with interest
rates primarily from 6.5% to 9.5%, principal and interest due
monthly or quarterly, maturities through 2016 2,583,000 4,612,000
Mortgage note payable, interest at 8%, principal and interest due
monthly, with balloon payment of $442,000 due July 1, 2004 602,000 617,000
Notes payable, primarily secured with acquired assets, with interest
rates from 7% to 8%, interest due quarterly, principal payment due
at maturity date, final maturities from 1997 to 1998 7,156,000 4,145,000
Acquisition note payable, bears interest at 8.0%,
principal and interest due on July 11, 1997 1,500,000 3,000,000
Capital lease obligations, monthly principal and
interest payments until 2001 626,000 702,000
------------- ------------
149,703,000 93,606,000
Less current portion (10,245,000) (8,999,000)
------------- ------------
$ 139,458,000 $ 84,607,000
============= ============
59
Principal payments required on long-term debt (excluding capital
leases) for the next five years and thereafter beginning January 1,
1997 are as follows:
1997 $ 10,020,000
1998 8,960,000
1999 20,101,000
2000 32,104,000
2001 76,860,000
Thereafter 1,032,000
-------------
$ 149,077,000
=============
On October 20, 1994, the Company obtained a $60 million 5-year secured
revolving line of credit (the "Secured Revolving Line of Credit") from
a syndicate of banks. The initial draw under the Secured Revolving Line
of Credit was applied primarily to repay all outstanding borrowings
under and cancel the Company's acquisition line of credit and the term
loan arising from a previously converted acquisition line of credit.
The Secured Revolving Line of Credit may be used for acquisitions and
other general corporate purposes, subject to the terms and conditions
of the respective credit and security agreements. Most of the Company's
operating assets have been pledged as security for borrowings under the
Secured Revolving Line of Credit. On April 14, 1995, the Secured
Revolving Line of Credit was increased from $60 million to $90 million.
On October 26, 1995, the Secured Revolving Line of Credit was increased
from $90 million to $150 million.
On May 1, 1996, the Company entered into a second amended and restated
Bank Credit Facility (the "Bank Credit Facility") to increase
commitments thereunder to $225 million. This Facility includes a $100
million 5-year term loan (the "Term Loan") and a $125 million 5-year
Secured Revolving Line of Credit.
Interest is payable on borrowings under the Bank Credit Facility, at
the election of the Company, at either a "Base Lending Rate" or an
"Adjusted Eurodollar Rate" (each as defined in the Bank Credit
Facility), plus a margin from 0% to 1.00% and from 0.5% to 2.00%,
respectively. As of December 31, 1996, borrowings under the Bank Credit
Facility bore interest at the banks' Adjusted Eurodollar Rate plus
1.00%. The weighted average borrowing rate was 6.845%. A commitment fee
of up to 0.375% per annum (.25% as of December 31, 1996) is payable by
the Company on the undrawn balance. The interest rate and commitment
fee are based on the Company's leverage ratio as defined in the Bank
Credit Facility agreement.
Subsequent to year end, the Company refinanced $14,855,000 of notes
payable to shareholders of acquired companies using the Secured
Revolving Line of Credit. The refinanced notes are classified in the
consolidated balance sheet according to the terms of the Secured
Revolving Line of Credit. The remaining notes to shareholders of
acquired companies are classified according to the terms of the notes.
Commencing on February 1, 1998, the Company shall make quarterly
principal payments on the Term Loan of $2 million per quarter through
and including November 1, 1998; $4 million per quarter through and
including August 1, 1999; $8 million per quarter through and including
November 1, 2000, and $20 million per
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quarter through and including May 1, 2001. The Secured Revolving Line
of Credit does not require principal payments until maturity at May 1,
2001.
The Credit Facility contains various financial covenants, the most
restrictive of which relate to measurements of leverage, shareholders'
equity, debt-to-equity ratios and interest coverage ratios. The Bank
Credit Facility also contains certain covenants which, among other
restrictions, impose certain limitations or prohibitions on the Company
with respect to the incurrence of certain indebtedness, the creation of
security interests on the assets of the Company, the payment of
dividends on and the redemption or repurchase of securities of the
Company, investments, acquisitions, advances, capital expenditures and
sales of Company assets. The Company must generally obtain bank consent
for (i) any single acquisition with an aggregate purchase price of $20
million or more or (ii) any acquisition which when combined with all
acquisitions completed in the prior twelve months exceeds $80 million.
The Company was in compliance with the covenants as of December 31,
1996.
CAPITAL LEASE COMMITMENTS
The Company leases certain equipment under capital leases. Future
minimum rental payments required on capital leases for the next five
years beginning January 1, 1997, less amounts representing interest,
are as follows:
1997 $ 265,000
1998 213,000
1999 93,000
2000 76,000
2001 65,000
----------
712,000
Less amounts representing interest (86,000)
----------
$ 626,000
==========
OPERATING LEASE COMMITMENTS
The Company has noncancelable operating leases on certain land,
vehicles, buildings and equipment. The approximate minimum future
rental commitments on the operating leases for the next five years
beginning January 1, 1997 are as follows:
1997 $ 8,524,000
1998 6,409,000
1999 4,701,000
2000 2,813,000
2001 1,593,000
Thereafter 2,227,000
------------
$ 26,267,000
============
Rent expense for all operating leases included in continuing operations
was approximately $8,356,000, $ 5,651,000 and $2,724,000 in 1996, 1995
and 1994, respectively.
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8. SHAREHOLDERS' EQUITY AND STOCK PLANS
NONQUALIFIED STOCK OPTION PLANS
Effective September 5, 1991, the Company's Board of Directors and
Counsel Corporation ("Counsel"), the owner of approximately 26% of the
Company's common stock at December 31, 1996, approved the adoption of
the 1991 Nonqualified Stock Option Plan (the "Plan"). Under the Plan,
as amended, 2,762,475 shares of common stock have been reserved for
issuance upon exercise of options granted thereunder. The maximum term
of any option granted pursuant to the Plan is ten years. Shares subject
to options granted under the Plan which expire, terminate or are
canceled without having been exercised in full become available again
for future grants.
The roll forward of stock options outstanding is as follows:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------------- ----------------
OUTSTANDING AT DECEMBER 31, 1993 594,750 $ 6.05
Granted 455,250 $ 10.07
Exercised 468,750 $ 6.03
Canceled -- $ --
--------- ---------
OUTSTANDING AT DECEMBER 31, 1994 581,250 $ 9.21
Granted 518,250 $ 16.51
Exercised 362,475 $ 9.28
Canceled 1,125 $ 16.50
--------- ---------
OUTSTANDING AT DECEMBER 31, 1995 735,900 $ 14.16
Granted 1,011,500 $ 18.10
Exercised 168,004 $ 11.81
Canceled 4,001 $ 17.50
--------- ---------
OUTSTANDING AT DECEMBER 31, 1996 1,575,395
=========
EXERCISABLE AT DECEMBER 31, 1996 810,437
=========
35,738 options outstanding at December 31, 1996 have exercise prices of
$6 and a weighted average remaining contractual life of 4.75 years.
Each of these are exercisable at year end. 84,900 options outstanding
at December 31, 1996 have exercise prices of $10 to $11.5, a weighted
average exercise price of $10.06 and a weighted average remaining
contractual life of 7.35 years. Each of these are exercisable at year
end. 1,359,757 options outstanding at December 31, 1996 have exercise
prices of $15.83 to $17.5, a weighted average exercise price of $17.15
and a weighted average remaining contractual life of 8.66 years. Of
these, 653,132 are exercisable at year end and have a weighted average
exercise price of $16.9. 95,000 options outstanding at December 31,
1996 have exercise prices of $20.67 to $26.92, a weighted average
exercise price of $24.10 and a weighted average remaining contractual
life of 9.39 years. Of these, 36,667 are exercisable at year end and
have a weighted average exercise price of $23.63.
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The options granted prior to 1995 are fully vested and expire in ten
years. Options granted during 1995 to all employees except officers and
directors have a three year vesting period, and expire in ten years.
Options granted during 1996 have a two year vesting period, and expire
in ten years. As of December 31, 1996, 183,351 shares remain available
for future grants of options under the Plan.
Effective May 17, 1995, the Company's Board of Directors approved the
adoption of the 1995 Nonqualified Stock Option Plan for Directors (the
"1995 Plan"). Under the 1995 Plan, 300,000 shares of 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 Plan which expire,
terminate or are canceled without having been exercised in full become
available for future grants. In 1995, the Company granted 31,500 shares
of common stock under the 1995 Plan at exercise prices of $19.67 and
$20.67. In 1996, the Company granted 24,000 shares of common stock at
an exercise price of $26.25. The issued options are fully vested and
expire in ten years.
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized
for the stock option plans. Had compensation cost for the Company's
stock option and employee stock purchase plans been determined based on
the fair value at the grant date of awards in 1996 and 1995 consistent
with the provisions of SFAS No. 123, the Company's net income and net
income per share would have been reduced to the pro forma amounts
indicated below:
1996 1995
------------ ----------
Net income - as reported $ 15,201,000 $ 9,089,000
Net income - pro forma 10,521,000 7,679,000
Net income per share - as reported 1.10 .84
Net income per share - pro forma .76 .71
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years. The weighted average fair value of options granted were
$11.07 and $10.82 for 1996 and 1995, respectively. The fair value of
each grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants in
1996 and 1995: dividend yield of 0.0%; expected volatility of 38.0%;
expected lives of 10 years; and risk-free interest rate range of 5.6%
to 6.8% and 5.5% to 7.7% for 1996 and 1995, respectively.
EMPLOYEE STOCK PURCHASE PLAN
On November 5, 1992, the Company's Board of Directors approved the
Company's 1993 Stock Purchase Plan and reserved 750,000 shares for
issuance under the plan. The plan was approved by the Company's
shareholders on May 7, 1993. Employees may purchase stock, subject to
certain limitations, at 85% of the lower of the closing
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market price at the beginning or at the end of each plan year, which is
the last day of February. As of December 31, 1996, 103,473 shares have
been issued under this plan.
WARRANTS
The Company issued warrants in 1993 for 12,000 shares of common stock
at $8.33 per share in relation to consulting services received by the
Company. The Company issued stock warrants in 1994 for 96,267 shares of
common stock at $7.33 to $12.00 per share in relation to 1994
acquisitions. In 1996, warrants were exercised for 66,600 shares at
prices from $7.33 to $12.00.
COMMON STOCK
In May 1996, the Company issued 1,650,000 shares of its common stock
(on a pre-split basis) to the public (the "1996 Secondary Offering") at
a price of $42.00 per share before underwriting discounts and expenses.
Net of discounts and expenses, the Company realized approximately $66
million from the 1996 Secondary Offering. Of the 1996 Secondary
Offering proceeds, approximately $59 million was applied to reduce
outstanding borrowings under the Secured Revolving Line of Credit and
the remainder was used to fund acquisitions.
In April 1995, the Company issued 1,815,000 shares of common stock (on
a pre-split basis) to the public (the "Secondary Offering") at a price
of $28.00 per share before underwriting discounts and expenses. Net of
discounts and expenses, the Company realized approximately $47.2
million from the Secondary Offering. The proceeds were used in part to
reduce outstanding borrowings under the Secured Revolving Line of
Credit and to fund acquisitions.
The Company completed a 3-for-2 common stock split dividend effective
with a record date at close of trading on June 28, 1996. All amounts
shown in the financial statements related to common shares outstanding,
weighted average common shares outstanding, net income per share, stock
options and warrants have been adjusted to reflect this stock split.
PREFERRED STOCK
The Company's certificate of incorporation was amended in 1996 to
authorize the issuance of up to 5,000,000 shares of preferred stock.
The Company's 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.
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9. INCOME TAXES
The provision (benefit) for income taxes for continuing operations is
comprised of the following components:
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------------------
1996 1995 1994
------------- ------------- --------------
Currently payable
Federal $ 8,039,000 $ 6,527,000 $ 4,010,000
State 827,000 851,000 471,000
----------- ----------- -----------
8,866,000 7,378,000 4,481,000
----------- ----------- -----------
Deferred tax provision (benefit)
Federal 626,000 (1,193,000) (899,000)
State 64,000 (156,000) (106,000)
----------- ----------- -----------
690,000 (1,349,000) (1,005,000)
----------- ----------- -----------
Provision for income taxes for continuing operations $ 9,556,000 $ 6,029,000 $ 3,476,000
=========== =========== ===========
A reconciliation of taxes computed at statutory income tax rates for
continuing operations is as follows:
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------------------
1996 1995 1994
-------------- -------------- ---------------
Provision for federal income taxes at statutory rate $ 8,665,000 $ 5,216,000 $ 3,074,000
State income taxes, net of federal tax benefit 371,000 545,000 362,000
Other 520,000 268,000 40,000
-------------- -------------- --------------
Provision for income taxes for continuing operations $ 9,556,000 $ 6,029,000 $ 3,476,000
============== ============== ==============
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The net deferred tax assets and liabilities of the continuing
operations, at the respective income tax rates, are as follows:
DECEMBER 31,
-----------------------------
1996 1995
------------- -------------
Current deferred tax asset:
Accounts receivable reserves $ 5,936,000 $ 3,794,000
Accrued liabilities and other 1,534,000 1,206,000
------------- -------------
Net current deferred tax asset $ 7,470,000 $ 5,000,000
============= =============
Noncurrent deferred tax asset:
Employee benefit plan deposits $ 101,000 $ 94,000
Financial reporting amortization in excess of tax
amortization 357,000 221,000
Other 414,000 85,000
------------- -------------
872,000 400,000
------------- -------------
Noncurrent deferred tax liability:
Tax depreciation in excess of financial reporting
depreciation (2,805,000) (1,263,000)
Acquisition costs (1,923,000) (479,000)
Conversion of cash to accrual method (272,000) (514,000)
Other (450,000) (193,000)
------------- -------------
(5,450,000) (2,449,000)
------------- -------------
Net noncurrent deferred tax liability $ (4,578,000) $ (2,049,000)
============= =============
In 1996 and 1995, the Company realized tax deductions resulting from
employees' exercise of non-qualified stock options. Tax benefits of
$450,000 and $1,297,000, respectively, have been recorded to paid-in
capital.
10. COMMITMENTS AND CONTINGENCIES
LITIGATION
There is certain known or possible litigation incidental to the
Company's business which, in management's opinion, will not have a
material adverse effect on the Company's results of operations or
financial condition.
Professional liability insurance up to certain limits is carried by the
Company for coverage of such claims. See Note 11 for further
discussion.
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EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has employment agreements with certain members of
management which provide for the payment to these members of amounts up
to one and one-half times their annual compensation in the event of a
termination without cause, a constructive discharge (as defined) or
upon a change in control of the Company (as defined). In addition, upon
such an event, the members may elect to require the Company to purchase
options granted to them for a purchase price equal to the difference
between the fair market value of the Company's common stock at the date
of termination and the stated option exercise price. The terms of such
agreements are from one to three years and automatically renew for one
year if not terminated by the employee or the Company. The maximum
contingent liability under these agreements is approximately $5.3
million.
The Company has consulting agreements with certain former owners of
businesses acquired by the Company. These agreements require payments
to be made to the former owners in the event of cancellation of the
consulting agreements without cause. The maximum contingent liability
under these agreements is approximately $443,000.
CONTINGENCIES
The Company is self-insured for the first $250,000, on a per claim
basis, for workers' compensation claims and for the first $100,000 or
$150,000 (depending on the plan chosen by the employee), on a per claim
basis, for health insurance for substantially all employees. The
Company provides reserves for the settlement of outstanding claims at
amounts believed to be adequate. The differences between actual
settlements and reserves are included in expense in the year finalized.
LETTERS OF CREDIT
The Company has in place a letter of credit totaling $375,000 securing
obligations with respect to its workers' compensation self-insurance
program. The letter of credit is secured by restricted cash.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company has established a Supplemental Executive Retirement Plan
(the "SERP") to provide retirement benefits for officers and employees
of the Company at the level of manager and above who have been
designated for participation by the President of the Company.
Participants in the SERP will be eligible to receive benefits
thereunder after reaching normal retirement age which is defined in the
SERP as either (i) age 65, (ii) age 60 and 10 years of service, or
(iii) age 55 and 15 years of service.
Under the SERP, participants can defer up to 6% of his or her base pay.
The Company makes matching contributions of 100% of the amount deferred
by each participant.
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Benefits under the SERP become fully vested upon the participant
reaching normal retirement age or the participant's disability or
death. In addition, if there is a change in control of the Company as
defined in the SERP, all participants shall be fully vested and each
participant shall be entitled to receive his or her benefits under the
SERP upon termination of employment.
The SERP trust funds are at risk of loss. Should the Company become
insolvent, its creditors would be entitled to a claim to the funds
superior to the claim of SERP participants.
401K RETIREMENT SAVINGS PLAN
The Company has a 401K Retirement Savings Plan (the "401K"),
administered by Pan American Life Insurance Company, to provide a tax
deferred retirement savings plan to its employees. To qualify,
employees must be 21 years of age and over, with twelve months of
continuous employment and must work at least twenty hours per week. The
401K is 100% employee funded with contributions limited to 1% to 15% of
compensation each pay period.
HEALTH CARE LEGISLATION
The healthcare industry is subject to numerous laws and regulations of
Federal, state and local governments. These laws and regulations
include, but are not necessarily limited to, matters such as licensure,
accreditation, government healthcare program participation
requirements, reimbursement for patient services, and Medicare and
Medicaid fraud and abuse. Management believes that the Company is in
compliance with fraud and abuse as well as other applicable government
laws and regulations. Compliance with such laws and regulations can be
subject to future government review and interpretation as well as
regulatory actions unknown or unasserted at this time.
In the fall of 1995, Congress proposed reductions in the Medicare
reimbursement rate for home oxygen therapy service and equipment, which
legislation was vetoed by President Clinton. Despite the presidential
veto, Congress continues to consider legislation affecting
reimbursement of these items, and Medicare reimbursement rates for
oxygen services and equipment could be reduced. The Company cannot be
certain of the timing or level of reductions for Medicare oxygen
reimbursement. Any such reductions could have a material adverse effect
on the operating results and cash flows of the Company.
11. PROFESSIONAL LIABILITY INSURANCE
The Company's professional liability policies are on an occurrence
basis and are renewable annually with per claim coverage limits of up
to $1,000,000 per occurrence and $3,000,000 in the aggregate. The
Company maintains a commercial general liability policy which includes
product liability coverage on the medical equipment that it sells or
rents with per claim coverage limits of up to $1,000,000 per occurrence
with a $1,000,000 product liability annual aggregate and a $2,000,000
general liability
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annual aggregate. The Company also maintains excess liability coverage
with a limit of $25,000,000 per occurrence and $25,000,000 in the
aggregate. While 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 additional insured, 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. There can be no
assurance that any of the Company's insurance will be sufficient to
cover any judgments, settlements or cost 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 cost relating to pending or future legal
proceedings, the Company's business and financial condition could be
materially, adversely affected. Subsequent to December 31, 1996, the
Company increased its excess liability coverage to $50,000,000 per
occurrence and $50,000,000 in the aggregate.
12. RELATED PARTY TRANSACTIONS
Colman Furlong & Co., a merchant banking firm ("Colman Furlong") of
which a director of the Company is a partner, received $120,000 plus
reimbursement of out-of-pocket expenses under an agreement to provide
acquisition and corporate finance services to the Company in 1994. This
agreement was terminated effective November 1, 1994. Colman Furlong
also received a $240,000 advisory fee plus reimbursement of
out-of-pocket expenses in connection with advising the Company on
arranging an expanded bank revolving credit facility and received
$390,000 from the Company plus reimbursement of out-of-pocket expenses
and 22,610 shares of common stock of the Company in connection with
advising the Company on the Advocat transaction. Colman Furlong also
received a five year warrant to acquire up to 40,017 shares of common
stock at $7.33 per share. During 1995, the Company engaged Colman
Furlong to assist in the ConPharma acquisition and an increase in the
Secured Revolving Line of Credit for which Colman Furlong was paid
$617,000.
Effective January 1, 1992 and for a term of one year, the Company
entered into a consulting agreement with the then chairman of the
Company and the chairman and chief executive officer of Counsel. The
agreement has been renewed each year through 1997. The agreement
provides for a base consulting fee of $20,000 per month, with
additional compensation at the discretion of the Board of Directors of
up to $60,000 per year. For each year of the agreement, the Company has
paid $300,000 pursuant to this agreement. In May 1994, the president of
Counsel became chairman of the Company and receives a consulting fee of
$8,500 per month for his service as chairman. The Company paid
$102,000, $102,000 and $68,000 under this agreement for 1996, 1995 and
1994, respectively.
A director of the Company is a partner in the law firm of Harwell
Howard Hyne Gabbert & Manner, P.C. ("Harwell Howard") which the Company
engaged during 1996 and 1995 to render legal advice in a variety of
activities for which Harwell Howard was paid $1,400,000 and $1,100,000,
respectively.
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13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER TOTAL
- -------------------------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Revenues From
Continuing Operations $55,053 $62,418 $71,980 $78,897 $268,348
======= ======= ======= ======= ========
Net Income From
Continuing Operations $ 2,930 $ 3,541 $ 4,304 $ 4,426 $ 15,201
======= ======= ======= ======= ========
Net Income Per Share From
Continuing Operations $ 0.24 $ 0.27 $ 0.29 $ 0.30 $ 1.10
======= ======= ======= ======= ========
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER TOTAL
- -------------------------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Revenues From
Continuing Operations $29,253 $38,457 $45,795 $48,866 $162,371
======= ======= ======= ======= ========
Net Income From
Continuing Operations $ 1,730 $ 2,364 $ 2,640 $ 2,355 $ 9,089
======= ======= ======= ======= ========
Net Income Per Share From
Continuing Operations $ 0.20 $ 0.21 $ 0.23 $ 0.20 $ 0.84
======= ======= ======= ======= ========
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American HomePatient, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of American HomePatient, Inc. and have issued
our report thereon dated February 19, 1997. Our audit was made for the purpose
of forming an opinion on those statements taken as a whole. The financial
statement schedule listed in the index under Item 14 is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 19, 1997
S-1
71
AMERICAN HOMEPATIENT, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1994, 1995 and 1996
Column A Column B Column C Column D Column E
--------- -------- -------- -------- ---------
Additions
Charged
Balance at to Costs Charged Balance at
Beginning and to other Deductions End of
Description of Period Expenses Accounts Other (1) (2) Period
- ------------------------------------- --------- -------- -------- -------- --------- ---------
For the year ended December 31, 1996:
Allowances for doubtful accounts $12,383 $11,450 $ ---- $ 6,540 $11,618 $18,755
------- ------- ------- -------- ------- -------
For the year ended December 31, 1995:
Allowances for doubtful accounts $ 5,961 $ 5,934 $ ---- $ 6,775 $ 6,287 $12,383
------- ------- ------- -------- ------- -------
For the year ended December 31, 1994
Allowances for doubtful accounts $ 2,625 $ 3,031 $ ---- $ 3,264 $ 2,959 $ 5,961
------- ------- ------- -------- ------- -------
________________
(1) Amounts recorded in connection with acquisitions.
(2) Amounts written off as uncollectible accounts, net of recoveries.
S-2
72
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ------ ----------------------- ----
3.1 --- Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement No.
33-42777 on Form S-1).
3.2 --- Certificate of Amendment to the Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.2 to Amendment No. 2
to the Company's Registration Statement No. 33-42777 on Form S-1).
3.3 --- Certificate of Amendment to the Certificate of Incorporation of the
Company (incorporated by reference to Registration Statement on Form
S-8 dated February 16, 1993).
3.4 --- Certificate of Ownership and Merger merging American HomePatient,
Inc. into Diversicare Inc. dated May 11, 1994 (incorporated by
reference to Exhibit 4.4 to the Company's Registration Statement No.
33-89568 on Form S-2).
3.5 --- Bylaws of the Company, as amended (incorporated by reference to
Exhibit 3.3 to the Company's Registration Statement No. 33-42777 on
Form S-1).
10.1 --- Stock Exchange Agreement dated May 10, 1994, by and among Counsel
Nursing Properties, Inc., Diversicare Inc., and Advocat Inc.
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement No. 33-89568 on Form S-2).
10.2 --- Asset Contribution Agreement dated May 10, 1994, by and among
Counsel Corporation and certain of its direct and indirect
subsidiaries (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement No. 33-89568 on Form S-2).
10.3 --- Registration Rights Agreement dated September 30, 1993, by and
among the Registrant, Counsel Corporation, Diversicare Corporation of
America, and Montreal Trust Company of Canada (incorporated by
reference to Exhibit 10.65 to the Company's Annual Report on Form
10-K for the year ended December 31, 1993).
10.4 --- Revolving Note dated October 26, 1995, by and between Bankers Trust
Company and American HomePatient, Inc. (incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.5 --- Revolving Note dated October 26, 1995, by and between NationsBank
of Tennessee, N.A. and American HomePatient, Inc. (incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.6 --- Revolving Note dated October 26, 1995, by and between The Boatmen's
National Bank of St. Louis and American HomePatient, Inc.
(incorporated by reference to Exhibit 10.10 to the Company's Annual
Report on Form
10-K for the year ended December 31, 1995).
10.7 --- Revolving Note dated October 26, 1995, by and between Banque
Paribas and American HomePatient, Inc. (incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.8 --- Revolving Note dated October 26, 1995, by and between Rabobank
Nederland, New York Branch and American HomePatient, Inc.
(incorporated by reference to Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995).
10.9 --- Revolving Note dated October 26, 1995, by and between PNC Bank,
Kentucky, Inc. and American HomePatient , Inc. (incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.10--- Revolving Note dated October 26, 1995, by and between AmSouth Bank
of Alabama and American HomePatient, Inc. (incorporated by reference
to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the
year
ended December 31, 1995).
10.11--- Swing Line Note dated October 26, 1995, by and between Bankers
Trust Company and American HomePatient, Inc. (incorporated by
reference to Exhibit 10.15 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ------ ----------------------- ----
10.12--- Subsidiary Security Agreement dated October 20, 1994 by and among
Bankers Trust Company and certain direct and indirect subsidiaries of
American HomePatient, Inc. (incorporated by reference to Exhibit
10.17 to the Company's Registration Statement No. 33-89568 on Form
S-2).
10.13--- Borrower Security Agreement dated October 20, 1994, by and between
Bankers Trust Company and American HomePatient, Inc. (incorporated by
reference to Exhibit 10.18 to the Company's Registration Statement
No. 33-89568 on Form S-2).
10.14--- Employment Agreement dated October 1, 1991, by and between the
Company and Edward K. Wissing (incorporated by reference to Exhibit
10.24 to Amendment No. 1 to the Company's Registration Statement No.
33-42777 on Form S-1).
10.15--- Amendment No. 1 to Employment Agreement dated June 10, 1994, by and
between the Company and Edward K. Wissing (incorporated by reference
to Exhibit 10.21 to the Company's Registration Statement No. 33-89568
on Form S-2).
10.16--- Employment Agreement dated February 8, 1995, by and between American
HomePatient, Inc. and Thomas E. Mills (incorporated by reference to
Exhibit 10.22 to the Company's Registration Statement No. 33-89568 on
Form S-2).
10.17--- Amendment No. 2 to Employment Agreement dated December 1, 1995, by and
between the Company and Edward K. Wissing (incorporated by reference
to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.18--- Consulting Agreement dated April 27, 1992, by and between the Company
and Allan C. Silber (incorporated by reference to Exhibit 10.24 to
the Company's Registration Statement No. 33-89568 on Form S-2).
10.19--- 1991 Non-Qualified Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.25 to the Company's Registration Statement
No. 33-89568 on Form S-2).
10.20--- Amendment No. 4 to 1992 Nonqualified Stock Option Plan (incorporated
herein by reference to Exhibit A of Schedule 14A dated April 17,
1995).
10.21--- 1995 Nonqualified Stock Option Plan for Directors (incorporated herein
by reference to Exhibit B of Schedule 14A dated April 17, 1995).
10.22--- 1993 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.26 to the Company's Registration Statement No. 33-89568 on
Form S-2).
10.23--- Trust Agreement for the Company Master Plan dated January 1, 1992,
by and between the Company and C&S/Sovran Trust Company (incorporated
by reference to Exhibit 10.42 to the Company's Annual Report on Form
10-K for the year ended December 31, 1991).
10.24--- Restated Master Agreement and Supplemental Executive Retirement Plan
(restated as of December 31, 1993) (incorporated by reference to
Exhibit 10.57 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993).
10.25--- Form of Stock Purchase Warrant dated August 11, 1994, by and between
Joseph F. Furlong, III, Kenneth B. Sawyer, and Robert S. Colman,
respectively, and American HomePatient, Inc. (incorporated by
reference to Exhibit 10.32 to the Company's Registration Statement
No. 33-89568 on Form S-2).
10.26--- Asset Purchase Agreement dated February 4, 1994, by and among American
HomePatient, Inc., Health Star Medical, Inc., and its affiliates
(incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K dated February 17, 1994).
10.27--- Form of Stock Purchase Warrant dated August 11, 1993, by and between
Diversicare Inc. and Age Wave, Inc. (incorporated by reference to
Exhibit 10.41 to the Company's Registration Statement No. 33-89568 on
Form S-2).
10.28--- Partnership Agreement dated November 1, 1994, by and between HCA Health
Services of Tennessee, Inc. and American HomePatient Ventures, Inc.
(incorporated by reference to Exhibit 10.42 to the Company's
Registration Statement No. 33-89568 on Form S-2).
10.29--- Agreement of Partnership of Alliance Home Health Care Partnership d/b/a
Medcenters Home Equipment dated January 1, 1994, by and between
Medical Centers Home Equipment and American HomePatient Ventures,
Inc. (incorporated by reference to Exhibit 10.43 to the Company's
Registration Statement No. 33-89568 on Form S-2).
74
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ------ ----------------------- ----
10.30--- Agreement of Limited Partnership of Health Star DME, Ltd. dated May
19, 1988, by and between Health Star Medical of Amarillo, Inc. and
HPBH Enterprises, Inc. as amended by Amendment No. 1 to Certificate
of Limited Partnership of Health Star DME, Ltd. dated February 4,
1994, by AHP, L.P., D/B/A AHP Health, L.P. (incorporated by reference
to Exhibit 10.44 to the Company's Registration Statement No. 33-89568
on Form S-2).
10.31--- Partnership Agreement of Paragon Home Medical Equipment Partnership
dated January 15, 1990, by and between Baylor Medical Plaza Services
Corporation and Healthstar Medical Equipment of Dallas, Inc. as
amended by Amendment to Partnership Agreement dated January 15, 1990,
by and between Baylor Medical Plaza Services Corporation and
Healthstar Medical Equipment of Dallas and as amended by Amendment to
Partnership Agreement dated March 31, 1994, by and between Medical
Development Corp. and AHP, L.P. (incorporated by reference to Exhibit
10.45 to the Company's Registration Statement No. 33-89568 on Form
S-2).
10.32--- Agreement of Partnership of Homelink Home Health Care
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 Health Care
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 Health Care 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 Company's Registration Statement No. 33-89568 on Form S-2).
10.33--- Management Agreement dated December 27,1994, by and among Rural/Metro
Corporation, Coronado Health Services, Inc. and American HomePatient,
Inc. (incorporated by reference to Exhibit 10.49 to the Company's
Registration Statement No. 33-89568 on Form S-2).
10.34--- Option Agreement dated December 27, 1994, by and among Rural/Metro
Corporation, Coronado Health Services, Inc. and American HomePatient,
Inc. (incorporated by reference to Exhibit 10.50 to the Company's
Registration Statement No. 33-89568 on Form S-2).
10.35--- Form of Underwriting Agreement (incorporated by reference to Exhibit
1 to the Company's Registration Statement No. 33-89568 on Form S-2).
10.36--- First Amendment to Credit Agreement by and among American HomePatient,
Inc., The Banks Named Therein, and Bankers Trust Company, as the
Agent (incorporated by reference to Exhibit 10.1 to the Company's
Report on Form 10-Q for the quarter ending March 31, 1995).
10.37--- Stock Purchase Agreement dated March 3, 1995 among ConPharma Home
Healthcare, Inc., Continental Pharma Cyrosan, Inc. and American
HomePatient, Inc. (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated April 28, 1995).
10.38---- Amended and Restated Credit Agreement by and among American
HomePatient, Inc., the Banks Named Therein and Bankers Trust Company,
as the Agent (incorporated by reference to Exhibit 10.1 to the
Company's Report on Form 10-Q for the quarter ending September 30,
1995).
10.39--- Stock Purchase Warrant dated March 31, 1994, by and between
Diversicare Inc. and Medical Environment Development Corp.
(incorporated by reference to Exhibit 4.6 to the Company's
Registration Statement No. 33-89568 on Form S-2).
10.40--- First Amendment to Amended and Restated Credit Agreement dated
December 28, 1995, by and among the Company, Bankers Trust Company
and the banks named therein (incorporated by reference to Exhibit
10.68 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.41--- Borrower Partnership Security Agreement dated December 28, 1995 by
and between Bankers Trust Company and the Company (incorporated by
reference to Exhibit 10.69 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.42--- Subsidiary Partnership Security Agreement dated December 28, 1995
by and between Bankers Trust Company and certain direct and indirect
subsidiaries of the Company (incorporated by reference to Exhibit
10.70 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
75
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ------ ----------------------- ----
10.43--- Amended and Restated Borrower Pledge Agreement dated December 28,
1995 by and between Bankers Trust Company and the Company
(incorporated by reference to Exhibit 10.71 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995).
10.44--- Amended and Restated Subsidiary Pledge Agreement dated December 28,
1995 by and among Bankers Trust Company and certain direct and
indirect subsidiaries of the Company (incorporated by reference to
Exhibit 10.72 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.45--- Subsidiary Guaranty dated October 20, 1994 by certain direct and
indirect subsidiaries of the Company (incorporated by reference to
Exhibit 10.73 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.46--- Second Amended and Restated Credit Agreement dated May 1, 1996 by and
among American HomePatient, Inc., the Banks named Therein and
Banker's Trust Company (incorporated herein by reference to Exhibit
10.3 to the Company's Report on Form 10-Q for the quarter ending June
30, 1996).
10.47--- Lease and addendum as amended dated October 25, 1995 by and between
Principal Mutual Life Insurance Company and American HomePatient,
Inc.
21 --- Subsidiary List.
23.1 --- Consent of Arthur Andersen LLP.
27 --- Financial Data Schedule (for SEC use only)