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EX-23 - EX-23 - AMERICAN HOMEPATIENT INC | g22370exv23.htm |
EX-21 - EX-21 - AMERICAN HOMEPATIENT INC | g22370exv21.htm |
EX-31.1 - EX-31.1 - AMERICAN HOMEPATIENT INC | g22370exv31w1.htm |
EX-32.2 - EX-32.2 - AMERICAN HOMEPATIENT INC | g22370exv32w2.htm |
EX-31.2 - EX-31.2 - AMERICAN HOMEPATIENT INC | g22370exv31w2.htm |
EX-32.1 - EX-32.1 - AMERICAN HOMEPATIENT INC | g22370exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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) |
Registrants telephone number, including area code: (615) 221-8884
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Common Stock, par value $0.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
Indicate by check mark whether the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12-b-2). Yes o No þ
The aggregate market value of registrants voting stock held by non-affiliates of the registrant,
computed by reference to the price at which the stock was last sold as of June 30, 2009 was
$1,800,077. Solely for the purposes of this calculation, all persons who are executive officers or
directors of the registrant and all persons who have filed a Schedule 13D or 13G with respect to
the registrants stock have been deemed to be affiliates.
On March 2, 2010, 17,573,389 shares of the registrants $0.01 par value Common Stock were
outstanding.
Documents Incorporated by Reference
The following documents are incorporated by reference into Part II, Item 5 and Part III, Items
10, 11, 12, 13 and 14 of this Form 10-K: portions of the Registrants definitive proxy statement
for its 2010 Annual Meeting of Stockholders.
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This Annual Report on Form 10-K includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 including, without limitation, statements
containing the words believes, anticipates, intends, expects, estimates, projects,
may, plan, will, likely, could and words of similar import. Such statements include
statements concerning the Companys business strategy, the ability to satisfy interest expense and
principal repayment obligations or to otherwise address these obligations, operations, cost savings
initiatives, industry, economic performance, financial condition, liquidity and capital resources,
adoption of, or changes in, accounting policies and practices, existing government regulations and
changes in, or the failure to comply with, governmental regulations, legislative proposals for
health care reform, the ability to enter into strategic alliances and arrangements with managed
care providers on an acceptable basis, and current and future changes in reimbursement rates, as
well as reimbursement reductions and the Companys ability to mitigate the impact of the
reductions. Such statements are not guarantees of future performance and are subject to various
risks and uncertainties. The Companys actual results may differ materially from the results
discussed in such forward-looking statements because of a number of factors, including those
identified in the Risk Factors section and elsewhere in this Annual Report on Form 10-K. The
forward-looking statements are made as of the date of this Annual Report on Form 10-K and the
Company does not undertake to update the forward-looking statements or to update the reasons that
actual results could differ from those projected in the forward-looking statements.
Available Information
The Company files reports with the Securities and Exchange Commission (SEC), including
annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K.
Copies of the Companys reports filed with the SEC may be obtained by the public at the SECs
Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at
1-800-SEC-0330. The Company files such reports with the SEC electronically, and the SEC maintains
an Internet site at www.sec.gov that contains the Companys periodic and current reports, proxy and
information statements, and other information filed electronically. The Companys website address
is www.ahom.com. The Company also makes available, free of charge through the Companys website, a
direct link to its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and other materials filed with the SEC electronically. The information provided on the
Companys website is not part of this report, and is therefore not incorporated by reference unless
such information is otherwise specifically referenced elsewhere in this report.
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PART I
ITEM 1. BUSINESS
Introduction
American HomePatient, Inc. and its subsidiaries (collectively, the Company) provide home
health care services and products consisting primarily of respiratory and infusion therapies and
the rental and sale of home medical equipment and home health care supplies. These services and
products are paid for primarily by Medicare, Medicaid, and other third-party payors. As of
December 31, 2009, the Company provided these services to patients primarily in the home through
241 branches in 33 states.
American HomePatient, Inc. was incorporated in Delaware in September 1991. American
HomePatient, Inc.s principal executive offices are located at 5200 Maryland Way, Suite 400,
Brentwood, Tennessee 37027-5018, and its telephone number at that address is (615) 221-8884.
Business
The Company provides home health care services and products consisting primarily of
respiratory therapy services, home infusion therapy services, and the rental and sale of home
medical equipment and home health care supplies. For the year ended December 31, 2009, such
services and products represented 84%, 9%, and 7% of revenues, respectively. These services and
products are paid for primarily by Medicare, Medicaid, and other third-party payors. The Companys
objective is to be a leading provider of home health care products and services in the markets in
which it operates.
As of December 31, 2009, the Company provided services to patients primarily in the home
through 241 branches in the following 33 states: Alabama, Arizona, Arkansas, Colorado,
Connecticut, Delaware, Florida, Georgia, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland,
Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Mexico, New York, North Carolina,
Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington, West
Virginia, and Wisconsin. As of December 31, 2009 the Company was an investor in and a manager of
eleven joint ventures.
The Company is required to report information about operating segments in annual financial
statements and interim financial reports. The Company is also required to make related disclosures
about products and services, geographic areas, and major customers. The Company manages its
business as one reporting segment.
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Services and Products
The Company provides a diversified range of home health care services and products. The
following table sets forth the percentage of revenues represented by each line of business for the
periods presented:
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Home respiratory therapy services |
84 | % | 81 | % | 78 | % | ||||||
Home infusion therapy services |
9 | 10 | 11 | |||||||||
Home medical equipment and home health supplies |
7 | 9 | 11 | |||||||||
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 branch 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 service technician or respiratory
therapist visits the patients home to deliver and to prepare the prescribed therapy or equipment.
Company representatives coordinate the prescribed therapy with the patients physician and train
the patient and caregiver in the correct use of the equipment. For patients renting equipment,
Company representatives also make periodic follow-up visits to the home to provide additional
instructions, perform required equipment maintenance, and deliver oxygen and other supplies.
The primary respiratory services that the Company provides are:
| Oxygen systems to assist patients with breathing. There are three types of oxygen systems: (i) oxygen concentrators, which are stationary units that filter ordinary room air to provide a continuous flow of oxygen; (ii) liquid oxygen systems, which are thermally-insulated containers of liquid oxygen which can be used as stationary units and/or as portable options for patients; and (iii) high pressure oxygen cylinders, which are used primarily for portability as an adjunct to oxygen concentrators. Oxygen systems are prescribed by physicians for patients with chronic obstructive pulmonary disease, cystic fibrosis, and neurologically-related respiratory problems. | ||
| Nebulizers and related inhalation drugs to assist patients with breathing. Nebulizer compressors are used to administer aerosolized medications (such as albuterol) to patients with asthma, bronchitis, chronic obstructive pulmonary disease, and cystic fibrosis. AerMedsÒ is the Companys registered marketing name for its aerosol medications program. | ||
| Respiratory assist devices and related supplies to force air through respiratory passage-ways during sleep. These treatments, which utilize continuous positive airway pressure (CPAP) or bi-level positive airway pressure therapy, are used on adults with |
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obstructive sleep apnea (OSA), a condition in which a patients normal breathing patterns are disturbed during sleep. |
The other respiratory services that the Company provides include: |
| Home ventilators to sustain a patients respiratory function mechanically in cases of severe respiratory failure when a patient can no longer breathe independently; | ||
| Non-invasive positive pressure ventilation (NPPV) to provide ventilation support via a face mask for patients with chronic respiratory failure and neuromuscular diseases. This therapy enables patients to receive positive pressure ventilation without the invasive procedure of intubation; and | ||
| Home respiratory evaluations and related diagnostic equipment to assist physicians in identifying, monitoring and managing their respiratory patients. |
Oxygen systems comprised approximately 37.9% of the Companys total 2009 revenues. Inhalation
drugs and nebulizers comprised approximately 5.5% and 1.5%, respectively, of the Companys total
2009 revenues. Respiratory assist devices, largely consisting of CPAP devices, and related
supplies comprised approximately 36.5% of 2009 revenues. All other respiratory products and
services comprised approximately 2.5% of the Companys total 2009 revenues. Respiratory therapy
services are provided by substantially all of the Companys branches other than the few that are
dedicated solely to infusion therapy.
Home Infusion Therapy Services. The Company provides a wide range of home infusion therapy
services. Patients are referred to a Company branch most often by primary care and specialist
physicians (such as infectious disease physicians and oncologists) as well as by hospital discharge
planners and case managers. After confirming the patients treatment plan with the physician, the
pharmacist mixes the medications and coordinates with the nurse the delivery of necessary
equipment, medication and supplies to the patients home. The Company provides the patient and
caregiver with detailed instructions on the patients prescribed medication, therapy, pump and
supplies. For patients renting equipment, the Company also schedules follow-up visits and
deliveries in accordance with physicians orders.
Home infusion therapy involves the administration of nutrients, antibiotics, and other
medications intravenously (into the vein), subcutaneously (under the skin), intramuscularly (into
the muscle), intrathecally (via spinal routes), epidurally (also via spinal routes), or through
feeding tubes into the digestive tract. The primary infusion therapy services that the Company
provides include the following:
| Enteral nutrition is the infusion of nutrients through a feeding tube inserted directly into the functioning portion of a patients digestive tract. This long-term therapy is often prescribed for patients who are unable to eat or to drink normally as a result of a neurological impairment such as a stroke or a neoplasm (tumor). |
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| Anti-infective therapy is the infusion of anti-infective medications into a patients bloodstream, typically for 5 to 14 days, to treat a variety of serious bacterial and viral infections and diseases. | ||
| Total parenteral nutrition (TPN) is the long-term provision of nutrients through central vein catheters that are surgically implanted into patients who cannot absorb adequate nutrients enterally due to a chronic gastrointestinal condition. | ||
| Pain management involves the infusion of certain drugs into the bloodstream of patients, primarily terminally or chronically ill patients, suffering from acute or chronic pain. | ||
| Other infusion therapies include chemotherapy, hydration, growth hormone and immune globulin therapies. |
Enteral nutrition services account for approximately 5.6% of the Companys total revenues in
2009 and are provided by many of the Companys branches. Anti-infective therapy, TPN, pain
management, and other infusion revenues accounted for approximately 3.9% of the Companys total
revenues in 2009. Other infusion therapies are currently provided by 3 of the Companys 241
branches.
Home Medical Equipment and Medical Supplies. The Company provides a variety of equipment and
supplies to serve the needs of home care patients. Revenues from home medical equipment and
supplies are derived principally from the rental and sale of wheelchairs, hospital beds, ambulatory
aids, bathroom aids and safety equipment, and rehabilitation equipment. Sales of home medical
equipment and medical supplies account for 6.8% of the Companys revenues in 2009 and are provided
by most of the Companys 241 branches.
Operations
Organization. Currently, the Companys operations are divided into 11 geographic areas with
each area headed by an area vice president. Each area vice president typically oversees the
operations of approximately 20 to 30 branches. Area vice presidents focus on revenue development
and cost control and assist local management with decision-making to improve responsiveness and
ensure quality in local markets. The Company operates regional billing centers that report
directly to the corporate reimbursement department under the leadership of the Senior Vice
President of Innovation and Technology and two regional vice presidents of reimbursement.
Additionally, the Company has four regional patient service centers that perform certain customer
service functions and report to the Vice President of Contact Care Integration. This
organizational structure adds specialized knowledge and focused management resources to the
billing, compliance, and reimbursement functions. The Company also operates a centralized CPAP
support center that performs CPAP supply order processing and fulfillment, a centralized oxygen
support center that coordinates scheduling and routing of portable oxygen deliveries for the
Companys branches, and a centralized pharmacy that performs inhalation drug order processing and
fulfillment.
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The Companys branches are typically staffed with a general manager, clinicians such as
respiratory therapists, service technicians, and customer service representatives. In most of its
markets, the Company employs account executives who are responsible for local sales efforts.
Account executives report directly to the general manager of their respective branch and indirectly
to their respective area director of sales.
The Company tries to appropriately balance between centralized and decentralized management
with an increased emphasis on centralizing functions to improve productivity. Operating managers
are encouraged to promptly and effectively respond to local market demands, while the Company
provides through its corporate office management support, compliance oversight and training,
marketing and managed care expertise, sales training and support, product development, and
financial and information systems. The Company retains centralized control over those functions
necessary to monitor quality of patient care and to maximize operational efficiency. Services
performed at the corporate office include financial and accounting functions, treasury, corporate
compliance, human resources, reimbursement oversight, sales and marketing support, clinical policy
and procedure development, regulatory affairs and licensure, and information system design. The
Companys patient service centers provide centralized order intake and revenue qualification.
Additionally, the Company has centralized its distribution of inhalation drugs and CPAP supplies.
Management regularly analyzes the Companys structure for opportunities to improve operations. See
Managements Discussion and Analysis of Financial Condition and Results of Operations General
Productivity and Profitability for additional discussion of centralization initiatives to improve
productivity.
Commitment to Quality. The Company maintains quality and performance improvement programs
related to the proper implementation of its service standards. Management believes that the
Company has developed and implemented service policies and procedures that comply with the
standards required by the Accreditation Commission for Health Care, Inc. (ACHC), its current
accrediting agency. As of January 1, 2008, the Company transitioned its accrediting agency from
the Joint Commission to ACHC, which, like the Joint Commission, is a deemed accreditation
organization for suppliers of durable medical equipment, prosthetics, orthotics, and supplies. As
a deemed accreditation organization, ACHCs accreditation is recognized by Centers for Medicare and
Medicaid Services (CMS) as proof that the Company has met or exceeds CMS quality standards in
order to bill the Medicare Part B program. All of the Companys operating branch locations are
ACHC-accredited. The Company has Quality Improvement Advisory Boards at many of its branches, and
branch general managers conduct quarterly quality improvement reviews. Area Quality Managers
(AQMs) conduct quality compliance audits at each branch to ensure compliance with state and federal
regulations, accreditation and quality standards, FDA regulations and internal standards. The AQMs
also help train all new clinical personnel on the Companys policies and procedures.
Training and Retention of Quality Personnel. Management recognizes that the Companys
business depends on its personnel. The Company attempts to recruit knowledgeable talent for all
positions including account executives who are capable of gaining new business from the local
medical community. In addition, the Company provides sales training and orientation to general
managers and account executives.
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Management Information Systems. Management believes that periodic refinement and upgrading of
its management information systems, which permit management to closely monitor the activities of
the Companys operations, is important to the Companys business. The Companys financial systems
provide, among other things, monthly budget analyses, trended financial data, financial comparisons
to prior periods, and comparisons among Company branches. These systems also provide a means for
management to monitor key statistical data for each branch, such as accounts receivable, payor mix,
cash collections, revenue mix and expense trends. Additionally, Medicare and other third party
claims are billed electronically through the Companys systems thereby facilitating and improving
the timeliness of accounts receivable collections. The Company also maintains a communication
network that provides company-wide access to email and the Internet. The Company maintains a
proprietary intranet, which is a productivity-driven, secure website focused on reducing paperwork,
disseminating information throughout the Company, and facilitating communication among the
Companys employees.
Corporate Compliance. The Companys goal is to operate its business with honesty and
integrity and in compliance with the numerous laws and regulations that govern its operations. The
Companys corporate compliance program is designed to help accomplish these goals through employee
training and education, a confidential disclosure program, written policy guidelines, periodic
reviews, compliance audits, and other programs. The Companys corporate compliance program is
monitored by its Compliance Officer and the Compliance Committee. The Compliance Committee, which
meets quarterly, is comprised of the Companys President and CEO, Chief Operating Officer, Chief
Financial Officer, Senior Vice President of Innovation and Technology, Senior Vice President of
Field Operations, Vice President of Human Resources, and Director of Financial Reporting and
Internal Audit. The Compliance Committee is advised by legal counsel. There can be no assurance
that the Companys compliance activities will prevent or detect violations of the governing laws
and regulations. See Business Government Regulation.
Hospital Joint Ventures
As of December 31, 2009, the Company owns 50% of nine home health care businesses and 70% of
two other home health care businesses. The remaining ownership interest of each of these
businesses is owned by local hospitals. Through management agreements, the Company is responsible
for the management of these businesses and receives fixed monthly management fees or monthly
management fees based upon a percentage of net revenues, net income or cash collections. The
operations of the 70%-owned joint ventures are consolidated with the operations of the Company.
The operations of the 50%-owned joint ventures are not consolidated with the operations of the
Company and are instead accounted for by the Company under the equity method.
The Companys joint ventures typically are 50/50 equity partnerships with an initial term of
between three and ten years and with the following typical provisions: (i) the Company contributes
assets of an existing business in the designated market or contributes cash to fund half of the
initial working capital required for the joint venture to commence operations; (ii) the hospital
partner contributes similar assets and/or an amount of cash equal in the aggregate to the fair
market value of the Companys net contribution; (iii) the Company is the managing partner for the
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
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contributions. Within the joint ventures designated market, all services provided within the
geographic market are deemed to be revenues of the joint venture including revenues from sources
other than the joint venture partner.
Revenues
The Company derives substantially all of its revenues from third-party payors including
Medicare, private insurers, and Medicaid. Medicare is a federally-funded and administered health
insurance program that provides coverage for beneficiaries who require certain medical services and
products. Medicaid is a state-administered reimbursement program that provides reimbursement for
certain medical services and products. Amounts paid under these programs are generally based upon
fixed rates. Revenues are recorded at the expected reimbursement rates when the services are
provided, merchandise is delivered, or equipment is rented to patients. Revenues are recorded at
net realizable amounts estimated to be paid by customers and third party payors. Although amounts
earned under the Medicare and Medicaid programs are subject to review by such third-party payors,
subsequent adjustments to such reimbursements are historically insignificant as these
reimbursements are based on fixed fee schedules. In the opinion of management, adequate provision
has been made for any adjustment that may result from such reviews. Any differences between
estimated settlements and final determinations are reflected in operations in the period known.
Sales revenues and related services include all product sales to patients and are derived from
the sale of aerosol medications and respiratory therapy equipment, the provision of infusion
therapies, the sale of home health care equipment and medical supplies, and the sale of supplies
and the provision of services related to the delivery of these products. Sales revenues are
recognized at the time of delivery and recorded at the expected payment amount based upon the type
of product and the payor. Rentals and other patient revenues are derived from the rental
of equipment related to the provision of respiratory therapy, home health care equipment, and
enteral pumps. All rentals of the equipment are provided by the Company on a month-to-month basis
and revenue is recorded at the expected payment amount based upon the type of rental and the payor.
Certain pieces of equipment are subject to capped rental arrangements, whereby title to the
equipment transfers to the patient at the end of the capped rental payment period.
Once initial delivery of rental equipment is made to the patient, a monthly billing cycle is
established based on the initial date of delivery. The Company recognizes rental revenue ratably
over the monthly service period and defers revenue for the portion of the monthly bill which is
unearned. The fixed monthly rental encompasses the rental of the product, delivery, set-up,
instruction, maintenance, repairs, and providing backup systems when needed, and as such, no
separate revenue is earned from the initial equipment delivery and setup process. Routine
maintenance and servicing of the equipment is the responsibility of the Company for as long as the
patient is renting the equipment.
Sales taxes collected from customers and remitted to governmental authorities are accounted
for on a net basis, and therefore, are excluded from revenues in the consolidated statements of
operations.
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The following table sets forth the percentage of the Companys revenues from each source
indicated for the years presented:
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Medicare |
50 | % | 52 | % | 53 | % | ||||||
Private pay, primarily private insurance |
42 | 40 | 39 | |||||||||
Medicaid |
8 | 8 | 8 | |||||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
Because the Company derives a significant portion of its revenues from Medicare and
Medicaid reimbursement, material changes in Medicare and Medicaid reimbursement have a material
impact on its revenues and, consequently, on its business operations and financial results.
Reimbursement levels typically are subject to downward pressure as the federal and state
governments and managed care payors seek to reduce payments. Thus, since its inception the Company
has experienced numerous reimbursement reductions related to its products and services and
regularly learns of proposals for other reductions, some of which are subsequently implemented as
proposed or in a modified form. The Company anticipates that future reductions will occur whether
through administrative action, legislative changes, or otherwise.
Management is working to counter the adverse impact of the reimbursement reductions currently
in effect as well as future reimbursement reductions through a variety of initiatives designed to
grow revenues, improve productivity, and reduce costs. See Business Sales and Marketing for a
discussion of the Companys initiatives to grow revenues and Managements Discussion and Analysis
of Financial Condition and Results of Operations General Productivity and Profitability for a
discussion of the Companys initiatives to improve productivity and reduce costs. The magnitude of
the adverse impact that reimbursement reductions will have on the Companys future operating
results and financial condition will depend upon the success of the Companys revenue growth and
cost reduction initiatives. Nevertheless, the adverse impact could be material. See Managements
Discussion and Analysis of Financial Condition and Results of Operations Trends, Events, and
Uncertainties for a discussion of reimbursement changes already enacted that will further affect
the Company in 2010 and beyond.
Collections
The Company has three key initiatives in place to maintain and/or improve collections of
accounts receivable: (i) proper staffing and training; (ii) process redesign and standardization;
and (iii) billing center specific goals geared toward improved cash collections and reduced
accounts receivable.
Net patient accounts receivable at December 31, 2009 was $25.9 million compared to net patient
accounts receivable of $38.3 million at December 31, 2008.
An important indicator of the Companys accounts receivable collection efforts is the
monitoring of the days sales outstanding (DSO). The Company monitors DSO trends for each of
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its branches and billing centers and for the Company in total as part of the management of the
billing and collections process. An increase in DSO usually results from certain revenue
management processes at the billing centers and/or branches not functioning at optimal levels or a
slow-down in the timeliness of payment processing by payors. A decline in DSO usually results from
process improvements or more timely payment processing by payors. Management uses DSO trends to
monitor, evaluate and improve the performance of the billing centers. The table below shows the
Companys DSO, net of discontinued operations, for the periods indicated and is calculated by
dividing net patient accounts receivable by the average daily revenue for the previous 90 days
(excluding dispositions and acquisitions), net of bad debt expense:
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
DSO |
39 days | 51 days | 57 days |
The decrease in DSO at December 31, 2009 compared to December 31, 2008 primarily is the
result of process improvements which have increased cash collections and decreased unbilled
revenue.
The Company attempts to minimize DSO by screening new patient cases for adequate sources of
reimbursement and by providing complete and accurate claims data to relevant payor sources. The
Companys level of DSO and net patient receivables is affected by the extended time required to
obtain necessary billing documentation.
Another key indicator of the Companys receivable collection efforts is the amount of unbilled
revenue, which is the amount of sales and rental revenues not yet billed to payors due to
incomplete documentation or the receipt of the Certificate of Medical Necessity (CMN). The
amount of unbilled revenue was $3.8 million and $5.2 million for December 31, 2009 and December 31,
2008, respectively, net of valuation allowances. This decrease primarily is the result of
improvements made in CMN procurement processes.
Sales and Marketing
The Company has increased its focus on sales and marketing efforts over the past several years
in an effort to improve revenues. During this time, management implemented changes designed to
improve the effectiveness of the Companys selling efforts. These include revisions to the Account
Executive commission plans and a restructuring of the sales organization. Management believes these
actions have resulted in a more focused sales management team.
The Companys sales and marketing focus for 2010 and beyond includes: (i) emphasizing
profitable revenue growth by focusing on oxygen and sleep-related products and services and by
increasing the Companys mix of Medicare and profitable managed care business; (ii) strengthening
its sales and marketing efforts through a variety of programs and initiatives; (iii) heightened
emphasis on sleep therapy and implementation of initiatives to expand sales of CPAP supplies; and
(iv) expanding managed care revenue through greater management attention and prioritization of
payors to secure managed care contracts at acceptable levels of profitability. Improvement in the
Companys ability to grow revenues will be critical to the Companys
success. Management will continue to review and monitor progress with its sales and marketing
efforts.
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Competition
The home health care industry is consolidating but remains highly fragmented and competition
varies significantly from market to market. There are still relatively few barriers to entry in
the local markets served by the Company, and the Company could encounter competition from new
market entrants. However, management believes Medicare reimbursement reductions affecting home
oxygen beginning in 2009 could limit new market entrants and could drive some less efficient
competitors out of this market. See Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations Trends, Events, and Uncertainties Reimbursement Changes and
the Companys Response for discussion of Medicare reimbursement reductions. In small and mid-size
markets, a large percentage of the Companys competition comes from local independent operators or
hospital-based facilities. In the larger markets, regional and national providers account for a
significant portion of competition and may have more resources to market their business.
Management believes that the competitive factors most important in the Companys lines of business
are ability to develop and to maintain relationships with referral sources, reputation with
referral sources, ease of doing business with the provider, quality of service, clinical expertise,
and the range of services offered.
Third-party payors and their case managers actively monitor and direct the care delivered to
their beneficiaries. Accordingly, relationships with such payors and their case managers and
inclusion within preferred provider and other networks of approved or accredited providers has
become a prerequisite in many cases to the Companys ability to serve many of the patients it
treats. Similarly, the ability of the Company and its competitors to align themselves with other
healthcare service providers may increase in importance as managed care providers and provider
networks seek out providers who offer a broad range of services, substantially discounted prices,
and geographic coverage.
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Branch Locations
The Companys 241 home health care branches as of December 31, 2009 are listed below:
Alabama
|
Florida | Kentucky | Nebraska | Ohio | Tennessee | Virginia | ||||||
Birmingham
|
Altamonte Springs | Bowling Green | Hastings1 | Bryan | Chattanooga | Charlottesville | ||||||
Dothan
|
Ft. Lauderdale | Lexington | Lincoln1 | Chillicothe | Clarksville | Chesapeake | ||||||
Huntsville
|
Ft. Myers | London | Norfolk1 | Cincinnati | Cookeville | Farmville | ||||||
Mobile
|
Ft. Walton Beach | Louisville | Omaha1 | Columbus | Dayton | Harrisonburg | ||||||
Montgomery1
|
Gainesville | Middlesboro | Dayton | Dickson | Lorton | |||||||
Holly Hill | Paducah | Nevada | Heath | Erin | Newport News | |||||||
Arizona
|
Jacksonville | Las Vegas | Mansfield | Jackson | Onancock1 | |||||||
Globe
|
Leesburg | Maine | Marion | Johnson City | Radford | |||||||
Tempe
|
Lynn Haven | Hermon | New Mexico | Maumee | Kingsport | Richmond | ||||||
Pensacola | Lewiston | Alamogordo | Middleburg Heights | Knoxville | Roanoke | |||||||
Arkansas
|
Rockledge | Albuquerque | Sandusky | Nashville | ||||||||
Batesville
|
St. Augustine | Maryland | Clovis | Springfield | Oneida | Washington | ||||||
Benton1
|
Tallahassee (2) | Cumberland | Farmington | Twinsburg | Tullahoma | Lakewood | ||||||
Bentonville
|
Tampa (2) | Salisbury1 | Grants | Zanesville | Union City | Yakima | ||||||
El Dorado
|
Las Cruces | |||||||||||
Ft. Smith
|
Georgia | Michigan | Roswell | Oklahoma | Texas | West Virginia | ||||||
Harrison
|
Albany | West Branch1 | Tulsa | Austin | Lewisburg | |||||||
Heber Springs1
|
Brunswick | New York | Bay City | Rainelle | ||||||||
Hot Springs
|
Dublin | Minnesota | Albany | Pennsylvania | Bryan | Wheeling | ||||||
Jonesboro
|
Eastman | Rochester | Geneva | Brookville | Conroe | |||||||
Little Rock1
|
Evans | Marcy | Camp Hill | Corpus Christi | Wisconsin | |||||||
Mena
|
Ft. Oglethorpe | Mississippi | Oneonta | Chambersburg | Harlingen | Marshfield | ||||||
Mtn. Home
|
Savannah | Tupelo | Painted Post | Danville | Houston | Oak Creek | ||||||
N. Little Rock1
|
Suwanee | Pleasant Valley | Erie | Lake Jackson | Onalaska | |||||||
Paragould
|
Valdosta | Missouri | Syracuse | Hanover Township | Longview | Racine | ||||||
Pine Bluff
|
Waycross | Cameron | Watertown | Johnstown | Lubbock | Woodruff | ||||||
Russellville
|
Crystal City | Webster | Lewistown | Lufkin | ||||||||
Warren
|
Illinois | Hannibal | Williamsville | Philipsburg | McAllen | |||||||
Collinsville | Jefferson City | Pittsburgh | Mount Pleasant | |||||||||
Colorado
|
Mt. Vernon | Kansas City | North Carolina | Pottsville | Nacogdoches | |||||||
Centennial
|
Peoria | Kirksville | Asheboro | Scottdale | Paris | |||||||
Cortez
|
Springfield | Mountain Grove | Asheville1 | State College | San Angelo | |||||||
Durango
|
Perryville | Boone1 | Trevose | San Antonio | ||||||||
Pagosa Springs
|
Iowa | Potosi | Brevard1 | Waynesboro | Sunnyvale | |||||||
Atlantic1 | Rolla | Charlotte | Williamsport | Temple | ||||||||
Connecticut
|
Decorah | Springfield | Concord | York | Tyler | |||||||
Cheshire
|
Dubuque | St. Louis | Durham | Victoria | ||||||||
Danville
|
Marshalltown | St. Peters | Gastonia | South Carolina | Woodway | |||||||
New Britain
|
Mason City | Warrensburg | Hickory1 | Columbia | ||||||||
North Liberty | Waynesville | Maiden1 | Conway1 | |||||||||
Delaware
|
Ottumwa | Marion1 | Florence | |||||||||
Dover
|
Pleasant Hill | Monroe | Greenville | |||||||||
Newark
|
Sioux City | Salisbury | Hartsville | |||||||||
Waterloo | Sanford1 | Lancaster | ||||||||||
Spruce Pine1 | Myrtle Beach1 | |||||||||||
Kansas | Whiteville | Pawleys Island1 | ||||||||||
Pittsburg | Wilmington | Rock Hill1 | ||||||||||
Winston-Salem | Summerville | |||||||||||
Union1 |
1 | Owned by a joint venture. | |
2 | City has multiple locations. |
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Supplies and Equipment
The Company centrally purchases home medical and respiratory equipment and other materials and
products required in connection with the Companys business from select suppliers.
Insurance
The Company maintains a commercial general liability policy which is on a claims-made basis.
This insurance is renewed annually and includes product liability coverage on the medical equipment
that it sells or rents with per claim coverage limits of up to $1.0 million per claim with a $5.0
million general liability annual aggregate. The Companys professional liability policy is on a
claims-made basis and is renewable annually with per claim coverage limits of up to $1.0 million
per claim and $5.0 million in the aggregate. The Companys commercial general liability policy and
the professional liability policy have a maximum policy aggregate of $7.0 million. Defense costs
are included in addition to the limits of insurance. The Company retains the first $50,000 of each
professional or general liability claim subject to a $500,000 aggregate for all such claims. The
Company also maintains excess liability coverage with limits of $20.0 million per claim and $20.0
million in the aggregate. Management believes the manufacturers of the equipment it sells or rents
currently maintain their own insurance, and for many of the Companys significant vendors, a
certificate of insurance has been received and the Company has been added by endorsement as an
additional insured. However, there can be no assurance that such manufacturers will continue to
maintain their own insurance, that such insurance will be adequate or available to protect the
Company, or that the Company will not have liability independent of that of such manufacturers
and/or their insurance coverage.
The Company is insured for vehicle liability for up to $1.0 million of each claim with a
$250,000 deductible for each claim. This deductible reduces the limit of insurance. The Company
retains the first $250,000 of each workers compensation claim and is insured for any additional
liabilities from each such claim. The Company did not maintain annual aggregate stop-loss coverage
for the years 2007, 2008, and 2009, as such coverage was not economically available. The Company
has not maintained aggregate stop-loss coverage since 2001.
The Company is self-insured for health insurance for substantially all employees for the first
$150,000 on a per person, per year basis. In addition, an aggregating specific deductible must be
satisfied in the amount of $140,000 before stop loss insurance would apply. The Company has also
maintained annual aggregate stop loss coverage of $10.1 million for 2009. Liabilities in excess of
this aggregate amount (up to $1.0 million) are the responsibility of the insurer. The health
insurance policies are limited to maximum lifetime reimbursements of $2.0 million per person for
2007, 2008, and 2009.
The Company maintains insurance protecting its directors and officers.
The Company provides accruals for its portion of the settlement of outstanding claims and
claims incurred but not reported at amounts believed to be adequate. The differences between
actual settlements and accruals are included in expense once a probable amount is known. See
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Managements Discussion and Analysis of Financial Condition and Results of Operations Critical
Accounting Policies.
There can be no assurance that any of the Companys insurance will be sufficient to cover any
judgments, settlements or costs relating to any pending or future legal proceedings or that any
such insurance will be available to the Company in the future on satisfactory terms, if at all. If
the insurance carried by the Company is not sufficient to cover any judgments, settlements or costs
relating to pending or future legal proceedings, the Companys business and financial condition
could be materially adversely affected.
Employees
At December 31, 2009, the Company had approximately 2,177 full-time employees, 94 part-time
employees, and 77 employees used on an as needed basis only. Approximately 102 individuals were
employed at the corporate office in Brentwood, Tennessee. None of the employees work under a union
contract.
Trademarks
The Company owns and uses a variety of marks, including American HomePatient®,
AerMeds®; American CPAP DirectTM; Redi ü ®;
EnterCaresm; CHF Heart Matters®; Rest Assured...Were the Home Sleep
Specialistssm; and Breathe, Nourish, Move, Thrivesm, which have
either been registered at the federal or state level or are being used pursuant to common law
rights.
Government Regulation
General. The Company, as a participant in the health care industry, is subject to extensive
federal, state, and local regulation. In addition to the Federal False Claims Act (False Claims
Act) and other federal and state anti-kickback and self-referral laws applicable to all of the
Companys operations (discussed more fully below), the Companys operations are subject to federal
laws covering the repackaging and dispensing of drugs (including oxygen) and regulating interstate
motor-carrier transportation. The Companys operations also are subject to state laws (most
notably licensing and controlled substances registration) governing pharmacies, nursing services
and certain types of home health agency activities.
The Federal False Claims Act imposes civil liability on individuals or entities that submit
false or fraudulent claims to the government for payment. False Claims Act penalties for
violations can include sanctions, including civil monetary penalties.
As a provider of services under the federal reimbursement programs such as Medicare, Medicaid
and TRICARE, the Company is subject to the federal statute known as the anti-kickback statute, also
known as the fraud and abuse law. This law prohibits any bribe, kickback, rebate, or
remuneration of any kind in return for, or as an inducement for, the referral of patients for
government-reimbursed health care services.
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The Company is also subject to the federal physician self-referral prohibition, known as the
Stark Law, which, with certain exceptions, prohibits physicians from referring patients to
entities with which they have a financial relationship. Many states in which the Company operates
have adopted similar fraud and abuse and self-referral laws, as well as laws that prohibit certain
direct or indirect payments or fee-splitting arrangements between health care providers, under the
theory that such arrangements are designed to induce or to encourage the referral of patients to a
particular provider. In many states these laws apply to services reimbursed by all payor sources.
In 1996, the Health Insurance Portability and Accountability Act (HIPAA) introduced a new
category of federal criminal health care fraud offenses relating to health care benefits, which are
referred to as Federal Health Care Offenses. The specific offenses are: health care fraud, theft
or embezzlement, false statements, obstruction of an investigation, and money laundering. These
crimes can apply to claims submitted not only to government reimbursement programs such as
Medicare, Medicaid, and TRICARE but also to claims submitted to any third-party payor, and they
carry penalties including fines and imprisonment. HIPAA has mandated an extensive set of
regulations to protect the privacy and security of individually identifiable health information.
The Company must follow strict requirements relating to documentation. As required by law, it
is Company policy that certain service charges (as defined by Medicare) falling under Medicare Part
B are confirmed with a certificate of medical necessity signed by a physician. In January 1999 the
OIG published a draft Model Compliance Plan for the Durable Medical Equipment, Prosthetics,
Orthotics, and Supply Industry. The OIG has stressed the importance for all health care providers
to have an effective compliance plan. The Company has created and implemented a compliance program
which it believes meets the elements of the OIGs Model Plan for the industry. As part of its
compliance program, the Company performs internal audits of the adequacy of billing documentation.
The Companys policy is to voluntarily refund to the government any reimbursements previously
received for claims with insufficient documentation that are identified in this process and that
cannot be corrected. The Company periodically reviews and updates its policies and procedures in
an effort to comply with applicable laws and regulations; however, certain proceedings have been
and may in the future be commenced against the Company alleging violations of applicable laws
governing the operation of the Companys business and its billing practices.
The Company is also subject to state laws governing Medicaid, professional training,
licensure, financial relationships with physicians, and the dispensing and storage of
pharmaceuticals. The facilities operated by the Company must comply with all applicable laws,
regulations, and licensing standards. Many of the Companys employees must maintain licenses to
provide some of the services offered by the Company. Additionally, certain of the Companys
employees are subject to state laws and regulations governing the professional practice of
respiratory therapy, pharmacy and nursing.
Information about individuals and other health care providers who have been sanctioned or
excluded from participation in government reimbursement programs is readily available on the
internet, and all health care providers, including the Company, are held responsible for carefully
screening entities and individuals they employ or do business with in order to avoid contracting
with an excluded provider. No one may bill government programs for services or supplies provided
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by an excluded provider, and the federal government may also impose sanctions, including
financial penalties, on companies that contract with excluded providers.
Health care law is an area of extensive and dynamic regulatory oversight. Changes in laws or
regulations or new interpretations of existing laws or regulations can have a dramatic effect on
permissible activities, the relative costs associated with doing business, and the amount and
availability of reimbursement from government and other third-party payors. There can be no
assurance that federal, state, or local governments will not impose additional standards or change
existing standards or interpretations.
Enforcement Activities. In recent years, various state and federal regulatory agencies have
stepped up investigative and enforcement activities with respect to the health care industry, and
many health care providers, including the Company and other durable medical equipment suppliers,
have received subpoenas and other requests for information in connection with their business
operations and practices. From time to time, the Company also receives notices and subpoenas from
various government agencies concerning plans to audit the Company, or requesting information
regarding certain aspects of the Companys business. The Company customarily cooperates with the
various agencies in responding to such subpoenas and requests. The Company expects to incur legal
expenses in the future in connection with existing and future investigations.
The government has broad authority and discretion in enforcing applicable laws and
regulations; therefore, the scope and outcome of any such investigations, inquiries, or legal
actions cannot be predicted. There can be no assurance that federal, state or local governments
will not impose additional regulations upon the Companys activities nor that the Companys past
activities will not be found to have violated some of the governing laws and regulations. Any such
regulatory changes or findings of violations of laws could adversely affect the Companys business
and financial position, and could even result in the exclusion of the Company from participating in
Medicare, Medicaid, and other contracts for goods or services reimbursed by the government.
Legal Proceedings
The Company is involved in certain claims and legal actions, most of which arise in the
ordinary course of its business. Although the ultimate outcomes of these actions are not
determinable at this time, the Company does not believe that the resolution of any presently
pending claims and lawsuits will, in the aggregate, have a material adverse effect on the Companys
financial condition or results of operations.
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ITEM 1A. RISK FACTORS
This section summarizes certain risks, among others, that should be considered by stockholders
and prospective investors in the Company. Many of these risks are also discussed in other sections
of this report.
The Companys secured debt became due on August 1, 2009 and was not repaid.
The Company maintains a significant amount of debt. The Company has long-term debt of $226.4
million, as evidenced by a promissory note to the agent for the Companys lenders (Lenders).
This indebtedness is secured by substantially all of the assets of the Company and matured on
August 1, 2009. The Company was not able to repay or refinance this debt at or prior to maturity.
As a result, the Company must refinance the debt, extend the maturity, restructure or make other
arrangements, some of which could have a material adverse effect on the value of the Companys
common stock. Furthermore, the Companys independent registered public accounting firm added an
explanatory paragraph to their report on the Companys consolidated financial statements for the
years ended December 31, 2009 and 2008 that noted these conditions indicated that the Company may
be unable to continue as a going concern. Given the unfavorable conditions in the current debt
market, the Company believes that third-party refinancing of the debt will not be possible at this
time. There can be no assurance that any of the Companys efforts to address the debt maturity
issue can be completed on favorable terms or at all. Other factors, such as uncertainty regarding
the Companys future profitability could also limit the Companys ability to resolve the debt
maturity issue. Subject to the limitations provided by the current forbearance agreement (see
Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity
and Capital Resources), the Companys Lenders have the right to foreclose on substantially all
assets of the Company, and this would have a material adverse effect on the Companys liquidity,
financial condition, and the value of the Companys common stock. See Managements Discussion and
Analysis of Financial Condition and Results of Operations Trends, Events and Uncertainties and
Liquidity and Capital Resources.
Reductions in Medicare and Medicaid reimbursement rates, as well as reductions from other third
party payors, are having a material adverse effect on the Companys results of operations and
financial condition, and future reductions could have further adverse effects.
On February 8, 2006, the Deficit Reduction Act of 2005 (DRA) was signed into law. The DRA
has reduced the reimbursement of certain products provided by the Company and significantly reduced
reimbursement related to oxygen beginning in 2009. On July 15, 2008, the Medicare Improvement for
Patients and Providers Act of 2008 (the MIPPA) was enacted and has further reduced reimbursement
for certain products. These reductions have had and will continue to have a material adverse effect
on the Companys revenues, net income, cash flows and capital resources. Enacted reimbursement
cuts, as well as, pending and proposed reimbursement cuts may negatively affect the Companys
business and prospects. See
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Managements Discussion and Analysis of Financial Condition and Results of Operations Trends,
Events and Uncertainties Reimbursement Changes and the Companys Response.
For the year ended December 31, 2009, the percentage of the Companys revenues derived from
Medicare, Medicaid and all other payors was 50%, 8%, and 42%, respectively. The revenues and
profitability of the Company may be impacted by the efforts of payors to contain or reduce the
costs of health care by delaying payments, lowering reimbursement rates, narrowing the scope of
covered services, increasing case management review of services, and negotiating reduced contract
pricing. Reductions in reimbursement levels under Medicare, Medicaid or private pay programs and
any changes in applicable government regulations could have a material adverse effect on the
Companys revenues and net income. Additional Medicare reimbursement reductions have been proposed
that would have a substantial and material adverse effect on the Companys revenues, net income,
cash flows and capital resources. Changes in the mix of the Companys patients among Medicare,
Medicaid and private pay categories and among different types of private pay sources may also
affect the Companys revenues and profitability. There can be no assurance that the Company will
continue to maintain its current payor mix, revenue mix, or reimbursement levels, a change in any
of which could have a material adverse effect on the Companys revenues, net income, cash flows and
capital resources. See Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Highland Capital Management, L.P. controls approximately 48% of the Companys common stock and
controls a majority of the Companys $226.4 million secured debt, which may allow Highland to exert
significant influence on certain aspects of our business.
On April 13, 2007, Highland Capital Management, L.P. filed a Schedule 13D/A with the
Securities and Exchange Commission reporting beneficial ownership of 8,437,164 shares of Company
common stock, which represents approximately 48% of the outstanding shares of the Company.
Highland also controls a majority of the Companys secured promissory notes that represent $226.4
million of secured debt. Highland could exert significant influence on all matters requiring
shareholder approval including the election of directors and the approval of significant corporate
transactions. Because of its control of the Companys debt, Highlands interests may be different
than those of holders of common stock who are not also holders of debt.
The Company maintains substantial leverage.
As a result of the amount of debt, a substantial portion of the Companys cash flow from
operations has been dedicated to servicing debt. The substantial leverage could adversely affect
the Companys ability to grow its business or to withstand adverse economic conditions and
reimbursement changes. See Managements Discussion and Analysis of Financial Condition and
Results of Operations Liquidity and Capital Resources.
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The Company is subject to extensive government regulation, and the Companys inability to comply
with existing or future laws, regulations or standards could have a material adverse effect on the
Companys operations, financial condition, business, or prospects.
The Company is subject to extensive and frequently changing federal, state, and local
regulation. In addition, new laws and regulations are adopted periodically to regulate products
and services in the health care industry. Changes in laws or regulations or new interpretations of
existing laws or regulations can have a dramatic effect on operating methods, costs and
reimbursement amounts provided by government and other third-party payors. There can be no
assurance that the Company is in compliance with all applicable existing laws and regulations or
that the Company will be able to comply with any new laws or regulations that may be enacted in the
future. Changes in applicable laws, any failure by the Company to comply with existing or future
laws, regulations or standards, or discovery of past regulatory noncompliance by the Company could
have a material adverse effect on the Companys operations, financial condition, business, or
prospects.
Because of reimbursement reductions, the Company must continue to find ways to grow revenues and
reduce expenses in order to generate earnings and cash flow.
The Company has implemented, and is currently implementing, a number of expense reduction
initiatives in response to reimbursement reductions. Any future significant reimbursement cuts
would require the Company to alter significantly its business model and cost structure, as well as
the services it provides to patients, in order to avoid substantial losses. Measures undertaken to
reduce expenses by improving efficiency can have an unintended negative impact on revenues,
referrals, billing, collections and other aspects of the Companys business, any of which can have
a material adverse effect on the Companys operations, financial condition, business, or prospects.
See Managements Discussion and Analysis of Financial Condition and Results of Operations.
The Company has substantial accounts receivable, and increased bad debt expense or delays in
collecting accounts receivable could have a material adverse effect on the Companys cash flows and
results of operations.
The Company has substantial accounts receivable as evidenced by DSO of 39 days as of December
31, 2009. No assurances can be given that future bad debt expense will not increase above current
operating levels as a result of difficulties associated with the Companys billing activities and
meeting payor documentation requirements and claim submission deadlines. Increased bad debt expense
or delays in collecting accounts receivable could have a material adverse effect on cash flows and
results of operations.
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New healthcare legislation or other changes in the administration or interpretation of government
health care programs or initiatives may have a material adverse effect on the Company.
The health care industry continues to undergo dramatic changes influenced in large part by
federal legislative initiatives. It is likely new federal health care initiatives will continue to
arise. The Medicare Prescription Drug and Improvement Act of 2003 and the Deficit Reduction Act of
2005 have had, and will continue to have, a material negative impact on the level of reimbursement.
The Medicare Improvements for Patients and Providers Act of 2008 has had a material negative
impact beginning in 2009. Potential reimbursement reductions associated with competitive bidding
could adversely affect the Companys future profitability. Additionally, from time to time other
modifications to Medicare reimbursement have been discussed. There can be no assurance that these
or other federal legislative and regulatory initiatives will not be adopted in the future. One or
more of these initiatives could materially limit patient access to, or the Companys reimbursement
for, products and services provided by the Company. Also, many states have proposed decreases in
Medicaid reimbursement. There can be no assurance that the adoption of such legislation or other
changes in the administration or interpretation of government health care programs or initiatives
will not have a material adverse effect on the Company. See Managements Discussion and Analysis
of Financial Condition and Results of Operations Trends, Events, and Uncertainties
Reimbursement Changes and the Companys Response.
The Company depends on retaining and obtaining profitable managed care contracts, and the Companys
business may be materially adversely affected if it is unable to retain or obtain such managed care
contracts.
As managed care plays a significant role in markets in which the Company operates, the
Companys success will, in part, depend on retaining and obtaining profitable managed care
contracts. There can be no assurance that the Company will retain or obtain such managed care
contracts. In addition, reimbursement rates under managed care contracts are likely to continue to
experience downward pressure as a result of payors efforts to contain or reduce the costs of
health care by increasing case management review of services, by increasing retrospective payment
audits, and by negotiating reduced contract pricing. Therefore, even if the Company is successful
in retaining and obtaining managed care contracts, it could experience declining profitability if
the Company does not also decrease its cost for providing services and/or increase higher margin
services.
The Companys common stock trades on the over-the-counter bulletin board, which reduces the
liquidity of an investment in the Company.
Trading of the Companys common stock under its current trading symbol, AHOM or AHOM.OB, is
conducted on the over-the-counter bulletin board which may limit the Companys ability to raise
additional capital and the ability of shareholders to sell their shares.
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Compliance with privacy regulations under HIPAA could result in significant costs to the Company
and delays in its collection of accounts receivable.
HIPAA Administrative Simplification requires all entities engaged in certain electronic
transactions to meet specific standards to ensure the confidentiality and security of individually
identifiable health information. In addition, HIPAA mandates the standardization of various types
of electronic transactions and the codes and identifiers used for these transactions. The Company
has implemented these standards. However, there is always the potential that some state Medicaid
programs that are not fully compliant with the electronic transaction standards could result in
delays in collections of accounts receivables.
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 was signed into law.
This new legislation contains significant expansions of the HIPAA Privacy and Security Rules and
numerous other changes that will affect the Company due to the major impact on health care
information and technology.
The new provisions include: (1) heightened enforcement and increased penalties for covered
entities; (2) extension of security provisions to business associates, vendors, and others; (3) new
stringent security breach notification requirements; and, (4) patients rights to restrict access
to protected health information.
Most of the provisions of the law took effect on February 17, 2010, one year after enactment,
although increased penalty provisions went into effect immediately. Other provisions require
implementing regulations and will take two years or longer to take effect. Any failure to comply
with this new legislation could have a material adverse effect on the Companys financial results
and financial condition.
The Company is highly dependent upon its senior management.
The Companys historical financial results, debt maturity issue, and reimbursement
environment, among other factors, may limit the Companys ability to attract and retain qualified
personnel, which in turn could adversely affect profitability.
The market in which the Company operates is highly competitive, and if the Company is unable to
compete successfully, its business will be materially adversely affected.
The home health care market is highly fragmented and competition varies significantly from
market to market. Currently, there are relatively few barriers to entry, and the Company could
encounter competition from new market entrants. In small and mid-size markets, the majority of the
Companys competition comes from local independent operators or hospital-based facilities. In
larger markets, regional and national providers account for a significant portion of competition.
Some of the Companys present and potential competitors are significantly larger than the Company
and have, or may obtain, greater financial and marketing resources than the Company.
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The provision of healthcare services entails an inherent risk of liability, and the Companys
insurance may not be sufficient to effectively protect the Company from all claims.
The provision of healthcare services entails an inherent risk of liability. Certain
participants in the home healthcare industry may be subject to lawsuits that may involve large
claims and significant defense costs. It is expected that the Company periodically will be subject
to such suits as a result of the nature of its business. The Company currently maintains product
and professional liability insurance intended to cover such claims in amounts which management
believes are in keeping with industry standards. There can be no assurance that the Company will
be able to obtain liability insurance coverage in the future on acceptable terms, if at all. There
can be no assurance that claims in excess of the Companys insurance coverage will not arise. A
successful claim against the Company in excess of the Companys insurance coverage could have a
material adverse effect upon the operations, financial condition or prospects of the Company.
Claims against the Company, regardless of their merit or eventual outcome, may also have a material
adverse effect upon the Companys ability to attract patients or to expand its business. In
addition, the Company maintains a large deductible for its workers compensation, auto liability,
commercial general and professional liability insurance. The Company is self-insured for its
employee health insurance and is at risk for claims up to individual stop loss and aggregate stop
loss amounts.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2009, the Company leased space for its corporate headquarters in the
Parklane Building, Maryland Farms Office Park, Brentwood, Tennessee. The Company entered into an
amended lease effective April 5, 2006 that provided for 29,000 square feet of leased space. The
amended lease has a base monthly rent of $47,000 and expires in July 2010.
The Company owns a facility in Waterloo, Iowa, which consists of approximately 35,000 square
feet and owns a 50% interest in one of its branches located in Little Rock, Arkansas, which
consists of approximately 16,000 square feet.
The Company leases the operating space required for its remaining branches, patient service
centers, and billing centers. A typical branch occupies between 1,000 and 4,000 square feet and
generally combines office and warehouse space. Approximately one-half of the square footage of a
typical branch consists of warehouse space. Lease terms on most of the leased properties range
from two to three years. Management believes that the Companys owned and leased properties are
adequate for its present needs and that suitable additional or replacement space will be available
as required.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
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PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Companys common stock is currently traded in the over-the-counter market or, on
application by broker-dealers, in the NASDs Electronic Bulletin Board under the symbol AHOM or
AHOM.OB. The following table sets forth representative bid quotations of the common stock for each
quarter of calendar years 2009 and 2008. The following bid quotations reflect interdealer prices
without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual
transactions. See Business Risk Factors regarding the over-the-counter bulletin board and
liquidity.
Bid Quotations | ||||||||
Fiscal Period | High | Low | ||||||
2009 1st Quarter |
$ | 0.26 | $ | 0.12 | ||||
2009 2nd Quarter |
$ | 0.46 | $ | 0.16 | ||||
2009 3rd Quarter |
$ | 0.32 | $ | 0.25 | ||||
2009 4th Quarter |
$ | 0.27 | $ | 0.10 | ||||
2008 1st Quarter |
$ | 1.30 | $ | 0.67 | ||||
2008 2nd Quarter |
$ | 1.00 | $ | 0.65 | ||||
2008 3rd Quarter |
$ | 0.80 | $ | 0.26 | ||||
2008 4th Quarter |
$ | 0.32 | $ | 0.10 |
On March 2, 2010, there were 1,374 holders of record of the common stock and the closing
sale price for the common stock was $0.16 per share.
The Company has not paid cash dividends on its common stock and anticipates that, for the
foreseeable future, any earnings will be retained for use in its business or for debt service and
no cash dividends will be paid. See Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources.
Information regarding the Companys equity compensation plans is incorporated by reference to
the Companys definitive proxy statement (Proxy Statement) for its 2010 annual meeting of
stockholders.
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The following graph compares the cumulative total returns of the Companys Common Stock with
those of NASDAQ Market (U.S.) Index and the Home Health Care Services Group (SIC number 8082)
Index, a peer group index. The peer group includes approximately 15 companies, excluding the
Company.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among American Home Patient, Inc., The NASDAQ Composite Index
And SIC Code 8082
Among American Home Patient, Inc., The NASDAQ Composite Index
And SIC Code 8082
* $100 invested on 12/31/04 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Fiscal year ending December 31.
The performance graph shown above and related information shall not be deemed soliciting
material or to be filed with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that the Company specifically
incorporates it by reference into such a filing.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data below is derived from the Companys financial statements and
should be read in conjunction with the related financial statements. Medicare reimbursement
reductions in 2006, 2007, 2008, and 2009, and reorganization items from the bankruptcy filing in
2002 affect the comparability of the financial data presented.
See Managements Discussion and Analysis of Financial Condition and Results of Operations.
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Year Ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(dollars in thousands, except per share data) | ||||||||||||||||||||
Income Statement Data: |
||||||||||||||||||||
Revenues |
$ | 236,297 | $ | 266,854 | $ | 293,027 | $ | 321,768 | $ | 321,965 | ||||||||||
Cost of sales and related services |
52,891 | 56,612 | 70,601 | 84,322 | 79,012 | |||||||||||||||
Cost of rentals and other revenues, including rental
equipment depreciation expense |
29,674 | 34,682 | 41,412 | 45,106 | 39,879 | |||||||||||||||
Operating expenses |
124,548 | 132,523 | 139,638 | 150,138 | 153,051 | |||||||||||||||
Bad debt expense |
3,517 | 4,635 | 8,164 | 10,771 | 9,396 | |||||||||||||||
General and administrative expenses |
20,909 | 19,841 | 19,194 | 18,052 | 16,749 | |||||||||||||||
Depreciation, excluding rental equipment, and
amortization |
3,866 | 4,102 | 3,361 | 3,598 | 3,610 | |||||||||||||||
Interest expense, net |
14,734 | 15,618 | 15,828 | 17,162 | 17,141 | |||||||||||||||
Other income, net |
(345 | ) | (1,040 | ) | (2,249 | ) | (335 | ) | (365 | ) | ||||||||||
Change of control (income) expense |
(12 | ) | (77 | ) | 5,637 | | | |||||||||||||
Total expenses |
249,782 | 266,896 | 301,586 | 328,814 | 318,473 | |||||||||||||||
Earnings from unconsolidated joint ventures |
5,243 | 6,201 | 5,754 | 5,373 | 4,816 | |||||||||||||||
(Loss) income from continuing operations before reorganization items
and income taxes |
(8,242 | ) | 6,159 | (2,805 | ) | (1,673 | ) | 8,308 | ||||||||||||
Reorganization items |
| | | 291 | 384 | |||||||||||||||
Provision for income taxes |
4,515 | 5,054 | 4,097 | 348 | 327 | |||||||||||||||
Net (loss) income from continuing operations |
$ | (12,757 | ) | $ | 1,105 | $ | (6,902 | ) | $ | (2,312 | ) | $ | 7,597 | |||||||
Less: Net income attributable to the noncontrolling interests |
(341 | ) | (408 | ) | (390 | ) | (421 | ) | (417 | ) | ||||||||||
Net (loss) income from continuing operations attributable to
American HomePatient |
(13,098 | ) | 697 | (7,292 | ) | (2,733 | ) | 7,180 | ||||||||||||
(Loss) income from discontinued operations, including gain on disposal
of assets, net of tax |
| (183 | ) | 1,770 | 146 | 564 | ||||||||||||||
Net (loss) income attributable to American HomePatient |
$ | (13,098 | ) | $ | 514 | $ | (5,522 | ) | $ | (2,587 | ) | $ | 7,744 | |||||||
Net (loss) income per common share attributable to
American HomePatient, Inc. common shareholders Basic |
||||||||||||||||||||
- Continuing operations |
$ | (0.75 | ) | $ | 0.04 | $ | (0.41 | ) | $ | (0.16 | ) | $ | 0.42 | |||||||
- Discontinued operations |
| (0.01 | ) | 0.10 | 0.01 | 0.03 | ||||||||||||||
Net (loss) income per common share attributable to American
HomePatient, Inc. common shareholders Basic |
$ | (0.75 | ) | $ | 0.03 | $ | (0.31 | ) | $ | (0.15 | ) | $ | 0.45 | |||||||
Net (loss) income per common share attributable to
American HomePatient, Inc. common shareholders Diluted |
||||||||||||||||||||
- Continuing operations |
$ | (0.75 | ) | $ | 0.04 | $ | (0.41 | ) | $ | (0.16 | ) | $ | 0.40 | |||||||
- Discontinued operations |
| (0.01 | ) | 0.10 | 0.01 | 0.03 | ||||||||||||||
Net (loss) income per common share attributable to American
HomePatient, Inc. common shareholders Diluted |
$ | (0.75 | ) | $ | 0.03 | $ | (0.31 | ) | $ | (0.15 | ) | $ | 0.43 | |||||||
Weighted average shares outstanding Basic |
17,573,000 | 17,573,000 | 17,573,000 | 17,543,000 | 17,296,000 | |||||||||||||||
Weighted average shares outstanding Diluted |
17,573,000 | 17,741,000 | 17,573,000 | 17,543,000 | 17,973,000 | |||||||||||||||
Year Ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Working capital |
$ | (198,112 | ) | $ | (197,332 | ) | $ | 24,846 | $ | 31,340 | $ | 35,135 | ||||||||
Total assets |
239,297 | 254,526 | 270,128 | 276,671 | 287,634 | |||||||||||||||
Total debt and
capital leases,
including current
portion |
229,123 | 234,310 | 244,410 | 251,257 | 251,019 | |||||||||||||||
Shareholders deficit |
(36,979 | ) | (24,157 | ) | (25,865 | ) | (20,698 | ) | (11,821 | ) |
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company provides home health care services and products to patients through its 241
branches in 33 states. These services and products are primarily paid for by Medicare, Medicaid,
and other third-party payors. As a result, prices for the Companys products and services are
primarily set by the payors and not by the Company. Since the Company cannot affect pricing, it
can improve operating results primarily by increasing revenues through increased volume of sales
and rentals and by controlling expenses. The Company can also improve cash flow by limiting the
amount of time that it takes to collect payment after delivering products and services. Key
indicators of performance include:
Sales and Rentals. Over the past several years the Company has increased its focus on sales
and marketing initiatives in an effort to improve revenues, especially related to respiratory
product lines, though the Companys efforts have produced mixed results. While growth has been
achieved in certain product lines, other lines have not increased or have declined. The Company
has also de-emphasized certain less profitable product lines, resulting in a decrease in revenue
associated with these lines, and Medicare reimbursement reductions have further decreased revenue.
See Year Ended December 31, 2009 Compared to Year ended December 31, 2008 Revenues for a
discussion of revenue decreases. Continuing to improve the Companys sales and marketing efforts
will be critical to the Companys success. Management closely tracks overall increases and
decreases in sales and rentals as well as increases and decreases by product-line and branch
location and region. Managements intent is to identify geographic or product line weaknesses and
take corrective actions. Reductions in reimbursement levels can more than offset an increased
volume of sales and rentals. See Trends, Events, and Uncertainties Reimbursement Changes and
the Companys Response.
Bad Debt Expense. Billing and collecting in the healthcare industry is extremely complex.
Rigorous substantive and procedural standards are set by each third party payor, and failure to
adhere to these standards can lead to non-payment, which can have a significant impact on the
Companys net income and cash flow. The Company measures bad debt as a percent of net sales and
rentals, and management considers this percentage a key indicator in monitoring its billing and
collection function. Bad debt expense as a percentage of net revenue decreased from 1.7% in 2008
to 1.5% in 2009. This decrease in bad debt expense as a percentage of net revenue is due to
improvements made in billing and collection processes which have increased cash collections and
decreased unbilled revenues.
Cash Flow. The Companys funding of day-to-day operations and all payments required to the
Companys Lenders comes from cash flow and cash on hand. The Company currently does not have
access to a revolving line of credit. The Companys secured debt matured on August 1, 2009. The
Company has entered into a series of forbearance agreements with the agent for the Companys
Lenders and certain forbearance holders in which the agent and forbearance holders agreed to
forbear from exercising rights and remedies prior to March 16, 2010, pursuant to the terms of the
current forbearance agreement. The nature of the Companys business requires substantial capital
expenditures in order to buy the equipment used to generate revenues. As a result, management
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views cash flow as particularly critical to the Companys operations. The Companys future
liquidity will continue to be dependent upon the relative amounts of current assets (principally
cash, accounts receivable, and inventories) and current liabilities (principally accounts payable,
accrued expenses and the secured debt). Management attempts to monitor and improve cash flow in a
number of ways, including inventory utilization analysis, cash flow forecasting, and accounts
receivable collection. In that regard, the length of time that it takes to collect receivables can
have a significant impact on the Companys liquidity as described below in Days Sales
Outstanding.
Days Sales Outstanding. Days sales outstanding (DSO) is a tool used by management to assess
collections and the consequential impact on cash flow. The Company calculates DSO by dividing net
patient accounts receivable by the average daily revenue for the previous 90 days (excluding
dispositions and acquisitions), net of bad debt expense. The Company attempts to minimize DSO by
screening new patient cases for adequate sources of reimbursement and by providing complete and
accurate claims data to relevant payor sources. The Company also monitors DSO trends for each of
its branches and billing centers and for the Company in total as part of the management of the
billing and collections process. An increase in DSO usually results from certain revenue
management processes at the billing centers and/or branches not functioning at optimal levels or a
slow-down in the timeliness of payment processing by payors. A decline in DSO usually results from
process improvements or more timely payment processing by payors. Management uses DSO trends to
monitor, evaluate and improve the performance of the billing centers. DSO, net of discontinued
operations, decreased from 51 days at December 31, 2008 to 39 days at December 31, 2009 primarily
due to improved cash collections on current billings and improved timeliness in obtaining necessary
billing documentation.
Unbilled Revenues. Another key indicator of the Companys receivable collection efforts is
the amount of unbilled revenue, which is the amount of sales and rental revenues not yet billed to
payors due to incomplete documentation or the receipt of the Certificate of Medical Necessity
(CMN). The amount of unbilled revenue was $3.8 million and $5.2 million for December 31, 2009
and December 31, 2008, respectively, net of valuation allowances. This decrease primarily is the
result of improvements made in CMN procurement processes.
Productivity and Profitability. In light of the reimbursement reductions affecting the
Company over the past several years and the possibility of continued reimbursement reductions in
the future, management has placed significant emphasis on improving productivity and reducing costs
over the past several years and will continue to do so. Management considers many of the Companys
expenses to be either fixed costs or cost of goods sold, which are difficult to reduce or
eliminate. As a result, managements primary areas of focus for expense reduction and containment
are through productivity improvements related to the Companys branches and billing centers. These
improvements have focused on centralization of certain activities previously performed at branches,
consolidation of certain billing center functions, and reduction in costs associated with delivery
of products and services to patients. Examples of recent centralization initiatives include the
centralization of revenue qualification processes through the Companys regional billing centers,
the centralization of order intake and order processing through the Companys patient service
centers, the centralization of CPAP supply order processing and fulfillment through the Companys
centralized CPAP support center, and the centralization of inhalation drug order processing and
fulfillment through the Companys centralized pharmacy. The Company has also established a
centralized oxygen support center to coordinate scheduling and routing of portable oxygen
deliveries for the Companys branches. Initiatives are also in place to
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improve asset utilization through an asset management system, reduce capital expenditures through
improved purchasing processes, reduce bad debt expense and revenue deductions through improved
revenue qualification and collection processes, reduce costs of delivery of products to patients
through improved routing, and reduce facility costs through more effective utilization of leased
space. Management utilizes a variety of monitoring tools and analyses to help identify and
standardize best practices and to identify and correct deficiencies. Similarly, the Company
monitors its business on a branch and product basis to identify opportunities to target growth or
contraction. These analyses have historically led to the closure or consolidation of branches and
to the emphasis on certain products and new sales initiatives. During 2009, the Company closed or
consolidated two branch locations and opened one branch location. The Company did not close or
consolidate any billing centers in 2009. The Company did not exit any lines of business as a
result of these branch closures, and as such, they are not deemed discontinued operations. See
Trends, Events, and Uncertainties Reimbursement Changes and the Companys Response for
additional discussion.
Discontinued Operations. Effective April 1, 2007, the Company sold the assets of its home
nursing business located in Tallahassee, Florida to Amedisys Home Health, Inc. of Florida. The
sales price was $3.1 million, of which $2.8 million was received in cash at closing, and the
remainder was received according to the terms of a promissory note. The Company recorded a gain in
the second quarter of 2007 of $3.0 million associated with this sale. The cash and note proceeds
from this transaction were utilized to pay down long-term debt.
Since the Company exited its home nursing line of business, the Company has presented the
nursing business as discontinued operations in 2008 and 2007.
Change of Control. On April 13, 2007, Highland Capital Management, L.P. filed a Schedule
13D/A with the Securities and Exchange Commission reporting beneficial ownership of 8,437,164
shares of Company common stock, which represented approximately 48% of the outstanding shares of
the Company as of that date. Under the terms of the employment agreement between the Company and
Joseph F. Furlong, III, the Companys chief executive officer, the acquisition by any person of
more than 35% of the Companys shares constitutes a change of control. Under Mr. Furlongs
employment agreement, this event gave Mr. Furlong the right to receive a lump sum payment in the
event he or the Company terminated his employment within one year after the change of control. The
Company accrued a liability for this potential payment in the second quarter of 2007 since the
ultimate requirement to make this payment was outside of the Companys control. As such, the
Company recorded an expense of $6.6 million in the second quarter of 2007, which was shown as
change of control expense in the consolidated statements of operations, and a liability in the
amount of $6.9 million, which was reflected in other accrued expenses on the consolidated balance
sheets. These items were comprised of 300% of Mr. Furlongs current year salary and maximum bonus,
immediate vesting of all unvested options, the buyout of outstanding options, reimbursement of
certain personal tax obligations associated with the lump sum payment, as well as payment of
certain insurance for up to 3 years after termination and office administrative expenses for up to
one year after termination.
The Company also established an irrevocable trust in the second quarter of 2007 to pay the
various components of the change of control obligation. During the remainder of 2007, the Company
reduced the change of control expense and related liability by $1.0 million due to revaluation of
the fair value of Mr. Furlongs outstanding stock options as of December 31, 2007.
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This decrease in expense is the result of a decline in the market value of the Companys
common stock at December 31, 2007.
On December 21, 2007, Mr. Furlongs employment agreement was amended. Per the terms of the
amendment, Mr. Furlong received a $3.3 million lump sum payment on January 4, 2008 to induce him to
continue his employment with the Company. This payment was made from the irrevocable trust and
reduced the Companys change of control liability. The payment was in lieu of certain amounts Mr.
Furlong would otherwise be entitled to under the amended employment agreement if his employment
with the Company had terminated. On May 1, 2008, as required for federal and state payroll tax
purposes, the Company withheld for remittance to tax authorities approximately $1.5 million. This
was the amount due to be reimbursed by the Company to Mr. Furlong for the tax liabilities he
incurred in connection with the compensation he received following the change of control as
stipulated in his amended employment agreement. The tax liabilities were related to federal excise
taxes due on the lump sum payment pursuant to IRS Section 280G. This payment was primarily made
from the irrevocable trust. The amended employment agreement also stipulated that all of Mr.
Furlongs stock options were deemed vested and exercisable as of January 2, 2008, and capped the
potential buyout of outstanding options at $1.4 million. The $1.4 million is maintained in the
irrevocable trust until these options expire or until 90 days after Mr. Furlongs termination,
whichever occurs first. In addition, the amendment stipulated the Company will pay for office
administrative expenses for up to 6 months after termination instead of up to one year as
originally agreed. The amendment also stipulated that certain insurance will be continued after
termination only until January 1, 2011.
On November 26, 2008, the Company executed a new employment agreement with Mr. Furlong (the
New Employment Agreement), which replaced the prior employment agreement between Mr. Furlong and
the Company. The provisions of the New Employment Agreement are retroactive to November 1, 2008.
The New Employment Agreement memorializes the terms of the prior employment agreement (as amended)
without change with the addition of the termination provision described below and certain
clarifying changes to the related definitions.
Under the New Employment Agreement, if Mr. Furlongs employment terminates due to a without
cause termination or constructive discharge (as defined in the New Employment Agreement), then Mr.
Furlong will receive: (i) an amount equal to the sum of 100% of his base salary plus 100% of his
target annual incentive award for the year of termination; and (ii) his pro rata target annual
incentive award for the year of termination.
During the year ended December 31, 2009, the Company reduced its change of control expense by
$12,000 as a result of the reduction of the liability associated with the Companys obligation to
pay certain insurance for Mr. Furlong until January 1, 2011. At December 31, 2009 and December 31,
2008 the irrevocable trust had a balance of $1.4 million and was reflected in prepaid expenses and
other current assets on the consolidated balance sheets.
Trends, Events, and Uncertainties
From time to time changes occur in the Companys industry or its business that make it
reasonably likely that aspects of its future operating results will be materially different than
its historical operating results. Sometimes these changes have not occurred, but their possibility
is sufficient to raise doubt regarding the likelihood that historical operating results are an
accurate
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gauge of future performance. The Company attempts to identify and describe these trends,
events, and uncertainties to assist investors in assessing the likely future performance of the
Company. Investors should understand that these matters typically are new, sometimes unforeseen,
and often are fluid in nature. Moreover, the matters described below are not the only issues that
can result in variances between past and future performance nor are they necessarily the only
material trends, events, and uncertainties that will affect the Company. As a result, investors
are encouraged to use this and other information to ascertain for themselves the likelihood that
past performance is indicative of future performance.
The trends, events, and uncertainties set out in the remainder of this section have been
identified by the Company as reasonably likely to materially affect the comparison of historical
operating results reported herein to either other past period results or to future operating
results.
The Companys Secured Debt Matured on August 1, 2009. For a discussion of the Companys
secured debt maturity, see Risk Factors and Managements Discussion and Analyses of Financial
Condition and Results of Operations Liquidity and Capital Resources.
Reimbursement Changes and the Companys Response. The Company regularly is faced with
reimbursement reductions and the prospect of additional reimbursement cuts. The following
reimbursement changes already enacted will further impact the Company in 2010 and beyond:
DRA Reimbursement Impact: The Deficit Reduction Act of 2005 (the DRA), which was
signed into law on February 8, 2006, affects the Companys reimbursement in a number of ways
including:
| The DRA contains a provision that eliminated the Medicare capped rental methodology for certain items of durable medical equipment, including wheelchairs, beds, and respiratory assist devices. The DRA changes the rental period to thirteen months, at which time the rental payments stop and title to the equipment is transferred to the beneficiary. The effective date of the provision to eliminate the capped rental methodology applies to items for which the first rental month occurs on or after January 1, 2006. As a result, the impact of this change was realized over a period of several years which began in 2007. | ||
| The DRA also contains a provision that limits the duration of monthly Medicare rental payments on oxygen equipment to 36 months. Prior to the DRA, Medicare provided indefinite monthly reimbursement for the rental of oxygen equipment as long as the patient needed the equipment and met medical qualifications. The effective date for the implementation of the 36 month rental cap for oxygen equipment was January 1, 2006. In the case of individuals who received oxygen equipment on or prior to December 31, 2005, the 36 month period began on January 1, 2006. Therefore, the financial impact of the reduction in revenue associated with the 36 month cap began in 2009. The DRA provided for the transfer of title of the oxygen equipment from the supplier to the patient at the end of the 36 month period. With the enactment of the Medicare Improvement for Patients and Providers Act of 2008 (MIPPA) in July of 2008, the provision related to the transfer of title of oxygen equipment was repealed effective January 1, 2009; however MIPPA did not repeal the cap on rental payments subsequent to the 36th |
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month. MIPPA also established new payment rules and supplier responsibilities following the 36 month rental period, the most significant of which are described below. |
o | A suppliers responsibility to service an oxygen patient ends at the time the oxygen equipment has been in continuous use by the patient for the equipments reasonable useful lifetime (currently defined by the Centers for Medicare and Medicaid Services (CMS) as five years for oxygen equipment). However, the supplier may replace this equipment and a new 36 month rental period and new reasonable useful lifetime period is started on the date the replacement item is delivered. Oxygen equipment that is lost, stolen, or irreparably damaged may also be replaced and a new 36 month rental period and new reasonable useful lifetime period is started (with CMS approval). A new certificate of medical necessity is required when oxygen equipment is replaced in each of the situations described above. | ||
o | A change in oxygen equipment modalities (e.g. from a concentrator to a stationary liquid system) prior to the end of the reasonable useful lifetime does not result in the start of a new 36 month rental period or new reasonable useful lifetime period, unless the change is medically justified and supported by written documentation from the patients physician. In addition, replacing oxygen equipment that is not functioning properly prior to the end of the reasonable useful lifetime period does not result in the start of a new 36 month rental period or new reasonable useful lifetime period. Finally, the transfer by a beneficiary to a new supplier prior to the end of the reasonable useful lifetime period does not result in the start of a new 36 month rental period or new reasonable useful lifetime period. | ||
o | Suppliers furnishing liquid or gaseous oxygen equipment during the initial 36 month rental period will be required to continue furnishing oxygen contents for any period of medical need following the 36 month rental cap for the remainder of the reasonable useful lifetime of the equipment. The reimbursement rate for portable oxygen contents will increase from approximately $29 per month during the 36 month rental period to approximately $77 per month after the 36 month rental period. At the start of a new 36 month rental period, the reimbursement rate for portable oxygen contents will revert back to approximately $29 per month. | ||
o | Suppliers are responsible for performing any repairs or maintenance and servicing of the oxygen equipment that is necessary to ensure that the equipment is in good working order for the reasonable useful lifetime of the oxygen equipment. No payment will be made for supplies, repairs, or maintenance and servicing either before or after the initial 36 month rental period, with the exception of one in-home visit by a supplier to inspect oxygen concentrators and transfilling equipment and provide general maintenance after the initial 36 month cap. Suppliers may not be reimbursed for more than 30 minutes of labor for this one in-home visit. Effective July 2010, beginning six months after the 36 month cap, a maintenance and servicing payment of $66 will be paid every six months. The maintenance and servicing fee covers all maintenance and servicing needed during the six month period. The supplier is responsible for performing all necessary maintenance, servicing and repair of the equipment at the time it is needed and must also visit the beneficiarys home during the first month of each six month period to inspect the |
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equipment and perform any necessary maintenance and servicing needed at the time of each visit. | |||
o | The Companys financial results were materially and adversely impacted beginning in 2009 as a result of changes in oxygen reimbursement as described above. Net revenue and net income were reduced in the twelve months of 2009 by approximately $17.5 million as a result of the reimbursement changes related to the 36 month oxygen cap. (See Recap of 2009 Impact of Medicare Reimbursement Changes below for additional discussion.) |
| On August 3, 2006, CMS published a Proposed Rule to implement the changes required by the DRA relating to the payment for oxygen, oxygen equipment, and capped rental DME items. The rule, which became final November 9, 2006 (DRA Implementation Rule), establishes revised payment classes and reimbursement rates for oxygen and oxygen equipment effective January 1, 2007, including revised rates for concentrators, liquid and gas stationary systems, and portable liquid and gas equipment. The DRA Implementation Rule also establishes a reimbursement rate for portable oxygen generating equipment and changes regulations related to maintenance reimbursement and equipment replacement reimbursement. Under the DRA Implementation Rule, during the initial 36 months of rental, the reimbursement rate for concentrators and stationary liquid and gas systems was approximately $199 per month for calendar years 2007 and 2008, approximately $193 per month for 2009, and approximately $189 per month for 2010. Under the DRA Implementation Rule, the reimbursement rate for liquid or gas portable equipment during the initial 36 months of rental is approximately $32 per month from 2007 through 2010. As a result of the enactment of MIPPA in July of 2008, the above reimbursement rates were decreased by 9.5% beginning on January 1, 2009. The reduced oxygen rates as specified in the DRA Implementation Rule that went into effect January 1, 2009 reduced the Companys net revenue and net income in the twelve months of 2009 by approximately $1.6 million. |
Competitive Bidding: The Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (MMA) froze reimbursement rates for certain durable medical equipment (DME) at
those rates in effect on October 1, 2003. These reimbursement rates will remain in effect until
the competitive bidding process establishes a single payment amount for those items, which amount
must be less than the current fee schedule. According to the MMA, competitive bidding will be
implemented in phases with ten of the largest metropolitan statistical areas (MSAs) included in
the program in the first round of bidding and seventy additional MSAs to be added in the second
round of bidding, with additional areas to be subsequently added. The MMA specified that the first
round of competitive bidding would be implemented in 2008 and the second round in 2009.
The bidding process for the first round of competitive bidding occurred in the latter half of
2007. The products included in the first round of bidding were: oxygen supplies and equipment;
standard power wheelchairs, scooters, and related accessories; complex rehabilitative power
wheelchairs and related accessories; mail-order diabetic supplies; enteral nutrients, equipment,
and supplies; CPAP devices, Respiratory Assist Devices (RADs), and related supplies and
accessories; hospital beds and related accessories; Negative Pressure Wound Therapy (NPWT) pumps
and related supplies and accessories; walkers and related accessories; and support surfaces.
The Company participated in the bidding process in eight of the ten markets included in the first
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round of bidding (Charlotte, Cincinnati, Cleveland, Dallas, Kansas City, Miami, Orlando, and
Pittsburgh). In early 2008, the Company was notified that it was a winning supplier in each of the
eight markets and the Company chose to accept all contracts awarded. The contract period for the
first round of bidding was scheduled to begin July 1, 2008 for a three year period. The Companys
average reduction in reimbursement associated with the first round of competitive bidding was
approximately 29%.
On July 15, 2008, the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA)
was enacted. Among other things, this legislation delayed the competitive bidding program to allow
time for CMS to make changes to the bidding process. As a result of this legislation, contracts
awarded in the first round were terminated and the bidding process for the first round was
restarted in 2009 and, except for a few exceptions, included the same products and geographic
locations included in the original first round of bidding. On January 16, 2009, CMS published an
Interim Final Rule implementing provisions of MIPPA related to the first round re-bidding process
and subsequent rounds of bidding. The effective date of the Interim Final Rule was originally to
be February 17, 2009, but was subsequently extended to April 18, 2009. The delay was used by CMS
to further review the issues of law and policy raised by the Interim Final Rule. On August 3,
2009, CMS published a tentative timeline and bidding requirements for the first round re-bidding
process which was subsequently finalized. Bidder registration began August 17, 2009 and bidding
began October 21, 2009 and closed December 21, 2009. The Company participated in the bidding
process in nine of the ten markets included in the re-bid first round of bidding. Reimbursement
rates from the bidding process will be announced in June 2010 and contract suppliers will be
announced in September 2010. The reimbursement rates resulting from the bidding process will go
into effect January 1, 2011. The second round bidding process is currently scheduled to begin in
2011.
To offset the savings not realized as a result of the competitive bidding delay, MIPPA called
for a nationwide 9.5% reduction in Medicare rates which began on January 1, 2009 for products
included in the first round of competitive bidding. This 9.5% reduction reduced the Companys net
revenue and net income by approximately $8.3 million in the twelve months of 2009. MIPPA also
requires CMS to make certain changes to the bidding process and repeals the transfer of title of
oxygen equipment to Medicare beneficiaries at the end of 36 months of continuous rental, as
specified in the Deficit Reduction Act of 2005. See DRA Reimbursement Impact below for
additional discussion. At this time, the exact timing and financial impact of competitive bidding
is not known, but management believes the impact could be material.
Recap of 2009 Impact of Medicare Reimbursement Changes: As a result of the various
Medicare reimbursement changes that became effective January 1, 2009, the Companys net revenue and
net income was reduced by approximately $27.4 million in the twelve months of 2009. This includes
approximately $17.5 million associated with the 36 month rental cap for oxygen equipment,
approximately $1.6 million associated with reductions in oxygen fee schedule payment amounts, and
approximately $8.3 million related to the 9.5% reduction associated with the delay of competitive
bidding, all of which are described above. Additionally, a change in inhalation drug product mix
resulting from Medicare reimbursement reductions which began April 1, 2008, decreased the Companys
revenue and net income by an additional $3.0 million for 2009 compared to 2008.
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Over the past several years in anticipation of continued reductions in reimbursement, the
Company has implemented various initiatives to improve productivity and reduce costs. These
initiatives have focused on the centralization of certain activities previously performed at
branches and billing centers, consolidation of certain billing center functions, and reductions of
costs associated with delivery of products and services to patients. The Company has also
implemented strategies designed to improve revenue growth, especially in the areas of oxygen and
sleep therapy. A portion of the reimbursement reduction impact described above was offset by the
full year impact of productivity improvements and cost reductions implemented in 2008, additional
productivity improvements and cost reductions implemented in 2009, and growth in respiratory
revenue in 2009, especially sleep therapy revenues. Management cannot provide any assurance that
future initiatives to improve productivity and/or increase revenues will be successful and there
can be no guarantee that actual cash flow in 2010 will be consistent with managements projections.
Accreditation: The Secretary of the Department of Health and Human Services is
required to establish and implement quality standards for suppliers of durable medical equipment,
prosthetics, orthotics, and supplies (DMEPOS). CMS published the standards on its website on
August 14, 2006. In order to continue to bill under Medicare Part B, DMEPOS suppliers were
required to meet these standards through an accreditation process outlined in the CMS final rule on
accreditation issued August 18, 2006. In order to participate in the original first round of
competitive bidding, all suppliers were required to obtain accreditation by October 31, 2007. All
of the Companys branch locations were accredited by the Joint Commission prior to this date. As
of January 1, 2008, all of the Companys branch locations transitioned from accreditation with the
Joint Commission to accreditation with Accreditation Commission for Health Care (ACHC).
In December of 2007, CMS announced that all existing suppliers must be accredited no later
than September 30, 2009. New suppliers who submit applications to the National Supplier
Clearinghouse (NSC) for a National Provider Identifier (NPI) prior to March 1, 2008 must be
accredited before January 1, 2009. Suppliers who submit applications to the NSC for an NPI on or
after March 1, 2008, must submit evidence of accreditation prior to the submission of the
application. Failure to meet these deadlines could result in the revocation of the suppliers
Medicare billing privileges. As all of the Companys operations are accredited through ACHC, these
deadlines did not impact the Companys operations.
Inhalation Drug Changes: A revision of the Nebulizers Local Coverage Determination
(LCD) was released by the Durable Medical Equipment Medicare Administrative Contractors on April
10, 2008. According to the LCD, effective July 1, 2008, claims for the drug Xopenex were to be
paid based on the reimbursement rate for albuterol, which is the least costly medically appropriate
alternative to Xopenex. Also according to the LCD, effective July 1, 2008, claims for the drug
DuoNeb were to be paid based on the reimbursement rate for the unit dose vials of albuterol and
Ipratropium each, which is the least costly medically appropriate alternative to DuoNeb. In June
of 2008, prior to implementation of the LCD, CMS provided guidance that the LCDs with effective
dates of service on or after July 1, 2008 were being revised to withdraw, pending further review,
the provision applying albuterol reimbursement rates to Xopenex. In addition, the effective date
for applying the least costly alternative provision to the unit dose combination solution of
albuterol and ipratropium (DuoNeb) was being revised and the effective date for this implementation
was to be on or after November 1, 2008. However, on October 16, 2008, the United States District
Court for the District of Columbia issued an order that permanently enjoined the implementing or
enforcing of the April 2008 LCD for DuoNeb or any local coverage
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determination for DuoNeb that bases reimbursement on a least costly alternative standard. The
Company cannot predict the impact this ruling will have on the pending least costly alternative
provision for Xopenex. Since the Company does not currently provide significant amounts of Xopenex
or DuoNeb, reimbursement changes related to these drugs would not be expected to materially impact
the Companys current revenue or profitability.
Positive Airway Pressure (PAP) Devices: CMS released a revised National Coverage
Determination (NCD) on March 13, 2008 for PAP equipment. The major change resulting from the
revised NCD was that specified home sleep tests could now be used in qualifying individuals for
CPAP devices. In July 2008, the four Medicare Jurisdictions released Local Coverage Determinations
(LCDs) which provided further coverage guidelines for PAP devices. The coverage provisions
contained in these LCDs, which went beyond the guidelines provided for in the NCD, were to become
effective on September 1, 2008. However, on August 18, 2008, all four Jurisdictions rescinded the
LCDs.
The four Jurisdictions published new revised LCDs on September 19, 2008 in order to provide
guidance for PAP equipment beyond the guidelines contained in the NCD. The LCDs require, effective
November 1, 2008, a face-to-face physician visit prior to the physician ordering sleep testing
which should generally contain a sleep history with symptoms associated with obstructive sleep
apnea (OSA) and sleep inventory, as well as pertinent physical examination. The LCD also requires
an initial three-month trial period during which (no sooner than the 31st day but no later than the
91st day after beginning treatment) there must be an additional face-to-face physician visit. The
treating physician must conduct a clinical reevaluation and document that the beneficiary is
benefiting from PAP therapy. This policy also requires compliance data be provided to show
patients use of the CPAP machine for four hours per night 70% of nights within a 30 day timeframe
during the initial 90 days of treatment in order to document medical necessity. The Company has
adapted its operations as a result of the policy changes outlined in the LCDs. The Companys
revenue and profitability have been and will continue to be negatively impacted by these policy
changes. During 2009, the Companys net revenue and net income were reduced by approximately $2.5
million as a result of the implementation of the Medicare PAP policy. The Company cannot
accurately predict the future magnitude of the impact at this time as the Company is still working
through the newly-implemented processes.
Surety Bond: In July 2007, CMS issued a proposed rule implementing section 4312 of
the Balanced Budget Act of 1997 (the BBA), which would require all suppliers of DMEPOS, except
those that are government operated, to obtain and retain a surety bond. On January 2, 2009 CMS
published a final rule requiring DME suppliers to post a $50,000 bond for each National Provider
Identification Number (NPI number). The effective date of the final rule was March 2, 2009,
however existing suppliers were not required to furnish the bond until October 2, 2009. This rule
requires the Company to obtain a surety bond for each of its 241 branch locations billing Medicare
using a unique NPI number. The Company obtained the required surety bonds for each of its branch
locations effective October 2, 2009 for a term of one year. The costs to obtain the surety bonds
for the initial one-year period did not materially impact the Companys financial results or
financial position. However, there can be no assurance that the Company will be able to obtain
renewals or that the costs of future renewals will remain at the current level.
Provider Enrollment, Chain and Ownership System: Section 1833(q) of the Social
Security Act requires that all physicians and non-physician practitioners that meet certain
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definitions be uniquely identified for all claims and services that are ordered or referred. To
meet this requirement, in April 2009, CMS expanded their current policy to require all health care
practitioners be listed in the government health plans national on-line Provider Enrollment, Chain
and Ownership System (PECOS). PECOS tracks physician and non-physician practitioners to ensure
they are of the type/specialty eligible to order or refer services for Medicare beneficiaries.
Under this new policy, Medicare claims submitted by the Company beginning January 3, 2011 that are
the result of an order or a referral from a practitioner not registered in PECOS will not be paid.
The original implementation date for denying payment was January 5, 2010, but was postponed to
April 5, 2010, and more recently postponed to January 3, 2011. Medicare claims submitted by the
Company prior to January 3, 2011 that are the result of an order or a referral from a practitioner
not registered in PECOS will be paid, but the Company will receive a warning indicating the
practitioner is not registered. The Company is working with its referring physicians towards PECOS
compliance but there can be no assurance that practitioners will be properly enrolled in PECOS, and
as such the Companys revenues and cash collections could be impacted beginning in 2011.
The following proposed changes, if enacted in their proposed or a modified form, could have a
significant impact on the Company:
Proposals to Further Reduce the Reimbursement for Oxygen Equipment: In September
2006, the Office of Inspector General of the Department of Health and Human Services issued a
report entitled Medicare Home Oxygen Equipment: Cost and Servicing. This report recommended,
among other things, that CMS work with Congress to reduce the current 36 month rental period for
oxygen equipment and specifically noted the anticipated savings to the Medicare program if the
rental period was capped at 13 months. Subsequently, CMS issued a response indicating agreement
with this recommendation. Additionally, the proposed budget of the United States Government for
fiscal year 2009 included a proposal to limit Medicare reimbursement of rental payments for most
oxygen equipment to 13 months from the current 36 months as specified in the DRA. There was no
formal action taken on this budget proposal. However, as described above, the recently enacted
MIPPA legislation requires a nationwide 9.5% reduction in Medicare reimbursement rates beginning
January 1, 2009 for products included in the first round of competitive bidding (which includes
oxygen equipment) and repeals the requirement to transfer title to the oxygen equipment to the
beneficiary at the end of the initial 36 months of rental.
The Company cannot predict future Medicare reimbursement for oxygen equipment, but it believes
that any significant decrease in the current 36 month rental period or reimbursement rate will have
a substantial and material negative financial impact to the Company. Such a decrease may require
the Company to alter significantly its business model and cost structure as well as limit or
eliminate certain products or services currently provided to patients in order to avoid substantial
losses. There can be no assurance that the Company could successfully manage these changes.
Additionally, management believes that any further reductions in reimbursement for oxygen equipment
could limit access to oxygen therapy for numerous Medicare beneficiaries.
Proposed Supplier and Quality Standards: In February of 2008, CMS published proposed
supplier standards to address concerns about the easy entry into the Medicare program by
unqualified and fraudulent providers. The proposed standards include, among other things,
prohibition of contracting licensed services to other entities, requirements to maintain a minimum
square footage for a business location, maintaining an operating business telephone number, a
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prohibition on the forwarding of telephone calls from the primary business location to another
location, and a requirement for the business location to be open to the public a minimum of 30
hours per week. The proposed standards also include a requirement to maintain a minimum level of
comprehensive liability insurance, a prohibition on directly soliciting patients, and a requirement
to obtain oxygen only from state licensed oxygen suppliers. The comment period for the proposed
supplier standards expired March 25, 2008. The Company provided comments by the stated deadline.
Certain of the proposed supplier standards, if enacted in the current form, could significantly
increase the Companys costs of providing services to patients. CMS has not yet published a final
rule regarding these proposed standards and the Company cannot predict the ultimate outcome.
In February 2008, CMS also proposed revised quality standards that are designed to improve the
quality of service provided to Medicare beneficiaries. Many of the proposed quality standards
included procedures and processes already performed by the Company. Final quality standards were
issued in October 2008 and are not expected to have a significant impact on the Company.
Management is working to counter the adverse impact of the reimbursement reductions currently
in effect as well as any future reimbursement reductions through a variety of initiatives designed
to grow revenues. See Overview Revenue Growth for a discussion of the Companys initiatives to
grow revenues. In addition, management will continue to be focused on evolving the Companys
business model to improve productivity and reduce costs. These efforts will particularly emphasize
centralization and consolidation of functions and improving logistics. See Overview -
Productivity and Profitability for a discussion of the Companys initiatives to improve
productivity and reduce costs. The magnitude of the adverse impact that reimbursement reductions
will have on the Companys future operating results and financial condition will depend upon the
success of the Companys revenue growth and cost reduction initiatives. Nevertheless, the adverse
effect of reimbursement reductions will be material in 2010 and beyond. See Risk Factors.
Critical Accounting Policies and Estimates
Managements Discussion and Analysis of Financial Condition and Results of Operations are
based upon the Companys consolidated financial statements. The preparation of these consolidated
financial statements in accordance with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates of the financial
statements, and the reported amounts of revenues and expenses during the reporting periods. On an
ongoing basis management evaluates its critical accounting policies and estimates.
A critical accounting policy is one which is both important to the understanding of the
financial condition and results of operations of the Company and requires managements most
difficult, subjective, or complex judgments, and often requires management to make estimates about
the effect of matters that are inherently uncertain. Management believes the following accounting
policies fit this definition:
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Revenue Recognition and Allowance for Doubtful Accounts. The Company provides credit for a
substantial part of its non third-party reimbursed revenues and continually monitors the
creditworthiness and collectibility of amounts due from its patients. Approximately 58% of the
Companys 2009 revenues were derived from participation in Medicare and state Medicaid programs.
Amounts paid under these programs are generally based upon a fixed rate. Revenues are recorded at
the expected reimbursement rates when the services are provided or when merchandise or equipment is
delivered to patients. Revenues are recorded net of estimated contractual adjustments or other
reimbursement adjustments. Although amounts earned under the Medicare and Medicaid programs are
subject to review by such third-party payors, subsequent adjustments to reimbursements as a result
of such reviews are historically insignificant as these reimbursements are based on fixed fee
schedules. In the opinion of management, adequate provision has been made for any adjustment that
may result from such reviews. Any differences between estimated settlements and final
determinations are reflected as an adjustment to revenue in the period known.
Sales revenues and related services include all product sales to patients and are derived from
the sale of sleep therapy supplies, aerosol medications, and respiratory therapy equipment, the
provision of infusion therapies, the sale of home health care equipment and medical supplies, and
the sale of other supplies and the provision of services related to the delivery of these products.
Sales revenues are recognized at the time of delivery and recorded at the expected payment amount
based upon the type of product and the payor. Rentals and other patient revenues are
derived from the rental of equipment related to the provision of respiratory therapy, home health
care equipment, and enteral pumps. All rentals of the equipment are provided by the Company on a
month-to-month basis and revenue is recorded at the expected payment amount based upon the type of
rental and the payor. Certain pieces of equipment are subject to capped rental arrangements,
whereby title to the equipment transfers to the patient at the end of the capped rental payment
period.
Once initial delivery of rental equipment is made to the patient, a monthly billing cycle is
established based on the initial date of delivery. The Company recognizes rental revenue ratably
over the monthly service period and defers revenue for the portion of the monthly bill which is
unearned. The fixed monthly rental encompasses the rental of the product, delivery, set-up,
instruction, maintenance, repairs, and providing backup systems when needed, and as such, no
separate revenue is earned from the initial equipment delivery and setup process. Routine
maintenance and servicing of the equipment is the responsibility of the Company for as long as the
patient is renting the equipment.
Sales taxes collected from customers and remitted to governmental authorities are accounted
for on a net basis and therefore are excluded from revenues in the consolidated statements of
operations.
The Company recognizes revenues at the time services are performed or products are delivered.
As such, a portion of patient receivables consists of unbilled revenue for which the Company has
not obtained all of the necessary medical documentation required to produce a bill, but has
provided the service or equipment. The Company calculates its allowance for doubtful accounts
based upon the type of receivable (billed or unbilled) as well as the age of the receivable. As a
receivable balance ages, an increasingly larger allowance is recorded for the receivable.
Management believes that the recorded allowance for doubtful accounts is adequate,
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and that historical collections substantiate the percentages used in the allowance valuation
process. However, the Company is subject to further loss to the extent uncollectible receivables
exceed its allowance for doubtful accounts. If the Company were to experience a deterioration in
the aging of its accounts receivable due to disruptions or a slow down in cash collections, the
Companys allowance for doubtful accounts and bad debt expense would likely increase from current
levels. Conversely, an improvement in the Companys cash collection trends and in its receivable
aging would likely result in a decrease in both the allowance for doubtful accounts and bad debt
expense.
The Companys allowance for doubtful accounts totaled approximately $3.4 million and $5.9
million as of December 31, 2009 and 2008, respectively.
Included in the Companys accounts receivable are amounts pending approval from third- party
payors, primarily balances due from patients applying for Medicaid benefits for the first time.
Since the vast majority of the Companys receivables are for established patients and for patients
already having coverage prior to receiving services, amounts pending third-party approval are
immaterial.
The table below details an aging by payor of the Companys gross patient accounts receivable
as of December 31, 2009.
Orders | Unbilled | Unapplied | ||||||||||||||||||||||||||||||||||||||
(in thousands) | Total | Current | 0-90 | 31-60 | 61-90 | 91-120 | 121-180 | 91-180 | >180 | Cash | ||||||||||||||||||||||||||||||
Managed Care |
$ | 8,792 | $ | 5,872 | $ | 548 | $ | 1,143 | $ | 673 | $ | 295 | $ | 309 | $ | 68 | $ | (116 | ) | $ | | |||||||||||||||||||
Medicaid |
$ | 2,606 | 1,416 | 222 | 416 | 290 | 151 | 174 | 40 | (103 | ) | | ||||||||||||||||||||||||||||
Medicare |
$ | 10,066 | 7,233 | 1,245 | 566 | 320 | 183 | 109 | 261 | 149 | | |||||||||||||||||||||||||||||
Other Payors |
$ | 2,858 | 1,703 | 102 | 532 | 223 | 161 | 135 | 12 | (10 | ) | | ||||||||||||||||||||||||||||
Private Pay |
$ | 3,413 | 1,229 | 1 | 791 | 583 | 509 | 141 | | 159 | | |||||||||||||||||||||||||||||
A/R Aged by Payor |
$ | 27,735 | $ | 17,453 | $ | 2,118 | $ | 3,448 | $ | 2,089 | $ | 1,299 | $ | 868 | $ | 381 | $ | 79 | $ | | ||||||||||||||||||||
Other Unbilled A/R |
$ | 1,818 | | 1,818 | | | | | | | | |||||||||||||||||||||||||||||
Unapplied Cash |
$ | (306 | ) | | | | | | | | | (306 | ) | |||||||||||||||||||||||||||
Total Aged A/R |
$ | 29,247 | $ | 17,453 | $ | 3,936 | $ | 3,448 | $ | 2,089 | $ | 1,299 | $ | 868 | $ | 381 | $ | 79 | $ | (306 | ) | |||||||||||||||||||
Other unbilled accounts receivable is primarily comprised of open orders and manually
accrued accounts receivable for which aging data by payor is not available.
Inventory Valuation and Cost of Sales Recognition. Inventory consists of certain equipment
and supplies which are priced at the lower of cost (on a first-in, first-out basis) or market
value. The Company recognizes cost of sales and relieves inventory on an interim basis using an
estimated gross margin percentage, based upon the type of product sold and payor mix, and performs
physical counts of inventory at each branch on an annual basis. The Company records a valuation
allowance for obsolete and slow moving items and for specific inventory. The Company is subject to
loss for inventory adjustments in excess of the recorded inventory valuation allowance. The
inventory valuation allowance was $0.2 million and $0.6 million at December 31, 2009 and 2008,
respectively.
Rental Equipment Valuation. Equipment is rented to patients on a month-to-month basis for use
in their homes and is depreciated over the equipments estimated useful life. On an annual basis,
the Company performs physical counts of rental equipment on hand at each branch
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and reconciles all recorded rental assets to internal billing reports. Any resulting adjustment
for unlocated, damaged, or obsolete equipment is charged to rental equipment depreciation expense.
Since rental equipment is maintained in the patients home, the Company is subject to loss
resulting from lost equipment as well as losses for damaged, outdated, or obsolete equipment.
Management records a valuation allowance for its estimated lost, damaged, outdated, or obsolete
rental equipment based upon analytical data derived from the Companys automated asset management
system. The rental equipment valuation was $0.9 million at December 31, 2009 and 2008.
Valuation of Long-lived Assets. Management evaluates the Companys long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. Management utilizes estimated undiscounted future cash flows to determine
if an impairment exists. If this analysis indicates an impairment exists, the amount of loss would
be determined based upon a comparison of the estimated fair value with the carrying value of the
asset. While management believes that the estimates of future cash flows are reasonable, different
assumptions regarding such cash flows could materially affect the evaluations.
Valuation of Goodwill. Goodwill is an asset representing the future economic benefits arising
from other assets acquired in a business combination that are not individually identified and
separately recognized. Goodwill is reviewed for impairment at least annually in accordance with
the provisions of FASB ASC Topic 350, Intangibles Goodwill and Other (Statement No. 142, Goodwill
and Other Intangible Assets). The Company has selected September 30 as its annual testing date.
An impairment loss is recognized to the extent that the carrying amount exceeds the assets fair
value. This determination is made at the reporting unit level and consists of two steps. First,
the Company determines the fair value of the reporting unit and compares it to its carrying amount.
Second, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss is
recognized for any excess of the carrying amount of the units goodwill over the implied fair value
of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of
the reporting unit in a manner similar to a purchase price allocation. The residual fair value
after this allocation is the implied fair value of the reporting unit goodwill.
The liabilities of the Company continue to exceed its assets resulting in a negative carrying
value of approximately $37.0 million at December 31, 2009. The equity based fair value of the
Company and its one reporting unit is approximately $2.3 million at December 31, 2009.
Accordingly, the Companys fair value exceeds its carrying value as of December 31, 2009 and, by
definition, no goodwill impairment is indicated. As long as the Company has a negative carrying
value and has a positive fair value (market capitalization), goodwill impairment will not be
indicated pursuant to ASC 350, which states if the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not impaired.
The Company is currently working toward a resolution of its debt maturity issue. If the
resolution of this issue includes additional equity resulting in a positive carrying value of the
Company and the positive carrying value exceeds the fair value of the reporting unit, goodwill of
the Company in the amount of $122.1 million at December 31, 2009 may be partially or completely
impaired at that time.
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Self Insurance. Self-insurance accruals primarily represent the accrual for self-insurance or
large deductible risks associated with workers compensation insurance, auto liability, commercial
general and professional liability insurance. The Company is insured for workers compensation and
auto liability but retains the first $250,000 of risk exposure for each claim. The Company did not
maintain annual aggregate stop loss coverage for the years 2009, 2008, and 2007, as such coverage
was not economically available. The Companys liability includes known claims and an estimate of
claims incurred but not yet reported. The estimated liability for workers compensation claims
totaled approximately $3.0 million and $3.1 million as of December 31, 2009 and 2008, respectively.
The estimated liability for auto claims totaled approximately $1.0 million and $1.2 million as of
December 31, 2009 and 2008, respectively. The estimated total liability for commercial general and
professional liability claims was $0.4 million and $0.5 million as of December 31, 2009 and 2008,
respectively. The Company utilizes analyses prepared by a third-party administrator based on
historical claims information to determine the required accrual and related expense associated with
workers compensation, auto liability, commercial general and professional liability insurance.
The Company records claims expense by plan year based on the lesser of the aggregate stop loss (if
applicable) or the developed losses as calculated by the third-party administrator.
The Company is also self-insured for health insurance for substantially all employees for the
first $150,000 on a per person, per year basis. In addition, an aggregating specific deductible
must be satisfied in the amount of $140,000 before stop loss insurance would apply. The Company
has also maintained annual aggregate stop loss coverage of $10.1 million for 2009. The health
insurance policies are limited to maximum lifetime reimbursements of $2.0 million per person for
2009, 2008 and 2007. The estimated liability for health insurance claims totaled approximately
$0.8 million as of December 31, 2009 and 2008. The Company reviews health insurance trends and
payment history and maintains an accrual for incurred but unpaid reported claims and for incurred
but not yet reported claims based upon its assessment of the lag time in reporting and paying
claims. Judgments made by the Company include: assessing historical paid claims; average lags
between the claims incurred dates, reported dates and paid dates; the frequency of claims; and the
severity of claims.
The Company is required to maintain cash collateral accounts with the insurance companies
related to its self-insurance obligations. The Company maintained cash collateral balances of $6.7
million at December 31, 2009, related to its self-insured obligations, which is included in other
assets.
Management continually analyzes its accrued liabilities for incurred but not reported claims
and for reported but not paid claims related to its self-insurance programs, and believes these
accruals to be adequate. However, significant judgment is involved in assessing these accruals,
and the Company is at risk for differences between actual settlement amounts and recorded accruals.
Any resulting adjustments are included in expense once a probable amount is known.
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RESULTS OF OPERATIONS
Summary of Statement of Operations Reporting
The Company reports its revenues as follows: (i) sales and related services revenues; and
(ii) rentals and other revenues. Sales and related services revenues are derived from the sale of
sleep therapy supplies, aerosol medications, and respiratory therapy equipment, the provision of
infusion therapies, the sale of home health care equipment and medical supplies, and the sale of
supplies and services related to the delivery of these products. Rentals and other revenues are
derived from the rental of equipment related to the provision of respiratory therapies, home health
care equipment, and enteral pumps. Cost of sales and related services includes the cost of
equipment and drugs and related supplies sold to patients. Cost of rentals and other revenues
includes the costs of oxygen and rental supplies, demurrage for leased oxygen cylinders, rent
expense for leased equipment, and rental equipment depreciation expense and excludes delivery
expenses and salaries associated with the rental set-up. Operating expenses include operating
branch labor costs, delivery expenses, area management expenses, selling costs, occupancy costs,
billing center costs, and other operating costs. General and administrative expenses include
corporate and senior management expenses. The majority of the Companys joint ventures are not
consolidated for financial statement reporting purposes. Earnings from unconsolidated joint
ventures with hospitals represent the Companys equity in earnings from unconsolidated joint
ventures and management and administrative fees from unconsolidated joint ventures.
The following table and related discussion set forth items from the Companys consolidated
statements of operations as a percentage of revenues for the periods indicated:
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenues |
100 | % | 100 | % | 100 | % | ||||||
Cost of sales and related services |
22 | 21 | 24 | |||||||||
Cost of rentals, including rental equipment depreciation |
13 | 13 | 14 | |||||||||
Operating expenses |
53 | 50 | 48 | |||||||||
Bad debt expense |
1 | 2 | 3 | |||||||||
General and administrative |
9 | 7 | 7 | |||||||||
Depreciation, excluding rental equipment, and amortization |
2 | 1 | 1 | |||||||||
Interest expense, net |
6 | 6 | 5 | |||||||||
Other income, net |
| | (1 | ) | ||||||||
Change of control expense |
| | 2 | |||||||||
Total expenses |
106 | 100 | 103 | |||||||||
Earnings from unconsolidated joint ventures |
2 | 2 | (2 | ) | ||||||||
(Loss) income from continuing operations before income taxes |
(4 | ) | 2 | (1 | ) | |||||||
Provision for income taxes |
2 | 2 | 1 | |||||||||
Net (loss) income from continuing operations |
(6 | )% | 0 | % | (2 | )% | ||||||
Less: Net income attributable to noncontrolling interests |
| | | |||||||||
Net (loss) income from continuing operations
attributable to American HomePatient |
(6 | ) | 0 | (2 | ) | |||||||
Operating income from discontinued operations, including gain on
disposal, net of tax |
| | 1 | |||||||||
Net (loss) income attributable to American HomePatient |
(6 | )% | 0 | % | (1 | )% | ||||||
46
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Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues. Revenues decreased from $266.9 million in 2008 to $236.3 million in 2009, a
decrease of $30.6 million, or 11.5%. The majority of this revenue decrease was attributable to
Medicare reimbursement reductions effective January 1, 2009 which reduced revenue by approximately
$27.4 million for the year ended 2009. A change in inhalation drug product mix resulting from
Medicare reimbursement reductions which began April 1, 2008 reduced revenue by an additional $3.0
million for the year ended 2009. Also contributing to the revenue decrease was the Companys
reduced emphasis on less profitable product lines such as non-respiratory durable medical equipment
and infusion therapy as well as the impact of the Medicare PAP policy implemented November 1, 2008
(see Managements Discussion and Analysis of Financial Condition and Results of Operations
Trends, Events, and Uncertainties Positive Airway Pressure Devices). These decreases were
partially offset by growth in oxygen patients and sleep therapy revenues, the Companys core
product lines. The following is a discussion of the components of revenues:
Sales and Related Services Revenues. Sales and related services revenues decreased from
$104.5 million in 2008 to $102.6 million in 2009, a decrease of $1.9 million, or 1.8%. This
decrease is primarily the result of a decrease in revenue associated with non-focus product lines,
a change in inhalation drug product mix and Medicare reimbursement reductions, partially offset by
an increase in sleep therapy revenue.
Rental Revenues. Rental revenues decreased from $162.3 million in 2008 to $133.7 million in
2009, a decrease of $28.6 million, or 17.6%. This decrease is primarily the result of Medicare
reimbursement reductions, the Medicare PAP policy, and a decrease in revenue associated with
non-focus product lines, partially offset by an increase in the number of oxygen patients.
Cost of Sales and Related Services. Cost of sales and related services decreased from $56.6
million in 2008 to $52.9 million in 2009, a decrease of $3.7 million, or 6.5%. As a percentage of
sales and related services revenues, cost of sales and related services decreased from 54.2% for
2008 to 51.5% for 2009. This decrease is primarily attributable to improved vendor pricing for
certain product lines and reductions in sales of less profitable product lines.
Cost of Rental Revenues. Cost of rental revenues decreased from $34.7 million in 2008 to
$29.7 million in 2009, a decrease of $5.0 million, or 14.4%. As a percentage of rental revenues,
cost of rental revenue increased from 21.4% for 2008 to 22.2% for 2009. This increase in
percentage is primarily the result of a reduction in revenue associated with Medicare reimbursement
cuts effective January 1, 2009, partially offset by reductions in purchases of supplies for
patients renting equipment and reduced rental equipment depreciation expense. The reduction in
rental equipment depreciation expense is primarily due to reductions in purchases of rental
equipment over the past several years as well as improvements made in the management of rental
equipment assets associated with the recent implementation of an upgraded asset management system.
Operating Expenses. Operating expenses decreased from $132.5 million in 2008 to $124.5
million in 2009, a decrease of $8.0 million or 6.0%. The decrease is primarily the result of
improved operating efficiencies and the resulting reduced operating costs. As a percentage of
revenues, operating expenses increased from 49.7% for 2008 to 52.7% for 2009. This increase in
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percentage is primarily attributable to a reduction in revenue associated with Medicare
reimbursement cuts effective January 1, 2009.
Bad Debt Expense. Bad debt expense decreased from $4.6 million in 2008 to $3.5 million in
2009, a decrease of $1.1 million, or 23.9%. As a percentage of revenues, bad debt expense
decreased from 1.7% for 2008 to 1.5% for 2009. This decrease in percentage is primarily due to
improved revenue qualification and collection processes.
General and Administrative Expenses. General and administrative expenses increased from $19.8
million in 2008 to $20.9 million in 2009, an increase of $1.1 million, or 5.6%. General and
administrative expenses continue to be affected in the current year by increases in certain
expenses associated with the implementation of enhancements to information systems and processes in
support of centralization of field activities. The Company has also incurred additional
professional fees in the current year related to the debt maturity issue. As a percentage of
revenues, general and administrative expenses increased from 7.4% for 2008 to 8.8% for 2009. This
increase in percentage is primarily due to a reduction in revenue associated with Medicare
reimbursement cuts effective January 1, 2009.
Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization
expenses decreased from $4.1 million in 2008 to $3.9 million in 2009, a decrease of $0.2 million,
or 4.9%. The decrease is primarily due to certain leasehold improvements becoming fully amortized.
Interest Expense, Net. Interest expense, net, decreased from $15.6 million in 2008 to $14.7
million in 2009, a decrease of $0.9 million, or 5.8%. This decrease is primarily attributable to a
reduced debt balance and interest income recorded in 2009 related to cash collateral held by
insurance companies associated with self-insurance obligations.
Other Income, Net. Other income, net, was $1.0 million for 2008 and $0.3 million for 2009.
Other income, net, for 2008 was comprised of $0.4 million income related to proceeds received from
a legal settlement and income related to various life insurance policies. Other income, net, for
2009 was primarily comprised of income related to various life insurance policies.
Earnings from Unconsolidated Joint Ventures. Earnings from unconsolidated joint ventures were
$6.2 million for 2008 and $5.2 million for 2009. The decrease is primarily attributable to the
impact of Medicare reimbursement reductions on the profitability of joint ventures effective
January 1, 2009.
Provision for Income Taxes. The provision for income taxes was $5.1 million and $4.5 million
for 2008 and 2009, respectively. This expense primarily relates to non-cash deferred state and
federal income taxes associated with indefinite lived intangible assets and state income tax
expense.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenues. Revenues decreased from $293.0 million in 2007 to $266.9 million in 2008, a
decrease of $26.1 million, or 8.9%. This revenue decrease was primarily attributable to a change
in inhalation drug product mix and the Companys de-emphasis of less profitable product lines
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such as non-respiratory durable medical equipment and infusion therapy. Also contributing to the
overall decrease in revenues was the effect of Company initiatives implemented in 2007 designed to
improve patient co-pay collections and provide appropriate service levels to patients. The Company
believes most of the revenue lost as a result of these initiatives was unprofitable. The following
is a discussion of the components of revenues:
Sales and Related Services Revenues. Sales and related services revenues decreased from
$122.3 million in 2007 to $104.5 million in 2008, a decrease of $17.8 million, or 14.6%. This
decrease is primarily the result of a decrease in revenue associated with less profitable product
lines and a change in inhalation drug product mix as described above.
Rental Revenues. Rental revenues decreased from $170.8 million in 2007 to $162.3 million in
2008, a decrease of $8.5 million, or 5.0%. This decrease is primarily the result of a decrease in
revenue associated with less profitable product lines, and revenue lost as a result of initiatives
designed to improve patient co-pay collections and to provide appropriate service levels to
patients, as described above.
Cost of Sales and Related Services. Cost of sales and related services decreased from $70.6
million in 2007 to $56.6 million in 2008, a decrease of $14.0 million, or 19.8%. As a percentage
of revenues, cost of sales and related services decreased from 24.1% for 2007 to 21.2% for 2008.
As a percentage of sales and related services revenues, cost of sales and related services
decreased from 57.7% for 2007 to 54.2% for 2008. This decrease is primarily attributable to a
change in inhalation drug product mix.
Cost of Rental Revenues. Cost of rental revenues decreased from $41.4 million in 2007 to
$34.7 million in 2008, a decrease of $6.7 million, or 16.2%. As a percentage of revenues, cost of
rental revenues decreased from 14.1% for 2007 to 13.0% for 2008. As a percentage of rental
revenues, cost of rental revenue decreased from 24.3% for 2007 to 21.4% for 2008. This decrease is
primarily due to a reduction in the purchases of oxygen for portability and a decrease in
depreciation expense associated with improvements in the management of rental equipment assets.
Operating Expenses. Operating expenses decreased from $139.6 million in 2007 to $132.5
million in 2008, a decrease of $7.1 million or 5.1%. The decrease is primarily the result of
improved operating efficiencies and the resulting reduced operating costs, partially offset by
increases in certain expenses associated with the development and implementation of initiatives
designed to provide additional productivity improvements. As a percentage of revenues, operating
expenses were 47.7% and 49.7% for 2007 and 2008, respectively. The increase in operating expenses
as a percentage of net revenue is due primarily to a decrease in inhalation drug revenue associated
with a change in product mix, which does not affect operating expenses.
Bad Debt Expense. Bad debt expense decreased from $8.2 million in 2007 to $4.6 million in
2008, a decrease of $3.6 million, or 43.9%. As a percentage of revenues, bad debt expense was 2.8%
and 1.7% for 2007 and 2008, respectively. This decrease is due primarily to improvements made in
the Companys accounts receivable collection processes.
General and Administrative Expenses. General and administrative expenses increased from $19.2
million in 2007 to $19.8 million in 2008, an increase of $0.6 million, or 3.1%. General and
administrative expenses continue to be affected in the current year by increases in certain
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expenses associated with the implementation of enhancements to information systems and processes
and additional centralization of field activities. As a percentage of revenues, general and
administrative expenses were 6.6% and 7.4% for 2007 and 2008, respectively.
Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization
expenses increased from $3.4 million in 2007 to $4.1 million in 2008, an increase of $0.7 million,
or 20.6%. The increase is primarily due to depreciation expense associated with the addition of
computer equipment and software.
Interest Expense, Net. Interest expense, net, decreased from $15.8 million in 2007 to $15.6
million in 2008, a decrease of $0.2 million, or 1.3%. This decrease is primarily attributable to a
reduced debt balance.
Other Income, Net. Other income, net, was $2.2 million for 2007 and $1.0 million for 2008.
The decrease is primarily due to income related to various life insurance policies that were
converted to guaranteed policies in 2007. Additionally, the Company recorded income of $0.4
million in 2008 related to proceeds received from the settlement of a legal dispute.
Change of Control Expense (Income). Change of control expense (income) was $5.6 million and
$(0.1) million for 2007 and 2008, respectively. In April 2007 an investor acquired more than 35%
of the Companys common stock, which constituted a change of control under the terms of the
employment agreement between the Company and Joseph F. Furlong, the Companys chief executive
officer. This change of control gave Mr. Furlong the right to receive a lump sum severance payment
in the event he or the Company terminated his employment within one year after the change of
control. In the second quarter of 2007, the Company recorded an expense of $6.6 million related to
this potential liability, which included the lump sum severance payment, expense related to the
acceleration of options and the potential buyout of options, and reimbursement of certain taxes
related to the payment. For the remainder of 2007, the Company reduced this expense and related
liability by $1.0 million due to revaluation of the fair value of Mr. Furlongs outstanding stock
options as of December 31, 2007. During 2008, the Company reduced this expense by $0.1 million
primarily due to revaluation of the fair value of Mr. Furlongs outstanding stock options as of
December 31, 2008.
Earnings from Unconsolidated Joint Ventures. Earnings from unconsolidated joint ventures were
$5.8 million for 2007 and $6.2 million for 2008. This increase is due to improved earnings of
several joint ventures.
Provision for Income Taxes. The provision for income taxes was $4.1 million and $5.1 million
for 2007 and 2008, respectively. This expense primarily relates to non-cash deferred state and
federal income taxes associated with indefinite lived intangible assets and state income tax
expense.
Liquidity and Capital Resources
The Company has long-term debt of $226.4 million, as evidenced by a promissory note to the
agent for the Lenders. This indebtedness is secured by substantially all of the assets of the
Company and matured on August 1, 2009. The Company was not able to repay this debt at or prior to
maturity from cash flow from operations and existing cash, or refinance this debt prior to
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the maturity date. As a result, the Company must refinance the debt, extend the maturity,
restructure or make other arrangements, some of which could have a material adverse effect on the
value of the Companys common stock. Given the unfavorable conditions in the current debt market,
the Company believes that third-party refinancing of the debt will not be possible at this time.
There can be no assurance that any of the Companys efforts to address the debt maturity issue can
be completed on favorable terms or at all. Other factors, such as uncertainty regarding the
Companys future profitability could also limit the Companys ability to resolve the debt maturity
issue. A series of forbearance agreements have been entered into by and among the Company, the
agent, and certain forbearance holders. The parties to the forbearance agreements have agreed to
not exercise, prior to the expiration of the term of the agreement, any of the rights or remedies
available to them as a result of the Companys failure to repay the secured debt on the maturity
date. The current forbearance agreement was effective February 12, 2010 and expires March 16,
2010. The Company, the agent, and the forbearance holders continue to work toward a resolution of
the debt maturity issue. However, there can be no assurance a resolution will be reached with
favorable terms to the Company and its stockholders or at all. Subject to the limitations provided
by the forbearance agreement, the Companys Lenders have the right to foreclose on substantially
all assets of the Company, and this would have a material adverse effect on the Companys
liquidity, financial condition, and the value of the Companys common stock.
At December 31, 2009 the Company had current assets of $66.0 million and current liabilities
of $264.2 million, resulting in working capital deficit of $(198.2) million and a current ratio of
0.3x as compared to a working capital deficit of $(197.3) million and a current ratio of 0.3x at
December 31, 2008. The current ratio for both periods has been significantly affected by the
Companys secured debt balance being classified as a current liability due to the August 1, 2009
maturity date.
Under the terms of the secured debt that matured on August 1, 2009, interest was payable
monthly on the secured debt at a rate of 6.785% per annum. Payments of principal were payable
annually on March 31 of each year in the amount of the Companys excess cash flow (defined as cash
in excess of $7.0 million at the end of the Companys fiscal year) for the previous fiscal year
end. An estimated prepayment of the excess cash flow was due on each September 30, prior to the
August 1, 2009 maturity date, in an amount equal to one-half of the anticipated Excess cash flow.
Since the maturity date, the Company has continued to pay interest on a monthly basis in an amount
consistent with the original terms of the secured debt.
The Company does not have access to a revolving line of credit. As of December 31, 2009, the
Company had unrestricted cash and cash equivalents of approximately $21.9 million.
The Companys principal cash requirements (other than the repayment of its matured secured
debt) are for working capital, capital expenditures, leases, and interest payments on its debt.
The Company must meet these on-going cash requirements with existing cash balances and net cash
provided by operations.
While managements cash flow projections and related operating plans indicate that the Company
can adequately fund its operating activities and continue existing interest payments through
existing cash and cash flow, cash flows from operations and available cash were not sufficient to
repay the Companys secured debt that matured on August 1, 2009. In light of the current general
credit market conditions, there can be no assurances that the Company will be
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able to deal successfully with the debt maturity issue on a timely basis or at all. As a result,
the Companys independent registered public accounting firm added an explanatory paragraph to their
report on the Companys consolidated financial statements for the years ended December 31, 2009 and
2008 that noted these conditions indicated that the Company may be unable to continue as a going
concern. Further Medicare reimbursement reductions could have a material adverse impact on the
Companys ability to meet its debt service requirements, required capital expenditures, or working
capital requirements. If existing cash and cash flow are not sufficient, there can be no assurance
the Company will be able to obtain additional funds from other sources on terms acceptable to the
Company or at all.
The Companys future cash flow will continue to be dependent upon the respective amounts of
current assets (principally cash, accounts receivable and inventories) and current liabilities
(principally accounts payable and accrued expenses). In that regard, accounts receivable can have
a significant impact on the Companys liquidity. The Company has various types of accounts
receivable, such as receivables from patients, contracts, and former owners of acquired businesses.
The majority of the Companys accounts receivable are patient receivables. Accounts receivable are
generally outstanding for longer periods of time in the health care industry than in many other
industries because of requirements to provide third-party payors with additional information
subsequent to billing and the time required by such payors to process claims. Certain accounts
receivable frequently are outstanding for more than 90 days, particularly where the account
receivable relates to services for a patient receiving a new medical therapy or covered by private
insurance or Medicaid. Net patient accounts receivable were $25.9 million and $38.3 million at
December 31, 2009 and December 31, 2008, respectively. Average DSO was approximately 39 and 51
days at December 31, 2009 and December 31, 2008, respectively. The Company calculates DSO by
dividing net patient accounts receivable by the average daily revenue for the previous 90 days
(excluding dispositions and acquisitions), net of bad debt expense. The Companys level of DSO and
net patient receivables is affected by the extended time required to obtain necessary billing
documentation.
The table below provides an aging of the Companys gross patient accounts receivable as of
December 31, 2009 and December 31, 2008.
Greater than | ||||||||||||||||
(In thousands) | Total | 0-90 | 91-180 | 180 days | ||||||||||||
December 31, 2009 |
$ | 29,247 | $ | 26,620 | $ | 2,548 | $ | 79 | ||||||||
Percent of total |
100 | % | 91 | % | 9 | % | 0 | % | ||||||||
December 31, 2008 |
$ | 44,153 | $ | 38,146 | $ | 4,285 | $ | 1,722 | ||||||||
Percent of total |
100 | % | 86 | % | 10 | % | 4 | % |
The Companys liquidity and capital resources have been, and likely will continue to be,
materially adversely impacted by Medicare reimbursement reductions. See Trends, Events, and
Uncertainties Reimbursement Changes and the Companys Response.
Net cash provided by operating activities increased from $35.4 million in 2008 to $37.0
million in 2009, an increase of $1.6 million. Payments made for additions to property and
equipment, net were $16.9 million in 2009 compared to $21.1 million for the same period in 2008.
Additionally, the Company entered into $6.4 million of capital leases for equipment for
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the year ended 2009 and entered into $1.2 million of capital leases for equipment for the same
period in 2008. Net cash used in financing activities decreased from $12.1 million in 2008 to
$12.0 million in 2009. The cash used in financing activities for the year ended 2009 includes
$11.6 million of principal payments on long-term debt and capital leases. The cash used in
financing for the year ended 2008 includes $11.3 million of principal payments on long-term debt
and capital leases.
Contractual Obligations and Commercial Commitments
The following is a tabular disclosure of all contractual obligations and commitments of the
Company as of December 31, 2009:
2014 & | ||||||||||||||||||||||||
Total | 2010 | 2011 | 2012 | 2013 | thereafter | |||||||||||||||||||
Secured debt and capital leases |
$ | 229,123,000 | $ | 229,120,000 | $ | 3,000 | $ | | $ | | $ | | ||||||||||||
Interest on secured debt and
capital leases* |
3,158,000 | 3,158,000 | | | | | ||||||||||||||||||
Operating lease obligations |
12,115,000 | 6,529,000 | 3,755,000 | 1,517,000 | 314,000 | | ||||||||||||||||||
Total contractual cash obligations |
$ | 244,396,000 | $ | 238,807,000 | $ | 3,758,000 | $ | 1,517,000 | $ | 314,000 | $ | | ||||||||||||
The Secured debt is comprised entirely of amounts owed to the Lenders that matured on
August 1, 2009. See Managements Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
Capital leases consist primarily of leases of office and computer equipment. Operating leases
are non-cancelable leases on certain vehicles and buildings.
At December 31, 2009 the Company had no off-balance sheet commitments or guarantees
outstanding.
At December 31, 2009 the Company had one letter of credit for $250,000 which expires in
January 2011. The letter of credit secures the Companys obligations with respect to its
professional liability insurance. The letter of credit is secured by a certificate of deposit,
which is included in restricted cash.
* Interest on the Secured Debt in the table above includes interest obligations through March 15,
2010, which is the final day of the forbearance period per the current forbearance agreement.
Recently Issued Accounting Standards
The FASB issued Accounting Standards Update (ASU) 2009-16, Transfers and Servicing (Topic
860): Accounting for Transfers of Financial Assets (FASB Statement No. 166, Accounting for
Transfers of Financial Assets an amendment of FASB Statement No. 140) in December 2009. ASU
2009-16 removes the concept of a qualifying special-purpose entity (QSPE) from Accounting
Standards Codification (ASC) Topic 860, Transfers and Servicing, and the exception
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from applying ASC 810-10 to ASPEs, thereby requiring transferors of financial assets to evaluate
whether to consolidate transferees that previously were considered QSPEs. Transferor-imposed
constraints on transferees whose sole purpose is to engage in securitization or asset-backed
financing activities are evaluated in the same manner under the provisions of the ASU as
transferor-imposed constraints on QSPEs were evaluated under the provisions of Topic 860 prior to
the effective date of the ASU when determining whether a transfer of financial assets qualifies for
sale accounting. The ASU also clarifies the Topic 860 sale-accounting criteria pertaining to legal
isolation and effective control and creates more stringent conditions for reporting a transfer of a
portion of a financial asset as a sale. The ASU is effective for periods beginning after December
15, 2009, and may not be early adopted. The Company expects that the adoption of ASU 2009-16 will
not have a material impact on its consolidated financial statements.
The FASB issued ASU 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities (FASB Statement No. 167, Amendments to FASB
Interpretation No. 46(R)) in December 2009. ASU 2009-17, which amends the Variable Interest Entity
(VIE) Subsections of ASC Subtopic 810-10, Consolidation Overall, revises the test for
determining the primary beneficiary of a VIE from a primarily quantitative risks and rewards
calculation based on the VIEs expected losses and expected residual returns to a primarily
qualitative analysis based on identifying the party or related-party group (if any) with (a) the
power to direct the activities that most significantly impact the VIEs economic performance and
(b) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could
potentially be significant to the VIE. The ASU requires kick-out rights and participating rights
to be ignored in evaluating whether a variable interest holder meets the power criterion unless
those rights are unilaterally exercisable by a single party or related party group. The ASU also
revises the criteria for determining whether fees paid by an entity to a decision maker or another
service provider are a variable interest in the entity and revises the Topic 810 scope
characteristic that identifies an entity as a VIE if the equity-at-risk investors as a group do not
have the right to control the entity through their equity interests to address the impact of
kick-out rights and participating rights on the analysis. Finally, the ASU adds a new requirement
to reconsider whether an entity is a VIE if the holders of the equity investment at risk as a group
lose the power, through the rights of those interests, to direct the activities that most
significantly impact the VIEs economic performance, and requires a company to reassess on an
ongoing basis whether it is deemed to be the primary beneficiary of a VIE. ASU 2009-17 is
effective for periods beginning after December 15, 2009 and may not be early adopted. Adoption of
ASU 2009-17 will result in the Company consolidating its 50%-owned joint ventures beginning January
1, 2010.
In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements (EITF Issue No. 08-1, Revenue Arrangements with Multiple
Deliverables). ASU 2009-13 amends ASC 650-25 to eliminate the requirement that all undelivered
elements have vendor specific objective evidence of selling price (VSOE) or third party evidence
of selling price (TPE) before an entity can recognize the portion of an overall arrangement fee
that is attributable to items that already have been delivered. In the absence of VSOE and TPE for
one or more delivered or undelivered elements in a multiple-element arrangement, entities will be
required to estimate the selling prices of those elements. The overall arrangement fee will be
allocated to each element (both delivered and undelivered items) based on their relative selling
prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the
entitys estimated selling price. Application of the residual method of allocating an overall
arrangement fee between delivered and undelivered elements will no longer be
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permitted upon adoption of ASU 2009-13. Additionally, the new guidance will require entities to
disclose more information about their multiple-element revenue arrangements. ASU 2009-13 is
effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010. Early adoption is permitted. The Company expects that
the adoption of ASU 2009-13 will not have a material impact on its consolidated financial
statements.
Recently Adopted Accounting Standards
The Company adopted FASB Statement No. 141(R), Business Combinations, as codified in FASB
ASC topic 805 (ASC 805) and FASB Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment to ARB No. 51, as codified in FASB ASC topic 810 (ASC 810)
on January 1, 2009. ASC 805 and ASC 810 require most identifiable assets, liabilities,
noncontrolling interests, and goodwill acquired in a business combination to be recorded at full
fair value and require noncontrolling interests (previously referred to as minority interests) to
be reported as a component of equity, which changes the accounting for transactions with
noncontrolling interest holders.
In April 2009, the FASB issued FSP FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments, as codified in FASB ASC Section 825-10-65 (ASC 825-10-65). ASC
825-10-65 require disclosures about fair value of financial instruments for interim reporting
periods as well as in annual financial statements. The adoption of ASC 825-10-65 did not have a
material impact on the Companys consolidated financial position and results of operations.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, as codified in FASB ASC
Section 855-10-05 (ASC 855-10-05). ASC 855-10-05 establishes general standards for accounting
for and disclosure of events that occur after the balance sheet date but before financial
statements are issued (subsequent events). More specifically, ASC 855-10-05 sets forth the
period after the balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition in the financial statements,
identifies the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the disclosures that should
be made about events or transactions that occur after the balance sheet date. The adoption of ASC
855-10-05 did not have a material impact on our financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No.
162, and establishes only two levels of U.S. GAAP, authoritative and nonauthoritative. The FASB
Accounting Standards Codification (the Codification) became the source of authoritative,
nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of
authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature
not included in the Codification became nonauthoritative. This standard is effective for financial
statements for interim or annual reporting periods ending after September 15, 2009. The Company
began to use the new guidelines and numbering system prescribed by the Codification when referring
to GAAP in the quarter ended September 30, 2009. As the Codification was not intended to change or
alter existing GAAP, it did not have an impact on the Companys financial statements.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company is not subject to material interest rate sensitivity since there is a fixed
interest rate for both the $226.4 million secured debt and the Companys unsecured debt. Interest
expense associated with other debts would not materially impact the Company as most of those
interest rates are fixed. The Company does not own and is not a party to any market risk sensitive
instruments. As previously discussed herein, there can be no assurance that any of the Companys
efforts to address the debt maturity issue can be completed on favorable terms or at all.
Additionally, there can be no assurance that any such resolution of the debt maturity issue would
result in the Companys secured debt continuing at a fixed, rather than variable, interest rate.
The Company has not experienced large increases in either the cost of supplies or operating
expenses due to inflation. With reductions in reimbursement by government and private medical
insurance programs and pressure to contain the costs of such programs, we bear the risk that
reimbursement rates set by such programs will not keep pace with inflation.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Financial statements are contained on pages F-62 through F-98 of this Report and are
incorporated herein by reference.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A(T). | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
The Companys chief executive officer and chief financial officer have evaluated the
effectiveness of the Companys disclosure controls and procedures as defined in Exchange Act Rules
13a-15(e) and 15d-15(e), as of December 31, 2009. Based on such evaluation, such officers have
concluded that, as of December 31, 2009, these disclosure controls and procedures were effective.
56
Table of Contents
Managements Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities
Exchange Act of 1934. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future periods are subject
to risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Under the supervision and with the
participation of management, including the CEO and the CFO, an evaluation was conducted of the
effectiveness of the Companys internal control over financial reporting based on criteria
established in the Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Management concluded that the Company maintained
effective internal control over financial reporting as of December 31, 2009. This annual report
does not include an attestation report of the Companys registered public accounting firm regarding
internal control over financial reporting. Managements report was not subject to attestation by
the Companys registered public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only managements report in this annual
report.
Changes in Internal Control Over Financial Reporting
There has been no change in the Companys internal control over financial reporting during the
quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
None.
57
Table of Contents
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
Information concerning directors, executive officers, and corporate governance of the Company
is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in
connection with the 2010 annual meeting of stockholders of the Company.
ITEM 11. | EXECUTIVE COMPENSATION |
Executive compensation information is incorporated herein by reference to the Proxy Statement
to be filed under Regulation 14A in connection with the 2010 annual meeting of stockholders of the
Company.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The equity compensation plan information and the security ownership of certain beneficial
owners and management information are incorporated herein by reference to the Proxy Statement to be
filed under Regulation 14A in connection with the 2010 annual meeting of stockholders of the
Company.
ITEM 13. | CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Information concerning certain relationships, related transactions, and director independence
of the Company is incorporated herein by reference to the Proxy Statement to be filed under
Regulation 14A in connection with the 2010 annual meeting of stockholders of the Company.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Information concerning the Companys principal accounting fees and services is incorporated
herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the
2010 annual meeting of stockholders of the Company.
58
Table of Contents
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
Financial statements and schedules of the Company required to be included in Part II, Item 8
are listed below.
Form 10-K Pages | ||
Financial Statements |
||
F-62 | ||
F-63 F-64 | ||
F-65 F-66 | ||
F-67 | ||
F-68 F-69 | ||
F-70 F-98 | ||
Financial Statement Schedules |
||
Schedule I Condensed Financial Information of
Registrant(1) |
||
S-1 | ||
Schedule III Real Estate and Accumulated Depreciation(2) |
||
Schedule IV Mortgage Loans on Real Estate(2) |
||
Schedule V Supplemental Information Concerning Property-Casualty
Insurance Operations(2) |
(1) | Omitted because test for inclusion was not met. | |
(2) | Omitted because schedule not applicable to Company. |
Exhibits
The Exhibits filed as part of the Report on Form 10-K are listed in the Index to Exhibits
immediately following the financial statement schedules.
59
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICAN HOMEPATIENT, INC. | ||||
/s/ JOSEPH F. FURLONG, III
|
||||
Chief Executive Officer and Director | ||||
/s/ STEPHEN L. CLANTON | ||||
Stephen L. Clanton | ||||
Chief Financial Officer | ||||
/s/ ROBERT L. FRINGER | ||||
Robert L. Fringer | ||||
Principal Accounting Officer |
Date: March 4, 2010
60
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Henry T. Blackstock
|
Director | March 4, 2010 | ||
/s/ Joseph F. Furlong, III
|
Director, President, and Chief Executive Officer | March 4, 2010 | ||
/s/ Donald R. Millard
|
Director | March 4, 2010 | ||
/s/ William C. ONeil
|
Director | March 4, 2010 | ||
/s/ W. Wayne Woody
|
Director | March 4, 2010 |
61
Table of Contents
American HomePatient, Inc. and Subsidiaries
Consolidated Financial Statements
As of December 31, 2009 and 2008 and for each of the years in the three year period ended December 31, 2009
Together with Report of Independent Registered Public Accounting Firm
As of December 31, 2009 and 2008 and for each of the years in the three year period ended December 31, 2009
Together with Report of Independent Registered Public Accounting Firm
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
American HomePatient, Inc:
American HomePatient, Inc:
We have audited the accompanying consolidated balance sheets of American HomePatient, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of
operations, shareholders deficit and comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2009. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement Schedule II-
Valuation and Qualifying Accounts as of December 31, 2009. These consolidated financial statements
and financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of American HomePatient, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2009, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in note 2 to the consolidated financial statements,
the Company has a net capital deficiency and has a net working capital deficiency resulting from
$226.4 million of debt that matured on August 1, 2009 that raise substantial doubt about its
ability to continue as a going concern. As a result of a series of forbearance agreements entered
into, the agent and forbearance holders agreed to forbear from exercising the rights and remedies
available to them as a result of the Companys failure to repay the outstanding principal balance
until March 16, 2010. Managements plans in regard to these matters are also described in note 2.
The consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/KPMG LLP
Nashville, TN
March 4, 2010
March 4, 2010
F-62
Table of Contents
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
ASSETS | 2009 | 2008 | ||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 21,944,000 | $ | 13,488,000 | ||||
Restricted cash |
250,000 | 250,000 | ||||||
Accounts receivable, less allowance for doubtful accounts of
$3,396,000 and $5,869,000, respectively |
26,371,000 | 39,061,000 | ||||||
Inventories, net of inventory valuation allowances of $212,000
and $577,000, respectively |
10,808,000 | 10,789,000 | ||||||
Prepaid expenses and other current assets |
6,675,000 | 9,863,000 | ||||||
Total current assets |
66,048,000 | 73,451,000 | ||||||
Property and equipment |
126,550,000 | 134,603,000 | ||||||
Less accumulated depreciation and amortization |
(96,294,000 | ) | (102,561,000 | ) | ||||
Property and equipment, net |
30,256,000 | 32,042,000 | ||||||
Goodwill |
122,093,000 | 122,093,000 | ||||||
Investment in joint ventures |
4,034,000 | 8,704,000 | ||||||
Other assets |
16,866,000 | 18,236,000 | ||||||
Total other assets |
142,993,000 | 149,033,000 | ||||||
TOTAL ASSETS |
$ | 239,297,000 | $ | 254,526,000 | ||||
(Continued)
F-63
Table of Contents
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
(Continued)
LIABILITIES AND SHAREHOLDERS DEFICIT | 2009 | 2008 | ||||||
CURRENT LIABILITIES: |
||||||||
Current portion of long-term debt and capital leases |
$ | 229,120,000 | $ | 234,259,000 | ||||
Accounts payable |
13,849,000 | 11,989,000 | ||||||
Other payables |
761,000 | 878,000 | ||||||
Deferred revenue |
5,292,000 | 6,261,000 | ||||||
Accrued expenses: |
||||||||
Payroll and related benefits |
6,704,000 | 10,302,000 | ||||||
Insurance, including self-insurance accruals |
5,258,000 | 5,531,000 | ||||||
Other |
3,176,000 | 1,563,000 | ||||||
Total current liabilities |
264,160,000 | 270,783,000 | ||||||
NONCURRENT LIABILITIES: |
||||||||
Capital leases, less current portion |
3,000 | 51,000 | ||||||
Deferred tax liability |
12,031,000 | 7,841,000 | ||||||
Other noncurrent liabilities |
82,000 | 8,000 | ||||||
Total noncurrent liabilities |
12,116,000 | 7,900,000 | ||||||
Total liabilities |
276,276,000 | 278,683,000 | ||||||
SHAREHOLDERS DEFICIT |
||||||||
American HomePatient, Inc. shareholders deficit: |
||||||||
Preferred stock, $.01 par value; authorized 5,000,000 shares;
none issued and outstanding |
| | ||||||
Common stock, $.01 par value; authorized 35,000,000 shares;
issued and outstanding, 17,573,000 shares |
176,000 | 176,000 | ||||||
Additional paid-in capital |
177,094,000 | 176,788,000 | ||||||
Accumulated deficit |
(214,681,000 | ) | (201,583,000 | ) | ||||
Total American HomePatient, Inc. shareholders deficit |
(37,411,000 | ) | (24,619,000 | ) | ||||
Noncontrolling interests |
432,000 | 462,000 | ||||||
Total shareholders deficit |
(36,979,000 | ) | (24,157,000 | ) | ||||
TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT |
$ | 239,297,000 | $ | 254,526,000 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-64
Table of Contents
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
2009 | 2008 | 2007 | ||||||||||
REVENUES: |
||||||||||||
Sales and related service revenues, net |
$ | 102,605,000 | $ | 104,520,000 | $ | 122,274,000 | ||||||
Rental revenues, net |
133,692,000 | 162,334,000 | 170,753,000 | |||||||||
Total revenues, net |
236,297,000 | 266,854,000 | 293,027,000 | |||||||||
EXPENSES: |
||||||||||||
Cost of sales and related services |
52,891,000 | 56,612,000 | 70,601,000 | |||||||||
Cost of rentals and other revenues, including rental equipment
depreciation of $21,824,000, $26,085,000, and
$31,055,000, respectively |
29,674,000 | 34,682,000 | 41,412,000 | |||||||||
Operating expenses |
124,548,000 | 132,523,000 | 139,638,000 | |||||||||
Bad debt expense |
3,517,000 | 4,635,000 | 8,164,000 | |||||||||
General and administrative |
20,909,000 | 19,841,000 | 19,194,000 | |||||||||
Depreciation, excluding rental equipment, and amortization |
3,866,000 | 4,102,000 | 3,361,000 | |||||||||
Interest expense, net |
14,734,000 | 15,618,000 | 15,828,000 | |||||||||
Other income, net |
(345,000 | ) | (1,040,000 | ) | (2,249,000 | ) | ||||||
Change of control (income) expense |
(12,000 | ) | (77,000 | ) | 5,637,000 | |||||||
Total expenses |
249,782,000 | 266,896,000 | 301,586,000 | |||||||||
Earnings from unconsolidated joint ventures |
5,243,000 | 6,201,000 | 5,754,000 | |||||||||
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES |
(8,242,000 | ) | 6,159,000 | (2,805,000 | ) | |||||||
Provision for income taxes |
4,515,000 | 5,054,000 | 4,097,000 | |||||||||
NET (LOSS) INCOME FROM CONTINUING OPERATIONS |
$ | (12,757,000 | ) | $ | 1,105,000 | $ | (6,902,000 | ) | ||||
Less: net income attributable to the noncontrolling interests |
(341,000 | ) | (408,000 | ) | (390,000 | ) | ||||||
NET (LOSS) INCOME FROM CONTINUING OPERATIONS
ATTRIBUTABLE TO AMERICAN HOMEPATIENT |
$ | (13,098,000 | ) | $ | 697,000 | $ | (7,292,000 | ) | ||||
DISCONTINUED OPERATIONS: |
||||||||||||
(Loss) income from discontinued operations, including gain on
disposal of assets of $3,001,000 in 2007, net of tax |
| (183,000 | ) | 1,770,000 | ||||||||
NET (LOSS) INCOME ATTRIBUTABLE TO AMERICAN
HOMEPATIENT |
$ | (13,098,000 | ) | $ | 514,000 | $ | (5,522,000 | ) | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-65
Table of Contents
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Continued)
2009 | 2008 | 2007 | ||||||||||
NET (LOSS) INCOME PER COMMON SHARE ATTRIBUTABLE
TO AMERICAN HOMEPATIENT, INC. COMMON
SHAREHOLDERS BASIC |
||||||||||||
(Loss) income from continuing operations |
$ | (0.75 | ) | $ | 0.04 | $ | (0.41 | ) | ||||
(Loss) income from discontinued operations |
$ | | $ | (0.01 | ) | $ | 0.10 | |||||
NET (LOSS) INCOME PER COMMON SHARE BASIC |
$ | (0.75 | ) | $ | 0.03 | $ | (0.31 | ) | ||||
NET (LOSS) INCOME PER COMMON SHARE ATTRIBUTABLE
TO AMERICAN HOMEPATIENT, INC. COMMON
SHAREHOLDERS DILUTED |
||||||||||||
(Loss) income from continuing operations |
$ | (0.75 | ) | $ | 0.04 | $ | (0.41 | ) | ||||
(Loss) income from discontinued operations |
$ | | $ | (0.01 | ) | $ | 0.10 | |||||
NET (LOSS) INCOME PER COMMON SHARE DILUTED |
$ | (0.75 | ) | $ | 0.03 | $ | (0.31 | ) | ||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
||||||||||||
- Basic |
17,573,000 | 17,573,000 | 17,573,000 | |||||||||
- Diluted |
17,573,000 | 17,741,000 | 17,573,000 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-66
Table of Contents
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIT AND
COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
Common Stock | Noncontrolling | Additional | Accumulated | |||||||||||||||||||||
Shares | Amount | Interests | paid-in Capital | Deficit | Total | |||||||||||||||||||
BALANCE, December 31, 2006 |
17,573,000 | $ | 176,000 | $ | 618,000 | $ | 175,083,000 | $ | (196,575,000 | ) | $ | (20,698,000 | ) | |||||||||||
Non-cash compensation expense for
stock options |
| | | 698,000 | | 698,000 | ||||||||||||||||||
Non-cash change of control expense |
| | | (275,000 | ) | | (275,000 | ) | ||||||||||||||||
Net loss and comprehensive loss |
| | | | (5,522,000 | ) | (5,522,000 | ) | ||||||||||||||||
Net income attributable to minority interest
holders |
| | 390,000 | | | 390,000 | ||||||||||||||||||
Distributions to minority interest holders |
| | (458,000 | ) | | | (458,000 | ) | ||||||||||||||||
BALANCE, December 31, 2007 |
17,573,000 | $ | 176,000 | $ | 550,000 | $ | 175,506,000 | $ | (202,097,000 | ) | $ | (25,865,000 | ) | |||||||||||
Non-cash compensation expense for
stock options |
| | | 391,000 | | 391,000 | ||||||||||||||||||
Non-cash change of control income |
| | | 891,000 | | 891,000 | ||||||||||||||||||
Net income and comprehensive income |
| | | | 514,000 | 514,000 | ||||||||||||||||||
Net income attributable to minority interest
holders |
| | 408,000 | | | 408,000 | ||||||||||||||||||
Distributions to minority interest holders |
| | (496,000 | ) | | | (496,000 | ) | ||||||||||||||||
BALANCE, December 31, 2008 |
17,573,000 | $ | 176,000 | $ | 462,000 | $ | 176,788,000 | $ | (201,583,000 | ) | $ | (24,157,000 | ) | |||||||||||
Non-cash compensation expense for
stock options |
| | | 282,000 | | 282,000 | ||||||||||||||||||
Non-cash change of control income |
| | | 24,000 | | 24,000 | ||||||||||||||||||
Net loss and comprehensive loss |
| | | | (13,098,000 | ) | (13,098,000 | ) | ||||||||||||||||
Net income attributable to minority interest
holders |
| | 341,000 | | | 341,000 | ||||||||||||||||||
Distributions to minority interest holders |
| | (371,000 | ) | | | (371,000 | ) | ||||||||||||||||
BALANCE, December 31, 2009 |
17,573,000 | $ | 176,000 | $ | 432,000 | $ | 177,094,000 | $ | (214,681,000 | ) | $ | (36,979,000 | ) | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-67
Table of Contents
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net (loss) income |
$ | (13,098,000 | ) | $ | 514,000 | $ | (5,522,000 | ) | ||||
Adjustments to reconcile net (loss) income to net cash
provided by operating activities: |
||||||||||||
Change of control (income) expense |
(12,000 | ) | (77,000 | ) | 5,637,000 | |||||||
Gain on sale of nursing agency |
| | (3,001,000 | ) | ||||||||
Gain on sale of infusion branch |
(184,000 | ) | (2,000 | ) | | |||||||
Deferred tax expense |
4,190,000 | 4,367,000 | 3,474,000 | |||||||||
Depreciation and amortization |
25,690,000 | 30,187,000 | 34,440,000 | |||||||||
Bad debt expense |
3,517,000 | 4,635,000 | 9,240,000 | |||||||||
Stock compensation expense |
282,000 | 391,000 | 698,000 | |||||||||
Equity in earnings of unconsolidated joint ventures |
(3,395,000 | ) | (4,304,000 | ) | (3,852,000 | ) | ||||||
Minority interest |
341,000 | 408,000 | 390,000 | |||||||||
Change in assets and liabilities |
||||||||||||
Restricted cash |
| | 400,000 | |||||||||
Accounts receivable |
9,173,000 | 1,446,000 | 87,000 | |||||||||
Inventories |
(106,000 | ) | 506,000 | 691,000 | ||||||||
Prepaid expenses and other current assets |
3,188,000 | 3,236,000 | (8,669,000 | ) | ||||||||
Deferred revenue |
(969,000 | ) | (4,000 | ) | (832,000 | ) | ||||||
Accounts payable, other payables and accrued expenses |
(675,000 | ) | (9,003,000 | ) | (3,048,000 | ) | ||||||
Other assets and liabilities |
1,013,000 | (997,000 | ) | (1,724,000 | ) | |||||||
Due to or from unconsolidated joint ventures, net |
8,065,000 | 4,047,000 | 4,096,000 | |||||||||
Net cash provided by operating activities |
37,020,000 | 35,350,000 | 32,505,000 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Cash paid for additions to property and equipment, net |
(16,863,000 | ) | (21,126,000 | ) | (17,968,000 | ) | ||||||
Proceeds from sale of nursing agency, net |
| | 2,757,000 | |||||||||
Proceeds from sale of infusion branch |
271,000 | 338,000 | | |||||||||
Cash paid for acquisitions |
| | (407,000 | ) | ||||||||
Net cash used in investing activities |
$ | (16,592,000 | ) | $ | (20,788,000 | ) | $ | (15,618,000 | ) | |||
(Continued)
F-68
Table of Contents
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
(Continued)
2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Distributions to minority interest owners |
$ | (371,000 | ) | $ | (496,000 | ) | $ | (458,000 | ) | |||
Principal payments on long-term debt and capital leases |
(11,601,000 | ) | (11,322,000 | ) | (12,223,000 | ) | ||||||
Proceeds on short-term note payable |
413,000 | | 3,520,000 | |||||||||
Principal payments on short-term note payable |
(413,000 | ) | (274,000 | ) | (3,494,000 | ) | ||||||
Net cash used in financing activities |
(11,972,000 | ) | (12,092,000 | ) | (12,655,000 | ) | ||||||
INCREASE IN CASH AND CASH EQUIVALENTS |
8,456,000 | 2,470,000 | 4,232,000 | |||||||||
CASH AND CASH EQUIVALENTS, beginning of year |
13,488,000 | 11,018,000 | 6,786,000 | |||||||||
CASH AND CASH EQUIVALENTS, end of year |
$ | 21,944,000 | $ | 13,488,000 | $ | 11,018,000 | ||||||
SUPPLEMENTAL INFORMATION: |
||||||||||||
Cash payments of interest |
$ | 14,364,000 | $ | 16,443,000 | $ | 16,884,000 | ||||||
Cash payments of income taxes |
$ | 293,000 | $ | 657,000 | $ | 610,000 | ||||||
Non-Cash Activity: |
||||||||||||
Capital leases entered into for property and equipment |
$ | 6,414,000 | $ | 1,222,000 | $ | 5,376,000 | ||||||
Changes in accounts payable related to purchases of
property and equipment |
$ | 196,000 | $ | (1,285,000 | ) | $ | (65,000 | ) | ||||
Change of control: |
||||||||||||
Other liabilities |
$ | 36,000 | $ | 968,000 | $ | 5,912,000 | ||||||
Additional paid-in capital |
$ | 24,000 | $ | 891,000 | $ | (275,000 | ) | |||||
Supplemental Disclosure of Investing Activities: |
||||||||||||
Disposition: |
||||||||||||
Gain on sale |
$ | 184,000 | $ | 2,000 | $ | 3,001,000 | ||||||
Inventories sold |
87,000 | 321,000 | 16,000 | |||||||||
Property and equipment, net, sold |
| 15,000 | 50,000 | |||||||||
Promissory note received from sale of nursing agency |
| | (310,000 | ) | ||||||||
Proceeds from sale |
$ | 271,000 | $ | 338,000 | $ | 2,757,000 | ||||||
Acquisition: |
||||||||||||
Rental equipment acquired |
$ | | $ | | $ | 113,000 | ||||||
Inventory acquired |
| | 35,000 | |||||||||
Goodwill acquired |
| | 259,000 | |||||||||
Cash paid for acquisition |
$ | | $ | | $ | 407,000 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-69
Table of Contents
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
1. ORGANIZATION AND BACKGROUND
American HomePatient, Inc. and subsidiaries (the Company or American HomePatient) 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, 2009, the Company provides these services to patients, primarily in the home, through
241 centers in 33 states.
2. GOING CONCERN AND LIQUIDITY
The accompanying financial statements have been prepared assuming the Company will continue as
a going concern. The Company has long-term debt of $226.4 million (the Secured Debt) at December
31, 2009, which was due to be repaid in full on August 1, 2009, as evidenced by a promissory note
to the agent for the Companys lenders (the Lenders) under a previous senior debt facility that
is secured by substantially all of the Companys assets. Highland Capital Management, L.P.
controls a majority of the Secured Debt. The entire amount of the Secured Debt is included in
current portion of long-term debt and capital leases at December 31, 2009. A series of forbearance
agreements have been entered into by and among the Company, NexBank, SSB (the Agent), and a
majority of the senior debt holders (the Forbearance Holders). The parties to the forbearance
agreements have agreed to not exercise, prior to the expiration of the term of the agreement, any
of the rights or remedies available to them as a result of the Companys failure to repay the
Secured Debt on the maturity date. The current forbearance agreement was effective February 12,
2010 and expires March 16, 2010. The Companys cash flow from operations and existing cash were
not sufficient to repay the Secured Debt by the maturity date, and the Company was unable to
refinance the Secured Debt by the maturity date. As a result, the Company must refinance the debt,
extend the maturity, restructure or make other arrangements, some of which could have a material
adverse effect on the value of the Companys common stock. Given the unfavorable conditions in the
current debt market, the Company believes that third-party refinancing of the debt will not be
possible at this time, which raises substantial doubt about the Companys ability to continue as a
going concern. There can be no assurance that any of the Companys efforts to address the debt
maturity issue can be completed on favorable terms or at all. Other factors, such as uncertainty
regarding the Companys future profitability could also limit the Companys ability to resolve the
debt maturity issue. Subject to the limitations provided by the forbearance agreement, the
Companys Lenders have the right to foreclose on substantially all assets of the Company, and this
would have a material adverse effect on the Companys liquidity, financial condition, and the value
of the Companys common stock.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its
majority-owned subsidiaries. In accordance with the Variable Interest Entity Subsections of FASB
ASC Subtopic 810-10 Consolidation-Overall (FASB Interpretation No. 46(R), Consolidation of Variable
Interest Entities), the Company must also consolidate any variable interest entities (VIEs) of
which it is the primary beneficiary, as defined. When the Company does not have a controlling
interest in an entity, but exerts significant influence over the entity, the Company applies the
equity method of accounting. Investments in 50% owned joint ventures are accounted for using the
equity method, and the results of 70% owned joint ventures are consolidated in the accompanying
consolidated financial statements. All significant intercompany accounts and transactions have
been eliminated in consolidation.
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The Company evaluated subsequent events through March 4, 2010, the date of the issuance of the
Companys condensed consolidated financial statements.
The Company has not identified any variable interest entities at December 31, 2009 or 2008, for
which consolidation is required.
Revenues
The Companys principal business is to provide home health care services and products to
patients, primarily in the home. Approximately 58% of the Companys revenues in 2009, 60% of the
Companys revenue in 2008 and 61% of the Companys revenue in 2007 are from participation in
Medicare and state Medicaid programs. Amounts paid under these programs are generally based upon
fixed rates. Revenues are recorded at the expected reimbursement rates when the services are
provided, merchandise delivered or equipment rented to patients. Revenues are recorded at net
realizable amounts estimated to be paid by customers and third-party payors. Although amounts
earned under the Medicare and Medicaid programs are subject to review by such third-party payors,
subsequent adjustments to reimbursements as a result of such reviews are historically insignificant
as these reimbursements are based on fixed fee schedules. In the opinion of management, adequate
provision has been made for any adjustment that may result from such reviews. Any differences
between estimated settlements and final determinations are reflected as a reduction to revenue in
the period known.
Sales revenues and related services include all product sales to patients and are derived from the
sale of aerosol medications and respiratory therapy equipment, the provision of infusion therapies,
the sale of home health care equipment and medical supplies, and the sale of supplies and the
provision of services related to the delivery of these products. Sales revenues are recognized at
the time of delivery and recorded at the expected payment amount based upon the type of product and
the payor. Rentals and other patient revenues are derived from the rental of equipment related to
the provision of respiratory therapy, home health care equipment, and enteral pumps. All rentals
of the equipment are provided by the Company on a month-to-month basis and revenue is recorded at
the expected payment amount based upon the type of rental and the payor. Certain pieces of
equipment are subject to capped rental arrangements, whereby title to the equipment transfers to
the patient at the end of the capped rental payment period.
Once initial delivery of rental equipment is made to the patient, a monthly billing cycle is
established based on the initial date of delivery. The Company recognizes rental revenue ratably
over the monthly service period and defers revenue for the portion of the monthly bill which is
unearned. The fixed monthly rental encompasses the rental of the product, delivery, set-up,
instruction, maintenance, repairs, and providing backup systems when needed, and as such, no
separate revenue is earned from the initial equipment delivery and setup process. Routine
maintenance and servicing of the equipment is the responsibility of the Company for as long as the
patient is renting the equipment.
Sales taxes collected from customers and remitted to governmental authorities are accounted for on
a net basis and therefore are excluded from revenues in the consolidated statements of operations.
The following table sets forth the percentage of revenues represented by each line of business for
the periods presented:
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Home respiratory therapy services
|
84 | % | 81 | % | 78 | % | ||||||
Home infusion therapy services
|
9 | 10 | 11 | |||||||||
Home medical equipment and home health supplies
|
7 | 9 | 11 | |||||||||
Total
|
100 | % | 100 | % | 100 | % | ||||||
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Cash Equivalents
Cash equivalents at December 31, 2009 and 2008 consist of overnight repurchase agreements with
an original term of less than three months. The Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash equivalents.
Restricted Cash
Restricted cash at December 31, 2009 and 2008 consists of one certificate of deposit, which is
used as collateral for a letter of credit associated with the Companys professional liability
insurance.
Accounts Receivable
The Company provides credit for a substantial portion of its non third-party reimbursed
revenues and continually monitors the credit worthiness and collectibility of amounts due from its
patients. The Company recognizes revenues at the time services are performed or products
delivered. A portion of patient receivables consists of unbilled receivables for which the Company
has not obtained all of the necessary medical documentation, but has provided the service or
equipment. The Company determines its allowance for doubtful accounts based upon the type of
receivable (billed or unbilled) as well as the age of the receivable. As a receivable balance
ages, an increasingly larger allowance is recorded for the receivable. Historical collections
substantiate the percentages of aged receivables for which an allowance is established. Account
balances are charged off against the allowance after all means of collection have been exhausted
and the potential for recovery is considered remote. The Company does not have any off-balance
sheet credit exposure related to its customers.
Inventory
Inventory consists of certain equipment and supplies which are priced at the lower of cost (on
a first-in, first-out basis) or market value. The Company recognizes cost of sales and relieves
inventory at estimated amounts on an interim basis based upon the type of product sold and payor
mix, and performs physical counts of inventory at each branch on an annual basis. Any resulting
adjustment from these physical counts is charged to cost of sales. The allowance established by
management for the valuation of inventory consists of an allowance for obsolete and slow moving
items.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at December 31, 2009 and 2008 are primarily
comprised of prepaid insurance premiums and include other deposits from which the Company expects
to benefit within the next year. At December 31, 2009 and 2008, prepaid insurance premiums
comprised $2,872,000 and $3,136,000 of prepaid expenses and other current assets, respectively.
Property and Equipment
Property and equipment are stated at cost and are depreciated or amortized primarily using the
straight-line method over the estimated useful lives of the assets for financial reporting purposes
and the accelerated cost recovery method for income tax reporting purposes. Assets under capital
leases and leasehold improvements under operating leases are amortized and depreciated over the
lesser of their estimated useful life or the base term of the lease for financial reporting
purposes. The estimated useful lives are as follows: buildings and improvements, 25 years; rental
equipment, 18 months to 5 years; furniture, fixtures and equipment, 4-7 years; leasehold
improvements, 3-5 years; and delivery equipment, 3 years.
Equipment is rented to patients on a month-to-month basis for use in their homes and is depreciated
over the equipments estimated useful life to the Company. On an annual basis the Company performs
physical counts of rental equipment on hand at each branch and reconciles all recorded rental
assets to internal billing reports. Any resulting adjustment for unlocated, damaged, or obsolete
equipment is charged to rental
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equipment depreciation expense. Since rental equipment is maintained in the patients home, the
Company is subject to loss resulting from lost equipment as well as losses for damaged, outdated,
or obsolete equipment. Management records a valuation allowance for its estimated lost, damaged,
outdated, or obsolete rental equipment based upon analytical data derived from the Companys
automated asset management system.
Maintenance and repairs are charged to expense as incurred, and major betterments and improvements
are capitalized. The cost and accumulated depreciation of assets sold or otherwise disposed of are
removed and the resulting gain or loss is reflected in the consolidated statements of operations.
Property and equipment obtained through purchase acquisitions are stated at their estimated fair
value determined on their respective dates of acquisition.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by the amount in which
the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are
separately presented in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal
group classified as held for sale would be presented separately in the appropriate asset and
liability sections of the balance sheet.
Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and separately recognized.
Goodwill is reviewed for impairment at least annually in accordance with the provisions of FASB ASC
Topic 350, Intangibles Goodwill and Other (Statement No. 142, Goodwill and Other Intangible
Assets). The Company has selected September 30 as its annual testing date. An impairment loss is
recognized to the extent that the carrying amount exceeds the assets fair value. This
determination is made at the reporting unit level and consists of two steps. First, the Company
determines the fair value of the reporting unit and compares it to its carrying amount. Second, if
the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized
for any excess of the carrying amount of the units goodwill over the implied fair value of that
goodwill. The implied fair value of goodwill is determined by allocating the fair value of the
reporting unit in a manner similar to a purchase price allocation. The residual fair value after
this allocation is the implied fair value of the reporting unit goodwill.
The liabilities of the Company continue to exceed its assets resulting in a negative carrying value
of approximately $37.0 million at December 31, 2009. The equity based fair value of the Company
and its one reporting unit is approximately $2.3 million at December 31, 2009. Accordingly, the
Companys fair value exceeds its carrying value as of December 31, 2009 and, by definition, no
goodwill impairment is indicated. As long as the Company has a negative carrying value and has a
positive fair value (market capitalization), goodwill impairment will not be indicated pursuant to
ASC 350, which states if the fair value of a reporting unit exceeds its carrying amount, goodwill
of the reporting unit is considered not impaired.
The Company is currently working toward a resolution of its debt maturity issue (see Note 2). If
the resolution of this issue includes additional equity resulting in a positive carrying value of
the Company and the positive carrying value exceeds the fair value of the reporting unit, goodwill
of the Company in the amount of $122.1 million at December 31, 2009 may be partially or completely
impaired at that time.
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Investments in Unconsolidated Joint Ventures
Investments in unconsolidated joint ventures of nine companies are accounted for by the equity
method. The Company would recognize an impairment when there is a loss in value in the equity
method investment which is determined to be an other than temporary decline.
Other Assets
Other assets include deposits with vendors and lessors which total $8,043,000 and $9,116,000
as of December 31, 2009 and 2008, respectively. The Company also has other assets of $8,352,000
and $8,141,000 at December 31, 2009 and 2008, respectively, relating to life insurance arrangements
that were recorded in connection with the prior acquisitions of certain home health care businesses
and life insurance arrangements assigned to the Company by former employees. The majority of these
assets are recorded at the amount to be received discounted over the remaining life expectancy of
the insured. These amounts are reflected in other assets in the accompanying consolidated balance
sheets.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and the tax credit carryforwards. Deferred tax assets and liabilities are
measured using the expected tax rates that will be in effect when the differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely
than not of being sustained. Recognized income tax positions are measured at the largest amount
that is greater than 50% likely of being realized. Changes in recognition or measurement are
reflected in the period in which the change in judgment occurs.
The Companys policy for recording interest and penalties associated with audits is to record such
items as an other expense and not as a component of income tax expense.
Stock Based Compensation
Stock-based compensation costs are based on the estimated fair value of the respective options
and the proportion vesting in the period. Deductions for stock-based employee compensation are
calculated using the Black-Scholes option-pricing model. Allocation of compensation expense is
made using historical option terms for option grants made to the Companys employees and historical
Company stock price volatility since the emergence from bankruptcy.
There were 485,000 options granted during the first quarter ended March 31, 2008. The estimated
fair value of these options was $0.76 per share using the Black-Scholes option-pricing model with
the following assumptions: dividend yield of 0%; expected volatility of 97%; expected life of 5
years; and risk-free interest rate of 2.92%. There were 10,000 options granted on June 4, 2008.
The estimated fair value of these options was $0.62 per share using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of
94%; expected life of 5 years; and risk-free interest rate of 3.26%. There were 30,000 options
granted on June 9, 2008. The estimated fair value of these options was $0.67 per share using the
Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected
volatility of 94%; expected life of 5 years; and risk-free interest rate of 3.41%. There were no
options granted during the third quarter ended September 30, 2008. There were 40,000 options
granted on December 31, 2008. The estimated fair value of these options was $0.09 per share using
the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%;
expected volatility of 98%; expected life of 5 years; and risk-free interest rate of 1.55%.
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There were 415,000 options granted during the first quarter ended March 31, 2009. The estimated fair value of these options was $0.17 per share using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 101%; expected life of 5 years; and risk-free interest rate of 2.06%. There were no options granted during the second or third quarters of 2009. There were 40,000 options granted on December 31, 2009. The estimated fair value of these options was $0.10 per share using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 98%; expected life of 5 years; and risk-free interest rate of 2.69%. | ||
The Company recognized $282,000 and $391,000 of stock-based compensation expense during the years ended December 31, 2009 and 2008, respectively. | ||
Under the 1991 Nonqualified Stock Option Plan (the 1991 Plan), as amended, 5,500,000 shares of the Companys common stock have been reserved for issuance upon exercise of options granted thereunder. The maximum term of any option granted pursuant to the 1991 Plan is ten years. Shares subject to options granted under the 1991 Plan which expire, terminate or are canceled without having been exercised in full become available again for future grants. | ||
Segment Disclosures | ||
Public business enterprises or other enterprises that are required to file financial statements with the Securities and Exchange Commission (SEC) are required to report information about operating segments in annual financial statements and report selected information about operating segments in interim financial reports. Certain disclosures about products and services, geographic areas, and major customers are also required. The Company manages its business as one operating segment. | ||
Comprehensive Income (Loss) | ||
The Company did not have any components of comprehensive income (loss) other than net income (loss) in all periods presented. | ||
Use of Estimates | ||
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the valuation of accounts receivable, inventory, goodwill, deferred tax assets and liabilities, and deferred revenue; the carrying amount of property and equipment; and the amount of self insurance accruals for healthcare, vehicle, and workers compensation claims. Actual results could differ from those estimates. | ||
Fair Value Measurements | ||
On January 1, 2008, the Company adopted the provisions of FASB Statement No. 157, Fair Value Measurements, included in ASC Topic 820, Fair Value Measurements and Disclosures, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Statement 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 (Statement 157) also establishes a framework for measuring fair value and expands disclosures about fair value measurements. | ||
On January 1, 2009, the Company adopted the provisions of ASC Topic 820 (Statement 157) to fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. |
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Management utilizes quoted market prices or pricing information of similar instruments to estimate the fair value of financial instruments. The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximate fair value because of the short-term nature of these items. | ||
At December 31, 2009 and 2008, it was not practicable to estimate the fair value of the Companys Secured Debt because of the August 1, 2009 maturity date and no market existed for comparable debt instruments and because of the Companys inability to estimate the fair value without incurring excessive costs. | ||
Fair Value Option | ||
Effective January 1, 2008, the Company adopted the Fair Value Option provisions of the Subsections of ASC Subtopic 825-10, Financial Instruments Overall, included in FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. ASC Subtopic 825-10 (Statement 159) gives the Company the irrevocable option to report most financial assets and financial liabilities at fair value on an instrument-by-instrument basis, with changes in fair value reported in earnings. Adoption of ASC Subtopic 825-10 did not impact the Companys financial position and results of operations. | ||
Reclassifications | ||
Certain reclassifications of prior year amounts related to presentation of net income attributable to noncontrolling interests have been made to conform to the current year presentation. The reclassifications did not affect net income attributable to the Company for any prior period. | ||
Recently Issued Accounting Standards | ||
The FASB issued Accounting Standards Update (ASU) 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets (FASB Statement No. 166, Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140) in December 2009. ASU 2009-16 removes the concept of a qualifying special-purpose entity (QSPE) from Accounting Standards Codification (ASC) Topic 860, Transfers and Servicing, and the exception from applying ASC 810-10 to ASPEs, thereby requiring transferors of financial assets to evaluate whether to consolidate transferees that previously were considered QSPEs. Transferor-imposed constraints on transferees whose sole purpose is to engage in securitization or asset-backed financing activities are evaluated in the same manner under the provisions of the ASU as transferor-imposed constraints on QSPEs were evaluated under the provisions of Topic 860 prior to the effective date of the ASU when determining whether a transfer of financial assets qualifies for sale accounting. The ASU also clarifies the Topic 860 sale-accounting criteria pertaining to legal isolation and effective control and creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale. The ASU is effective for periods beginning after December 15, 2009, and may not be early adopted. The Company expects that the adoption of ASU 2009-16 will not have a material impact on its consolidated financial statements. |
The FASB issued ASU 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R)) in December 2009. ASU 2009-17, which amends the Variable Interest Entity (VIE) Subsections of ASC Subtopic 810-10, Consolidation Overall, revises the test for determining the primary beneficiary of a VIE from a primarily quantitative risks and rewards calculation based on the VIEs expected losses and expected residual returns to a primarily qualitative analysis based on identifying the party or related-party group (if any) with (a) the power to direct the activities that most significantly impact the VIEs economic performance and (b) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. The ASU requires kick-out rights and participating rights to be ignored in evaluating whether a variable interest holder meets the power criterion unless those rights are unilaterally exercisable by a single party or related party group. The ASU also revises the criteria for determining whether fees paid by an entity to a decision maker or another service provider are a variable interest in the entity and revises the Topic 810 scope characteristic that identifies an entity as a VIE if the |
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equity-at-risk investors as a group do not have the right to control the entity through their equity interests to address the impact of kick-out rights and participating rights on the analysis. Finally, the ASU adds a new requirement to reconsider whether an entity is a VIE if the holders of the equity investment at risk as a group lose the power, through the rights of those interests, to direct the activities that most significantly impact the VIEs economic performance, and requires a company to reassess on an ongoing basis whether it is deemed to be the primary beneficiary of a VIE. ASU 2009-17 is effective for periods beginning after December 15, 2009 and may not be early adopted. Adoption of ASU 2009-17 will result in the Company consolidating its 50%-owned joint ventures beginning January 1, 2010. |
In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (EITF Issue No. 08-1, Revenue Arrangements with Multiple Deliverables). ASU 2009-13 amends ASC 650-25 to eliminate the requirement that all undelivered elements have vendor specific objective evidence of selling price (VSOE) or third party evidence of selling price (TPE) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. In the absence of VSOE and TPE for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. The overall arrangement fee will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entitys estimated selling price. Application of the residual method of allocating an overall arrangement fee between delivered and undelivered elements will no longer be permitted upon adoption of ASU 2009-13. Additionally, the new guidance will require entities to disclose more information about their multiple-element revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company expects that the adoption of ASU 2009-13 will not have a material impact on its consolidated financial statements. |
4. | DISCONTINUED OPERATIONS | |
Effective April 1, 2007, the Company sold the assets of its home nursing business located in Tallahassee, Florida to Amedisys Home Health, Inc. of Florida. The sales price was $3.1 million, of which $2.8 million was received in cash at closing, with the remainder to be received according to the terms of a promissory note. The Company recorded a gain in the second quarter of 2007 of $3.0 million associated with this sale. The cash and note proceeds from this transaction were utilized to pay down long-term debt. | ||
Since the Company exited its home nursing line of business, the Company has presented the nursing business as discontinued operations in 2008 and 2007, with comparable presentation for prior years. |
5. | CHANGE OF CONTROL | |
On April 13, 2007, Highland Capital Management, L.P. filed a Schedule 13D/A with the Securities and Exchange Commission reporting beneficial ownership of 8,437,164 shares of Company common stock, which represented approximately 48% of the outstanding shares of the Company as of that date. Under the terms of the employment agreement between the Company and Joseph F. Furlong, III, the Companys chief executive officer, the acquisition by any person of more than 35% of the Companys shares constitutes a change of control. Under Mr. Furlongs employment agreement, this event gave Mr. Furlong the right to receive a lump sum payment in the event he or the Company terminated his employment within one year after the change of control. The Company accrued a liability for this potential payment in the second quarter of 2007 since the ultimate requirement to make this payment was outside of the Companys control. As such, the Company recorded an expense of $6.6 million in the second quarter of 2007, which was shown as change of control expense in the consolidated statements of operations, and a liability in the amount of $6.9 million, which was reflected in other accrued expenses on the consolidated balance sheets. These items were comprised of 300% of Mr. Furlongs current year salary and maximum bonus, immediate vesting of all unvested options, the buyout of outstanding options, reimbursement of certain personal tax obligations associated with the lump sum payment, as well as payment of certain insurance for up to 3 years after termination and office administrative expenses for up to one year after termination. |
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The Company also established an irrevocable trust in the second quarter of 2007 to pay the various components of the change of control obligation. During the remainder of 2007, the Company reduced the change of control expense and related liability by $1.0 million due to revaluation of the fair value of Mr. Furlongs outstanding stock options as of December 31, 2007. This decrease in expense is the result of a decline in the market value of the Companys common stock at December 31, 2007. | ||
On December 21, 2007, Mr. Furlongs employment agreement was amended. Per the terms of the amendment, Mr. Furlong received a $3.3 million lump sum payment on January 4, 2008 to induce him to continue his employment with the Company. This payment was made from the irrevocable trust and reduced the Companys change of control liability. The payment was in lieu of certain amounts Mr. Furlong would otherwise be entitled to under the amended employment agreement if his employment with the Company had terminated. On May 1, 2008, as required for federal and state payroll tax purposes, the Company withheld for remittance to tax authorities approximately $1.5 million. This was the amount due to be reimbursed by the Company to Mr. Furlong for the tax liabilities he incurred in connection with the compensation he received following the change of control as stipulated in his amended employment agreement. The tax liabilities were related to federal excise taxes due on the lump sum payment pursuant to IRS Section 280G. This payment was primarily made from the irrevocable trust. The amended employment agreement also stipulated that all of Mr. Furlongs stock options were deemed vested and exercisable as of January 2, 2008, and capped the potential buyout of outstanding options at $1.4 million. The $1.4 million is maintained in the irrevocable trust until these options expire or until 90 days after Mr. Furlongs termination, whichever occurs first. In addition, the amendment stipulated the Company will pay for office administrative expenses for up to 6 months after termination instead of up to one year as originally agreed. The amendment also stipulated that certain insurance will be continued after termination only until January 1, 2011. | ||
On November 26, 2008, the Company executed a new employment agreement with Mr. Furlong (the New Employment Agreement), which replaced the prior employment agreement between Mr. Furlong and the Company. The provisions of the New Employment Agreement are retroactive to November 1, 2008. The New Employment Agreement memorializes the terms of the prior employment agreement (as amended) without change with the addition of the termination provision described below and certain clarifying changes to the related definitions. | ||
Under the New Employment Agreement, if Mr. Furlongs employment terminates due to a without cause termination or constructive discharge (as defined in the New Employment Agreement), then Mr. Furlong will receive: (i) an amount equal to the sum of 100% of his base salary plus 100% of his target annual incentive award for the year of termination; and (ii) his pro rata target annual incentive award for the year of termination. | ||
During the year ended December 31, 2009 the Company reduced its change of control expense by $12,000, as a result of the reduction of the liability associated with the Companys obligation to pay certain insurance for Mr. Furlong until January 1, 2011. At December 31, 2009 and December 31, 2008 the irrevocable trust had a balance of $1.4 million and was reflected in prepaid expenses and other current assets on the consolidated balance sheets. |
6. | FAIR VALUE MEASUREMENTS AND FAIR VALUE OPTION | |
The Company adopted ASC Topic 820 (Statement 157) on January 1, 2008 for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. On January 1, 2009, the Company adopted the provisions of ASC Topic 820 (Statement 157) for fair value measurements of nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. ASC Topic 820 (Statement 157) establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows: |
| Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
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| Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. | ||
| Level 3 inputs are unobservable inputs for the asset or liability. |
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety. | ||
The following is a description of the valuation methodology used for financial assets measured at fair value, including the general classification of such assets pursuant to the valuation hierarchy. | ||
Money Market Accounts The Company currently has cash, overnight purchase agreements, and an irrevocable trust that are primarily invested in money market funds. These items are classified as Level 1 because fair value is determined by quoted market prices in an active market. | ||
At December 31, 2009 and 2008, it was not practicable to estimate the fair value of the Companys Secured Debt because of the August 1, 2009 maturity date and no market existed for comparable debt instruments and because of the Companys inability to estimate the fair value without incurring excessive costs. |
7. | INVESTMENT IN JOINT VENTURES | |
The Company owns 50% of nine home health care businesses, and 70% of two home health care businesses as of December 31, 2009 and 2008 (the Joint Ventures). The remaining ownership percentage of each joint venture is owned by local hospitals or other investors within the same community. Under management agreements, the Company is responsible for the management of these businesses and receives fixed monthly management fees or monthly management fees based upon a percentage of net revenues, net income or cash collections. The operations of the two 70% owned joint ventures are consolidated with the operations of the Company. The operations of the nine 50% owned joint ventures are not consolidated with the operations of the Company and are accounted for by the Company under the equity method of accounting. | ||
The Company provides accounting and receivable billing services to the joint ventures. The joint ventures are charged for their share of such costs based on contract terms. The Companys earnings from unconsolidated joint ventures include equity in earnings of 50% owned joint ventures, management fees and fees for accounting and receivable billing services. Management fees and fees for accounting and receivable billing services were approximately $1,848,000, $1,897,000, and $1,902,000 for 2009, 2008, and 2007, respectively. The Companys investment in unconsolidated joint ventures includes payables to joint ventures totaling $3,046,000 as of December 31, 2009 and receivables from joint ventures totaling $582,000 as of December 31, 2008. Minority interest represents the outside partners 30% ownership interests in the consolidated joint ventures, and totals $432,000 and $462,000 as of December 31, 2009 and 2008, respectively. |
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Summarized financial information of the nine 50% owned joint ventures at December 31, 2009 and 2008 and for each of the years in the three year period ending December 31, 2009 is as follows: |
2009 | 2008 | 2007 | ||||||||||
Cash |
$ | 1,669,000 | $ | 5,343,000 | ||||||||
Accounts receivable, net |
3,594,000 | 4,947,000 | ||||||||||
Property and equipment, net |
3,534,000 | 3,683,000 | ||||||||||
Other assets |
6,028,000 | 3,233,000 | ||||||||||
Total assets |
$ | 14,825,000 | $ | 17,206,000 | ||||||||
Accounts payable and accrued expenses |
$ | 893,000 | $ | 1,283,000 | ||||||||
Partners capital |
13,932,000 | 15,923,000 | ||||||||||
Total liabilities and partners capital |
$ | 14,825,000 | $ | 17,206,000 | ||||||||
Net sales and rental revenues |
$ | 33,507,000 | $ | 35,511,000 | $ | 35,969,000 | ||||||
Cost of sales and rentals, including rental depreciation |
10,106,000 | 9,632,000 | 9,409,000 | |||||||||
Operating and management fees |
16,303,000 | 16,938,000 | 18,683,000 | |||||||||
Depreciation, excluding rental equipment, amortization and
interest expense |
122,000 | 143,000 | 169,000 | |||||||||
Total expenses |
26,531,000 | 26,713,000 | 28,261,000 | |||||||||
Pre-tax income |
$ | 6,976,000 | $ | 8,798,000 | $ | 7,708,000 | ||||||
8. | ACCOUNTS RECEIVABLE | |
The Companys accounts receivable consist of the following components: |
December 31, | ||||||||
2009 | 2008 | |||||||
Patient receivables: |
||||||||
Medicare and related copay portions |
$ | 10,630,000 | $ | 16,764,000 | ||||
All other, principally commercial insurance companies, and
related copay portions |
18,617,000 | 27,389,000 | ||||||
29,247,000 | 44,153,000 | |||||||
Other receivables, principally due from vendors and former
owners of acquired businesses |
520,000 | 777,000 | ||||||
Total accounts receivable |
29,767,000 | 44,930,000 | ||||||
Less: Allowance for doubtful accounts |
3,396,000 | 5,869,000 | ||||||
Accounts receivable, net |
$ | 26,371,000 | $ | 39,061,000 | ||||
Of the patient receivables, $4.6 million and $6.5 million are unbilled as of December 31, 2009 and 2008, respectively. |
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9. | PROPERTY AND EQUIPMENT | |
Property and equipment, at cost, consists of the following: |
December 31, | ||||||||
2009 | 2008 | |||||||
Land |
51,000 | 51,000 | ||||||
Buildings and improvements |
5,162,000 | 4,909,000 | ||||||
Rental equipment |
81,327,000 | 90,658,000 | ||||||
Furniture, fixtures and equipment |
39,862,000 | 38,793,000 | ||||||
Delivery equipment |
148,000 | 192,000 | ||||||
$ | 126,550,000 | $ | 134,603,000 | |||||
Depreciation expense was $25.3 million, $29.7 million, and $34.0 million for the years ended December 31, 2009, 2008, and 2007, respectively. | ||
Property and equipment under capital leases are included under the various equipment categories. As of December 31, 2009 and 2008, gross property held under capital leases totals $8,630,000 and $4,324,000, respectively, and related accumulated amortization was $3,795,000 and $2,741,000, respectively. | ||
Rental equipment is net of valuation allowances of $895,000 and $890,000 at December 31, 2009 and 2008, respectively. | ||
As of December 31, 2009 and 2008, respectively, accumulated depreciation includes $57,528,000 and $64,889,000 of accumulated depreciation related to rental equipment. | ||
Additions to property and equipment consist primarily of medical equipment rented to patients, computer equipment, office equipment, leasehold improvements, and furniture and fixtures. Additions to property and equipment, net, were $16.9 million, $21.1 million, and $18.0 million for the years ended December 31, 2009, 2008, and 2007, respectively. In addition to these cash outlays, the Company also acquired equipment by entering into capital leases of $6.4 million, $1.2 million, and $5.4 million for the years ended December 31, 2009, 2008, and 2007, respectively. |
10. | GOODWILL | |
The changes in the carrying amount of goodwill are as follows: |
Balance at December 31, 2009 and 2008 |
$ | 122,093,000 | ||
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11. | DEBT AND CAPITAL LEASES | |
At December 31, 2009 and 2008 debt and capital lease obligations consist of the following: |
December 31, | ||||||||
2009 | 2008 | |||||||
Debt which is secured by substantially all assets of the Company
and was due August 1, 2009. As a result of the Approved Plan,
the secured debt bears interest at 6.785%, payable monthly |
$ | 226,358,000 | $ | 233,569,000 | ||||
Capital lease obligations, monthly payments until 2011 |
2,765,000 | 741,000 | ||||||
Total debt and capital leases |
229,123,000 | 234,310,000 | ||||||
Less: current portion |
(229,120,000 | ) | (234,259,000 | ) | ||||
Debt and capital leases, less current portion |
$ | 3,000 | $ | 51,000 | ||||
The Approved Plan provides that principal is payable annually on the secured debt on March 31 of each year in the amount of the Companys Excess Cash Flow (defined in the Approved Plan as cash in excess of $7.0 million at the end of the Companys fiscal year) for the previous fiscal year, with an estimated prepayment due on each previous September 30 in an amount equal to one-half of the anticipated March payment. The Companys remaining Excess Cash Flow payment due after computing the actual 2007 Excess Cash Flow was $4.0 million, which was paid on March 31, 2008. On September 30, 2008, the Company made a payment of $5.0 million, which was one-half of the estimated 2008 Excess Cash Flow. The Company made a principal payment of $6.5 million on March 31, 2009 which represented the remaining Excess Cash Flow payment due on that date based on actual Excess Cash Flow as of December 31, 2008. Since the maturity date, the Company continues to pay interest on a monthly basis consistent with the original terms of the Secured Debt. | ||
A series of forbearance agreements have been entered into by and among the Company, the Agent for the Companys lenders, and certain Forbearance Holders. The parties to the forbearance agreements have agreed to not exercise, prior to the expiration of the term of the agreement, any of the rights or remedies available to them as a result of the Companys failure to repay the Secured Debt on the maturity date. The current forbearance agreement was effective February 12, 2010 and expires March 16, 2010. | ||
The Company has certain debt covenants that restrict the transfer or sale of collateral other than in the ordinary course of business without written consent, or allowing other non-permitted liens on the collateral. |
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Capital Leases | ||
The Company leases certain equipment under capital leases. Future minimum rental payments required on capital leases beginning January 1, 2010 are as follows: |
2010 |
$ | 2,763,000 | ||
2011 |
3,000 | |||
2,766,000 | ||||
Less amounts representing interest ranging from 1.9%
to 4.3% |
(1,000 | ) | ||
$ | 2,765,000 | |||
12. | COMMITMENTS AND CONTINGENCIES |
Operating Lease Commitments
The Company has noncancelable operating leases on certain land, vehicles, buildings and
equipment. Some of the leases contain renewal options and require the Company to pay all executory
costs such as maintenance. The Company accounts for operating leases on a straight-line basis over
the base term of the leases, with the difference between actual lease payments and straight-line
expenses over the lease term included in deferred rent. The minimum future rental commitments on
noncancelable operating leases (with initial or remaining lease terms in excess of one year), net
of sublease proceeds, for the next five years and thereafter beginning January 1, 2009 are as
follows:
Minimum Lease | Sublease | Net Lease | ||||||||||
Payments | Proceeds | Commitments | ||||||||||
2010 |
$ | 6,529,000 | $ | (104,000 | ) | $ | 6,425,000 | |||||
2011 |
3,755,000 | (65,000 | ) | 3,690,000 | ||||||||
2012 |
1,517,000 | | 1,517,000 | |||||||||
2013 |
314,000 | | 314,000 | |||||||||
2014 |
| | | |||||||||
$ | 12,115,000 | $ | (169,000 | ) | $ | 11,946,000 | ||||||
Rent expense for all operating leases was approximately $10,427,000, $12,110,000, and $13,591,000
in 2009, 2008, and 2007, respectively.
Litigation
The Company is subject to certain known or possible litigation incidental to the Companys
business, which, in managements opinion, will not have a material adverse effect on the Companys
results of operations or financial condition.
The Company maintains insurance for general liability, director and officer liability and property.
Certain policies are subject to deductibles. In addition to the insurance coverage provided, the
Company indemnifies certain officers and directors for actions taken on behalf of the Company.
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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 from one-half to two times their annual compensation (including bonus and certain benefits in some instances) in the event of a termination without cause, a constructive discharge (as defined in the employment agreements) or upon a change in control of the Company (as defined in the employment agreements). The terms of such agreements automatically renew for one year unless notice is given pursuant to the terms thereof. The maximum contingent liability under these agreements at December 31, 2009 is approximately $4,838,000. | ||
Self-Insurance | ||
Self-insurance accruals primarily represent the accrual for self-insurance or large deductible risks associated with workers compensation insurance, vehicle liability, commercial general and professional liability insurance. The Company is insured for workers compensation and vehicle liability but retains the first $250,000 of risk exposure for each claim. The Company did not maintain annual aggregate stop loss coverage for the years 2009, 2008 and 2007, as such coverage was not economically available. The Companys liability includes known claims and an estimate of claims incurred but not yet reported. The estimated liability for workers compensation claims totaled approximately $2,978,000 and $3,113,000 as of December 31, 2009 and 2008, respectively. The estimated liability for vehicle claims totaled approximately $1,048,000 and $1,153,000 as of December 31, 2009 and 2008, respectively. The estimated total liability for commercial general and professional liability claims was $396,000 and $493,000 as of December 31, 2009 and 2008, respectively. The Company utilizes analyses prepared by a third-party administrator based on historical claims information to determine the required accrual and related expense associated with workers compensation, vehicle liability, commercial general and professional liability insurance. The Company records claims expense by plan year based on the lesser of the aggregate stop loss (if applicable) or the developed losses as calculated by the third-party administrator. | ||
The Company is also self-insured for health insurance for substantially all employees for the first $150,000 on a per person, per year basis. In addition, an aggregating specific deductible must be satisfied in the amount of $140,000 before stop loss insurance would apply. The Company has also maintained an annual aggregate stop loss coverage of $10.1 million for 2009. The health insurance policies are limited to maximum lifetime reimbursements of $2,000,000 per person for 2009, 2008 and 2007. The estimated liability for health insurance claims totaled $839,000 and $775,000 as of December 31, 2009 and 2008, respectively. The Company reviews health insurance trends and payment history and maintains an accrual for incurred but unpaid reported claims and for incurred but not yet reported claims based upon its assessment of lag time in reporting and paying claims. | ||
Management continually analyzes its accruals for incurred but not reported claims and for reported but unpaid claims related to its self-insurance programs and believes these accruals to be adequate. However, significant judgment is involved in assessing these accruals, and the Company is at risk for differences between actual settlement amounts and recorded accruals, and any resulting adjustments are included in expense once a probable amount is known. | ||
The Company is required to maintain cash collateral accounts with the insurance companies related to its self-insurance obligations. As of December 31, 2009 and 2008, the Company maintained cash collateral balances of $6.7 million, which is included in other assets. | ||
Letters of Credit | ||
At December 31, 2009, the Company had one letter of credit for $250,000 which expires in January 2011. The letter of credit secures the Companys obligations with respect to its professional liability insurance. The letter of credit is secured by a certificate of deposit, which is included in restricted cash. |
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401K Retirement Savings Plan | ||
The Company maintains a 401k Retirement Savings Plan (the 401k), administered by Massachusetts Mutual Life Insurance Company, to provide a tax deferred retirement savings plan to its employees. To qualify, employees must be at least 21 years of age, with twelve months of continuous employment and must work at least twenty hours per week. Employees may contribute up to 100% of their compensation, not exceeding a limit set annually by the Internal Revenue Service. The Company matches 25% of the first 3% of employee contributions. The Company match was suspended July 1, 2009. For the years ended December 31, 2009, 2008, and 2007, expense of $159,000, $281,000, and $282,000, respectively, associated with the Companys matching is included in the consolidated statements of operations. | ||
Government Regulation | ||
The Company, as a participant in the health care industry, is subject to extensive federal, state and local regulation. In addition to the Federal False Claims Act (False Claims Act) and other federal and state anti-kickback and self-referral laws applicable to all of the Companys operations (discussed more fully below), the operations of the Companys home health care centers are subject to federal laws covering the repackaging and dispensing of drugs (including oxygen) and regulating interstate motor-carrier transportation. Such centers also are subject to state laws (most notably licensing and controlled substances registration) governing pharmacies, nursing services and certain types of home health agency activities. | ||
The Federal False Claims Act imposes civil liability on individuals or entities that submit false or fraudulent claims to the government for payment. False Claims Act penalties for violations can include sanctions, including civil monetary penalties. | ||
As a provider of services under the federal reimbursement programs such as Medicare, Medicaid and TRICARE, the Company is subject to the federal statute known as the anti-kickback statute, also known as the fraud and abuse law. This law prohibits any bribe, kickback, rebate or remuneration of any kind in return for, or as an inducement for, the referral of patients for government-reimbursed health care services. | ||
The Company is also subject to the federal physician self-referral prohibition, known as the Stark Law, which, with certain exceptions, prohibits physicians from referring patients to entities with which they have a financial relationship. Many states in which the Company operates have adopted similar fraud and abuse and self-referral laws, as well as laws that prohibit certain direct or indirect payments or fee-splitting arrangements between health care providers, under the theory that such arrangements are designed to induce or to encourage the referral of patients to a particular provider. In many states, these laws apply to services reimbursed by all payor sources. | ||
In 1996, the Health Insurance Portability and Accountability Act (HIPAA) introduced a new category of federal criminal health care fraud offenses. If a violation of a federal criminal law relates to a health care benefit, then an individual is guilty of committing a Federal Health Care Offense. The specific offenses are: health care fraud, theft or embezzlement, false statements, obstruction of an investigation, and money laundering. These crimes can apply to claims submitted not only to government reimbursement programs such as Medicare, Medicaid and TRICARE, but to any third-party payor, and carry penalties including fines and imprisonment. | ||
HIPPA mandated an extensive set of regulations to protect the privacy of individually identifiable health information. | ||
The Company must follow strict requirements with paperwork and billing. As required by law, it is Company policy that certain service charges (as defined by Medicare) falling under Medicare Part B are confirmed with a Certificate for Medical Necessity (CMN) signed by a physician. In January 1999, the Office of Inspector General of the Department of Health and Human Services (OIG) published a draft Model Compliance Plan for the Durable Medical Equipment, Prosthetics, Orthotics and Supply Industry. The OIG has stressed the importance for all health care providers to have an effective compliance plan. The Company has created and implemented a compliance program, which it believes meets the elements of the OIGs Model Plan for the industry. As part of its compliance program, the Company performs internal audits of the adequacy of billing documentation. The Companys policy is to voluntarily refund to the government any reimbursements |
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previously received for claims with insufficient documentation that are identified in this process and that cannot be corrected. The Company periodically reviews and updates its policies and procedures in an effort to comply with applicable laws and regulations; however, certain proceedings have been and may in the future be commenced against the Company alleging violations of applicable laws governing the operation of the Companys business and its billing practices. | ||
The Company is also subject to state laws governing Medicaid, professional training, licensure, financial relationships with physicians and the dispensing and storage of pharmaceuticals. The facilities operated by the Company must comply with all applicable laws, regulations and licensing standards. Many of the Companys employees must maintain licenses to provide some of the services offered by the Company. Additionally, certain of the Companys employees are subject to state laws and regulations governing the professional practice of respiratory therapy, pharmacy and nursing. | ||
Information about individuals and other health care providers who have been sanctioned or excluded from participation in government reimbursement programs is readily available on the Internet, and all health care providers, including the Company, are held responsible for carefully screening entities and individuals they employ or do business with, to avoid contracting with an excluded provider. The entity cannot bill government programs for services or supplies provided by an excluded provider, and the federal government may also impose sanctions, including financial penalties, on companies that contract with excluded providers. | ||
Health care law is an area of extensive and dynamic regulatory oversight. Changes in laws or regulations or new interpretations of existing laws or regulations can have a dramatic effect on permissible activities, the relative costs associated with doing business, and the amount and availability of reimbursement from government and other third-party payors. There can be no assurance that federal, state, or local governments will not impose additional standards or change existing standards or interpretations. | ||
In recent years, various state and federal regulatory agencies have stepped up investigative and enforcement activities with respect to the health care industry, and many health care providers, including the Company and other durable medical equipment suppliers, have received subpoenas and other requests for information in connection with their business operations and practices. From time to time, the Company also receives notices and subpoenas from various government agencies concerning plans to audit the Company, or requesting information regarding certain aspects of the Companys business. The Company cooperates with the various agencies in responding to such subpoenas and requests. The Company expects to incur additional legal expenses in the future in connection with existing and future investigations. | ||
The government has broad authority and discretion in enforcing applicable laws and regulations; therefore, the scope and outcome of any such investigations, inquiries, or legal actions cannot be predicted. There can be no assurance that federal, state or local governments will not impose additional regulations upon the Companys activities nor that the Companys past activities will not be found to have violated some of the governing laws and regulations. Any such regulatory changes or findings of violations of laws could adversely affect the Companys business and financial position, and could even result in the exclusion of the Company from participating in Medicare, Medicaid, and other contracts for goods or services reimbursed by the government. |
13. | SHAREHOLDERS EQUITY AND STOCK PLANS |
Nonqualified Stock Option Plans | ||
Under the 1991 Nonqualified Stock Option Plan (the 1991 Plan), as amended, 5,500,000 shares of the Companys common stock have been reserved for issuance upon exercise of options granted thereunder. The maximum term of any option granted pursuant to the 1991 Plan is ten years. Shares subject to options granted under the 1991 Plan which expire, terminate or are canceled without having been exercised in full become available again for future grants. |
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An analysis of stock options outstanding under the 1991 Plan is as follows: |
Weighted | ||||||||
Average | ||||||||
Options | Exercise Price | |||||||
Outstanding at December 31, 2006 |
2,221,250 | $ | 3.45 | |||||
Granted |
525,000 | 1.63 | ||||||
Exercised |
| | ||||||
Canceled |
(207,100 | ) | 9.14 | |||||
Outstanding at December 31, 2007 |
2,539,150 | 2.61 | ||||||
Granted |
525,000 | 1.02 | ||||||
Exercised |
| | ||||||
Canceled |
(533,150 | ) | 5.45 | |||||
Outstanding at December 31, 2008 |
2,531,000 | 1.68 | ||||||
Granted |
415,000 | 0.22 | ||||||
Exercised |
| | ||||||
Canceled |
(210,000 | ) | 0.54 | |||||
Outstanding at December 31, 2009 |
2,736,000 | $ | 1.55 | |||||
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There were no stock options exercised in 2009 or 2008. At December 31, 2009, there was $0.2 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average of 1.2 years. |
Weighted | ||||||||
Average | ||||||||
Grant-date | ||||||||
Nonvested Options | Options | Fair Value | ||||||
Balance at December 31, 2007 |
481,250 | $ | 1.82 | |||||
Granted |
525,000 | 0.75 | ||||||
Vested |
(217,084 | ) | 2.04 | |||||
Forfeited |
(31,000 | ) | 1.71 | |||||
Balance at December 31, 2008 |
758,166 | 1.02 | ||||||
Granted |
415,000 | 0.17 | ||||||
Vested |
(328,249 | ) | 1.26 | |||||
Forfeited |
(10,000 | ) | 0.17 | |||||
Balance at December 31, 2009 |
834,917 | $ | 0.52 | |||||
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Options granted under the 1991 Plan as of December 31, 2009 have the following characteristics: |
Weighted | ||||||||||||||||||||||||||||||||||||
Average | ||||||||||||||||||||||||||||||||||||
Exercise | ||||||||||||||||||||||||||||||||||||
Weighted | Price of | Weighted | ||||||||||||||||||||||||||||||||||
Average | Options | Options | Average | |||||||||||||||||||||||||||||||||
Weighted | Remaining | Exercisable | Exercisable | Remaining | ||||||||||||||||||||||||||||||||
Average | Contractual | Aggregate | at | at | Contractual | Aggregate | ||||||||||||||||||||||||||||||
Year of | Options | Exercise | Exercise | Life in | Intrinsic | Dec. 31, | Dec. 31, | Life in | Intrinsic | |||||||||||||||||||||||||||
Grant | Outstanding | Prices | Price | Years | Value | 2009 | 2009 | Years | Value | |||||||||||||||||||||||||||
2000 |
220,000 | $0.17 to $0.30 | $ | 0.18 | 0.85 | | 220,000 | $ | 0.18 | 0.85 | | |||||||||||||||||||||||||
2004 |
450,000 | $1.31 to $1.80 | $ | 1.64 | 4.39 | | 450,000 | $ | 1.64 | 4.39 | | |||||||||||||||||||||||||
2005 |
170,000 | $2.21 to $3.55 | $ | 2.97 | 5.10 | | 170,000 | $ | 2.97 | 5.10 | | |||||||||||||||||||||||||
2006 |
470,000 | $0.61 to $3.30 | $ | 3.24 | 6.14 | | 467,500 | $ | 3.26 | 6.14 | | |||||||||||||||||||||||||
2007 |
496,000 | $1.25 to $2.40 | $ | 1.63 | 7.24 | | 418,583 | $ | 1.63 | 7.23 | | |||||||||||||||||||||||||
2008 |
525,000 | $0.85 to $1.03 | $ | 1.02 | 8.18 | | 175,000 | $ | 1.02 | 8.18 | | |||||||||||||||||||||||||
2009 |
405,000 | $ 0.22 | $ | 0.22 | 9.16 | | $ | | 9.16 | | ||||||||||||||||||||||||||
2,736,000 | $ | | 1,901,083 | $ | | |||||||||||||||||||||||||||||||
Options granted during 2000 and 2001 have a three year vesting period and expire in ten years. No options were granted during 2002 or 2003. Options granted during 2004 have a two or three year vesting period and expire in ten years. Options granted during 2005 have a three year vesting period and expire in ten years. Options granted during 2006 have a four year vesting period and expire in ten years. Options granted in 2007 have a three year vesting period and expire in ten years. Options granted in 2008 and 2009 have a three year vesting period and expire in ten years. As of December 31, 2009, shares available for future grants of options under the 1991 Plan total 310,109. |
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Options granted under the 1991 Plan as of December 31, 2008 have the following characteristics: |
Weighted | ||||||||||||||||||||||||||||||||||||
Average | ||||||||||||||||||||||||||||||||||||
Exercise | ||||||||||||||||||||||||||||||||||||
Weighted | Price of | Weighted | ||||||||||||||||||||||||||||||||||
Average | Options | Options | Average | |||||||||||||||||||||||||||||||||
Weighted | Remaining | Exercisable | Exercisable | Remaining | ||||||||||||||||||||||||||||||||
Average | Contractual | Aggregate | at | at | Contractual | Aggregate | ||||||||||||||||||||||||||||||
Year of | Options | Exercise | Exercise | Life in | Intrinsic | Dec. 31, | Dec. 31, | Life in | Intrinsic | |||||||||||||||||||||||||||
Grant | Outstanding | Prices | Price | Years | Value | 2008 | 2008 | Years | Value | |||||||||||||||||||||||||||
1999 |
200,000 | $0.56 | $ | 0.56 | 0.86 | | 200,000 | $ | 0.56 | 0.86 | | |||||||||||||||||||||||||
2000 |
220,000 | $0.17 to $0.30 | $ | 0.18 | 1.85 | | 220,000 | $ | 0.18 | 1.85 | | |||||||||||||||||||||||||
2004 |
450,000 | $1.31 to $1.80 | $ | 1.64 | 5.39 | | 450,000 | $ | 1.64 | 5.39 | | |||||||||||||||||||||||||
2005 |
170,000 | $2.21 to $3.55 | $ | 2.97 | 6.10 | | 170,000 | $ | 2.97 | 6.10 | | |||||||||||||||||||||||||
2006 |
470,000 | $0.61 to $3.30 | $ | 3.24 | 7.14 | | 391,667 | $ | 3.27 | 7.14 | | |||||||||||||||||||||||||
2007 |
496,000 | $1.25 to $2.40 | $ | 1.63 | 8.24 | | 341,167 | $ | 1.62 | 8.22 | | |||||||||||||||||||||||||
2008 |
525,000 | $0.85 to $1.03 | $ | 1.02 | 9.18 | | | $ | | | | |||||||||||||||||||||||||
2,531,000 | $ | | 1,772,834 | $ | | |||||||||||||||||||||||||||||||
Options granted during 1999 vested upon grant or have a three year vesting period and expire in ten years. Options granted during 2000 and 2001 have a three year vesting period and expire in ten years. No options were granted during 2002 or 2003. Options granted during 2004 have a two or three year vesting period and expire in ten years. Options granted during 2005 have a three year vesting period and expire in ten years. Options granted during 2006 have a four year vesting period and expire in ten years. Options granted in 2007 have a three year vesting period and expire in ten years. Options granted in 2008 have a three year vesting period and expire in ten years. As of December 31, 2008, shares available for future grants of options under the 1991 Plan total 515,109. |
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Under the 1995 Nonqualified Stock Option Plan for Directors (the 1995 Plan), as amended as of February 10, 2000, 600,000 shares of the Companys common stock have been reserved for issuance upon exercise of options granted thereunder. The maximum term of any option granted pursuant to the 1995 Plan is ten years. Shares subject to options granted under the 1995 Plan which expire, terminate or are canceled without having been exercised in full become available for future grants. | ||
An analysis of stock options outstanding under the 1995 Plan is as follows: |
Weighted | ||||||||
Average | ||||||||
Options | Exercise Price | |||||||
Outstanding at December 31, 2006 |
468,000 | $ | 1.62 | |||||
Granted |
40,000 | 1.12 | ||||||
Exercised |
| | ||||||
Canceled |
(6,000 | ) | 21.06 | |||||
Outstanding at December 31, 2007 |
502,000 | 1.35 | ||||||
Granted |
40,000 | 0.12 | ||||||
Exercised |
| | ||||||
Canceled |
(6,000 | ) | 1.69 | |||||
Outstanding at December 31, 2008 |
536,000 | 1.25 | ||||||
Granted |
40,000 | 0.14 | ||||||
Exercised |
| | ||||||
Canceled |
(6,000 | ) | 0.53 | |||||
Outstanding at December 31, 2009 |
570,000 | $ | 1.18 | |||||
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Options granted under the 1995 Plan as of December 31, 2009 have the following characteristics: |
Weighted | Weighted | |||||||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||||||
Weighted | Remaining | Exercise | ||||||||||||||||||||||||||
Average | Contractual | Price of | Aggregate | |||||||||||||||||||||||||
Year of | Options | Exercise | Exercise | Life in | Options | Options | Intrinsic | |||||||||||||||||||||
Grant | Outstanding | Prices | Price | Years | Exercisable | Exercisable | Value | |||||||||||||||||||||
2000 |
140,000 | $0.20 to $0.30 | $ | 0.26 | 0.61 | 140,000 | $ | 0.26 | | |||||||||||||||||||
2001 |
15,000 | $0.75 | $ | 0.75 | 2.00 | 15,000 | $ | 0.75 | | |||||||||||||||||||
2002 |
15,000 | $0.15 | $ | 0.15 | 3.00 | 15,000 | $ | 0.15 | | |||||||||||||||||||
2003 |
80,000 | $1.29 | $ | 1.29 | 4.00 | 80,000 | $ | 1.29 | | |||||||||||||||||||
2004 |
100,000 | $1.18 to $3.46 | $ | 2.32 | 4.71 | 100,000 | $ | 2.32 | | |||||||||||||||||||
2005 |
50,000 | $3.27 | $ | 3.27 | 6.00 | 50,000 | $ | 3.27 | | |||||||||||||||||||
2006 |
50,000 | $1.40 | $ | 1.40 | 7.01 | 50,000 | $ | 1.40 | | |||||||||||||||||||
2007 |
40,000 | $1.12 | $ | 1.12 | 8.01 | 40,000 | $ | 1.12 | | |||||||||||||||||||
2008 |
40,000 | $0.12 | $ | 0.12 | 9.01 | 40,000 | $ | 0.12 | 400 | |||||||||||||||||||
2009 |
40,000 | $0.14 | $ | 0.14 | 10.00 | 40,000 | $ | 0.14 | | |||||||||||||||||||
570,000 | 570,000 | $ | 400 | |||||||||||||||||||||||||
Options granted under the 1995 Plan as of December 31, 2008 have the following characteristics: |
Weighted | Weighted | |||||||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||||||
Weighted | Remaining | Exercise | ||||||||||||||||||||||||||
Average | Contractual | Price of | Aggregate | |||||||||||||||||||||||||
Year of | Options | Exercise | Exercise | Life in | Options | Options | Intrinsic | |||||||||||||||||||||
Grant | Outstanding | Prices | Price | Years | Exercisable | Exercisable | Value | |||||||||||||||||||||
1999 |
6,000 | $0.53 | $ | 0.53 | 1.00 | 6,000 | $ | 0.53 | | |||||||||||||||||||
2000 |
140,000 | $0.20 to $0.30 | $ | 0.26 | 1.61 | 140,000 | $ | 0.26 | | |||||||||||||||||||
2001 |
15,000 | $0.75 | $ | 0.75 | 3.00 | 15,000 | $ | 0.75 | | |||||||||||||||||||
2002 |
15,000 | $0.15 | $ | 0.15 | 4.00 | 15,000 | $ | 0.15 | | |||||||||||||||||||
2003 |
80,000 | $1.29 | $ | 1.29 | 5.00 | 80,000 | $ | 1.29 | | |||||||||||||||||||
2004 |
100,000 | $1.18 to $3.46 | $ | 2.32 | 5.71 | 100,000 | $ | 2.32 | | |||||||||||||||||||
2005 |
50,000 | $3.27 | $ | 3.27 | 7.00 | 50,000 | $ | 3.27 | | |||||||||||||||||||
2006 |
50,000 | $1.40 | $ | 1.40 | 8.00 | 50,000 | $ | 1.40 | | |||||||||||||||||||
2007 |
40,000 | $1.12 | $ | 1.12 | 9.00 | 40,000 | $ | 1.12 | | |||||||||||||||||||
2008 |
40,000 | $0.12 | $ | 0.12 | 10.00 | 40,000 | $ | 0.12 | 800 | |||||||||||||||||||
536,000 | 536,000 | $ | 800 | |||||||||||||||||||||||||
The Directors options are fully vested upon issuance and expire ten years from date of issuance. | ||
Preferred Stock | ||
The Companys certificate of incorporation was amended in 1996 to authorize the issuance of up to 5,000,000 shares of preferred stock. The Companys Board of Directors is authorized to establish the terms and rights of each such series, including the voting powers, designations, preferences, and other special rights, qualifications, limitations or restrictions thereof. As of December 31, 2009, no preferred shares have been issued. |
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Income Per Common Share | ||
Income per share is measured at two levels: basic income per share and diluted income per share. Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted income per share is computed by dividing net income by the weighted average number of common shares after considering the additional dilution related to stock options. In computing diluted income per share, the outstanding stock options are considered dilutive using the treasury stock method. | ||
For the years ended December 31, 2009, 2008 and 2007, approximately 2,708,000, 2,737,000, and 1,310,000 shares, respectively, attributable to the exercise of outstanding options were excluded from the calculation of diluted earnings per share because their effect was antidilutive. |
14. | INCOME TAXES |
The provision (benefit) for income taxes is comprised of the following components: |
For the Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Current |
||||||||||||
Federal |
$ | | $ | | $ | | ||||||
State |
325,000 | 687,000 | 623,000 | |||||||||
325,000 | 687,000 | 623,000 | ||||||||||
Deferred |
||||||||||||
Federal |
3,760,000 | 3,919,000 | 3,116,000 | |||||||||
State |
430,000 | 448,000 | 358,000 | |||||||||
4,190,000 | 4,367,000 | 3,474,000 | ||||||||||
Provision for income taxes |
$ | 4,515,000 | $ | 5,054,000 | $ | 4,097,000 | ||||||
The difference between the actual income tax provision and the tax provision computed by applying the statutory federal income tax rate to income from operations before income taxes is attributable to the following: |
For the Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(Benefit) provision for federal income taxes at
statutory rate |
$ | (2,989,000 | ) | $ | 2,032,000 | $ | (499,000 | ) | ||||
State income taxes, net of federal tax benefit |
630,000 | 883,000 | 405,000 | |||||||||
Valuation allowance |
6,262,000 | 1,791,000 | 1,637,000 | |||||||||
Other non-deductible expenses |
612,000 | 348,000 | 2,554,000 | |||||||||
Provision for income taxes |
$ | 4,515,000 | $ | 5,054,000 | $ | 4,097,000 | ||||||
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The net deferred tax assets and liabilities are as follows: |
December 31, | ||||||||
2009 | 2008 | |||||||
Current deferred tax assets: |
||||||||
Allowance for doubtful accounts |
$ | 1,306,000 | $ | 2,245,000 | ||||
Accrued liabilities and other |
3,340,000 | 3,383,000 | ||||||
4,646,000 | 5,628,000 | |||||||
Less valuation allowance |
(4,646,000 | ) | (5,628,000 | ) | ||||
Net current deferred tax assets |
$ | | $ | | ||||
Noncurrent deferred tax assets (liabilities): |
||||||||
Tax amortization in excess of financial reporting amortization |
$ | (12,031,000 | ) | $ | (7,841,000 | ) | ||
Financial reporting amortization in excess of tax amortization |
167,000 | 171,000 | ||||||
Net operating loss carryforwards |
73,242,000 | 65,319,000 | ||||||
Noncurrent asset valuation reserves |
348,000 | 346,000 | ||||||
Financial reporting depreciation in excess of tax depreciation |
5,474,000 | 5,589,000 | ||||||
Other |
1,071,000 | 1,633,000 | ||||||
68,271,000 | 65,217,000 | |||||||
Less valuation allowance |
(80,302,000 | ) | (73,058,000 | ) | ||||
Net noncurrent deferred tax liabilities |
$ | (12,031,000 | ) | $ | (7,841,000 | ) | ||
For the year ended December 31, 2002, amortization of the Companys indefinite-life intangible assets, consisting of goodwill, ceased for financial statement purposes. As of December 31, 2006, the Companys deferred tax asset relating to indefinite-life intangibles was $1.2 million, which was fully reserved by a valuation allowance. As a result of additional tax amortization during 2007, 2008, and 2009, this deferred tax asset relating to indefinite-life intangibles became a deferred tax liability of $7.8 million as of December 31, 2008 and $12.0 million as of December 31, 2009. The Company cannot determine when the reversal of the deferred tax liability relating to its indefinite-life intangible assets will occur, or whether such reversal would occur within the Companys net operating loss carry-forward period. For the years ended December 31, 2009 and 2008, the Company recognized a non-cash charge totaling $4.2 million and $4.4 million, respectively, to income tax expense to increase the valuation allowance against the Companys deferred tax assets, primarily consisting of net operating loss carry-forwards. | ||
State income taxes were $0.3 million, $0.7 million, and $0.6 million for the years ended December 31, 2009, 2008, and 2007, respectively. | ||
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of approximately $162,972,000 prior to the expiration of the federal net operating loss carryforwards beginning in 2019. Taxable loss for the year ended December 31, 2009 is estimated to be $16,831,000 and the actual taxable loss for the year ended December 31, 2008 was $8,163,000. Based upon the historical taxable losses, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences; thus, the Company recorded a valuation allowance to fully reserve all net deferred tax assets as of December 31, 2009 and 2008. The increase in the valuation allowance in 2009 and 2008 was $6,262,000 and $1,793,000, respectively. |
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The Company adopted the provisions of FIN 48, included in ASC Subtopic 740-10, on January 1, 2007 and has analyzed filing positions in all of the federal and state jurisdictions as of December 31, 2007, where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company has identified its federal tax return and its state income tax returns filed in Texas, Florida, New York, Pennsylvania, Arkansas, Ohio, Iowa and Tennessee as its major tax jurisdictions. The periods subject to examination for the Companys federal return are the 2006 through 2008 tax years. The periods subject to examination for the Companys state returns in major tax jurisdictions are years 2005 through 2008. As of December 31, 2009, there were no active federal, state or local income tax audits. | ||
As a result of the implementation of ASC 740-10, the Company recognized no material adjustment in the liability for unrecognized tax benefits. A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows: |
Gross unrecognized tax benefits at December 31, 2007 |
$ | 1,288,000 | ||
Increases for tax positions of prior years |
44,000 | |||
Decreases for tax positions of prior years |
| |||
Lapse of statute of limitations |
(82,000 | ) | ||
Gross unrecognized tax benefits at December 31, 2008 |
$ | 1,250,000 | ||
Increases for tax positions of prior years |
| |||
Decreases for tax positions of prior years |
| |||
Lapse of statute of limitations |
(68,000 | ) | ||
Gross unrecognized tax benefits at December 31, 2009 |
$ | 1,182,000 | ||
The Company had approximately $12,000 and $18,000 of accrued interest related to uncertain tax positions at December 31, 2009 and December 31, 2008, respectively. The total amount of unrecognized tax benefits that would affect the Companys tax rate if recognized relates solely to certain state matters and is $92,000 and $158,000 as of December 31, 2009 and December 31, 2008, respectively. | ||
On April 10, 2007, the acquisition of 5,368,982 shares of the Companys common stock by Highland Capital resulted in an ownership change for purposes of Section 382 of the Internal Revenue Code. As a result, the future utilization of certain net operating loss carryforwards which existed at the time of the ownership change will be limited on an annual basis. The Companys annual Section 382 federal limitation will be approximately $2.0 million, without consideration of the impact of the future potential recognition of built-in gains or losses as provided by Section 382. The Company is in the process of assessing the potential limitation of its state net operating loss carryforwards resulting from the ownership change but does not anticipate the limitation to be material. |
15. | INSURANCE |
The Company maintains a commercial general liability policy which is on a claims-made basis. This insurance is renewed annually and includes product liability coverage on the medical equipment that it sells or rents with per claim coverage limits of up to $1.0 million per claim with a $5.0 million product liability annual aggregate and a $3.0 million general liability annual aggregate. The Companys professional liability policy is on a claims-made basis and is renewable annually with per claim coverage limits of up to $1.0 million per claim and $5.0 million in the aggregate. The Companys commercial general liability policy and the professional liability policy have a maximum policy aggregate of $7.0 million, including defense costs. The Company retains the first $50,000 of each professional or general liability claim subject to a $500,000 aggregate. After the $500,000 aggregate has been reached, a $10,000 per claim deductible applies to all future claims applicable to this policy period. The Company also maintains excess liability coverage with limits of $20.0 million per claim and $20.0 million in the aggregate. Management believes the manufacturers of the equipment it sells or rents currently maintain their own insurance, and in some cases the Company has received evidence of such coverage and has been added by endorsement as an additional insured; however, there can be no assurance that such manufacturers will continue to do so, that such insurance will be adequate or available to protect the Company, or that the Company will not have liability independent of that of such manufacturers and/or their insurance coverage. |
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Table of Contents
The Company is insured for vehicle liability coverage for $1.0 million per accident; subject to a per claim deductible of $250,000. The Company is insured for workers compensation losses; subject to a per claim deductible of $250,000. The Company also provides accruals for the settlement of outstanding claims and claims incurred but not reported at amounts believed to be adequate. The differences between actual settlements and accruals are included in expense once a probable amount is known. The Company did not maintain annual aggregate stop-loss coverage for the years 2007, 2008 and 2009, as such coverage was not economically available. | ||
There can be no assurance that any of the Companys insurance will be sufficient to cover any judgments, settlements or costs relating to any pending or future legal proceedings or that any such insurance will be available to the Company in the future on satisfactory terms, if at all. If the insurance protection purchased by the Company is not sufficient to cover any judgments, settlements or costs relating to pending or future legal proceedings, the Companys business and financial condition could be materially adversely affected. |
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16. | QUARTERLY FINANCIAL INFORMATION (UNAUDITED) | |
The following are the Companys 2009 and 2008 quarterly financial information (amounts in thousands, except per share data): |
First | Second | Third | Fourth | Full | ||||||||||||||||
2009 | Quarter | Quarter | Quarter | Quarter | Year | |||||||||||||||
Revenues, net |
$ | 58,311 | $ | 57,686 | $ | 58,991 | $ | 61,309 | $ | 236,297 | ||||||||||
(Loss) income from operations before
income taxes |
(3,930 | ) | (2,654 | ) | (1,755 | ) | 97 | (8,242 | ) | |||||||||||
Provision for income taxes |
1,164 | 1,266 | 874 | 1,211 | 4,515 | |||||||||||||||
Net loss |
$ | (5,094 | ) | $ | (3,920 | ) | $ | (2,629 | ) | $ | (1,114 | ) | $ | (12,757 | ) | |||||
Less: net income attributable to the noncontrolling
interests |
$ | (74 | ) | $ | (69 | ) | $ | (91 | ) | $ | (107 | ) | $ | (341 | ) | |||||
Net loss attributable to American HomePatient |
$ | (5,168 | ) | $ | (3,989 | ) | $ | (2,720 | ) | $ | (1,221 | ) | $ | (13,098 | ) | |||||
Net (loss) income per common share attributable to
American HomePatient |
||||||||||||||||||||
- Basic |
$ | (0.29 | ) | $ | (0.23 | ) | $ | (0.15 | ) | $ | (0.08 | ) | $ | (0.75 | ) | |||||
- Diluted |
$ | (0.29 | ) | $ | (0.23 | ) | $ | (0.15 | ) | $ | (0.08 | ) | $ | (0.75 | ) | |||||
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First | Second | Third | Fourth | Full | ||||||||||||||||
2008 | Quarter | Quarter | Quarter | Quarter | Year | |||||||||||||||
Revenues, net |
$ | 69,214 | $ | 64,194 | $ | 65,641 | $ | 67,805 | $ | 266,854 | ||||||||||
Income (loss) from continuing operations before
income taxes |
1,919 | (603 | ) | 1,688 | 3,155 | 6,159 | ||||||||||||||
Provision for income taxes |
1,270 | 1,410 | 1,012 | 1,362 | 5,054 | |||||||||||||||
Net income (loss) from continuing operations |
$ | 649 | $ | (2,013 | ) | $ | 676 | $ | 1,793 | $ | 1,105 | |||||||||
Less: net income attributable to the noncontrolling
interests |
$ | (95 | ) | $ | (119 | ) | $ | (92 | ) | $ | (102 | ) | $ | (408 | ) | |||||
Net income (loss) from continuing operations attributable
to American HomePatient |
$ | 554 | $ | (2,132 | ) | $ | 584 | $ | 1,691 | $ | 697 | |||||||||
Loss from discontinued operations |
| | | (183 | ) | (183 | ) | |||||||||||||
Net income (loss) |
$ | 554 | $ | (2,132 | ) | $ | 584 | $ | 1,508 | $ | 514 | |||||||||
Net income (loss) per common share attributable to
American HomePatient Basic |
||||||||||||||||||||
Income (loss) from continuing operations |
$ | 0.03 | $ | (0.12 | ) | $ | 0.03 | $ | 0.10 | $ | 0.04 | |||||||||
Loss from discontinued operations |
| | | (0.01 | ) | (0.01 | ) | |||||||||||||
Net income (loss) per common share attributable to
American HomePatient Basic |
$ | 0.03 | $ | (0.12 | ) | $ | 0.03 | $ | 0.09 | $ | 0.03 | |||||||||
Net income (loss) per common share attributable to
American HomePatient Diluted |
||||||||||||||||||||
Income (loss) from continuing operations |
$ | 0.03 | $ | (0.12 | ) | $ | 0.03 | $ | 0.10 | $ | 0.04 | |||||||||
Loss from discontinued operations |
| | | (0.01 | ) | (0.01 | ) | |||||||||||||
Net income (loss) per common share attributable to
American HomePatient Diluted |
$ | 0.03 | $ | (0.12 | ) | $ | 0.03 | $ | 0.09 | $ | 0.03 | |||||||||
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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2009, 2008 and 2007
For the Years Ended December 31, 2009, 2008 and 2007
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Column A | Column B | Column C | Column D | Column E | ||||||||||||
Additions | Deductions | |||||||||||||||
Balance at | Write-offs | Balance at | ||||||||||||||
Beginning | Bad Debt | Net of | End of | |||||||||||||
Description | of Period | Expense | Recoveries | Period | ||||||||||||
For the year ended December 31, 2009: |
$ | 5,869,000 | $ | 3,517,000 | $ | 5,990,000 | $ | 3,396,000 | ||||||||
For the year ended December 31, 2008: |
$ | 11,822,000 | $ | 4,818,000 | $ | 10,771,000 | $ | 5,869,000 | ||||||||
For the year ended December 31, 2007: |
$ | 17,076,000 | $ | 9,240,000 | $ | 14,494,000 | $ | 11,822,000 | ||||||||
S-1
Table of Contents
INDEX TO EXHIBITS
Exhibit Number | Description of Exhibit | |
2.1
|
Second Amended Joint Plan of Reorganization Proposed by the Debtors and the Official Unsecured Creditors Committee dated January 2, 2003 (incorporated by reference to Exhibit 99.3 to the Companys Current Report on Form 8-K filed on March 27, 2003). | |
3.1
|
Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Companys Registration Statement No. 33-42777 on Form S-1). | |
3.2
|
Certificate of Amendment to the Certificate of Incorporation of the Company dated October 31, 1991 (incorporated by reference to Exhibit 3.2 to Amendment No. 2 to the Companys Registration Statement No. 33-42777 on Form S-1). | |
3.3
|
Certificate of Amendment to the Certificate of Incorporation of the Company Dated May 14, 1992 (incorporated by reference to the Companys Registration Statement on Form S-8 dated February 16, 1993). | |
3.4
|
Certificate of Ownership and Merger merging American HomePatient, Inc. into Diversicare Inc. dated May 11, 1994 (incorporated by reference to Exhibit 4.4 to the Companys Registration Statement No. 33-89568 on Form S-2). | |
3.5
|
Certificate of Amendment to the Certificate of Incorporation of the Company dated June 8, 1996 (incorporated by reference to Exhibit 3.5 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2004). | |
3.6
|
Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.3 to the Companys Registration Statement No. 33-42777 on Form S-1). | |
3.7
|
Amendment to the Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K dated November 5, 2007). | |
10.1
|
Amended and Restated American HomePatient, Inc. 1991 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10 to the Companys Registration Statement on Form S-8 filed on April 5, 2004). | |
10.2
|
Amendment No. 1 to Amended and Restated American HomePatient, Inc. 1991 Nonqualified Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Companys Registration Statement on Form S-8 filed on May 17, 2005). | |
10.3
|
1995 Nonqualified Stock Option Plan for Directors (incorporated by reference to Exhibit 10.2 to the Companys Annual Report on Form 10-K for the year ended December 31, 2004). |
Table of Contents
Exhibit Number | Description of Exhibit | |
10.4
|
Amendment No. 1 to 1995 Nonqualified Stock Option Plan for Directors (incorporated by reference to Exhibit 10.3 to the Companys Annual Report on Form 10-K for the year ended December 31, 2004). | |
10.5
|
Amendment No. 2 to 1995 Nonqualified Stock Option Plan for Directors (incorporated by reference to Exhibit 10.2 to the Companys Registration Statement on Form S-8 filed on May 17, 2005). | |
10.6
|
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 10.5 to the Companys Annual Report on Form 10-K for the year ended December 31, 2004). | |
10.7
|
Employment Agreement dated November 26, 2008 between the Company and Joseph F. Furlong, III (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated November 26, 2008). | |
10.8
|
Form of Promissory Note dated July 1, 2003, by American HomePatient, Inc. and certain of its direct and indirect subsidiaries (incorporated by reference to Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). | |
10.9
|
Second Amended and Restated Assignment and Borrower Security Agreement dated July 1, 2003, by and between American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). | |
10.10
|
Second Amended and Restated Assignment and Subsidiary Security Agreement dated July 1, 2003, by and between certain direct and indirect subsidiaries of American HomePatient, Inc. and Bank of Montreal, as (incorporated by reference to Exhibit 10.6 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). | |
10.11
|
Amended and Restated Borrower Partnership Security Agreement dated July 1, 2003, by and between American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.7 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). | |
10.12
|
Amended and Restated Subsidiary Partnership Security Agreement dated July 1, 2003, by and between certain direct and indirect subsidiaries of American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.8 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). | |
10.13
|
Second Amended and Restated Borrower Pledge Agreement dated July 1, 2003, by and between American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.9 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). |
Table of Contents
Exhibit Number | Description of Exhibit | |
10.14
|
Second Amended and Restated Subsidiary Pledge Agreement dated July 1, 2003, by and between certain direct and indirect subsidiaries of American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.10 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). | |
10.15
|
Amended and Restated Concentration Bank Agreement dated July 1, 2003, by and between American HomePatient, Inc., PNC Bank, National Association, and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.11 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). | |
10.16
|
Second Amended and Restated Collection Bank Agreement dated July 1, 2003, by and between American HomePatient, Inc., PNC Bank, National Association, and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.12 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). | |
10.17
|
Employment Agreement effective January 21, 2005 between the Company and Stephen Clanton (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated January 26, 2005). | |
10.18
|
Employment Agreement effective February 9, 2005 between the Company and Frank Powers (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated April 28, 2005). | |
10.19
|
Amendment No. 1 to Employment Agreement effective November 10, 2006 between the Company and Stephen Clanton (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K dated November 13, 2006). | |
10.20
|
Amendment No. 1 to Employment Agreement effective November 10, 2006 between the Company and Frank Powers (incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K dated November 13, 2006). | |
10.21
|
Amendment to lease dated April 5, 2006, by and between Principal Mutual Life Insurance Company and American HomePatient, Inc. (incorporated by reference to Exhibit 10.22 to the Companys Annual Report on Form 10-K for the year ended December 31, 2006). | |
10.22
|
Offer Letter accepted by James P. Reichmann on June 18, 2007 (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated June 21, 2007). | |
10.23
|
Confidentiality, Non-Competition and Severance Pay Agreement dated June 18, 2007 with James P. Reichmann (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K dated June 21, 2007). |
Table of Contents
Exhibit Number | Description of Exhibit | |
10.24
|
Amendment No. 2 to Amended and Restated American HomePatient, Inc. 1991 Nonqualified Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated March 3, 2008). | |
10.25
|
Forbearance Agreement dated July 2, 2009, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein (incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). | |
10.26
|
Second Forbearance Agreement dated August 31, 2009, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein (incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). | |
10.27
|
Third Forbearance Agreement dated October 1, 2009, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein (incorporated by reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). | |
10.28
|
Fourth Forbearance Agreement dated October 30, 2009, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein. | |
10.29
|
Fifth Forbearance Agreement dated November 30, 2009, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein. | |
10.30
|
Sixth Forbearance Agreement dated December 15, 2009, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein. | |
21
|
Subsidiary List. | |
23
|
Consent of KPMG LLP. | |
31.1
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Chief Executive Officer. | |
31.2
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Chief Financial Officer. | |
32.1
|
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Chief Executive Officer. | |
32.2
|
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Chief Financial Officer. |