Attached files
file | filename |
---|---|
EX-15.1 - EX-15.1 - AMERICAN HOMEPATIENT INC | g23244exv15w1.htm |
EX-10.1 - EX-10.1 - AMERICAN HOMEPATIENT INC | g23244exv10w1.htm |
EX-10.2 - EX-10.2 - AMERICAN HOMEPATIENT INC | g23244exv10w2.htm |
EX-32.1 - EX-32.1 - AMERICAN HOMEPATIENT INC | g23244exv32w1.htm |
EX-31.2 - EX-31.2 - AMERICAN HOMEPATIENT INC | g23244exv31w2.htm |
EX-32.2 - EX-32.2 - AMERICAN HOMEPATIENT INC | g23244exv32w2.htm |
EX-31.1 - EX-31.1 - AMERICAN HOMEPATIENT INC | g23244exv31w1.htm |
EX-10.3 - EX-10.3 - AMERICAN HOMEPATIENT INC | g23244exv10w3.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended: March 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
American HomePatient, Inc.
(exact name of registrant as specified in its charter)
Delaware | 0-19532 | 62-1474680 | ||
(State or other jurisdiction of | (Commission | (IRS Employer Identification No.) | ||
incorporation or organization) | File Number) |
5200 Maryland Way, Suite 400, Brentwood, Tennessee | 37027 | |
(Address of principal executive offices) | (Zip Code) |
(615) 221-8884
(Registrants telephone number, including area code)
None
(Former name, former address and former fiscal year, if changes since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes 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 whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of accelerated filer,
large 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 Rule 12b-2 of the
Exchange Act). Yes o No þ
17,573,389
(Outstanding shares of the issuers common stock as of May 3, 2010)
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INDEX
Page No. | ||||||||
PART I | ||||||||
Item 1. | ||||||||
3 | ||||||||
5 | ||||||||
6 | ||||||||
8 | ||||||||
Item 2. | 20 | |||||||
Item 3. | 37 | |||||||
Item 4T. | 37 | |||||||
Report of Independent Registered Public Accounting Firm | 38 | |||||||
PART II | ||||||||
Item 1A. | 39 | |||||||
Item 6. | 45 | |||||||
Signatures | 47 | |||||||
EX-10.1 | ||||||||
EX-10.2 | ||||||||
EX-10.3 | ||||||||
EX-15.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(unaudited)
March 31, | December 31, | |||||||
ASSETS | 2010 | 2009 | ||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 19,832,000 | $ | 23,613,000 | ||||
Restricted cash |
| 250,000 | ||||||
Accounts receivable, less allowance for doubtful accounts of
$4,568,000 and $4,199,000, respectively |
32,402,000 | 29,968,000 | ||||||
Inventories, net of inventory valuation allowances of $191,000
and $212,000, respectively |
11,039,000 | 12,240,000 | ||||||
Prepaid expenses and other current assets |
5,805,000 | 6,690,000 | ||||||
Total current assets |
69,078,000 | 72,761,000 | ||||||
Property and equipment |
139,756,000 | 142,166,000 | ||||||
Less accumulated depreciation and amortization |
(106,273,000 | ) | (108,376,000 | ) | ||||
Property and equipment, net |
33,483,000 | 33,790,000 | ||||||
Goodwill |
123,621,000 | 123,621,000 | ||||||
Other assets |
16,531,000 | 16,977,000 | ||||||
Total other assets |
140,152,000 | 140,598,000 | ||||||
TOTAL ASSETS |
$ | 242,713,000 | $ | 247,149,000 | ||||
(Continued)
3
Table of Contents
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(unaudited)
(Continued)
March 31, | December 31, | |||||||
LIABILITIES AND SHAREHOLDERS DEFICIT | 2010 | 2009 | ||||||
CURRENT LIABILITIES: |
||||||||
Current portion of long-term debt and capital leases |
$ | 227,327,000 | $ | 229,120,000 | ||||
Accounts payable |
15,148,000 | 14,153,000 | ||||||
Other payables |
775,000 | 788,000 | ||||||
Deferred revenue |
6,039,000 | 5,292,000 | ||||||
Accrued expenses: |
||||||||
Payroll and related benefits |
6,081,000 | 6,961,000 | ||||||
Insurance, including self-insurance accruals |
5,286,000 | 5,258,000 | ||||||
Other |
3,628,000 | 3,466,000 | ||||||
Total current liabilities |
264,284,000 | 265,038,000 | ||||||
NONCURRENT LIABILITIES: |
||||||||
Capital leases, less current portion |
| 3,000 | ||||||
Deferred tax liability |
13,026,000 | 12,031,000 | ||||||
Other noncurrent liabilities |
101,000 | 82,000 | ||||||
Total noncurrent liabilities |
13,127,000 | 12,116,000 | ||||||
Total liabilities |
277,411,000 | 277,154,000 | ||||||
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 |
177,127,000 | 177,094,000 | ||||||
Accumulated deficit |
(219,211,000 | ) | (214,681,000 | ) | ||||
Total American HomePatient, Inc. shareholders deficit |
(41,908,000 | ) | (37,411,000 | ) | ||||
Noncontrolling interests |
7,210,000 | 7,406,000 | ||||||
Total shareholders deficit |
(34,698,000 | ) | (30,005,000 | ) | ||||
TOTAL LIABILITIES AND SHAREHOLDERS DEFICIT |
$ | 242,713,000 | $ | 247,149,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(unaudited)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
REVENUES: |
||||||||
Sales and related service revenues, net |
$ | 29,099,000 | $ | 27,374,000 | ||||
Rental revenues, net |
37,906,000 | 38,786,000 | ||||||
Total revenues, net |
67,005,000 | 66,160,000 | ||||||
EXPENSES: |
||||||||
Cost of sales and related services |
14,569,000 | 14,378,000 | ||||||
Cost of rentals and other revenues, including rental equipment
depreciation of $5,769,000 and $6,410,000, respectively |
8,065,000 | 8,568,000 | ||||||
Operating expenses |
34,457,000 | 35,065,000 | ||||||
Bad debt expense |
1,796,000 | 1,296,000 | ||||||
General and administrative |
5,116,000 | 5,126,000 | ||||||
Depreciation, excluding rental equipment, and amortization |
932,000 | 1,024,000 | ||||||
Interest expense, net |
3,798,000 | 3,866,000 | ||||||
Other (income) expense |
(87,000 | ) | 14,000 | |||||
Change of control income |
(3,000 | ) | (3,000 | ) | ||||
Total expenses |
68,643,000 | 69,334,000 | ||||||
LOSS FROM OPERATIONS BEFORE INCOME
TAXES |
(1,638,000 | ) | (3,174,000 | ) | ||||
Provision for income taxes |
1,135,000 | 1,164,000 | ||||||
NET LOSS |
$ | (2,773,000 | ) | $ | (4,338,000 | ) | ||
Less: Net income attributable to the noncontrolling interests |
$ | (996,000 | ) | $ | (830,000 | ) | ||
NET LOSS ATTRIBUTABLE TO AMERICAN
HOMEPATIENT, INC. |
(3,769,000 | ) | (5,168,000 | ) | ||||
NET LOSS PER COMMON SHARE ATTRIBUTABLE TO
AMERICAN HOMEPATIENT, INC. COMMON SHAREHOLDERS |
||||||||
- Basic |
$ | (0.21 | ) | $ | (0.29 | ) | ||
- Diluted |
$ | (0.21 | ) | $ | (0.29 | ) | ||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
||||||||
- Basic |
17,573,000 | 17,573,000 | ||||||
- Diluted |
17,573,000 | 17,573,000 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(unaudited)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss attributable to American HomePatient, Inc. |
$ | (3,769,000 | ) | $ | (5,168,000 | ) | ||
Adjustments to reconcile net loss to net cash provided by
operating activities: |
||||||||
Change of control income |
(3,000 | ) | (3,000 | ) | ||||
Gain on sale of infusion branch |
| (184,000 | ) | |||||
Deferred tax expense |
995,000 | 1,069,000 | ||||||
Depreciation and amortization |
6,701,000 | 7,434,000 | ||||||
Bad debt expense |
1,796,000 | 1,296,000 | ||||||
Stock compensation expense |
57,000 | 90,000 | ||||||
Net income attributable to noncontrolling interests |
996,000 | 830,000 | ||||||
Change in assets and liabilities: |
||||||||
Restricted cash |
250,000 | | ||||||
Accounts receivable |
(4,230,000 | ) | 5,943,000 | |||||
Inventories |
1,201,000 | 2,156,000 | ||||||
Prepaid expenses and other current assets |
885,000 | 2,900,000 | ||||||
Deferred revenue |
(14,000 | ) | (1,165,000 | ) | ||||
Accounts payable, other payables and accrued expenses |
(837,000 | ) | (3,908,000 | ) | ||||
Other assets and liabilities |
433,000 | 1,751,000 | ||||||
Net cash provided by operating activities |
4,461,000 | 13,041,000 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Cash payments for additions to property and equipment, net |
(5,254,000 | ) | (5,606,000 | ) | ||||
Proceeds from sale of infusion branch |
| 271,000 | ||||||
Net cash used in investing activities |
$ | (5,254,000 | ) | $ | (5,335,000 | ) | ||
(Continued)
6
Table of Contents
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(unaudited)
(Continued)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Distributions to noncontrolling interests |
$ | (1,202,000 | ) | $ | (1,299,000 | ) | ||
Contributions from noncontrolling interests |
10,000 | | ||||||
Principal payments on long-term debt and capital leases |
(1,796,000 | ) | (7,670,000 | ) | ||||
Net cash used in financing activities |
(2,988,000 | ) | (8,969,000 | ) | ||||
DECREASE IN CASH AND CASH EQUIVALENTS |
(3,781,000 | ) | (1,263,000 | ) | ||||
CASH AND CASH EQUIVALENTS, beginning of period |
23,613,000 | 18,831,000 | ||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 19,832,000 | $ | 17,568,000 | ||||
SUPPLEMENTAL INFORMATION: |
||||||||
Cash payments of interest |
$ | 3,840,000 | $ | 3,954,000 | ||||
Cash payments of income taxes |
$ | 130,000 | $ | 76,000 | ||||
Non-Cash Activity: |
||||||||
Capital leases entered into for property and equipment |
$ | | $ | 1,153,000 | ||||
Changes in accounts payable related to purchases of
property and equipment |
$ | 1,108,000 | $ | (634,000 | ) | |||
Change of control: |
||||||||
Other liabilities |
$ | 21,000 | $ | 6,000 | ||||
Additional paid-in capital |
$ | (24,000 | ) | $ | (9,000 | ) | ||
Cumulative adjustment for deferred revenue |
$ | 761,000 | $ | | ||||
Supplemental Disclosure of Investing Activities: |
||||||||
Disposition of infusion branch: |
||||||||
Inventories sold |
$ | | $ | 87,000 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Table of Contents
AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(unaudited)
1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements of American HomePatient, Inc. and its
subsidiaries (the Company) for the three months ended March 31, 2010 and 2009 herein are
unaudited and have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with U.S. generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying unaudited interim condensed consolidated financial statements reflect
all adjustments (consisting of only normally recurring accruals) necessary to present fairly the
Companys financial position at March 31, 2010, its results of operations for the three months
ended March 31, 2010 and 2009 and its cash flows for the three months ended March 31, 2010 and
2009.
The results of operations for the three months ended March 31, 2010 and 2009 are not necessarily
indicative of the operating results for the entire respective years. Subsequent events have been
evaluated as disclosed in Note 4. These unaudited interim condensed consolidated financial
statements should be read in conjunction with the audited financial statements and notes thereto
included in the Companys 2009 Annual Report on Form 10-K.
Certain reclassifications of prior year amounts related to consolidation of the Companys 50% owned
joint ventures have been made to conform to the current year presentation. The reclassification
did not affect net income attributable to the Company for any prior period. (See Note 2 below.)
2. CONSOLIDATION OF 50%-OWNED JOINT VENTURES
Prior to January 1, 2010, the Company accounted for its 50%-owned joint ventures as equity
investments. Effective January 1, 2010, the Company began consolidating its 50%-owned joint
ventures as a result of the Companys adoption of the provisions of Accounting Standards Update
(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)). ASU 2009-17 was issued by the FASB in December 2009 and was effective for periods
beginning after December 15, 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. Management concluded the Company is the primary beneficiary of the
50%-owned joint ventures in accordance with the provisions outlined in ASU 2009-17 and therefore
began consolidating the 50%-owned joint ventures effective January 1, 2010.
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ASU 2009-17 states that the difference between the amount added to the balance sheet of the
consolidating entity and the amount of any previously recognized interest in the newly consolidated
VIEs shall be recognized as a cumulative effect adjustment to retained earnings. The 50%-owned
joint ventures had not previously recognized deferred revenues associated with rental arrangements.
Upon consolidation on January 1, 2010, deferred revenue for the 50%-owned joint ventures in the
amount of $761,000 was recognized by the Company. As a result, the Company recorded a cumulative
adjustment on January 1, 2010 which increased deferred revenue and increased accumulated deficit by
$761,000.
Summarized financial information of the nine 50%-owned joint ventures at March 31, 2010 and
December 31, 2009 is as follows:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Cash |
$ | 1,367,000 | $ | 1,669,000 | ||||
Accounts receivable, net |
3,874,000 | 3,597,000 | ||||||
Property and equipment, net |
3,547,000 | 3,534,000 | ||||||
Other assets |
2,949,000 | 2,989,000 | ||||||
Total assets |
$ | 11,737,000 | $ | 11,789,000 | ||||
Accounts payable and accrued expenses |
$ | 449,000 | $ | 878,000 | ||||
Deferred revenue |
761,000 | | ||||||
Total liabilities |
$ | 1,210,000 | $ | 878,000 | ||||
3. 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 March 31,
2010, 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 March 31, 2010. A Restructuring Support Agreement (see
Note 4, Subsequent Events for a more detailed discussion) has been entered into by and among the
Company, NexBank, SSB (the Agent), and a majority of the senior debt holders, which provides for
restructuring the Company and the Companys senior debt. 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. If the Company is unable to
restructure the Secured Debt pursuant to the Restructuring Support Agreement, 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 the transactions
contemplated by the Restructuring Support Agreement will be consummated, and if the Secured Debt is
not restructured under the Restructuring Support Agreement then it is unlikely that any of the
Companys other 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 Restructuring Support
9
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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.
4. SUBSEQUENT EVENTS
On April 27, 2010, the Company entered into an agreement with its Lenders and its largest
shareholder, Highland Capital Management, L.P. (Highland), with respect to restructuring the
Company and the Companys senior debt (the Restructuring Support Agreement). The Company has
entered into the Restructuring Support Agreement in order to address its Secured Debt maturity
issue. Pursuant to the Restructuring Support Agreement, the Company has agreed to propose to its
stockholders for their approval a change in Companys state of incorporation from Delaware to
Nevada (the Reincorporation) as the first step in a series of transactions that is expected to
result in each stockholder other than Highland and its affiliates receiving $0.67 per share for
each share owned of the Companys common stock. As a result of these transactions,
including the follow-on merger described below, the Company would cease to be a publicly traded
company.
The Restructuring Support Agreement requires the Company, subject to a series of conditions
(including the approval by its stockholders of the Reincorporation), to undertake a series of
transactions, including the Reincorporation, a self-tender offer by the Company to repurchase
outstanding shares of its common stock, a long-term restructuring of the Companys secured debt,
and a follow-on merger that would make the Company a private company.
Pursuant to the Restructuring Support Agreement, and subject to the terms and conditions contained
therein:
| The Company agreed to retire at a 15% discount a portion of its outstanding secured debt obligations held by a single entity that is equal to approximately 4.5% of the total outstanding secured debt. |
| Highland and its affiliates, who collectively beneficially own approximately 48% of the outstanding common stock of the Company as of the date of the Restructuring Support Agreement, each agreed to vote their stock in favor of the Reincorporation. |
| Conditioned upon approval of the Reincorporation by the Companys stockholders, the Company agreed to carry out the Reincorporation. In the Reincorporation, stockholders in the Company will become stockholders in a new parent company of the Registrant incorporated in Nevada (the New Company). |
| If the Reincorporation is approved and carried out as described above, the New Company agreed that it would then commence a self-tender offer to its stockholders (other than Highland and its affiliates) at $0.67 per share. This tender offer will not occur if the Reincorporation is not approved. |
| In the event this self-tender offer is accepted by a number of the New Companys stockholders holding shares which together with the shares owned by Highland and its affiliates, represent at least 90% of the number of its outstanding shares, and subject to other customary closing conditions, the New Company agreed that it would repurchase all of the tendered shares. |
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| If the self-tender offer is accepted, the Lenders have agreed to restructure its debt into two four-year secured term loans. This restructuring will not occur if the tender offer does not close. The first lien term loan would be in a principal amount of approximately $100.0 million, and the second lien term loan would have a principal amount of approximately $126.4 million. The second lien term loan would bear a higher rate of interest than the first lien term loan (however, the substantial majority of interest under the second lien term loan could be paid in kind at the election of the Company), but would rank junior in priority pursuant to the terms of a customary intercreditor agreement. Both term loans would have a variable interest rate component, but in all instances would bear interest at a rate higher than the current 6.785% fixed interest rate on the Companys Secured Debt. |
| If the self-tender offer is completed, but less than 100% of the shares of the New Company not owned by Highland or its affiliates are tendered, Highland has agreed to take all actions to cause the Company to initiate a follow-on merger at the conclusion of the self-tender offer pursuant to which the remaining shares of common stock in the New Company not held by Highland and its affiliates would be cancelled in exchange for sixty-seven cents ($0.67) per share. Highland then would cause the Company to de-register its stock pursuant to federal securities laws. |
The Restructuring Support Agreement may be terminated under certain circumstances, including by
either party if the Reincorporation has not occurred on or prior to August 10, 2010 or the
self-tender offer has not been completed on or prior to September 30, 2010.
The above summary of the Restructuring Support Agreement does not set forth all details of the
Reincorporation and related transactions and is subject to, and qualified in its entirety by, the
full text of the Restructuring Support Agreement attached as Exhibit 10.4 to this quarterly report,
which is incorporated to this description by reference.
This description may be deemed to be solicitation material in respect of the proposed
Reincorporation and related transactions. In connection with the proposed Reincorporation, the
Company intends to file relevant materials with the SEC, including a proxy statement on Schedule
14A. COMPANY STOCKHOLDERS ARE URGED TO READ THE COMPANYS PROXY STATEMENT BECAUSE IT WILL CONTAIN
IMPORTANT INFORMATION ABOUT THE PROPOSED REINCORPORATION. Investors and security holders will be
able to obtain the proxy statement and other relevant documents free of charge at the SECs web
site, http://www.sec.gov, and the Companys stockholders will receive information at an appropriate
time on how to obtain transaction-related documents for free from the Company. Such documents are
not currently available.
The Company, its directors and its executive officers may be deemed to be participants in the
solicitation of proxies from the Companys stockholders in respect of the proposed Reincorporation.
Information about the Companys directors and executive officers is set forth in the proxy
statement for the Companys 2009 Annual Meeting of Stockholders, which was filed with the SEC on
April 22, 2009. Investors may obtain additional information regarding the interest of such
participants by reading the proxy statement regarding the Reincorporation when it becomes
available.
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Table of Contents
5. STOCK BASED COMPENSATION
The Company records compensation costs for fixed plan stock options based on the estimated fair
value of the respective options and the proportion vesting in the period. Deductions for
stock-based employee compensation expense 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 Companys
emergence from bankruptcy.
There were no options granted during the first quarter ended March 31, 2010. 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%.
The Company recognized $57,000 and $90,000 of stock-based compensation expense in the three months
ended March 31, 2010 and 2009, 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.
An analysis of stock options outstanding under the 1991 Plan is as follows:
Weighted | ||||||||
Average | ||||||||
Options | Exercise Price | |||||||
Outstanding at December 31, 2009 |
2,736,000 | $ | 1.55 | |||||
Granted |
| | ||||||
Exercised |
| | ||||||
Canceled |
| | ||||||
Outstanding at March 31, 2010 |
2,736,000 | $ | 1.55 | |||||
There were no stock options exercised during the three months ended March 31, 2010 or 2009.
At March 31, 2010, there was $0.2 million of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the 1991 Plan. That cost is expected
to be recognized over a weighted-average period of 1.1 years.
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Weighted | ||||||||
Average | ||||||||
Grant-date | ||||||||
Nonvested Options | Options | Fair Value | ||||||
Balance at December 31, 2009 |
834,917 | $ | 0.52 | |||||
Granted |
| | ||||||
Vested |
(355,334 | ) | 0.61 | |||||
Forfeited |
| | ||||||
Balance at March 31, 2010 |
479,583 | $ | 0.44 | |||||
Options granted under the 1991 Plan as of March 31, 2010 have the following characteristics:
Weighted | ||||||||||||||||||||||||||||||||||||
Weighted | Average | |||||||||||||||||||||||||||||||||||
Average | Remaining | |||||||||||||||||||||||||||||||||||
Exercise | Contractual | Aggregate | ||||||||||||||||||||||||||||||||||
Weighted | Price of | Life in | Intrinsic | |||||||||||||||||||||||||||||||||
Average | Options | Options | Years of | Value | ||||||||||||||||||||||||||||||||
Weighted | Remaining | Exercisable | Exercisable | Options | of Options | |||||||||||||||||||||||||||||||
Average | Contractual | Aggregate | at | at | Exercisable | Exercisable | ||||||||||||||||||||||||||||||
Year of | Options | Exercise | Exercise | Life in | Intrinsic | March 31, | March 31, | at March 31, | at March 31, | |||||||||||||||||||||||||||
Grant | Outstanding | Prices | Price | Years | Value | 2010 | 2010 | 2010 | 2010 | |||||||||||||||||||||||||||
2000 |
220,000 | $ | 0.17 to $0.30 | $ | 0.18 | 0.60 | 5,300 | 220,000 | $ | 0.18 | 0.60 | 5,300 | ||||||||||||||||||||||||
2004 |
450,000 | $ | 1.31 to $1.80 | $ | 1.64 | 4.14 | | 450,000 | $ | 1.64 | 4.14 | | ||||||||||||||||||||||||
2005 |
170,000 | $ | 2.21 to $3.55 | $ | 2.97 | 4.85 | | 170,000 | $ | 2.97 | 4.85 | | ||||||||||||||||||||||||
2006 |
470,000 | $ | 0.61 to $3.30 | $ | 3.24 | 5.90 | | 467,500 | $ | 3.26 | 5.90 | | ||||||||||||||||||||||||
2007 |
496,000 | $ | 1.25 to $2.40 | $ | 1.63 | 7.00 | | 477,250 | $ | 1.62 | 6.98 | | ||||||||||||||||||||||||
2008 |
525,000 | $ | 0.85 to $1.03 | $ | 1.02 | 7.94 | | 336,667 | $ | 1.02 | 7.93 | | ||||||||||||||||||||||||
2009 |
405,000 | $ | 0.22 | $ | 0.22 | 8.92 | | 135,000 | $ | 0.22 | 8.92 | | ||||||||||||||||||||||||
2,736,000 | $ | 5,300 | 2,256,417 | $ | 5,300 | |||||||||||||||||||||||||||||||
Options granted under the 1991 Plan as of December 31, 2009 have the following
characteristics:
Weighted | ||||||||||||||||||||||||||||||||||||
Weighted | Average | |||||||||||||||||||||||||||||||||||
Average | Remaining | |||||||||||||||||||||||||||||||||||
Exercise | Contractual | Aggregate | ||||||||||||||||||||||||||||||||||
Weighted | Price of | Life in | Intrinsic | |||||||||||||||||||||||||||||||||
Average | Options | Options | Years of | Value | ||||||||||||||||||||||||||||||||
Weighted | Remaining | Exercisable | Exercisable | Options | of Options | |||||||||||||||||||||||||||||||
Average | Contractual | Aggregate | at | at | Exercisable | Exercisable | ||||||||||||||||||||||||||||||
Year of | Options | Exercise | Exercise | Life in | Intrinsic | Dec. 31, | Dec. 31, | at Dec. 31, | at Dec. 31, | |||||||||||||||||||||||||||
Grant | Outstanding | Prices | Price | Years | Value | 2009 | 2009 | 2009 | 2008 | |||||||||||||||||||||||||||
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 | $ | | |||||||||||||||||||||||||||||||
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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, 2008, and 2009 have a three year vesting period and
expire in ten years. As of March 31, 2010 and December 31, 2009, shares available for future
grants of options under the 1991 Plan total 310,109.
Under the 1995 Nonqualified Stock Option Plan for Directors (the 1995 Plan), as amended, 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, 2009 and March 31, 2010 |
570,000 | $ | 1.18 | |||||
Options granted under the 1995 Plan as of December 31, 2009 and March 31, 2010 have the
following characteristics:
Weighted | Weighted | |||||||||||||||||||||||||||||||||||
Average | Average | Weighted | Aggregate | Aggregate | ||||||||||||||||||||||||||||||||
Remaining | Remaining | Average | Intrinsic | Intrinsic | ||||||||||||||||||||||||||||||||
Weighted | Contractual | Contractual | Exercise | Value | Value | |||||||||||||||||||||||||||||||
Average | Life in | Life in | Price of | of Options | of Options | |||||||||||||||||||||||||||||||
Year of | Options | Exercise | Exercise | Years | Years | Options | Options | Exercisable | Exercisable | |||||||||||||||||||||||||||
Grant | Outstanding | Prices | Price | 12/31/2009 | 3/31/2010 | Exercisable | Exercisable | 12/31/2009 | 3/31/2010 | |||||||||||||||||||||||||||
2000 |
140,000 | $ | 0.20 to $0.30 | $ | 0.26 | 0.61 | 0.37 | 140,000 | $ | 0.26 | | | ||||||||||||||||||||||||
2001 |
15,000 | $ | 0.75 | $ | 0.75 | 2.00 | 1.75 | 15,000 | $ | 0.75 | | | ||||||||||||||||||||||||
2002 |
15,000 | $ | 0.15 | $ | 0.15 | 3.00 | 2.76 | 15,000 | $ | 0.15 | | 750 | ||||||||||||||||||||||||
2003 |
80,000 | $ | 1.29 | $ | 1.29 | 4.00 | 3.76 | 80,000 | $ | 1.29 | | | ||||||||||||||||||||||||
2004 |
100,000 | $ | 1.18 to $3.46 | $ | 2.32 | 4.71 | 4.47 | 100,000 | $ | 2.32 | | | ||||||||||||||||||||||||
2005 |
50,000 | $ | 3.27 | $ | 3.27 | 6.00 | 5.76 | 50,000 | $ | 3.27 | | | ||||||||||||||||||||||||
2006 |
50,000 | $ | 1.40 | $ | 1.40 | 7.01 | 6.76 | 50,000 | $ | 1.40 | | | ||||||||||||||||||||||||
2007 |
40,000 | $ | 1.12 | $ | 1.12 | 8.01 | 7.76 | 40,000 | $ | 1.12 | | | ||||||||||||||||||||||||
2008 |
40,000 | $ | 0.12 | $ | 0.12 | 9.01 | 8.76 | 40,000 | $ | 0.12 | 400 | 3,200 | ||||||||||||||||||||||||
2009 |
40,000 | $ | 0.14 | $ | 0.14 | 10.00 | 9.76 | 40,000 | $ | 0.14 | | 2,400 | ||||||||||||||||||||||||
570,000 | 570,000 | $ | 400 | $ | 6,350 | |||||||||||||||||||||||||||||||
The Directors options are fully vested upon issuance and expire ten years from date of
issuance.
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6. NET (LOSS) INCOME PER COMMON SHARE
Net (loss) income per share is measured at two levels: basic net (loss) income per share and
diluted net (loss) income per share. Basic net (loss) income per share is computed by dividing net
(loss) income by the weighted average number of common shares outstanding during the year. Diluted
net loss per share is computed by dividing net loss by the weighted average number of common shares
outstanding, excluding stock options as they would be antidilutive. Diluted net 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 net income per
share, the stock options are considered dilutive using the treasury stock method.
The following information is necessary to calculate net loss per share for the periods presented:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Net loss attributable to American |
||||||||
HomePatient, Inc. |
$ | (3,769,000 | ) | $ | (5,168,000 | ) | ||
Weighted average common shares outstanding |
17,573,000 | 17,573,000 | ||||||
Effect of dilutive options |
| | ||||||
Adjusted diluted common shares outstanding |
17,573,000 | 17,573,000 | ||||||
Net loss per common share attributable to |
||||||||
American HomePatient, Inc. common |
||||||||
shareholders |
||||||||
- Basic |
$ | (0.21 | ) | $ | (0.29 | ) | ||
- Diluted |
$ | (0.21 | ) | $ | (0.29 | ) | ||
7. INCOME TAXES
On April 10, 2007, the acquisition of 5,368,982 shares of the Companys common stock by Highland
Capital Management, L.P. 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. For state tax purposes, 28 of the Companys 35 filing states apply
rules similar to IRC Section 382, resulting in an NOL carryforward limitation in these
jurisdictions.
Amortization of the Companys indefinite-life intangible assets, consisting of goodwill, ceased for
financial statement purposes for the year ended December 31, 2002. The Company had a deferred tax
liability of $12.0 million as of December 31, 2009 and $13.0 million at March 31,
2010 relating to indefinite-life intangibles. The Company cannot determine when the reversal of
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this deferred tax liability will occur, or whether such reversal would occur within the Companys
net operating loss carry-forward period. For the three months ended March 31, 2010 and 2009, the
Company recognized a non-cash charge totaling $1.0 million and $1.1 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.
8. 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. This decrease in expense
was 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
16
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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 each of the three month periods ended March 31, 2010 and 2009, the Company reduced its
change of control expense by $3,000 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 March
31, 2010 and December 31, 2009 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.
9. FAIR VALUE MEASUREMENTS
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. |
| 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.
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Table of Contents
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 March 31, 2010 and December 31, 2009, 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.
10. SECURED DEBT
The Company has Secured 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. As described more fully in Note 3, Going Concern
and Liquidity, 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 the maturity date. As described
more fully in Note 4, Subsequent Events, the Company has entered into a Restructuring Support
Agreement with the Lenders in order to restructure the Secured Debt.
Under the terms of the Secured Debt, interest was payable monthly on the Secured Debt at a rate of
6.785% per annum. Payments of principal were paid 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 in an amount equal to one-half of the anticipated 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.
11. RECENTLY ADOPTED ACCOUNTING STANDARDS
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
18
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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 resulted
in the Company consolidating its 50%-owned joint ventures beginning January 1, 2010.
12. GOODWILL IMPAIRMENT ANALYSIS
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 $34.7 million at March 31, 2010. The equity based fair value of the Company and
its one reporting unit is approximately $3.5 million at March 31, 2010. Accordingly, the Companys
fair value exceeds its carrying value as of March 31, 2010 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 4). 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 $123.6 million at March 31, 2010 may be partially or completely
impaired at that time.
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ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 including, without limitation, statements
containing the words believes, anticipates, intends, expects, estimates, projects,
may, plan, will, likely, could and words of similar import. Such statements include
statements concerning the proposed Reincorporation and the related transactions, the Companys
business strategy, the ability to satisfy interest expense and principal repayment obligations or
to otherwise address those 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 healthcare reform, the ability
to enter into strategic alliances and arrangements with managed care providers on an acceptable
basis, and current and future 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 Quarterly Report on Form 10-Q. The forward-looking statements are made as of the date of this
Quarterly Report on Form 10-Q and the Company does not undertake to update the forward-looking
statements or to update the reasons that actual results could differ from those projected in the
forward-looking statements.
Overview
American HomePatient, with operations in 33 states, provides home health care services and
products consisting primarily of respiratory and infusion therapies, the rental and sale of home
medical equipment, and the sale of home health care supplies.
20
Table of Contents
The following table sets forth the percentage of revenues represented by each line of business
for the periods presented:
Three months ended March 31, | ||||||||
2010 | 2009 | |||||||
Oxygen systems |
38 | % | 37 | % | ||||
Sleep therapy |
36 | 34 | ||||||
Inhalation drugs |
6 | 5 | ||||||
Nebulizers |
2 | 2 | ||||||
Other respiratory |
2 | 4 | ||||||
Total home respiratory therapy services |
84 | % | 82 | % | ||||
Enteral nutrition services |
5 | 5 | ||||||
Other infusion services |
4 | 4 | ||||||
Total home infusion therapy services |
9 | % | 9 | % | ||||
Total home medical equipment and supplies |
7 | % | 9 | % | ||||
100 | % | 100 | % | |||||
The Companys products and services are primarily paid for by Medicare, Medicaid, and
other third-party payors. Since amounts paid under these programs are generally based upon fixed
rates, the Company generally is not able to set the prices that it receives for products and
services provided to patients. Thus, the Company improves operating results primarily by
increasing revenues through increased volume of sales and rentals, shifting product mix toward
higher margin product lines, and controlling expenses. The Company can also improve cash flow by
limiting the amount of time that it takes to collect payment after providing products and services.
Key indicators of performance are:
Revenue Growth. The Company operates in an industry with pre-set prices subject to
reimbursement reductions. Therefore, in order to increase revenue, the Company must increase the
volume of sales and rentals. Reductions in reimbursement levels can more than offset an increase
in volume. Management closely tracks overall increases and decreases in sales and rentals as well
as increases and decreases by product line and by branch location and geographic area in order to
identify product line or geographic weaknesses and take corrective actions. The Companys sales
and marketing focus 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 higher margin
revenues will be critical to the Companys success. Management will continue to review and monitor
progress with its sales and marketing efforts. See Managements Discussion and Analysis of
Financial Condition and Results of Operations Trends, Events, and Uncertainties Reimbursement
Changes and the Companys Response.
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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 increased from $1.3 million for the three months ended March
31, 2009 to $1.8 million for the three months ended March 31, 2010. As a percentage of net
revenue, bad debt expense increased from 2.0% for the three months ended March 31, 2009 to 2.7% for
the three months ended March 31, 2010. The increase in bad debt expense in the first quarter of
2010 is primarily attributable to a temporary decrease in cash collections resulting from temporary
delays in bill submissions associated with procedural changes implemented in early 2010.
Cash Flow. The Companys funding of day-to-day operations and all payments required to the
Companys secured creditors 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.
Under the terms of the Restructuring Support Agreement, the Lenders have agreed to forbear from
exercising rights and remedies until the consummations of the transactions contemplated by the
Restructuring Support Agreement or the termination of the Restructuring Support 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 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. See Managements
Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital
Resources.
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 was 44 and 38 days at
March 31, 2010 and December 31, 2009, respectively. This increase in DSO is primarily the result
of temporary delays in bill submissions in the first quarter of 2010 associated with procedural
changes implemented in early 2010.
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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 $4.7 million and $4.0 million for March 31, 2010 and
December 31, 2009, respectively, net of valuation allowances. The increase in unbilled revenue is
primarily attributable to temporary delays in bill submissions in the first quarter of 2010
associated with procedural changes implemented in early 2010.
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 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. See Trends, Events, and Uncertainties Reimbursement
Changes and the Companys Response for additional discussion.
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 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
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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, Note 4 Subsequent Events, and 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 month. MIPPA also established new payment rules and supplier responsibilities following the 36 month rental period, the most significant of which are described below. |
| 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 |
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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. |
| 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. | ||
| 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 increases 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. | ||
| 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 during the initial 36 month rental period. 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 equipment and perform any necessary maintenance and servicing needed at the time of each visit. | ||
| The Companys financial results were materially and adversely impacted beginning in 2009 as a result of changes in oxygen reimbursement as described above. Including the 50% owned joint ventures, net revenue and net income were reduced in the twelve months of 2009 by approximately $20.0 million and $18.8 million, respectively, as a result of the reimbursement changes related to the 36 month oxygen cap. |
| 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 |
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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. Including the 50% owned joint ventures, the Company estimates the reduction in the rate for concentrators and stationary systems for 2010 will reduce net revenue and net income by approximately $0.8 million in 2010. |
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 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
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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 first round 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. Including the 50% owned joint
ventures, this 9.5% reduction reduced the Companys net revenue and net income by approximately
$9.5 million and $8.9 million, respectively, 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. At this time, the exact timing and financial impact of
competitive bidding is not known, but management believes the impact could be material.
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 reductions described above have been offset by
productivity improvements, cost reductions, and growth in respiratory revenue, 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
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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.
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 to aid patients in improving compliance.
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 definitions be uniquely identified for all claims and services that are ordered or
referred. To meet
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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, MIPPA required 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 repealed
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 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 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.
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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.
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 Companys management considers the
following accounting policies to be the most critical in relation to the Companys consolidated
financial statements: revenue recognition and allowance for doubtful accounts, inventory valuation
and cost of sales recognition, rental equipment valuation, valuation of long-lived assets,
valuation of goodwill and other intangible assets, and self insurance accruals. These policies are
presented in detail within Managements Discussion and Analysis of Financial Condition and Results
of Operations in the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2009.
Results of Operations
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
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 center 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.
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The following table and discussion sets forth items from the Companys interim condensed
consolidated statements of income as a percentage of revenues for the periods indicated:
Percentage of Revenues | ||||||||
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenues |
100.0 | % | 100.0 | % | ||||
Cost of sales and related services |
21.7 | 21.7 | ||||||
Cost of rental, including rental equipment depreciation |
12.0 | 13.0 | ||||||
Operating expenses |
51.4 | 53.0 | ||||||
Bad debt expense |
2.7 | 2.0 | ||||||
General and administrative |
7.6 | 7.7 | ||||||
Depreciation, excluding rental equipment, and
amortization |
1.4 | 1.5 | ||||||
Interest expense, net |
5.7 | 5.8 | ||||||
Other income, net |
(0.1 | ) | | |||||
Change of control income |
| | ||||||
Total expenses |
102.4 | % | 104.7 | % | ||||
Loss from operations before income taxes |
(2.4 | ) | (4.7 | ) | ||||
Provision for income taxes |
1.7 | 1.8 | ||||||
Net loss |
(4.1 | )% | (6.5 | )% | ||||
Less: Net income attributable to the noncontrolling
interests |
(1.5 | ) | (1.3 | ) | ||||
Net loss attributable to American
HomePatient, Inc. |
(5.6 | )% | (7.8 | )% | ||||
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Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
Revenues. Revenues increased from $66.2 million for the quarter ended March 31, 2009 to $67.0
million for the same period in 2010, an increase of $0.8 million, or 1.2%. The increase in revenue
is primarily attributable to growth in the Companys core respiratory product lines of oxygen and
sleep therapy, partially offset by reductions in revenue associated with non-respiratory home
medical equipment (HME) and infusion therapy as a result of the Companys continued reduction in
emphasis of these less profitable product lines. The following is a discussion of the components
of revenues:
Sales and Related Services Revenues. Sales and related services revenues increased from
$27.4 million for the quarter ended March 31, 2009 to $29.1 million for the same period of
2010, an increase of $1.7 million, or 6.2%. This increase is primarily the result of
increased sleep therapy revenue and inhalation drug revenue, partially offset by a decrease
in revenue associated with non-focus product lines, including non-respiratory HME and
infusion therapy.
Rental Revenues. Rental revenues decreased from $38.8 million for the quarter ended March
31, 2009 to $37.9 million for the same period in 2010, a decrease of $0.9 million, or 2.3%.
This decrease is primarily the result of a decrease in revenue associated with non-focus
product lines, partially offset by an increase in oxygen revenue.
Cost of Sales and Related Services. Cost of sales and related services increased from $14.4
million for the quarter ended March 31, 2009 to $14.6 million for the same period in 2010, an
increase of $0.2 million, or 1.4%. As a percentage of sales and related services revenues, cost of
sales and related services decreased from 52.5% for the quarter ended March 31, 2009 to 50.1% for
the same period in 2010. This decrease is primarily attributable to improved vendor pricing for
certain products, reductions in sales of less profitable product lines, and a change in product mix
associated with inhalation drug revenue.
Cost of Rental Revenues. Cost of rental revenues decreased from $8.6 million for the quarter ended
March 31, 2009 to $8.1 million for the same period in 2010, a decrease of $0.5 million, or 5.8%.
As a percentage of rental revenues, cost of rental revenue decreased from 22.1% for the quarter
ended March 31, 2009 to 21.3% for the quarter ended March 31, 2010. This decrease is primarily
attributable to a decrease in rental equipment depreciation due to reductions in rental equipment
purchases over the past several years largely the result of the Companys reduced emphasis on
non-respiratory HME product lines.
Operating Expenses. Operating expenses decreased from $35.1 million for the quarter ended March
31, 2009 to $34.5 million for the same period in 2010, a decrease of $0.6 million or 1.7%. As a
percentage of revenues, operating expenses decreased from 53.0% for the quarter ended March 31,
2009 to 51.4% for the quarter ended March 31, 2010. This decrease is primarily the result of
improved operating efficiencies.
Bad Debt Expense. Bad debt expense increased from $1.3 million for the quarter ended March 31,
2009 to $1.8 million for the same period in 2010, an increase of $0.5 million, or 38.5%. As a
percentage of revenues, bad debt expense increased from 2.0% for the quarter ended March 31,
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2009 to 2.7% for the quarter ended March 31, 2010. The increase in bad debt expense in the first
quarter of 2010 is primarily attributable to a temporary decrease in cash collections resulting
from temporary delays in bill submissions associated with procedural changes implemented in early
2010. The Companys net patient accounts receivable decreased from $36.5 million at March 31, 2009
to $32.1 million at March 31, 2010. Additionally, days sales outstanding (DSO) decreased from 51
days at March 31, 2009 to 44 days at March 31, 2010. The reduction in net patient accounts
receivable and DSO demonstrates the Companys continued improvements made in its revenue
qualification and collection processes.
General and Administrative Expenses. General and administrative expenses were $5.1 million for
each of the quarters ended March 31, 2009 and March 31, 2010. As a percentage of revenues, general
and administrative expenses decreased from 7.7% for the quarter ended March 31, 2009 to 7.6% for
the quarter ended March 31, 2010.
Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization expenses
were $1.0 million for the quarter ended March 31, 2009 and $0.9 million for the quarter ended March
31, 2010.
Interest Expense, Net. Interest expense, net, was $3.9 million for the quarter ended March 31,
2009 and $3.8 million for the quarter ended March 31, 2010.
Other Income, Net. Other income, net, was $0.1 million for the quarter ended March 31, 2010. The
majority of other income, net, for the quarter ended March 31, 2010 is due to income related to
various life insurance policies.
Provision for Income Taxes. The provision for income taxes was $1.2 million for the quarter ended
March 31, 2009 and $1.1 million for the same period in 2010. This expense primarily relates to
non-cash deferred federal and state 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 the
maturity date. A series of forbearance agreements were entered into by and among the Company, the
agent, and certain forbearance holders. The parties to the forbearance agreements 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. On April 27, 2010, the Company entered into the Restructuring Support Agreement, which
provides for restructuring the Company and the Companys senior debt in order to address its
Secured Debt maturity issue. Pursuant to the Restructuring Support Agreement, the Company has
agreed to propose to its stockholders for their approval a change in the Companys state of
incorporation from Delaware to Nevada as the first step in a series of transactions that is
expected to result in each stockholder other than Highland and its affiliates receiving $0.67 per
share for each share owned of the Companys common stock. As a result of these transactions,
including the follow-on merger, the Company would cease to be a publicly traded company. See Note
4 Subsequent Events. Given the unfavorable conditions in the
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current debt market, the Company believes that third-party refinancing of the debt would not be
possible at this time if the transactions contemplated under the Restructuring Support Agreement
are not consummated. Other factors, such as uncertainty regarding the Companys future
profitability would also limit the Companys ability to resolve the debt maturity issue. However,
there can be no assurance that the transaction contemplated under the Restructuring Support
Agreement will be consummated, and in such case it is unlikely that a resolution on the debt
maturity will be reached with favorable terms to the Company and its stockholders or at all.
Subject to the limitations provided by the Restructuring Support 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 March 31, 2010 the Company had current assets of $69.1 million and current liabilities of
$264.3 million, resulting in a working capital deficit of $(195.2) million and a current ratio of
0.3x as compared to a working capital deficit of $(187.5) million and a current ratio of 0.3x at
March 31, 2009. 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. 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 March 31, 2010, the
Company had unrestricted cash and cash equivalents of approximately $19.8 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, if the proposed Reincorporation and the related transactions are not
consummated, there can be no assurances that the Company will be 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 quarter ended March 31, 2010 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.
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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 $32.1 million and $29.4 million at
March 31, 2010 and December 31, 2009, respectively. Average DSO was approximately 44 and 38 days
at March 31, 2010 and December 31, 2009, 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 March
31, 2010 and December 31, 2009.
Greater than | ||||||||||||||||
(In thousands) | Total | 0-90 | 91-180 | 180 days | ||||||||||||
March 31, 2010 |
$ | 36,634 | $ | 33,148 | $ | 3,259 | $ | 227 | ||||||||
Percent of total |
100 | % | 90 | % | 9 | % | 1 | % | ||||||||
December 31, 2009 |
$ | 33,646 | $ | 30,242 | $ | 2,967 | $ | 437 | ||||||||
Percent of total |
100 | % | 90 | % | 9 | % | 1 | % |
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 was $4.5 million and $13.0 million for the three
months ended March 31, 2010 and 2009. Payments made for additions to property and equipment, net
were $5.3 million for the three months ended March 31, 2010 compared to $5.6 million for the same
period in 2009. Additionally, the Company entered into $1.2 million of capital leases for
equipment in the first quarter of 2009. Net cash used in financing activities was $3.0 million and
$9.0 million for the three months ended March 31, 2010 and 2009, respectively. The cash used in
financing activities for the quarter ended March 31, 2010 includes $1.8 million of principal
payments on long-term debt and capital leases. The cash used in financing for the quarter ended
March 31, 2009 includes $7.7 million of principal payments on long-term debt and capital leases.
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Contractual Obligations and Commercial Commitments
The following is a tabular disclosure of all contractual obligations and commitments, including all
off-balance sheet arrangements of the Company as of March 31, 2010:
Twelve Months Ending March 31, | After March 31, | |||||||||||||||||||||||
Total | 2011 | 2012 | 2013 | 2014 | 2014 | |||||||||||||||||||
Secured debt and
capital leases |
$ | 227,327,000 | $ | 227,327,000 | $ | | $ | | $ | | $ | | ||||||||||||
Interest on secured debt
and capital leases* |
5,631,000 | 5,631,000 | | | | | ||||||||||||||||||
Operating lease
obligations |
13,017,000 | 6,695,000 | 4,289,000 | 1,846,000 | 187,000 | | ||||||||||||||||||
Total contractual cash
obligations |
$ | 245,975,000 | $ | 239,653,000 | $ | 4,289,000 | $ | 1,846,000 | $ | 187,000 | $ | | ||||||||||||
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
noncancelable leases on certain vehicles and buildings.
At March 31, 2010 the Company had no off-balance sheet commitments or guarantees outstanding.
* | Interest on the Secured Debt in the table above includes interest obligations through August 10, 2010, which is the date the Restructuring Support Agreement may be terminated if the Reincorporation has not occurred. |
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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not been subject to material interest rate sensitivity since the Company paid a
fixed interest rate for its $226.4 million of Secured Debt that matured on August 1, 2009.
Interest expense associated with other debt would not materially impact the Company as most
interest rates are fixed. The Company does not own and is not a party to any material market risk
sensitive instruments.
The Company has not experienced large increases in either the cost of supplies or operating
expenses as a result of inflation. With reductions in reimbursement by government and private
medical insurance programs and pressure to contain the costs of such programs, the Company bears
the risk that reimbursement rates set by such programs will not keep pace with inflation.
ITEM 4T 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 March 31, 2010. Based on such evaluation, such officers have
concluded that, as of March 31, 2010, these disclosure controls and procedures were effective.
There has been no change in the Companys internal control over financial reporting during the
quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
American HomePatient, Inc.:
American HomePatient, Inc.:
We have reviewed the interim condensed consolidated balance sheet of American HomePatient, Inc. and
subsidiaries (the Company) as of March 31, 2010, the related condensed consolidated statements of
operations for the three-month periods ended March 31, 2010 and 2009, and the related condensed
consolidated statements of cash flows for the three-month periods ended March 31, 2010 and 2009.
These condensed consolidated financial statements are the responsibility of the Companys
management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the
interim condensed consolidated financial statements referred to above for them to be in conformity
with U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet of American HomePatient, Inc. and
subsidiaries as of December 31, 2009, and the related consolidated statements of operations,
shareholders deficit and comprehensive loss, and cash flows for the year then ended (not presented
herein); and in our report dated March 4, 2010, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2009, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been derived.
Note 2 of the Companys audited financial statements as of December 31, 2009, and for the year then
ended disclosed that the Company had a net capital deficiency and had a net working capital
deficiency resulting from $226.4 million of debt that matured on August 1, 2009. Our auditors
report on those financial statements included an explanatory paragraph referring to the matters in
note 2 of those financial statements and indicating that these matters raised substantial doubt
about the Companys ability to continue as a going concern. As indicated in note 3 of the Companys
unaudited interim condensed consolidated financial information as of March 31, 2010, and for the
three months then ended, the Company has a net capital deficiency and a net working capital
deficiency resulting from $226.4 million of debt that matured on August 1, 2009. As a result of the
Restructuring Support Agreement entered into, the Companys lenders 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 the consummation of the transactions contemplated under the
Restructuring Support Agreement or the termination of the Restructuring Support Agreement. The
accompanying interim financial information does not include any adjustments that might result from
the outcome of this uncertainty.
/s/ KPMG LLP
Nashville, Tennessee
May 5, 2010
May 5, 2010
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PART II. OTHER INFORMATION
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
three months ended March 31, 2010 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. If the proposed Reincorporation is not successful, there can be no assurance that any of the
Companys other 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 Restructuring Support Agreement (see Note 4 Subsequent Events), 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.
The Companys failure to complete the proposed Reincorporation and related transactions could
negatively affect the Company and its stockholders.
On April 27, 2010, the Company entered into a Restructuring Support Agreement with its Lenders
and its largest shareholder, Highland Capital Management, L.P., with respect to restructuring the
Company and the Companys senior debt. See Note 4 Subsequent Events. There is no assurance
that the Reincorporation and the related transactions will be approved by the Companys
stockholders, and there is no assurance that the other conditions to the completion of the
Reincorporation and the related transactions will be satisfied. In connection with the
Reincorporation and the related transactions, the Company will be subject to several risks,
including the following:
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| the market price of the Companys common stock may reflect a market assumption that the Reincorporation will occur, and a failure to complete the Reincorporation could result in a decline in the market price of the Companys common stock; | ||
| certain costs relating to the Reincorporation, such as legal, accounting and financial advisory fees, are payable by the Company whether or not the Reincorporation is completed; | ||
| under certain circumstances, if the Reincorporation is not completed, the Company may be required to pay the Lenders a termination fee of up to $2.26 million; | ||
| there may be substantial disruption to the Companys business and a distraction of management and employees from day-to-day operations, because matters related to the Reincorporation may require substantial commitments of their time and resources; | ||
| uncertainty about the effect of the Reincorporation may adversely affect the Companys relationships with its employees, suppliers and other persons with whom the Company has business relationships; and | ||
| there may be lawsuits filed against the Company relating to the Reincorporation. |
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 the Company.
Highland Capital Management has 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 stockholder
approval, including the approval of the Reincorporation and the related 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.
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 three months ended March 31, 2010, the percentage of the Companys revenues derived
from Medicare, Medicaid and all other payors was 52%, 8%, and 40%, 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.
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.
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.
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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 44 days as of March 31,
2010. 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.
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.
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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.
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.
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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.
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 6 EXHIBITS
EXHIBIT | ||
NUMBER | DESCRIPTION OF EXHIBITS | |
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
|
Seventh Forbearance Agreement dated January 14, 2010, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein (attached). | |
10.2
|
Eighth Forbearance Agreement dated February 12, 2010, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein (attached). | |
10.3
|
Ninth Forbearance Agreement dated March 12, 2010, by American HomePatient, Inc., certain of its direct and indirect subsidiaries, and NexBank, SSB, as agent, and the forebearing holders as identified therein (attached). | |
10.4
|
Restructuring Support Agreement entered into by the Company, Highland Capital Management, L.P. and senior lenders dated April 27, 2010 (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated April 28, 2010. | |
15.1
|
Awareness Letter of KPMG LLP. | |
31.1
|
Certification pursuant to Rule 13a-14(a)/15d-14(a) Chief Executive Officer. | |
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Table of Contents
EXHIBIT | ||
NUMBER | DESCRIPTION OF EXHIBITS | |
31.2
|
Certification pursuant to Rule 13a-14(a)/15d-14(a) 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. |
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN HOMEPATIENT, INC. |
||||
May 5, 2010 | By: | /s/ Stephen L. Clanton | ||
Stephen L. Clanton | ||||
Chief Financial Officer and An Officer Duly Authorized to Sign on Behalf of the registrant |
47