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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 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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
17, 1998 was $315,218,314.
On March 17, 1998, 14,921,577 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 1998 Annual Meeting of Stockholders.
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PART I
ITEM 1. BUSINESS
INTRODUCTORY SUMMARY
American HomePatient, Inc. (the "Company") was incorporated in Delaware in
September 1991. The Company's principal executive offices are located at 5200
Maryland Way, Suite 400, Brentwood, Tennessee 37027-5018, and its telephone
number at that address is (615) 221-8884. The Company provides home health care
services and products consisting primarily of respiratory and infusion therapies
and the rental and sale of home medical equipment and home health care supplies.
These services and products are paid for primarily by Medicare, Medicaid and
other third-party payors. As of December 31, 1997, the Company provided these
services to patients primarily in the home through 329 centers in 35 states.
Since its inception the Company has experienced substantial growth primarily as
a result of its strategy of acquiring successful, operating home healthcare
businesses and entering into joint venture relationships and strategic alliances
with hospitals and hospital systems.
MATERIAL 1997 CORPORATE DEVELOPMENTS.
Medicare Oxygen Reimbursement Reductions and Related Restructuring. In
August, Congress enacted and President Clinton signed the Balanced Budget Act of
1997 which will reduce the Medicare reimbursement rate for oxygen related
services by 25 percent beginning January 1, 1998, and by another five percent
beginning January 1, 1999. In addition, Consumer Price Index increases in oxygen
reimbursement rates will not resume until the year 2003. American HomePatient is
one of the nation's largest providers of home oxygen services to patients, many
of whom are Medicare recipients, and is therefore significantly affected by this
legislation. Medicare oxygen reimbursements account for approximately 23.5
percent of the Company's revenues.
On September 25, 1997, the Company announced initiatives to aggressively
respond to planned Medicare reimbursement reductions by fundamentally reshaping
the Company for long-term growth (the "Restructuring"). More than 100 of the
Company's total operating and billing locations will be impacted by the planned
activities. The specific actions resulted in pre-tax accounting charges in the
third quarter of 1997 of $65.0 million due to the closure, consolidation, or
scaling back of approximately 20 percent of the Company's total operating
centers, the closure or scaling back of nine billing centers, the elimination of
four operating regions, the scaling back or elimination of marginal products and
services at numerous locations, and the related termination of approximately 350
employees in the affected operating and billing centers. These activities are
expected to be substantially completed by June 1998.
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The $65.0 million pre-tax charges recorded in the third quarter of 1997
specifically related to the write-down of goodwill and other non current assets
($8.2 million), the closure, consolidation, scaling back, or elimination of
services at selected locations ($44.8 million), and the negative impact on the
remaining operating locations ($12.0 million).
The write-off of goodwill and other non current assets is required under
SFAS No. 121 based upon management's estimate of the impact of the announced
Medicare oxygen reimbursement reductions on the Company's continuing operations.
Management's projections of future operations considering the reduced
reimbursement rates for oxygen related services indicated that the carrying
value of goodwill and other non current assets should be written down by $8.2
million.
The closure, consolidation, scaling back, or elimination of services at
more than 100 of the Company's operating and billing centers resulted in the
write-off of goodwill and other intangible assets specifically identified with
affected locations ($12.2 million), the accrual of estimated employee severance
and related exit costs ($6.7 million), the accrual of estimated facility exit
costs including future lease costs, the write-off of leasehold improvements, and
the write-down of furniture and equipment ($6.1 million), the write-down of
accounts receivable to estimated realizable value ($8.7 million), the write-down
of inventory to estimated realizable value ($2.2 million), the write-down of
rental equipment to estimated realizable value ($2.8 million), the termination
of related management contracts ($3.0 million), and other exit costs ($3.1
million). The accounting charges discussed above are recorded in the
accompanying 1997 consolidated statements of operations as cost of sales
($2,204,000), operating expenses ($8,729,000), restructuring charge
($33,829,000), and goodwill impairments ($8,165,000).
Due to the comprehensive nature of this restructuring, including the
consolidation of regional responsibilities, refinements and modifications of
existing procedures in all locations, reorganization of the field management
structure, and additional management attention required to accomplish the
restructuring in the desired timeframe, negative impacts are anticipated in the
remaining operating businesses relative to realization of accounts receivable,
inventories and rental equipment, for which an additional $12.0 million charge
was recorded. This accounting charge is recorded in the accompanying 1997
consolidated statements of operations as cost of sales ($3,051,000) and
operating expenses ($9,022,000).
The total accounting charges discussed above are recorded in the
accompanying 1997 consolidated statements of operations in the following
classifications:
Cost of sales $ 5,255,000
Operating expenses 17,751,000
Restructuring charge 33,829,000
Goodwill impairments 8,165,000
-------------
$ 65,000,000
=============
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The expected cash payments related to the restructuring charge accrued on
September 25, 1997 were approximately $17.7 million. During the fourth quarter
of 1997, $4.1 million was charged against the related accruals as costs were
incurred and payments were made. The remaining accrual at December 31, 1997
primarily represents estimated employee severance and related exit costs ($4.1
million), estimated facility exit costs ($4.5 million), termination of
management contracts ($3.0 million) and other exit costs ($2.0 million).
During the fourth quarter of 1997, the following actions occurred related
to the restructuring: (i) 323 employees were terminated or notified of upcoming
termination in 1998; (ii) 47 operating centers were closed; (iii) 5 billing
locations were closed and (iv) 44 operating centers were consolidated, scaled
back or eliminated marginal products and services. The Company also drastically
reduced and streamlined its field organization during the fourth quarter of
1997. The Company moved from three operating areas with over 20 regions to 11
areas. One of these areas is solely dedicated to the development and operations
of the Company's hospital joint venture partnerships.
Changes to Bank Credit Facility. On June 6, 1997, the Company amended and
restated its Bank Credit Facility (the "Bank Credit Facility") to increase
commitments thereunder from $225.0 million to $325.0 million. The Bank Credit
Facility included a $150.0 million five-year term loan and a $175.0 million
five-year revolving line of credit. On December 19, 1997, the Company amended
and restated its Bank Credit Facility to increase commitments thereunder from
$325.0 million to $400.0 million. The Bank Credit Facility includes a $75.0
million five-year term loan and a $325.0 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".
Home Health Care Acquisitions. Effective in December 1997, the Company
acquired the stock of National Medical Systems, Inc. ("NMS") for $34.1 million
in notes payable to sellers and $9.9 million in assumed liabilities. In February
1998, $33.1 million of the notes payable to sellers was funded from operations
and draws on the Bank Credit Facility. NMS consists of 35 centers in Arkansas,
Oklahoma and Texas.
Additionally, effective in 1997, the Company acquired 27 home health care
businesses consisting of 63 centers. The aggregate purchase price included cash
of $88.2 million, assumed liabilities of $18.2 million and notes payable to
sellers of $7.6 million. The cash amounts have been funded from operations and
draws on the Bank Credit Facility. Of the 98 centers acquired in 1997, the
Company has consolidated 10 centers within other Company locations.
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BUSINESS
The Company provides home health care services and products consisting
primarily of respiratory therapy services, infusion therapy services and the
rental and sale of home medical equipment and home health care supplies. For the
year ended December 31, 1997, such services represented 47%, 18% and 35%,
respectively, of net revenues. These services and products are paid for
primarily by Medicare, Medicaid and other third-party payors. The Company's
objective is to be a leading provider of diversified home health care services
in the markets in which it operates. Management seeks to establish regional
concentrations of centers to develop the market penetration necessary for the
Company to be a cost-effective provider of comprehensive home health care
services to managed care and other third-party payors.
The Company has long relied on its five "strategic imperatives" to guide
its successful growth. These imperatives have included: (i) growth by
acquisition in small to mid-size markets; (ii) building regional density; (iii)
development of joint ventures and strategic alliances with major integrated
health care delivery systems; (iv) same-store revenue growth, and (v) cost
containment.
In response to the Medicare oxygen reimbursement reductions, the Company
has redefined its strategic imperatives. The new imperatives include:
- Continuing to be an active consolidator in the home health care market
to take advantage of the increased acquisition opportunities presented
by current market conditions.
- Maximizing operating leverage by (i) achieving cost-efficiencies, (ii)
initiating process and structure improvements at all levels of the
Company's operations, and (iii) streamlining field operations to
create a new operating model.
- Accelerating the development of joint ventures and strategic alliances
with major hospitals and integrated health care delivery systems.
- Increasing local market share by focusing on the Company's core
product categories of respiratory and infusion services.
- Continuing the Company's commitment to provide Personal Caring
Service, its value system, which keeps quality patient care at the
forefront of all activities.
As of December 31, 1997, the Company provided services to patients
primarily in the home through 329 centers in the following 35 states: Alabama,
Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois,
Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota,
Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina,
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Tennessee, Texas, Virginia, Washington, and Wisconsin. The Company had
approximately 4,800 employees at December 31, 1997.
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 internal growth. During this
period, the Company generated a compound annual growth rate of approximately 63%
in net revenues, from $90.2 million in 1994 to $387.3 million in 1997, while
expanding from 141 centers in 20 states at December 31, 1994 to 329 centers in
35 states at December 31, 1997.
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 1997, the Company acquired 28 home health care companies, consisting of
98 centers with annualized net revenues of over $110 million, and entered 4 new
states. In 1997, the Company continued its strategy of developing joint venture
relationships and strategic contractual alliances with hospitals and hospital
systems to make the Company a provider of home care services in integrated
health care delivery networks. Internal growth in net revenues and operating
income has been achieved by expanding the range of services offered,
implementing branch level cost controls and aggressively seeking to increase the
sources of patient referrals.
SERVICES AND PRODUCTS
The Company provides a diversified range of home health care services and
products. The following table sets forth the percentage of net revenues
represented by each line of business for the periods presented:
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ---- ----
Home respiratory therapy services . . . . . . . . . 53% 49% 47%
Home infusion therapy services . . . . . . . . . . . 20 18 18
Home medical equipment and medical supplies. . . . . 27 33 35
--- --- ---
Total 100% 100% 100%
=== === ===
Home Respiratory Therapy Services. The Company provides a wide variety of
home respiratory services primarily to patients with severe and chronic
pulmonary diseases. Patients are referred to a Company center most often by
primary care and pulmonary physicians as well as by hospital discharge planners
and case managers. After reviewing pertinent medical records on the patient and
confirming insurance coverage information, a Company respiratory therapist or
technician visits the 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
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home to provide additional instructions, required equipment maintenance and
oxygen and other supplies.
The respiratory services that the Company provides include the following:
- Oxygen systems to assist patients with breathing. There are three
types of oxygen systems: (i) oxygen concentrators, which are
stationary units that filter ordinary 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 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 obstructive sleep apnea (OSA), a condition in which a
patient's normal breathing patterns are disturbed during sleep.
- Apnea monitors to monitor and to warn parents of apnea episodes in
newborn infants as a preventive measure against sudden infant death
syndrome.
- Home sleep screenings and studies to detect sleep disorders and the
magnitude of such disorders.
The provision of oxygen-related services and systems comprised
approximately 56% of the Company's 1997 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 8 of its centers, and,
until recently, has historically focused its acquisition strategy almost
entirely on home respiratory services companies. The Company continues to
acquire home respiratory services companies.
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Home Infusion Therapy Services. The Company provides a wide range of home
infusion therapy services. Patients are referred to a Company center most often
by primary care and specialist physicians (such as infectious disease physicians
and oncologists) as well as by hospital discharge planners and case managers.
After confirming the patient's treatment plan with the physician, the pharmacist
mixes the medications and coordinates with the nurse the delivery of necessary
equipment, medication and supplies to the patient's home. The Company provides
the patient and caregiver with detailed instructions on the patient's prescribed
medication, therapy, pump and supplies. 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.
The Company's other infusion therapies include chemotherapy, hydration,
growth hormone and immune globulin therapies. Enteral nutrition services account
for approximately 32% of the Company's infusion revenues, while antibiotic
therapy, TPN, and pain management and other medications accounted for
approximately 27%, 9% 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 85 of its 329 centers.
The Company acquired over $27 million in infusion revenues in 1997 and expects
to evaluate the acquisitions of selective home infusion services companies
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primarily in larger markets in 1998 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
opportunities to provide home medical equipment to its customers who also are
receiving respiratory therapy or infusion therapy.
OPERATIONS
Organization. A major component of the Company's reshaping activities was
the reorganization and streamlining of the field structure. Currently, the
Company's operations are divided into ten geographic areas, each headed by an
area vice president. The Company has also developed an eleventh special area
which is specifically dedicated to the operations of the Company's 21 hospital
joint ventures. See "Hospital Joint Ventures and Strategic Alliances". Each area
vice president oversees the operations of approximately 25 - 35 centers.
Management believes this regional organizational structure enhances management
flexibility and facilitates communication. Specifically, it provides for a
greater focus on local market operations and control at the operating level,
while enabling the Company's management to be close to the patients and
concentrate on achieving the Company's strategic goals. Area vice presidents
focus on cost control, participate in the identification and integration of new
acquisitions and assist local management with decision making to improve
responsiveness in local markets.
The Company's centers are typically staffed with a general manager, a
business office manager, a director of patient services (normally a registered
nurse or respiratory therapist), registered nurses, clinical coordinators,
respiratory therapists, service technicians and customer service
representatives. In 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 the Support
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Center level include financial and accounting functions, clinical policy and
procedure development, system design and corporate acquisitions and development.
The Company has moved certain functions previously performed at the Support
Center or local level to the area level, such as quality improvement oversight,
billing, collections and purchasing, 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. Area quality improvement ("QI") specialists conduct quality compliance
audits at each center to ensure compliance with state and federal regulations,
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 Company's Governing Body which consists of the President
and Chief Executive Office, Chief Operating Officer, Chief Financial Officer,
Senior Vice President of Marketing, Vice President of Clinical & Regulatory
Affairs and three Area Vice Presidents meets quarterly to review and oversee the
Company's quality assurance and corporate compliance programs. 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.
Management Information Systems. Management believes that periodic
refinement and upgrading of its management information systems, which permit
management to monitor closely the activities of the Company's centers is
important to the Company's continuing success. 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 collections, net revenues and
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operating trends. The Company also has focused upon integrating the information
systems of acquired centers as a part of its overall integration efforts.
During 1997, the Company installed a new general ledger system to provide
expanded capacity and functionality. In so doing, Year 2000 compliance was also
accomplished. Remaining actions for Year 2000 involve primarily upgrading field
support software and desktop computers as part of an overall Year 2000 plan. The
remaining costs are not material to the Company.
The Company's Allowable Branch Cost Model(TM) is a productivity tool that
allows local and area managers use to track the cost of delivering a specific
product or service. The model is currently operating in 198 of the Company's 329
centers representing over 60% of the Company's revenues.
HOSPITAL JOINT VENTURES AND STRATEGIC ALLIANCES
As of December 31, 1997, the Company had 21 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 Columbia, SC
Baptist Medical Center Montgomery, AL
Baptist Medical System (3 hospitals) Little Rock, AR
Baylor Health System (10 hospitals) Dallas, TX
Central Carolina Hospital Sanford, NC
Centura Health (6 hospitals) Denver, CO
Columbia/HCA Gainesville, FL
Columbia/HCA Jackson, TN
Columbia/HCA (10 hospitals) Nashville, TN
Columbia/HCA (5 hospitals) Richmond, VA
Columbia/HCA Roanoke, VA
Conway Hospital Conway, SC
East Alabama Medical Center Opelika, AL
Fort Sanders Alliance (5 hospitals) Knoxville, TN
Frye Regional Medical Center/Grace Hickory, Maiden,
Hospital/Caldwell Memorial Morganton, NC
High Plains Baptist Hospital (2 hospitals) 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
Wallace Thompson Hospital Union, SC
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.
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.
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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,
-----------------------
1995 1996 1997
---- ---- ----
Medicare. . . . . . . . . . . . . . . . . . . . . 46% 46% 44%
Private pay, primarily private insurance. . . . . 42 41 44
Medicaid. . . . . . . . . . . . . . . . . . . . . 12 13 12
--- --- ---
Total 100% 100% 100%
=== === ===
The Omnibus Budget Reconciliation Act of 1987 ("OBRA 1987") created six
categories for home medical equipment reimbursement under the Medicare Part B
program, for which the Company qualifies. OBRA 1987 also defined whether
products would be paid for on a rental or sale basis and established fixed
monthly payment rates for oxygen service regardless of the type of service (i.e.
concentrators, liquid oxygen, etc.) as well as a 15-month rental ceiling on
certain medical equipment. After 15 months of rental, rental payments cease for
HME and the Company receives a "maintenance fee" each six months equivalent to
one-month's rental. The Omnibus Budget Reconciliation Act of 1990 ("OBRA 1990")
made new changes to Medicare Part B reimbursement. The substantive changes
relating to OBRA 1990 included a national standardization of Medicare rates for
certain equipment categories, which vary slightly state by state and further
reductions in amounts paid for HME rentals.
In August 1993, Congress passed the Omnibus Budget Reconciliation Act of
1993 ("OBRA 1993"), which included approximately $56 billion in reimbursement
reductions to the Medicare program over the following five years. The specific
reimbursement changes that became effective for fiscal 1994 related to the
recategorization of certain respiratory products, to the capped rental program,
coupled with a reduction in reimbursement rates for these same products.
In August 1997, President Clinton signed a Balanced Budget Act that will
reduce the Medicare reimbursement rate for oxygen by 25% beginning January 1,
1998 and by another 5% beginning January 1, 1999. Medicare oxygen reimbursement
rates will be held steady thereafter as Consumer Price Index increases for
oxygen and durable medical equipment will not resume until the year 2003. The
Medicare oxygen reimbursement reductions affect approximately 23.5% of the
Company's net revenues. As a result, the Company announced in September that it
will close, consolidate or scale back 20% of its operating centers and nine of
its billing centers; and scale back or eliminate marginal products and services
for an additional 12% of its locations. The restructuring affected over 100 of
the Company's total operating and billing locations.
The Company's significant growth in net revenues has been accompanied by
corresponding growth in net accounts receivable. Net patient accounts receivable
at December 31, 1997 were $102.4 million compared to net accounts receivable of
$76.1 million at December 31, 1996. The Company attempts to minimize days' sales
in outstanding net accounts receivable ("DSO") by
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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,
-----------------------
1995 1996 1997
---- ---- ----
Days' sales outstanding. . . . . 91 days 93 days 88 days
The decrease in DSO between 1997 and 1996 is primarily attributable to the
accounts receivable reserved in September, 1997 for restructured centers.
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.
SALES AND MARKETING
Sales. The Company has recorded strong sales revenue growth over the past
three years. However, as part of the Company's fundamental reshaping and 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. Local market selling to traditional sources is the primary
responsibility of account executives who report directly to a branch general
manager. The Company's 1998 sales and marketing plan includes the addition of
50% more selling resources for local sales efforts.
Managed Care Sales. The Company takes a selective approach to managed care
contracts utilizing its local operating and market strengths, supplemented by
area and corporate managed care expertise. The Company utilizes 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. The Company
has a senior level, experienced operating team to lead its efforts to develop
additional hospital joint ventures and strategic alliances as well as to manage
and operate new joint ventures. The team also consists of six former key
operations managers providing it significant depth in leadership and experience.
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,
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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 equipment and services, 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.
Additionally, the Company introduce its new clinical and marketing programs such
as NPPV (non-invasive positive pressure ventilators) program designed to treat
chronic respiratory failure patients. This therapy provides patients an
innovative method of treatment that helps reduce hospitalization and improve the
patients' quality of life. The Company has added many new NPPV patients to its
patient base during 1997. 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.
COMPETITION
The home health care industry is rapidly consolidating but remains highly
fragmented and competition varies significantly from market to market. In the
small and mid-size markets in which the Company primarily operates, the majority
of its competition comes from local independent operators or hospital-based
facilities, whose primary competitive advantage is market familiarity. In the
larger markets, regional and national providers account for a significant
portion of competition. In addition, there are still relatively few barriers to
entry in the local markets served by the Company, and it may encounter
substantial competition from new market entrants. Management believes that the
competitive factors most important in the 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.
Third party payors and their case managers actively monitor and direct the
care delivered to their beneficiaries. Accordingly, relationships with such
payors and their case managers and inclusion within preferred provider and other
networks of approved or accredited providers has become a prerequisite, in many
cases, to the Company's ability to serve many of the patients 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 329 home health care centers as of
December 31, 1997.
ALABAMA Waterbury Ottumwa Joplin Marion Lock Haven Houston(2)
Alexander City Sioux City Kansas City Morehead City McKees Rocks Irving(a)
Andalusia DELAWARE Waterloo Kirksville Morganton(a) Mt. Pleasant Lake Jackson
Birmingham Dover Mexico Morrisville Phillipsburg Laredo
Dothan Newark KANSAS Mountain Grove Newland Philadelphia Longview
Fayette Wilmington Pittsburg Osage Beach Salisbury Pottsville Lubbock
Florence Potosi Sanford(a) Sharon Lufkin
Foley FLORIDA KENTUCKY Rolla Spruce Pine(a) State College McAllen
Huntsville Crawfordville Bowling Green Salem Sylva Titusville Mexia
Mobile Crystal River Corbin Springfield Wadesboro Trevose Mount Pleasant
Montgomery(a) Daytona Beach Danville St. Louis(2) Whiteville Warminster Nacogdoches
Opelika(a) Ft. Lauderdale Eddyville St. Robert Winston-Salem Waynesboro Pampa(a)
Russellville Ft. Myers Elizabethtown Warrensburg Warren Paris
Sylacauga(a) Ft. Walton Beach Florence OHIO York Pasadena
Troy Gainesville(a) Jackson NEBRASKA Bryan Pittsburgh
Tuscaloosa Jacksonville Lexington Omaha Cambridge SOUTH CAROLINA Plainview
Leesburg London Chillicothe Columbia(a) San Antonio
ARIZONA Marianna Louisville NEVADA Cincinnati Conway(a) San Angelo
Bullhead City Orlando Mayfield Boulder City Columbus Florence Temple
Globe Panama City Paducah Las Vegas(2) Dayton Greenville Texarkana
Lake Havasu Pensacola Pineville Pahrump Mansfield N. Charleston Tyler
Phoenix Port St. Lucie Somerset Maumee Rock Hill(a) Victoria
Safford Rockledge Whitley City NEW JERSEY Newark Union(a) Waco
Tucson(b) St. Augustine Cranbury Springfield Van
Tallahassee LOUISIANA Flemington Twinsburg TENNESSEE
ARKANSAS Tampa Bogalusa Cedar Grove Zanesville Chattanooga VIRGINIA
Batesville Hammond Cookeville Farmville
Benton GEORGIA Slidell NEW MEXICO OKLAHOMA Dayton Salem(a)
Berryville Albany Alamogordo Antlers Jackson(a) Onley
Dardanelle Americus MAINE Albuquerque Bartlesville Johnson City Richmond(a)
El Dorado(a) Brunswick Auburn Clovis Claremore Kingsport Chesapeake
Ft. Smith Camilla Bangor Farmington Enid Knoxville(a)
Harrison Dublin Rumford Grants Grove Manchester WASHINGTON
Hot Springs Eastman Hobbs Hugo Nashville(a) Bremerton
Jonesboro(2) Ft. Oglethorpe MARYLAND Las Cruces Lawton Oak Ridge(a) Seattle
Little Rock(a)(2) Martinez/Augusta Cumberland Roswell Muskogee Oneida(a) Tacoma
Mena Nashville Frederick McAlester Rogersville Yakima
Mtn. Home Savannah Salisbury NEW YORK Tulsa Union City
Newport Valdosta Albany Wagoner Morristown WISCONSIN
Rogers Waycross MICHIGAN Buffalo(2) Murfreesboro Burlington
Paragould Detroit E. Syracuse OREGON Eau Claire
Pine Bluff ILLINOIS Gaylord(a) Geneva Eugene TEXAS Elkhorn
Salem Alsip West Branch(a) Marcy Medford Abilene Kenosha
Springdale Arlington Heights Oneonta Amarillo(a) La Crosse
Warren Peoria MINNESOTA Skaneateles PENNSYLVANIA Austin Marshfield
Springfield Rochester Watertown Bradford Bay City Milwaukee
COLORADO Webster Brookville Beaumont Minocqua
Cortez IOWA MISSISSIPPI Utica Burnham Borger(a) Monona
Denver(a) Cedar Rapids Tupelo Carlisle Brownwood Racine
Durango Clarinda NORTH CAROLINA Clearfield Bryan
Pagosa Springs Coralville MISSOURI Asheboro Erie Conroe
Davenport Cameron Asheville Everett Corpus Christi
CONNECTICUT Decorah Columbia Bakersville Harrisburg Dallas(a)(2)
Brookfield Des Moines Festus Charlotte Hazelton Ennis(a)
Danielson Dubuque Florissant Hickory(a) Houtzdale Ft. Worth
New Britain Marshalltown Hannibal Kannapolis Johnstown Hereford
New Milford Mason City Ironton Maiden(a) Kane Harlingen
- - ----------------------------------
(a) Owned by a joint venture.
(b) Managed but not owned by the Company.
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SUPPLIES AND EQUIPMENT
The Company purchases medical equipment, 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 $50,000,000 per occurrence
and $50,000,000 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.
EMPLOYEES
The retention of qualified employees is a high priority for the Company. At
December 31, 1997, the Company employed approximately 3,700 full-time, 450
part-time and 650 PRN individuals. Of these individuals, approximately 125 were
employed at the corporate support center. As of December 31, 1997, approximately
323 employees were terminated or notified of upcoming termination in 1998 as
part of the Restructuring. Management believes that the Company's employee
relations are good. None of the Company's employees are represented by a labor
union.
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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.
GOVERNMENT REGULATION
The Company, as a participant in the healthcare industry, 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. Additionally,
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.
The Company's operations are also subject to a series of laws and
regulations dating back to the Omnibus Budget Reconciliation Act of 1987 ("OBRA
1987") which 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, under the theory that such arrangements are
designed to induce or to encourage the referral of patients to a particular
provider.
The Company regularly reviews and updates its policies and procedures in an
effort to comply with applicable laws and regulations. The Company must follow
strict requirements with paperwork and billing. As required by law, it is
Company policy that all service charges falling under Medicare Part B are
confirmed with a Certificate for Medical Necessity prescribed by a physician.
In recent years, various state and federal regulatory agencies have stepped
up investigative and enforcement activities with respect to the health care
industry, and many health care providers and DME suppliers have received
subpoenas and other requests for information in connection with such activities.
On February 12, 1998, a subpoena from the Office of Inspector General of the
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Department of Health and Human Services ("OIG") was served on the Company at its
Pineville, Kentucky center in connection with an investigation relating to
possible improper claims for Medicare payment. The Company has retained
experienced health care counsel to represent it in this connection and intends
to fully cooperate. Although the Company's counsel has conducted an initial
meeting with governmental officials, this matter is still in its preliminary
stages. In addition the Company from time to time receives notices and subpoenas
from various governmental agencies concerning their plans to audit the Company
or requesting information regarding certain aspects of the Company's business,
and the Company cooperates with the various agencies in responding to such
requests. While the government has broad authority to enforce applicable laws
and regulations, and therefore the scope and outcome of these investigations and
inquiries cannot be predicted with certainty, management does not believe at the
present time that any pending investigations or inquiries will have a material
adverse impact on the Company. As evidence of the past efforts of the Company in
successfully working with the government, in 1997 the Company was the recipient
of the prestigious Hammer Award by Vice President Al Gore in recognition of the
support of the Company in working with the Federal Food and Drug Administration
in developing compliance protocols.
Healthcare law 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. There can be no assurance
that either the federal, state or local governments will not impose additional
regulations upon the Company's activities which might adversely affect the
Company's business so that the Company will be unable to comply with all
regulations in the geographic areas in which it wishes to commence, or presently
conducts its business.
RISK FACTORS
This section summarizes certain risks, among others, that should be
considered by stockholders and prospective investors in the Company. Many of
these risks are discussed in other sections on this report.
Medicare Reimbursement for Oxygen Therapy Services. In 1997 oxygen therapy
services reimbursement from Medicare accounted for approximately 23.5% of the
Company's revenues. The Balanced Budget Act of 1997, as amended, reduced
Medicare reimbursement rates for oxygen and certain oxygen equipment to 75% of
their 1997 levels beginning January 1, 1998 and to 70% of their 1997 levels
beginning January 1, 1999. In addition, Consumer Price Index increases in
Medicare oxygen reimbursement rates will not resume until the year 2003. The
Company cannot be certain that additional reimbursement reductions for oxygen
therapy services or other services and products provided by the Company will not
occur. Any such reductions could have a material adverse effect on the Company's
net revenues and net income. See "Business - Material 1997 Corporate
Developments," "Business - Revenues and Collections" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Medicare Reimbursement for Oxygen Therapy Services."
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Dependence on Reimbursement by Third-Party Payors. In 1997, the percentage
of the Company's net revenues derived from Medicare, Medicaid and private pay
was 44%, 12% and 44%, respectively. The net revenues and profitability of the
Company are affected by the continuing efforts of all payors to contain or
reduce the costs of health care by lowering reimbursement rates, narrowing the
scope of covered services, increasing case management review of services and
negotiating reduced contract pricing. Any changes in reimbursement levels under
Medicare, Medicaid or private pay programs and any changes in applicable
government regulations could have a material adverse effect on the Company's net
revenues. Changes in the mix of the Company's patients among Medicare, Medicaid
and private pay categories and among different types of private pay sources, may
also affect the Company's net revenues and profitability. There can be no
assurance that the Company will continue to maintain its current payor or
revenue mix. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business - Revenues and Collections."
Role of Managed Care. As managed care assumes an increasingly significant
role in markets in which the Company operates, the Company's success will, in
part, depend on retaining and obtaining managed care contracts. There can be no
assurance that the Company will retain or continue to obtain such managed care
contracts. In addition, reimbursement rates under managed care contracts are
likely to continue experiencing downward pressure as a result of payors' efforts
to contain or reduce the costs of health care by increasing case management
review of services and negotiating reduced contract pricing. Therefore, even if
the Company is successful in retaining and obtaining managed care contracts,
unless the Company also decreases its cost for providing services and increases
higher margin services, it will experience declining profit margins. See
"Business."
Government Regulation. The Company is subject to extensive and frequently
changing federal, state and local regulation. In addition, new laws and
regulations are adopted periodically to regulate new and existing products and
services in the health care industry. Changes in laws or regulations or new
interpretations of existing laws or regulations can have a dramatic effect on
operating methods, costs and reimbursement amounts provided by government and
other third-party payors. Federal laws governing the Company's activities
include regulation of the repackaging and dispensing of drugs, Medicare
reimbursement and certification and certain financial relationships with
physicians and other health care providers. Although the Company intends to
comply with all applicable fraud and abuse laws, there can be no assurance that
administrative or judicial interpretation of existing laws or regulations or
enactments of new laws or regulations will not have a material adverse effect on
the Company's business. The Company is subject to state laws governing Medicaid,
professional training, certificates of need, licensure, financial relationships
with physicians and the dispensing and storage of pharmaceuticals. The
facilities operated by the Company must comply with all applicable laws,
regulations and licensing standards. In addition, many of the Company's
employees must maintain licenses to provide some of the services offered by the
Company. There can be no assurance that federal, state or local governments will
not change existing standards or impose additional standards. Any failure to
comply with existing or future standards could have a material adverse effect on
the Company's results of operations, financial condition or prospects.
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No Assurance of Successful Integration of Acquisitions or Continued Growth.
The Company intends to continue to expand its business through acquisitions of
home health care companies, growth in internal net revenues and the formation
of additional hospital joint ventures and strategic alliances. There can be no
assurance that suitable acquisitions will be identified, that consent from the
Company's lenders, where required, will be obtained or that acquisitions will be
consummated on acceptable terms. In addition, there can be no assurance that
these companies, once acquired, will be integrated successfully into the
Company's operations or that any acquisition will not have a material adverse
effect upon the Company's results of operations, financial condition or
prospects, especially in the fiscal quarters immediately following such
transactions. In addition, although the Company intends to expand its business
through hospital joint ventures and strategic alliances, there can be no
assurance that the Company will be able to maintain such relationships. Finally,
there can be no assurance that the Company can increase or maintain growth in
net revenues, enter into additional hospital joint ventures and strategic
alliances or increase net revenues at existing hospital joint ventures and
strategic alliances. The price of the Company's common stock may fluctuate
substantially in response to quarterly variations in the Company's operating and
financial results, announcements by the Company or other developments affecting
the Company, as well as general economic and other external factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Business."
Management of Growth. As the Company's business develops and expands, the
Company may need to implement enhanced operational and financial systems and may
require additional employees and management, operational and financial
resources. There can be no assurance that the Company will successfully (i)
implement and maintain any such operational and financial systems, or (ii) apply
the human, operational and financial resources needed to manage a developing and
expanding business. Failure to implement such systems successfully and use such
resources effectively could have a material adverse effect on the Company's
results of Operations, financial condition or prospects. See "Business."
Competition. The home health care market is highly fragmented and
competition varies significantly from market to market. In the small and
mid-size markets in which the Company primarily operates, the majority of its
competition comes from local independent operators or hospital-based facilities,
whose primary competitive advantage is market familiarity. In the larger
markets, regional and national providers account for a significant portion of
competition. Some of the Company's present and potential competitors are
significantly larger than the Company and have, or may obtain, greater financial
and marketing resources than the Company. In addition, there are relatively few
barriers to entry in the local markets served by the Company, and it may
encounter substantial competition from new market entrants. As the industry
consolidates, the Company also faces competition for acquisitions from current
and new market participants that could increase acquisition prices or inhibit
the Company's acquisition strategy. See "Business - Competition."
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Impact of Health Care Reform. The health care industry continues to undergo
dramatic changes. Although proposed federal legislation to impose greater
control on health care spending has not been enacted by Congress to date, there
can be no assurance that federal health care legislation will not be adopted in
the future. Some states are adopting health care programs and initiatives as a
replacement for Medicaid. It is also possible that proposed federal legislation
will include language which provides incentives to further encourage Medicare
recipients to shift to Medicare at-risk managed care programs. There can be no
assurance that the adoption of such legislation or other changes in the
administration or interpretation of governmental health care programs or
initiatives will not have a material adverse effect on the Company.
Liability and Adequacy of Insurance. The provision of health care services
entails an inherent risk of liability. Certain participants in the home health
care industry may be subject to lawsuits which may involve large claims and
significant defense costs. It is expected that the Company periodically will be
subject to such suits as a result of the nature of its business. The Company
currently maintains product and professional liability insurance intended to
cover such claims in amounts which management believes are in keeping with
industry standards. There can be no assurance that the Company will be able to
obtain liability insurance coverage in the future on acceptable terms, if at
all. There can be no assurance that claims in excess of the Company's insurance
coverage or claims not covered by the Company's insurance coverage will not
arise. A successful claim against the Company in excess of the Company's
insurance coverage could have a material adverse effect upon the results of
operations, financial condition or prospects of the Company. Claims against the
Company, regardless of their merit or eventual outcome, may also have a material
adverse effect upon the Company's ability to attract patients or to expand its
business. See "Business - Insurance."
Influence of Executive Officers, Directors and Principal Stockholder. On
March 20, 1998, the Company's executive officers, directors and principal
stockholder, Counsel Corporation ("Counsel"), in the aggregate, beneficially
owned approximately 35% of the outstanding shares of the common stock of the
Company. As a result of such equity ownership and their positions in the
Company, if the executive officers, directors and principal stockholder were to
vote all or substantially all of their shares in the same manner, they could
significantly influence the management and policies of the Company, including
the election of the Company's directors and the outcome of matters submitted to
stockholders of the Company for approval. The Company is highly dependent upon
its senior management, and competition for qualified management personnel is
intense. The inability to attract and retain qualified personnel could adversely
affect the Company's business.
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ITEM 2. PROPERTIES
The Company's corporate headquarters occupy approximately 31,000 square
feet leased in the Parklane Building, Maryland Farms, Brentwood, Tennessee. The
lease has a seven year term with base monthly rent of $39,000.
The Company owns its centers in Tallahassee, Florida, Waterloo, Iowa,
Harrisburg, Pennsylvania and North Charleston, South Carolina which consist of
approximately 15,000, 35,000, 43,000 and 10,000 square feet, respectively 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 324 home health care centers. A typical center
occupies between 2,000 and 6,000 square feet and generally combines showroom,
office and warehouse space, with approximately two-thirds of the square footage
consisting of warehouse space. Lease terms on most of the leased centers range
from three to five years. Management believes that the Company's owned and
leased properties are adequate for its present needs and that suitable
additional or replacement space will be available as required.
ITEM 3. LEGAL PROCEEDINGS
As with any health care provider, the Company is engaged in routine
litigation incidental to its business and which is not material to the Company.
Additionally, in recent years, the health care industry has come under
increasing scrutiny from various state and federal regulatory agencies, which
are stepping up investigative and enforcement activities. While these activities
cannot be predicted with certainty, management does not believe that they will
have a material adverse impact on the Company. For a description of these
activities, see "Governmental Regulation."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
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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 1996 and 1997 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
------------- ----- ---
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
1997 1st Quarter $28.25 $20.75
1997 2nd Quarter $25.25 $16.75
1997 3rd Quarter $25.50 $16.25
1997 4th Quarter $27.00 $18.50
On March 17, 1998, there were 650 holders of record of the common stock and
the closing bid quotation for the common stock was $21.125 per share, as
reported by NASDAQ Stock Market. Most of the Company's stockholders have their
holdings in the street name of their broker/dealer.
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."
Pursuant to a Warrant Agreement issued to Robert A. Clasen in 1994 in
connection with one of the Company's acquisitions, Mr. Clasen purchased 2,500,
2,500, 1,500 and 1,000 shares of the Company's common stock for $12 per share on
January 24, March 13, May 19 and July 21, 1997, respectively. The common stock
was issued to Mr. Clasen in reliance upon Section 4(2) of the Securities Act of
1933, as amended, and upon Rule 505 of Regulation D. Less than
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$5,000,000 of the Company's common stock was issued and no general solicitation
or advertising was made.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
FINANCIAL STATEMENTS PRESENTED AND DERIVATION OF INFORMATION
The following selected financial data below is derived from the audited
financial statements of the Company and should be read in conjunction with those
statements, including the related notes thereto. The addition of new operations
through acquisitions 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,
----------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Net revenues $ 61,315 $ 90,185 $ 162,371 $ 268,348 $ 387,277
Cost of sales and related services, excluding
depreciation and amortization expense 13,677 17,445 34,031 58,575 97,418
Operating expenses 31,307 47,081 82,608 138,213 216,532
General and administrative expenses 5,520 7,829 11,704 14,664 15,953
Depreciation and amoritization expense 4,532 6,656 14,081 23,845 33,736
Interest expense 542 2,132 4,829 8,294 16,494
Restructuring charge -- -- -- -- 33,829
Goodwill impairment -- -- -- -- 8,165
---------- ---------- ----------- ----------- ------------
Total expenses 55,578 81,143 147,253 243,591 422,127
---------- ---------- ----------- ----------- ------------
Income (Loss) from continuing operations before taxes 5,737 9,042 15,118 24,757 (34,850)
Provision (Benefit) for income taxes 2,254 3,476 6,029 9,556 (8,942)
---------- ---------- ----------- ----------- ------------
Income (Loss) from continuing operations $ 3,483 $ 5,566 $ 9,089 $ 15,201 $ (25,908)
========== ========== =========== =========== ============
Income (Loss) from continuing operations per
share - basic $ 0.46 $ 0.68 $ 0.86 $ 1.13 $ (1.75)
========== ========== =========== =========== ============
Income (Loss) from continuing operations per
share - diluted $ 0.45 $ 0.67 $ 0.84 $ 1.10 $ (1.75)
========== ========== =========== =========== ============
Weighted average shares outstanding - basic 7,621,000 8,131,000 10,550,000 13,473,000 14,839,000
Weighted average shares outstanding - diluted 7,734,000 8,344,000 10,838,000 13,841,000 14,839,000
DECEMBER 31,
-------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $14,961 $ 20,848 $ 46,272 $ 84,012 $112,721
Total assets 60,065 110,965 232,516 395,611 558,366
Total debt and capital leases, including current portion 17,472 35,908 93,606 149,703 301,324
Shareholders' equity 36,950 58,096 119,431 215,642 194,089
26
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS ANNUAL REPORT ON FORM 10-K INCLUDES FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 INCLUDING,
WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES," "ANTICIPATES,"
"INTENDS," "EXPECTS," "ESTIMATES," "MAY," "WILL" AND WORDS OF SIMILAR IMPORT.
SUCH STATEMENTS INCLUDE STATEMENTS CONCERNING THE COMPANY'S BUSINESS STRATEGY,
ACQUISITION STRATEGY, OPERATIONS, COST SAVINGS INITIATIVES, INDUSTRY, ECONOMIC
PERFORMANCE, FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES, EXISTING
GOVERNMENT REGULATIONS AND CHANGES IN, OR THE FAILURE TO COMPLY WITH,
GOVERNMENTAL REGULATIONS, LEGISLATIVE PROPOSALS FOR HEALTHCARE REFORM, THE
ABILITY TO ENTER INTO JOINT VENTURES, STRATEGIC ALLIANCES AND ARRANGEMENTS WITH
MANAGED CARE PROVIDERS ON AN ACCEPTABLE BASIS AND CHANGES IN REIMBURSEMENT
POLICIES. SUCH STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN
SUCH FORWARD-LOOKING STATEMENTS BECAUSE OF A NUMBER OF FACTORS, INCLUDING THOSE
IDENTIFIED IN THE "RISK FACTORS" SECTION AND ELSEWHERE IN THIS ANNUAL REPORT ON
FORM 10-K. THE FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE DATE OF THIS ANNUAL
REPORT ON FORM 10-K AND THE COMPANY DOES NOT UNDERTAKE TO UPDATE THE
FORWARD-LOOKING STATEMENTS OR TO UPDATE THE REASONS THAT ACTUAL RESULTS COULD
DIFFER FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
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,
-----------------------
1995 1996 1997
---- ---- ----
Home respiratory therapy services 53% 49% 47%
Home infusion therapy services 20 18 18
Home medical equipment and medical supplies 27 33 35
--- --- ---
Total 100% 100% 100%
=== === ===
Changes in the Company's business mix over the periods indicated resulted
primarily from the increase in medical equipment and medical supplies revenues
generated by acquired operations. From 1995 through 1997, the Company acquired
85 home health care companies (17, 40 and 28 companies in 1995, 1996 and 1997,
respectively). The Company's goal is to maintain a diversified offering of home
health care services, including a higher percentage of infusion therapy services
27
28
than it has currently in order to provide the comprehensive array of services
that managed care organizations are likely to require.
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 overlapping centers; (iii) decreasing collection periods and
associated billing costs; and (iv) moving certain functions to the area level.
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. The majority of the Company's hospital joint
ventures are not consolidated for financial statement reporting purposes.
Earnings from hospital joint ventures represent the Company's equity in earnings
from unconsolidated hospital joint ventures and management and administrative
fees 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 operating center labor costs, delivery expenses,
selling costs, 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 and area
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.
MEDICARE REIMBURSEMENT FOR OXYGEN THERAPY SERVICES
The Balanced Budget Act of 1997 will reduce the Medicare oxygen
reimbursement rates by 25 percent beginning January 1, 1998, and by another five
percent beginning January 1, 1999. In addition, Consumer Price Index increases
in Medicare oxygen reimbursement rates will not resume until the year 2003. The
Company is one of the nation's largest providers of home oxygen services to
patients, many of whom are Medicare recipients, and is therefore significantly
affected by this legislation. Medicare oxygen reimbursements account for
approximately 23.5 percent of the Company's revenues.
28
29
On September 25, 1997, the Company announced initiatives to respond to the
Medicare oxygen reimbursement reductions by fundamentally reshaping the Company
for long-term growth. The Restructuring impacted more than 100 of the Company's
total operating and billing centers. Specific actions resulted in pre-tax
accounting charges of $65.0 million due to the closure, consolidation, or
scaling down of approximately 20 percent of the Company's operating centers, the
closure or scaling back of nine billing centers, the elimination of four
operating regions, the scaling back or elimination of marginal products and
services at numerous locations, and the related termination of approximately 350
employees.
RESULTS OF OPERATIONS
The Company's net revenues from continuing operations have grown at a
compound annual growth rate of approximately 63% during the period from January
1, 1994 through December 31, 1997. In addition, since 1991, the Company has
expanded its operations from 24 home health care centers in four states to 329
home health care centers in 35 states. This growth has been achieved through a
combination of internal growth, acquisitions, start-up operations, hospital
joint ventures and strategic alliances. The Company acquired 81, 101 and 98
centers during 1995, 1996 and 1997, respectively. Throughout this expansion, the
Company's earnings before interest, taxes, depreciation and amortization
("EBITDA") has remained constant at 21% of revenues.
As more fully discussed in "Material 1997 Corporate Developments" and Note
3 of the December 31, 1997 consolidated financial statements, the Company
recorded $65.0 million of accounting charges in the quarter ended September 30,
1997 related to the Medicare oxygen reimbursement reductions and related
restructuring. In addition to the $65.0 million charge, the Company also
recorded $2.0 million of unusual charges in the third quarter of 1997 as
follows: (i) the Company finalized the results of physical inventory counts for
certain acquired locations primarily in Oklahoma and Texas and recorded a charge
to income of $1.0 million, and (ii) in connection with the Company's analysis of
locations during the planning for the restructuring discussed above, management
determined that an additional charge of $1.0 million was required to
appropriately state the required franchise tax accrual.
The impact of these charges on the various classifications within the
consolidated statements of operations is as follows:
Cost of sales $ 6,255,000
Operating expenses 18,751,000
Restructuring charge 33,829,000
Goodwill impairment 8,165,000
------------
$ 67,000,000
============
29
30
Due to the comprehensive restructuring and reshaping program that occurred
in the fourth quarter of 1998, the Company purposefully slowed its pace of
acquisitions during the quarter and experienced higher than normal operating
expenses in select markets. Concurrently, it completely revamped its field
management structure and eliminated an entire layer of management. These
activities adversely affected the financial results for the fourth quarter.
The following table and discussion set forth items from the income
statement as a percentage of net revenues before the 1997 unusual charges for
the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
---- ---- ----
Net revenues 100% 100% 100%
Cost of sales and related services, excluding depreciation and
amortization expense 21 22 24
Operating expenses 51 52 51
General and administrative expense 7 5 4
Depreciation and amortization expense 9 9 9
Interest expense 3 3 4
---- ---- ----
Total expenses 91 91 92
---- ---- ----
Income from operations before taxes 9 9 8
Provision for income taxes 3 3 3
---- ---- ----
Income from operations 6 6 5
==== ==== ====
OTHER DATA:
EBITDA 21% 21% 21%
Historically, the Company reported same-store growth. Due to the
restructuring activity that occurred during the fourth quarter of 1997, the
Company determined that internal growth is a more accurate representation of
revenue growth than same-store growth. The Company has moved to an internal
growth calculation which still reflects the strength of operations excluding
acquired revenues.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The operations of acquired centers are included in the operations of the
Company from the effective date of each acquisition. Because of the substantial
acquisition activity, the comparison of the results of operations between 1997
and 1996 is materially impacted by the operations of these acquired businesses.
NET REVENUES. Net revenues increased from $268.3 million in 1996 to $387.3
million in 1997, an increase of $119.0 million, or 44%. The Company estimates
that $94.0 million of this increase in net revenues is attributable to the
acquired businesses. The remainder of the increase is primarily attributable to
internal revenue growth generated through the Company's sales and marketing
efforts. Internal revenue growth, including net revenues of hospital joint
ventures
30
31
managed by the Company and accounted for under the equity method, was
13% for 1997. Following is a discussion of the components of net revenues:
Sales and Related Services Revenues. Sales and related services
revenues increased from $119.3 million in 1996 to $180.2 million in 1997,
an increase of $60.9 million, or 51%. This increase is primarily
attributable to the acquisition of home health care businesses and internal
revenue growth.
Rentals and Other Revenues. Rentals and other revenues increased from
$142.7 million in 1996 to $200.3 million in 1997, an increase of $57.6
million, or 40%. This increase is primarily attributable to the acquisition
of home health care businesses and internal revenue growth.
Earnings from Joint Ventures. Earnings from joint ventures increased
from $6.4 million in 1996 to $6.9 million in 1997, an increase of $500,000,
which was primarily attributable to internal growth, acquired and
newly-formed joint ventures. Internal revenue growth of joint ventures was
23% in 1997 compared to 1996, increasing the Company's total internal
revenue growth rate by 1%.
COST OF SALES AND RELATED SERVICES. Cost of sales and related services
increased from $58.6 million in 1996 to $91.2 million in 1997, an increase of
$32.6 million, or 56%. This increase was primarily attributable to acquisitions.
As a percentage of sales and related services revenues, cost of sales and
related services increased from 49% in 1996 to 51% in 1997. This percentage
increase was attributable to the change in the mix of sales and related service
revenues primarily attributable to the acquired home health care businesses.
OPERATING EXPENSES. Operating expenses increased from $138.2 million in
1996 to $197.8 million in 1997, an increase of $59.6 million, or 43%. This
increase was primarily attributable to increased costs associated with the
Company's increased net revenues. As a percentage of net revenues, operating
expenses decreased from 52% in 1996 to 51% in 1997. During the fourth quarter of
1997, operating expenses were higher than budgeted primarily due to the
reorganization of the field management structure and management's focus on
implementing the restructuring plan. The higher operating expenses were
partially offset by the improvement in bad debt expense. Bad debt expense as a
percentage of net revenue decreased from 4.3% in 1996 to 3.3% in 1997 as a
result of the Company's increased focus on accounts receivable management.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $14.7 million in 1996 to $16.0 million in 1997, an increase of
$1.3 million, or 9%. As a percentage of net revenues, general and administrative
expenses decreased from 5% in 1996 to 4% in 1997 as a result of a larger base of
revenues to which to spread the general and administrative expenses. The larger
base of revenues is due to internal growth and acquisitions.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased from $23.8 million in 1996 to $33.7 million in 1997, an
increase of $9.9 million. This
31
32
increase was primarily attributable to depreciation expense and the amortization
of goodwill recorded in connection with acquisitions.
INTEREST EXPENSE. Interest expense increased from $8.3 million in 1996 to
$16.5 million in 1997, an increase of $8.2 million. This increase was
attributable to interest expense on increased borrowings under the Bank Credit
Facility to fund acquisitions of home healthcare business during 1996 and 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The operations of acquired centers are included in the operations of the
Company from the effective date of each acquisition. Because of the substantial
acquisition activity, the comparison of the results of operations between 1996
and 1995 is materially impacted by the operations of these acquired businesses.
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%. The Company estimates
that $97.0 million of this increase in net revenues is attributable to the
acquired businesses. The remainder of the increase is primarily attributable to
Same-store growth generated through the Company's sales and marketing efforts.
Same store growth, including net revenues of hospital joint ventures managed by
the Company and accounted for under the equity method, was 9% 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%. This increase is primarily attributable
to the acquisition of home health care businesses and Same-store revenue
growth.
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%. This increase is primarily attributable to the acquisition
of home health care businesses and Same-store revenue growth.
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 and $1.2 million was attributable to growth in
the Company's existing joint ventures. Same-store revenue growth of joint
ventures was 37% in 1996 compared to 1995, increasing the Company's total
Same-store revenue 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 primarily attributable to acquisitions.
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
32
33
increase was attributable to the change in mix of sales and related service
revenues primarily attributable to the acquired home health care businesses.
OPERATING EXPENSES. Operating expenses increased from $82.6 million in 1995
to $138.2 million in 1996, an increase of $55.6 million, or 67%. This increase
was primarily attributable to increased costs associated with the Company's
increased net revenues. As a percentage of net revenues, operating expenses
increased from 51% in 1995 to 52% 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 $11.7 million in 1995 to $14.7 million in 1996, an increase of
$3.0 million, or 26%. This increase was primarily attributable 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 7% in 1995 to 5% 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 primarily attributable 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 to
interest expense on increased borrowings used under the Bank Credit Facility to
fund acquisitions of home health care businesses during 1995 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had current assets of $170.8 million and
current liabilities of $58.1 million, resulting in working capital of $112.7
million and a current ratio of 2.9x. This compares to working capital of $84.0
million and a current ratio of 3.4x at December 31, 1996.
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
33
34
receivable relates to services for a patient receiving a new medical therapy or
covered by private insurance or Medicaid. Net patient accounts receivable were
$76.1 million and $102.4 million at December 31, 1996 and December 31, 1997,
respectively. This increase is primarily attributable to the acquisitions of
home health care businesses and the internal revenue growth net of the $17.7
million in accounts receivable related charges associated with the Medicare
oxygen reimbursement reduction response. Average days' sales in accounts
receivable was approximately 93 and 88 days' sales outstanding at December 31,
1996, and December 31, 1997, respectively. The decrease is primarily
attributable to the accounts receivable reserved in September, 1997 for
restructured centers.
Net cash provided by operating activities increased from $13.2 million in
1996 to $14.3 million in 1997, an increase of $1.1 million. Net cash used in
investing activities increased from $116.2 million in 1996 to $134.1 million in
1997, an increase of $17.9 million. Acquisition expenditures increased from
$93.8 million in 1996 to $103.3 million in 1997, an increase of $9.5 million.
Capital expenditures increased from $21.2 million in 1996 to $32.5 million in
1997, an increase of $11.3 million. Net cash provided from financing activities
increased from $106.1 million in 1996 to $124.6 million in 1997, an increase of
$18.5 million. The cash provided from financing activities in 1997 primarily
related to proceeds from the Bank Credit Facility, while $68.5 million of the
proceeds in 1996 were provided from a public sale of Company stock.
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 June 6, 1997, the Company amended and
restated its Bank Credit Facility to increase commitments thereunder from $225.0
million to $325.0 million. On December 19, 1997, the Company amended and
restated its Bank Credit Facility to increase commitments thereunder from $325.0
million to $400.0 million. The Bank Credit Facility currently includes a $75.0
million five-year term loan and a $325.0 million 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 0.625% and
from 0.375% to 1.375%, respectively. The Company's ability to borrow under the
Bank Credit Facility terminates on December 16, 2002, subject to exceptions set
forth therein. As of December 31, 1997, the total loans outstanding under the
Bank Credit Facility was approximately $255.4 million and the weighted average
borrowing rate was 7.029%. A commitment fee of up to 0.375% per annum (0.375% as
of December 31, 1997) 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.
34
35
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 $30.0 million or more, and any acquisition which, when
combined with all acquisitions completed in the prior 12 months, exceeds $100.0
million and certain other transactions. The Company was in compliance with the
covenants at December 31, 1997.
IMPLEMENTATION OF FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards, "Earnings per Share" ("SFAS
128") has been issued effective for fiscal years ending after December 15, 1997.
SFAS No. 128 establishes standards for computing and presenting earnings per
share. The Company adopted SFAS No. 128 in the fourth quarter of 1997 and
restated all prior year earnings per share.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") has been issued effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. The Company is required to adopt the provisions of
SFAS 130 in 1998 and does not expect adoption thereof to have a material effect
on the Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") has been issued
effective for fiscal years beginning after December 15, 1997. SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that these enterprises report selected information about operating segments in
interim financial reports issued to shareholders. The Company is required to
adopt the provisions of SFAS 131 in the fourth quarter of 1998 and does not
expect adoption thereof to have a material effect on the Company's financial
position or results of operations.
35
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements are contained on pages 40 through 74 of this Report
and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 8, 1998 ("Proxy Statement") for the annual meeting of stockholders to be
held on May 28, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Executive compensation information is incorporated by reference to the
Proxy Statement.
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 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions of
the Company is incorporated by reference to the Proxy Statement.
36
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements are contained on pages 40 through 74 of this
Report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 8, 1998 ("Proxy Statement") for the annual meeting of stockholders to be
held on May 28, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Executive compensation information is incorporated by reference to the
Proxy Statement.
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 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
of the Company is incorporated by reference to the Proxy Statement.
PART IV
36
38
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 41
Consolidated Balance Sheets, December 31, 1996 and 1997 42 - 43
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996, and 1997 44 - 45
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1995, 1996, and 1997 46 - 48
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1996, and 1997 49 - 51
Notes to Consolidated Financial Statements,
December 31, 1997 52 - 74
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, 1997.
None.
37
39
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 20, 1998
38
40
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 20, 1998
- - ----------------------------------
Morris A. Perlis
/s/Allan Silber Director March 20, 1998
- - ----------------------------------
Allan C. Silber
/s/Henry T. Blackstock Director March 20, 1998
- - ----------------------------------
Henry T. Blackstock
/s/Joseph Furlong III Director March 20, 1998
- - ----------------------------------
Joseph Furlong III
/s/Thomas Dattilo Director March 20, 1998
- - ----------------------------------
Thomas Dattilo
/s/Edward Sonshine Director March 20, 1998
- - ----------------------------------
Edward Sonshine
/s/Mark Manner Director March 20, 1998
- - ----------------------------------
Mark Manner
/s/Edward K. Wissing Chief Executive March 20, 1998
- - ---------------------------------- Officer
Edward K. Wissing
/s/Mary Ellen Rodgers Chief Financial March 20, 1998
- - ---------------------------------- Officer and
Mary Ellen Rodgers Chief Accounting
Officer
39
41
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
40
42
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,
1997 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Nashville, Tennessee
February 23, 1998
41
43
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
------------- ------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 12,050,000 $ 7,299,000
Restricted cash 50,000 425,000
Accounts receivable, less allowance for doubtful
accounts of $43,862,000 and $18,755,000,
respectively 114,386,000 79,460,000
Inventories 25,824,000 21,921,000
Prepaid expenses and other assets 1,423,000 1,353,000
Income tax receivable 8,099,000 872,000
Deferred tax asset 8,998,000 7,470,000
------------ ------------
Total current assets 170,830,000 118,800,000
------------ ------------
PROPERTY AND EQUIPMENT, at cost: 146,803,000 95,254,000
Less accumulated depreciation and amortization (66,729,000) (38,384,000)
------------ ------------
Net property and equipment 80,074,000 56,870,000
------------ ------------
OTHER ASSETS:
Excess of cost over fair value of net assets
acquired, net 262,294,000 198,193,000
Investment in joint ventures 14,974,000 12,405,000
Deferred financing costs, net 3,967,000 2,761,000
Other assets 26,227,000 6,582,000
------------ ------------
Total other assets 307,462,000 219,941,000
------------ ------------
$558,366,000 $395,611,000
============ ============
(Continued)
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44
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------------------------------ ------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt and capital leases $ 9,361,000 $ 10,245,000
Trade accounts payable 13,484,000 8,698,000
Other payables 1,343,000 775,000
Accrued expenses:
Payroll and related benefits 9,553,000 6,672,000
Restructuring accrual 13,604,000 --
Other 10,764,000 8,398,000
------------ ------------
Total current liabilities 58,109,000 34,788,000
------------ ------------
NONCURRENT LIABILITIES:
Long-term debt and capital leases, less
current portion 291,963,000 139,458,000
Deferred tax liabilities 2,046,000 4,578,000
Other noncurrent liabilities 12,159,000 1,145,000
------------ ------------
Total noncurrent liabilities 306,168,000 145,181,000
------------ ------------
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, 14,901,000 and
14,677,000 shares, respectively 149,000 147,000
Paid-in capital 171,133,000 166,780,000
Retained earnings 22,807,000 48,715,000
------------ ------------
Total shareholders' equity 194,089,000 215,642,000
------------ ------------
$558,366,000 $395,611,000
============ ============
The accompanying notes are an integral part of these consolidated balance
sheets.
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45
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ------------- ------------
REVENUES:
Sales and related service revenues $180,176,000 $119,266,000 $ 70,240,000
Rentals and other revenues 200,251,000 142,660,000 88,170,000
Earnings from joint ventures 6,850,000 6,422,000 3,961,000
------------ ------------ ------------
Total revenues 387,277,000 268,348,000 162,371,000
------------ ------------ ------------
EXPENSES:
Cost of sales and related services, excluding
depreciation and amortization 97,418,000 58,575,000 34,031,000
Operating 216,532,000 138,213,000 82,608,000
General and administrative 15,953,000 14,664,000 11,704,000
Depreciation and amortization 33,736,000 23,845,000 14,081,000
Interest 16,494,000 8,294,000 4,829,000
Restructuring charge 33,829,000 -- --
Goodwill impairment 8,165,000 -- --
------------ ------------ ------------
Total expenses 422,127,000 243,591,000 147,253,000
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (34,850,000) 24,757,000 15,118,000
------------ ------------ ------------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current (5,979,000) 8,866,000 7,378,000
Deferred (2,963,000) 690,000 (1,349,000)
------------ ------------ ------------
(8,942,000) 9,556,000 6,029,000
------------ ------------ ------------
NET INCOME (LOSS) $(25,908,000) $ 15,201,000 $ 9,089,000
============ ============ ============
(Continued)
44
46
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Continued)
1997 1996 1995
----------- ----------- ------------
NET INCOME (LOSS) PER COMMON SHARE -
BASIC $ (1.75) $ 1.13 $ .86
=========== =========== ===========
DILUTED $ (1.75) $ 1.10 $ .84
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING -
BASIC 14,839,000 13,473,000 10,550,000
=========== =========== ===========
DILUTED 14,839,000 13,841,000 10,838,000
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
45
47
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COMMON STOCK
----------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- -------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1994 8,375,204 $ 83,000 $33,588,000 $24,425,000 $ 58,096,000
---------- -------- ----------- ----------- ------------
Issuance of shares through exercise of
employee stock options 362,475 5,000 3,468,000 -- 3,473,000
Issuance of shares through employee stock
purchase plan 26,486 -- 245,000 -- 245,000
Tax benefit of stock options exercised -- -- 1,297,000 -- 1,297,000
Issuance of shares, net of issuance costs 2,722,500 27,000 47,204,000 -- 47,231,000
Net income -- -- -- 9,089,000 9,089,000
---------- -------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1995 11,486,665 $115,000 $85,802,000 $33,514,000 $119,431,000
---------- -------- ----------- ----------- ------------
(Continued)
46
48
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Continued)
COMMON STOCK
----------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
BALANCE, DECEMBER 31, 1995 11,486,665 $115,000 $ 85,802,000 $33,514,000 $119,431,000
---------- -------- ------------ ----------- ------------
Issuance of shares through exercise of
employee stock options 168,004 2,000 1,981,000 -- 1,983,000
Issuance of shares through employee
stock purchase plan 34,007 -- 423,000 -- 423,000
Issuance of shares through exercise
of stock warrants 66,600 -- 516,000 -- 516,000
Issuance of shares in connection with an
acquisition 446,460 5,000 11,603,000 -- 11,608,000
Tax benefit of stock options exercised -- -- 450,000 -- 450,000
Issuance of shares, net of issuance
costs 2,475,000 25,000 66,005,000 -- 66,030,000
Net income -- -- -- 15,201,000 15,201,000
---------- -------- ------------ ----------- ------------
BALANCE, DECEMBER 31, 1996 14,676,736 $147,000 $166,780,000 $48,715,000 $215,642,000
========== ======== ============ =========== ============
(Continued)
47
49
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Continued)
COMMON STOCK
----------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- -------- ------------ ----------- ------------
BALANCE, DECEMBER 31, 1996 14,676,736 $147,000 $166,780,000 $ 48,715,000 $215,642,000
========== ======== ============ ============ ============
Issuance of shares through exercise of
employee stock options 184,862 2,000 3,125,000 -- 3,127,000
Issuance of shares through employee
stock purchase plan 32,152 -- 608,000 -- 608,000
Issuance of shares through exercise
of stock warrants 7,500 -- 90,000 -- 90,000
Tax benefit of stock options exercised -- -- 530,000 -- 530,000
Net loss -- -- -- (25,908,000) (25,908,000)
---------- -------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 14,901,250 $149,000 $171,133,000 $ 22,807,000 $194,089,000
========== ======== ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
48
50
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(25,908,000) $ 15,201,000 $ 9,089,000
Adjustments to reconcile net income (loss) to net
cash provided from operating activities:
Depreciation and amortization 33,736,000 23,845,000 14,081,000
Equity in earnings of unconsolidated joint ventures (3,476,000) (3,375,000) (2,138,000)
Deferred income taxes (2,963,000) 690,000 (1,349,000)
Minority interest 244,000 161,000 135,000
Goodwill impairment and write-off 20,411,000 -- --
Other non-cash charges 44,589,000 -- --
Change in assets and liabilities, net of acquisitions:
Restricted cash 375,000 (50,000) --
Accounts receivable, net (31,944,000) (14,920,000) (5,956,000)
Inventories (999,000) (2,303,000) (1,370,000)
Prepaid expenses and other assets 416,000 348,000 (573,000)
Income tax receivable (8,520,000) (940,000) --
Trade accounts payable, accrued expenses and
other current liabilities (5,982,000) (4,196,000) (6,889,000)
Restructuring accrual (4,108,000) -- --
Deferred costs (51,000) (30,000) (55,000)
Other assets and liabilities (1,475,000) (1,281,000) 158,000
------------ ------------ ------------
Net cash provided from operating
activities 14,345,000 13,150,000 5,133,000
------------ ------------ ------------
(Continued)
49
51
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Continued)
1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired $(103,289,000) $ (93,800,000) $ (94,353,000)
Additions to property and equipment, net (32,530,000) (21,157,000) (13,964,000
Distributions to minority interest owners (166,000) (65,000) (135,000)
Distributions from (advances to) unconsolidated
joint ventures, net 1,839,000 (1,193,000) 240,000
------------- ------------- -------------
Net cash used in investing activities (134,146,000) (116,215,000) (108,212,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs (1,859,000) (1,299,000) (1,255,000)
Proceeds from long-term debt 133,766,000 47,196,000 56,765,000
Principal payments on debt and capital leases (10,228,000) (8,286,000) (2,614,000)
Proceeds from sale of stock, net of issuance costs 2,873,000 68,529,000 50,703,000
------------- ------------- -------------
Net cash provided from financing activities 124,552,000 106,140,000 103,599,000
------------- ------------- -------------
(Continued)
50
52
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Continued)
1997 1996 1995
----------- ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS $ 4,751,000 $3,075,000 $ 520,000
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 7,299,000 4,224,000 3,704,000
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $12,050,000 $7,299,000 $4,224,000
=========== ========== ==========
SUPPLEMENTAL INFORMATION:
Cash payments of interest $16,675,000 $8,042,000 $4,171,000
=========== ========== ==========
Cash payments of income taxes $ 2,985,000 $9,866,000 $9,573,000
=========== ========== ==========
In connection with the acquisitions of home health care businesses, the Company
issued 446,460 shares of common stock in 1996, and debt of $41.7 million, $22.4
million, and $13.5 million in 1997, 1996 and 1995, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
51
53
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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, 1997, the Company provides these services to
patients in the home through 329 branches in 35 states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. 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 56%, 59% and 58% of the Company's net
revenues in 1997, 1996 and 1995, 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.
52
54
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments that have an
original maturity of less than three months.
ACCOUNTS RECEIVABLE
The Company's accounts receivable, before allowances, consists of the
following components:
DECEMBER 31,
---------------------------
1997 1996
------------ -----------
Patient receivables:
Medicare $ 45,077,000 $31,388,000
All other, principally commercial insurance 101,137,000 63,439,000
------------ -----------
146,214,000 94,827,000
Other receivables, principally due from
vendors and former owners 12,034,000 3,388,000
------------ -----------
Total $158,248,000 $98,215,000
============ ===========
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 operations. The
provisions for doubtful accounts excluding the restructuring and other
special charges of $17,750,000 in 1997 were $12,791,000, $11,450,000 and
$5,934,000 in 1997, 1996 and 1995, 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.
53
55
In 1997, 1996 and 1995, depreciation expense includes $20,344,000,
$15,059,000 and $9,645,000, respectively, related to the depreciation of
rental equipment.
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 operations.
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 $12,296,000 and $6,968,000 as of
December 31, 1997 and 1996, 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.
In connection with the restructuring as described in Note 3, the Company
wrote-down $8.1 million of goodwill as required under SFAS No. 121 based
upon management's estimate of the impact of the announced Medicare oxygen
reimbursement reductions on the Company's continuing operations. Also, the
Company wrote off $12.2 million of goodwill related to the closure of
certain operating centers which is reflected as part of the restructuring
charge in the consolidated statements of operations.
DEFERRED FINANCING COSTS
Financing costs are amortized primarily using the straight-line method
over the periods of the related indebtedness.
OTHER ASSETS
The estimated value of non-compete agreements, net of accumulated
amortization of $1,850,000 and $1,504,000 as of December 31, 1997 and
1996, respectively, are amortized over the lives of the agreements,
generally periods of up to seven years. As of December 31, 1997 and 1996,
the net amounts of non-compete agreements of $711,000 and $1,056,000,
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, 1997 and 1996 is
$1,902,000 and $1,791,000,
54
56
respectively, and is reflected in other assets in the accompanying
consolidated balance sheets.
Receivables under split dollar value life insurance arrangements of
$14,957,000 at December 31, 1997, were recorded in connection with the
acquisitions of certain home health care businesses and are reflected in
other assets. The Company owes premiums on the split dollar value life
insurance policies of $10,770,000 at December 31, 1997 which are
classified as other noncurrent liabilities.
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, accrued liabilities, 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
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, 1997.
55
57
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") has been issued effective for fiscal
years beginning after December 15, 1997. SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. The Company is required
to adopt the provisions of SFAS 130 in 1998 and does not expect adoption
thereof to have a material effect on the Company's financial position or
results of operations.
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") has been
issued effective for fiscal years beginning after December 15, 1997. SFAS
131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements
and require that these enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
The Company is required to adopt the provisions of SFAS 131 in the fourth
quarter of 1998 and does not expect adoption thereof to have a material
effect on the Company's financial position or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1996 consolidated
financial statements to conform to the 1997 presentation.
3. MEDICARE OXYGEN REIMBURSEMENT REDUCTIONS AND RELATED RESTRUCTURING
In August, Congress enacted and President Clinton signed the Balanced
Budget Act of 1997 which will reduce the Medicare reimbursement rate for
oxygen related services by 25 percent on January 1, 1998, and by another
five percent in 1999. In addition, Consumer Price Index increases in
oxygen reimbursement rates will not resume until the year 2003. American
HomePatient is one of the nation's largest providers of home oxygen
services to patients, many of whom are Medicare recipients, and is
therefore significantly affected by this legislation. Medicare oxygen
reimbursements account for approximately 23.5 percent of the Company's
revenues.
On September 25, 1997, the Company announced initiatives to aggressively
respond to planned Medicare oxygen reimbursement reductions by
fundamentally reshaping the Company for long-term growth and value
creation. More than 100 of the Company's total operating and billing
locations will be impacted by the planned activities. The specific actions
resulted in pre-tax accounting charges in the third quarter of 1997 of
$65.0 million due to the closure, consolidation, or scaling back of
approximately 20 percent of the Company's total operating centers, the
closure or scaling back of nine billing centers, the elimination of four
operating regions, the scaling back or elimination of marginal products
and services at numerous locations, and the related termination of
approximately 350 employees in the affected operating and billing centers.
These activities are expected to be substantially completed by June 1998.
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58
The $65.0 million pre-tax charges recorded in the third quarter of 1997
specifically related to the write-down of goodwill and other non current
assets ($8.2 million), the closure, consolidation, scaling back, or
elimination of services at selected locations ($44.8 million), and the
anticipated negative impact on assets of the remaining operating locations
($12.0 million).
The write-off of goodwill and other non current assets is required under
SFAS No. 121 based upon management's estimate of the impact of the
announced Medicare oxygen reimbursement reductions on the Company's
continuing operations. Management's projections of future operations
considering the reduced reimbursement rates for oxygen related services
indicated that the carrying value of goodwill and other non current assets
should be written down by $8.2 million.
The closure, consolidation, scaling back, or elimination of services at
more than 100 of the Company's operating and billing centers resulted in
the write-off of goodwill and other intangible assets specifically
identified with affected locations ($12.2 million), the accrual of
estimated employee severance and related exit costs ($6.7 million), the
accrual of estimated facility exit costs including future lease costs, the
write-off of leasehold improvements, and the write-down of furniture and
equipment ($6.1 million), the write-down of accounts receivable to
estimated realizable value ($8.7 million), the write-down of inventory to
estimated realizable value ($2.2 million), the write-down of rental
equipment to estimated realizable value ($2.8 million), the termination of
related management contracts ($3.0 million), and other exit costs ($3.1
million). The accounting charges discussed in this paragraph are recorded
in the accompanying 1997 consolidated statements of operations as cost of
sales ($2,204,000), operating expenses ($8,729,000), and restructuring
charge ($33,829,000).
Due to the comprehensive nature of this restructuring, including the
consolidation of regional responsibilities, reorganization of the field
management structure, refinements and modifications of existing procedures
in all locations and additional management attention required to
accomplish the restructuring in the desired timeframe, negative impacts
are anticipated in the remaining operating locations relative to
realization of accounts receivable, inventories and rental equipment, for
which an additional $12.0 million charge was recorded. This accounting
charge is recorded in the accompanying 1997 consolidated statements of
operations as cost of sales ($3,051,000) and operating expenses
($9,022,000).
The total accounting charges discussed above are recorded in the
accompanying 1997 consolidated statements of operations in the following
classifications:
Cost of sales $ 5,255,000
Operating expenses 17,751,000
Restructuring charge 33,829,000
Goodwill and other intangible impairments 8,165,000
-----------
$65,000,000
===========
57
59
During the fourth quarter of 1997, the following actions occurred related
to the restructuring: (i) 155 employees were terminated; (ii) 47 operating
centers were closed; (iii) 5 billing locations were closed and (iv) 44
operating centers were consolidated, scaled back or had marginal products
and services eliminated. Also, the Company revamped its field management
structure and eliminated an entire layer of management.
The expected cash payments related to the restructuring charge accrued on
September 25, 1997 were approximately $17.7 million. During the fourth
quarter of 1997, $4.1 million was charged against the related accruals as
costs were incurred and payments were made. The remaining accrual at
December 31, 1997 primarily represents estimated employee severance and
related exit costs ($4.1 million), estimated facility exit costs ($4.5
million), termination of management contracts ($3.0 million) and other
exit costs ($2.0 million).
4. INVESTMENT IN JOINT VENTURE PARTNERSHIPS
The Company owns 50% of sixteen 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 $2,289,000 and
$1,807,000 at December 31, 1997 and 1996, respectively.
The Company guarantees a mortgage payable of one of the Partnerships. The
balance of the guaranteed debt at December 31, 1997 is $469,000.
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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,
1997 1996
------------ ------------
Accounts receivable, net $12,902,000 $10,112,000
Other current assets 5,512,000 1,682,000
Property and equipment, net 12,551,000 9,351,000
Other assets 1,364,000 813,000
----------- -----------
Total assets $32,329,000 $21,958,000
=========== ===========
Accounts payable $ 1,236,000 $ 740,000
Accrued payroll and other 5,600,000 1,084,000
Partners' capital 25,493,000 20,134,000
----------- -----------
Total liabilities and partners' capital $32,329,000 $21,958,000
=========== ===========
Net sales and rental revenues $44,898,000 $34,756,000
----------- -----------
Cost of sales 7,513,000 7,696,000
Operating and management fees 25,952,000 17,519,000
Depreciation, amortization and interest
expense 4,342,000 2,793,000
----------- -----------
Total expenses 37,807,000 28,008,000
----------- -----------
Pre-tax income $ 7,091,000 $ 6,748,000
=========== ===========
The Company's ownership percentage of undistributed earnings of the
Partnerships at December 31, 1997 and 1996 is $6,653,000 and $4,823,000,
respectively. For federal and state income tax reporting purposes, each
partner reports their share of the profits and losses of the Partnerships.
5. ACQUISITIONS
1997 ACQUISITIONS
Effective in December 1997, the Company acquired the stock of National
Medical Systems, Inc. ("NMS") for $34.1 million in notes payable to
sellers and $9.9 million in assumed liabilities. In February 1998, $33.1
million of the notes payable to sellers was funded from operations and
draws on the Bank Credit Facility (see discussion at Note 7). NMS consists
of 35 branches.
Additionally, effective in 1997, the Company acquired 27 home health care
businesses consisting of 63 branches. The aggregate purchase price
included cash of $88.2 million, assumed liabilities of $18.2 million and
notes payable to sellers of $7.6 million. The cash amounts have been
funded from operations and draws on the Bank Credit Facility (see
discussion at Note 7). Of the 98 branches acquired in 1997, the Company
has consolidated 10 branches within other Company locations.
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1996 ACQUISITIONS
Effective in 1996, the Company acquired 40 home health care businesses
consisting of 101 branches. The aggregate purchase price included cash of
$103.2 million, assumed liabilities of $15.4 million, notes payable to
sellers of $7.6 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.
The allocation of the aggregate purchase price of the 1997 and 1996
acquisitions is summarized as follows:
1997 1996
------------ ------------
Net current and other assets $ 28,546,000 $ 24,877,000
Fixed assets 23,182,000 16,107,000
Goodwill, noncompete agreements and
other intangibles 106,306,000 96,898,000
------------ ------------
$158,034,000 $137,882,000
============ ============
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 1997 are currently being evaluated and final
allocations of the purchase prices will be made in 1998. Management
believes that the final allocations will not materially affect the
Company's results of operations. The consolidated statements of operations
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,
--------------------------
1997 1996
-------- --------
(in thousands except share data)
Net revenues $443,062 $426,985
======== ========
Net income (loss) from operations $(22,637) $ 22,139
======== ========
Net income (loss) from operations per
common share - basic $ (1.53) $ 1.61
======== ========
Net income (loss) from operations per
common share - diluted $ (1.53) $ 1.57
======== ========
Weighted average common shares
outstanding - basic 14,839 13,772
======== ========
Weighted average common shares
outstanding - diluted 14,839 14,140
======== ========
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6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
DECEMBER 31,
----------------------------
1997 1996
------------ -----------
Land $ 671,000 $ 902,000
Buildings and improvements 7,841,000 6,207,000
Rental equipment 113,166,000 74,234,000
Furniture, fixtures and equipment 20,837,000 11,053,000
Delivery vehicles 4,288,000 2,858,000
------------ -----------
$146,803,000 $95,254,000
============ ===========
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:
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
Secured Revolving Line of Credit $213,613,000 $ 36,755,000
Secured Term Loan 75,000,000 100,000,000
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 1,107,000 2,583,000
Mortgage note payable, interest at 8%, principal
and interest due monthly, with balloon payment of
$442,000 due July 1, 2004 584,000 602,000
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 in 1998 7,292,000 7,156,000
Acquisition note payable, interest at 7.0%, principal
and interest due on August 26, 1998 1,000,000 --
Acquisition note payable, interest at 7.0%, principal
and interest due on February 4, 2000 1,000,000 --
Acquisition note payable, interest at 8.0%, principal
and interest due on July 11, 1997 -- 1,500,000
First mortgage note payable, interest at 8.5%, principal
and interest due monthly through 2003, with call
provisions beginning in 1998 -- 481,000
Capital lease obligations, monthly principal and
interest payments until 2001 1,728,000 626,000
----------- ------------
301,324,000 149,703,000
Less current portion (9,361,000) (10,245,000)
------------ ------------
$291,963,000 $139,458,000
============ ============
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Principal payments required on long-term debt (excluding capital leases)
for the next five years and thereafter beginning January 1, 1998 are as
follows:
1998 $ 8,611,000
1999 3,075,000
2000 10,076,000
2001 21,075,000
2002 255,688,000
Thereafter 1,071,000
------------
$299,596,000
============
On December 19, 1997, the Company entered into a Fourth Amended and
Restated Bank Credit Facility (the "Bank Credit Facility") to increase
commitments thereunder to $400.0 million. This Bank Credit Facility
includes a $75.0 million five-year secured term loan (the "Secured Term
Loan") and a $325.0 million five-year secured revolving line of credit
(the "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, 1997, borrowings under the Bank Credit Facility bore interest
at the banks' Adjusted Eurodollar Rate plus 1.00%. The weighted average
borrowing rate was 7.029%. A commitment fee of up to 0.375% per annum
(0.375% as of December 31, 1997) is payable by the Company on the undrawn
balance. The interest rate and commitment fee are based on the Company's
leverage ratio, as such ratio is defined in the Bank Credit Facility
agreement.
Subsequent to year end, the Company refinanced $31,000,000 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 September 15, 1999, the Company shall make quarterly
principal payments on the Secured Term Loan of $1.5 million per quarter
through and including June 15, 2000; $3.0 million per quarter through and
including March 15, 2001; $6.0 million per quarter through and including
June 15, 2002; and $15.0 million per quarter through and including
December 16, 2002. The Secured Revolving Line of Credit does not require
principal payments until maturity at December 16, 2002.
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
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
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purchase price of $30.0 million or more or (ii) any acquisition which when
combined with all acquisitions completed in the prior twelve months
exceeds $100.0 million. The Company was in compliance with the covenants
as of December 31, 1997. Most of the Company's operating assets have been
pledged as security for borrowings under the Bank Credit Facility.
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, 1998, less amounts representing interest, are as
follows:
1998 $ 869,000
1999 617,000
2000 292,000
2001 101,000
2002 52,000
----------
1,931,000
Less amounts representing interest 203,000
----------
$1,728,000
==========
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, 1998
are as follows:
1998 $ 9,796,000
1999 7,628,000
2000 5,187,000
2001 3,234,000
2002 1,581,000
Thereafter 1,459,000
-----------
$28,885,000
===========
Rent expense for all operating leases was approximately $13,811,000,
$8,356,000 and $5,651,000 in 1997, 1996 and 1995, respectively.
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8. SHAREHOLDERS' EQUITY AND STOCK PLANS
NONQUALIFIED STOCK OPTION PLANS
Under the 1991 Nonqualified Stock Option Plan (the "Plan"), as amended,
3,200,000 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 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.
An analysis of stock options outstanding is as follows:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
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 $ 16.93
Granted 267,000 $ 21.64
Exercised 184,862 $ 15.00
Canceled 54,475 $ 19.57
--------- ---------
OUTSTANDING AT DECEMBER 31, 1997 1,603,058 $ 17.85
========= =========
EXERCISABLE AT DECEMBER 31, 1997 1,062,388
=========
31,638 options outstanding at December 31, 1997 have exercise prices of $6
and a weighted average remaining contractual life of 3.75 years. Each of
these are exercisable at year end. 37,900 options outstanding at December
31, 1997 have exercise prices of $10 to $11.5, a weighted average exercise
price of $10.05 and a weighted average remaining contractual life of 6.45
years. Each of these are exercisable at year end. 1,202,520 options
outstanding at December 31, 1997 have exercise prices of $15.83 to $17.5,
a weighted average exercise price of $17.18 and a weighted average
remaining contractual life of 7.70 years. Of these, 872,308 are
exercisable at year end and have a weighted average exercise price of
$17.10. 331,000 options outstanding at December 31, 1997 have exercise
prices of $20.44 to $28.00 a weighted average exercise price of $22.31 and
a weighted average remaining contractual life of 8.83 years. Of these,
120,542 are exercisable at year end and have a weighted average exercise
price of $22.95.
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
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vesting period, and expire in ten years. Options granted during 1996 have
a two year vesting period, and expire in ten years. Options granted during
1997 have two and three year vesting periods, and expire in ten years. As
of December 31, 1997, 408,351 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. In 1997, the Company granted 24,000 shares of
common stock at an exercise price of $21.06. 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 1997, 1996 and 1995 consistent with
the provisions of SFAS No. 123, the Company's net income (loss) and net
income (loss) per common share would have been reduced to the pro forma
amounts indicated below:
1997 1996 1995
------------ ----------- ----------
Net income (loss) - as reported $(25,908,000) $15,201,000 $9,089,000
Net income (loss) - pro forma (31,326,000) 10,521,000 7,659,000
Net income (loss) per common share -
as reported
Basic (1.75) 1.13 .86
Diluted (1.75) 1.10 .84
Net income (loss) per common share -
pro forma
Basic (2.11) .78 .73
Diluted (2.11) .77 .72
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 $13.31, $11.07 and
$10.82 for 1997, 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 1997, 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 5.7% to 6.5%, 5.6% to
6.8% and 5.5% to 7.7% for 1997, 1996 and 1995, respectively.
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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 market price at
the beginning or at the end of each plan year, which is the last day of
February. As of December 31, 1997, 135,559 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 1997, warrants were exercised for 7,500 shares at $12.00
per share.
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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EARNINGS PER SHARE
In the fourth quarter of 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). SFAS No. 128 establishes standards for computing and
presenting earnings per share. Under the standards established by SFAS
128, earnings per share is measured at two levels: basic earnings per
share and diluted earnings per share. Basic earnings per share is computed
by dividing net income by the weighted average number of common shares
outstanding during the year. Diluted earnings per share is computed by
dividing net income by the weighted average number of common shares after
considering the additional dilution related to convertible preferred
stock, convertible debt, options and warrants. Net income per common share
for prior periods have been restated to comply with SFAS 128. In computing
diluted earnings per share, the outstanding stock warrants and stock
options are considered dilutive using the treasury stock method. The
following table information is necessary to calculate earnings per share
for the years ending December 31, 1997, 1996 and 1995:
1997 1996 1995
------------ ----------- -----------
Net income (loss) $(25,908,000) $15,201,000 $ 9,089,000
============ =========== ===========
Weighted average common
shares outstanding 14,839,000 13,473,000 10,550,000
Effect of dilutive options and
warrants -- 368,000 288,000
------------ ----------- -----------
Adjusted diluted common shares
outstanding 14,839,000 13,841,000 10,838,000
============ =========== ===========
Net income (loss) per common
share
- Basic $ (1.75) $ 1.13 $ 0.86
============ =========== ===========
- Diluted $ (1.75) $ 1.10 $ 0.84
============ =========== ===========
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9. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following
components:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------
1997 1996 1995
------------ ---------- ----------
Current
Federal $(5,702,000) $8,039,000 $ 6,527,000
State (277,000) 827,000 851,000
----------- ---------- -----------
(5,979,000) 8,866,000 7,378,000
----------- ---------- -----------
Deferred
Federal (2,826,000) 626,000 (1,193,000)
State (137,000) 64,000 (156,000)
----------- ---------- -----------
(2,963,000) 690,000 (1,349,000)
----------- ---------- -----------
Provision (benefit) for income taxes $(8,942,000) $9,556,000 $ 6,029,000
=========== ========== ===========
A reconciliation of taxes computed at statutory income tax rates is as
follows:
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------
1997 1996 1995
------------ ---------- ----------
Provision (benefit) for federal income taxes at
statutory rate $(12,198,000) $8,665,000 $5,216,000
State income taxes, net of federal tax benefit (592,000) 371,000 545,000
Other, principally non-deductible goodwill 3,848,000 520,000 268,000
------------ ---------- ----------
Provision (benefit) for income taxes $ (8,942,000) $9,556,000 $6,029,000
============ ========== ==========
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The net deferred tax assets and liabilities, at the respective income tax
rates, are as follows:
DECEMBER 31,
--------------------------
1997 1996
----------- ------------
Current deferred tax asset:
Accrued restructuring liabilities $ 5,346,000 $ --
Accounts receivable reserves 403,000 5,936,000
Accrued liabilities and other 3,249,000 1,534,000
----------- -----------
Net current deferred tax asset $ 8,998,000 $ 7,470,000
=========== ===========
Noncurrent deferred tax asset:
Valuation reserves $ 2,163,000 $ 122,000
Employee benefit plan deposits 354,000 101,000
Other 1,155,000 --
----------- -----------
$ 3,672,000 $ 223,000
----------- -----------
Noncurrent deferred tax liability:
Tax amortization in excess of financial
reporting amortization $(1,685,000) $(2,448,000)
Acquisition costs (2,575,000) (1,923,000)
Tax depreciation in excess of financial
reporting depreciation (1,455,000) --
Other (3,000) (430,000)
----------- -----------
(5,718,000) (4,801,000)
----------- -----------
Net noncurrent deferred tax liability $(2,046,000) $(4,578,000)
=========== ===========
In 1997, 1996 and 1995 the Company realized tax deductions resulting from
employees' exercise of non-qualified stock options. Tax benefits of
$530,000, $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 $3.4 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 $560,000.
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.
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 INDUSTRY
The health care 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 health care program participation requirements,
reimbursement for patient services, and Medicare and Medicaid fraud and
abuse. Recently, government activity has increased with respect to
investigation and allegations concerning possible violations of fraud and
abuse statutes and regulations by health care providers. Violations of
these laws and regulations could result in expulsion from government
health care programs together with the imposition of significant fines and
penalties, as well as significant repayment for patient services
previously billed. 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. On February 12, 1998, a subpoena from
the Office of Inspector General of the Department of Health and Human
Services ("OIG") was served on the Company at its Pineville, Kentucky
center in connection with an investigation relating to possible improper
claims for Medicare payment. The Company has retained experienced health
care counsel to represent it in this connection and intends to fully
cooperate. Although the Company's counsel has conducted an initial meeting
with governmental officials, this matter is still in its preliminary
stages. In addition the Company from time to time receives notices and
subpoenas from various governmental agencies concerning their plans to
audit the Company or requesting information regarding certain aspects of
the Company's business, and the Company cooperates with the various
agencies in responding to such requests. While the government has broad
authority to enforce applicable laws and regulations, and therefore the
scope and outcome of these investigations and inquiries cannot be
predicted with certainty, management does not believe at the present time
that any pending investigations or inquiries will have a material adverse
impact on the Company.
72
74
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 annual aggregate. The Company also maintains excess liability
coverage with a limit of $50,000,000 per occurrence and $50,000,000 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.
12. RELATED PARTY TRANSACTIONS
Colman Furlong & Co., a merchant banking firm ("Colman Furlong") of which
a director of the Company is a partner, was engaged in 1995 to assist in
an 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 Corporation ("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 under this
agreement for 1997, 1996 and 1995. Counsel owns approximately 26% of the
Company's common stock at December 31, 1997.
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
73
75
1997, 1996 and 1995 to render legal advice in a variety of activities for
which Harwell Howard was paid $1,656,000, $1,400,000 and $1,100,000,
respectively.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER TOTAL
------------ ------- ------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Revenues
$84,586 $94,789 $102,651 $105,251 $387,277
======= ======= ======== ======== ========
Net Income (Loss) $ 4,638 $ 4,902 $(40,196)(1) $ 4,748 $(25,908)
======= ======= ======== ======== ========
Basic Income (Loss) Per Share $ 0.31 $ 0.33 $ (2.70)(1) $ 0.32 $ (1.75)
======= ======= ======== ======== ========
Diluted Income (Loss) Per Share $ 0.31 $ 0.33 $ (2.70)(1) $ 0.31 $ (1.75)
======= ======= ======== ======== ========
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER TOTAL
--------------- ------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Revenues $55,053 $62,418 $ 71,980 $ 78,897 $268,348
======= ======= ======== ======== ========
Net Income $ 2,930 $ 3,541 $ 4,304 $ 4,426 $ 15,201
======= ======= ======== ======== ========
Basic Income Per Share $ 0.25 $ 0.27 $ 0.29 $ 0.30 $ 1.13
======= ======= ======== ======== ========
Diluted Income Per Share $ 0.24 $ 0.27 $ 0.29 $ 0.30 $ 1.10
======= ======= ======== ======== ========
(1) Includes $65.0 million pre-tax charges recorded due to restructuring.
(See Note 3)
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76
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 23, 1998. 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 23, 1998
S-1
77
AMERICAN HOMEPATIENT, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1995, 1996 and 1997
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, 1997:
Allowances for doubtful accounts $18,755 $30,541(3) $-- $8,408 $13,842 $43,862
------- ------- --- ------ ------- -------
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
------- ------- --- ------ ------- -------
- - ----------------
(1) Amounts recorded in connection with acquisitions.
(2) Amounts written off as uncollectible accounts, net of recoveries.
(3) Includes $17.75 million charge associated with restructuring.
S-2
78
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 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).
10.2 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).
10.3 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).
10.4 Revolving Note dated October 26, 1995, by and between BanqueParibas 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
79
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE
------- ----------------------- ----
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 Amendment No. 4 to 1992 Nonqualified Stock Option Plan (incorporated herein by
reference to Exhibit A of Schedule 14A dated April 17, 1995).
10.17 1995 Nonqualified Stock Option Plan for Directors (incorporated herein by
reference to Exhibit B of Schedule 14A dated April 17, 1995).
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 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).
80
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE
------- ----------------------- ----
10.23 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).
10.24 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)
10.25 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).
10.26 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).
10.27 Agreement of Partnership of Homelink Home Healthcare Partnership dated February 28,
1985, by and between Med-E-Quip Rental and Leasing, Inc. and Homelink Home Health
Care Services, Inc., as amended by First Amendment to Agreement of Partnership of
Homelink Home Health Care Partnership dated February 28, 1988, by and between
Med-E-Quip Rental and Leasing, Inc. and Homelink Home Healthcare Services, Inc. and
Second Amendment to Agreement of Partnership of Homelink Home Health Care Partnership
dated October 1, 1988, by and between Med-E-Quip Rental and Leasing, Inc. and
Homelink Home Health Care Services, Inc. and Third Amendment to Agreement of
Partnership of Homelink Healthcare Partnership dated October 1, 1991, by and between
Med-E-Quip Rental and Leasing, Inc. and Homelink Home Health Care Services, Inc.
(Incorporated by reference to Exhibit 10.46 to the Company's Registration Statement
No. 33-89568 on Form S-2).
10.28 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).
10.29 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).
10.30 Form of Underwriting Agreement (incorporated by reference to Exhibit 1 to
the Company's Registration Statement No. 33-89568 on Form S-2).
10.31 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).
81
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE
------- ----------------------- ----
10.32 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).
10.33 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).
10.34 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).
10.35 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).
10.36 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).
10.37 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).
10.38 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).
10.39 Second Amended and Restated Credit Agreement dated May 1, 1996 by and among American
HomePatient, Inc., the banks named therein and Bankers Trust Company (incorporated by
reference to Exhibit 10.3 to the Company's Report on Form 10-Q for the quarter
ending June 30, 1996).
10.40 Lease and addendum as amended dated October 25, 1995 by and between Principal Mutual
Life Insurance Company and American HomePatient, Inc. (incorporated by reference to
Exhibit 10.47 to the Company's Report on Form 10-K for the year ended December
31, 1996).
10.41 Stock Purchase Agreement dated December 23, 1997 among National Medical
Systems, Inc., its stockholders named therein, and American HomePatient, Inc.
(Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K
dated February 17, 1998).
10.42 Amendment to Stock Purchase Agreement dated February 5, 1998 among National Medical
Systems, Inc., its stockholders named therein, and American HomePatient, Inc.
(Incorporated by reference to Exhibit 2.2 to the Company's Report on Form
8-K dated February 17, 1998).
82
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE
------- ----------------------- ----
10.43 Third Amended and Restated Credit Agreement dated June 6, 1997 by and among American
HomePatient, Inc. and banks named therein and Bankers Trust Company (Incorporated by
reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter
ending June 30, 1997).
10.44 Fourth Amended and Restated Credit Agreement dated December 19, 1997 by and among
American HomePatient, Inc., the Banks named therein and Bankers Trust Company.
10.45 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
Bankers Trust Company.
10.46 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
ABN Amrobank, N.V.
10.47 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
AmSouth Bank.
10.48 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
Bank of America, NT & SA.
10.49 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
Bank of Montreal.
10.50 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
Corestates Bank, N.A.
10.51 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
First American National Bank.
10.52 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
The First National Bank of Chicago.
10.53 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
The Fuji Bank, Limited, Atlanta Agency.
10.54 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
NationsBank, N.A.
10.55 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
PNC Bank, Kentucky, Inc.
10.56 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
Cooperative Centrale Raiffesen Boerenleenbank, B.A., "Rabobank Nederland," New York
Branch.
10.57 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
the Sakura Bank, Limited.
10.58 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
Suntrust Bank, Nashville, N.A.
10.59 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
Union Bank of California, N.A.
10.60 Revolving Note dated December 23, 1997 by and between American HomePatient, Inc. and
Union Bank of Switzerland, New York Branch.
10.61 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and
Bankers Trust Company.
83
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE
------- ----------------------- ----
10.62 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and ABN
Amrobank, N.V.
10.63 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and
AmSouth Bank.
10.64 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and
Bank of America, NT & SA.
10.65 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and Bank
of Montreal.
10.66 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and
Corestates Bank, N.A.
10.67 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and First
American National Bank.
10.68 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and The
First National Bank of Chicago.
10.69 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and The
Fuji Bank, Limited, Atlanta Agency.
10.70 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and
NationsBank, N.A.
10.71 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and PNC
Bank, Kentucky, Inc.
10.72 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and
Cooperative Centrale Raiffesen Boerenleenbank, B.A., "Rabobank Nederland," New York
Branch.
10.73 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and the
Sakura Bank, Limited.
10.74 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and
Suntrust Bank, Nashville, N.A.
10.75 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and Union
Bank of California, N.A.
10.76 Term Note dated December 19, 1997 by and between American HomePatient, Inc. and Union
Bank of Switzerland, New York Branch.
10.77 Swing Line Note dated December 19, 1997 by and between American HomePatient, Inc. and
Bankers Trust Company.
10.78 Master Agreement dated October 11, 1996 by and between American HomePatient, Inc. and
Bank of Montreal.
10.79 Severance Agreement dated December 22, 1997 by and between American HomePatient, Inc.
and Thomas E. Mills.
10.80 Amendment No. 3 to Employment Agreement dated December 23, 1997 by and between
American HomePatient, Inc. and Edward K. Wissing.
10.81 Letter Agreement dated August 7, 1997 by and between American HomePatient, Inc.,
and DCAmerica, Inc.
21 Subsidiary List.
84
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS PAGE
------- ----------------------- ----
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule (for SEC use only).