AHP files for Chapter 11

Saturday, August 31, 2002

BRENTWOOD, Tenn. — In what one industry watcher called the "most upbeat" Chapter 11 announcement he'd ever seen, American HomePatient filed for bankruptcy Aug. 1, seeking protection from creditors while reorganizing $275 million in debt.

"It is not a situation like some companies with a cash flow problem who rush to Chapter 11 because they need the protection to keep operating," said CEO Joseph Furlong. "We are operating just fine."

Furlong termed the bankruptcy filing a "100-percent plan," meaning that creditors and vendors will receive all they are owed, either immediately or over time with interest.

"We're not haircutting or discounting anyone," Furlong said. "There will be no layoffs, no asset sales. Employees will continue to be paid. We will continue high quality care. No one should see any changes."

The company was scheduled to pay off

entire $275 million Dec. 31, and while it has good cash flow, AHP has nowhere near that much cash on hand. Nor, with today's tight credit market, could the national find another lender willing to refinance the debt. Furlong said.

By filing for Chapter 11 protection, AHP will be able to continue its day-to-day operations and renegotiate more favorable terms for its debt. The better terms will free up more cash to fuel the company's growth and pay down the debt's principal, Furlong said.

"I don't' like to see any homecare company belly flop like this, but for American HomePatient, it was the only thing they could do," said homecare consultant Schuyler Hoss.

Furlong pretty much agreed. Another alternative would have been to sell the company. AHP explored that avenue, but there were no takers for a company with $275 million in debt, he said.

AHP's debt problems stem from a diverse group of 18 creditors — traditional banks as well as private investment companies — that hold a piece of the $275 million debt. In order to refinance it, all 18 had to unanimously agree to a specific plan, which they never did, even though AHP tried to hammer one out, Furlong said.

In Chapter 11, a vote to refinance the debt requires only 75% of the lenders, provided they control 66% of the loan value.

"The only thing that surprised me about the Chapter 11 filing is that they didn't do it earlier," said Bob Guoy, who headed AHPs' rehab division between 1997-2002. "This is what Chapter 11 is supposed to do: help companies make these moves and be successful in moving forward."

American HomePatient accumulated the debt during an acquisition binge in the mid 1990s. When Furlong arrived in 1998, he inherited a company with $323 million in debt. Since then, AHP has paid $42 million in principal, $100 million in interest and $8 million in related fees and expenses.

AHP's problems are a bit like a consumer with tons of credit card debt, said one industry watcher. The bulk of the debt payments go to interest.

Over the past few years the company lost millions and watched it stock price drop to 35 cents a share. It's problems weren't all debt related, however. Weak sales agents and business strategies that alienated referral sources, such as dropping low margin product lines, contributed to the company's problems, Furlong said.

In an effort to right the ship, Furlong said, the company has cut its DSO from 81 to 61 days and its bad debt expense from about 6% to 3.4%. AHP has improved and boosted its sales force from about 95 to 140, and last summer the company settled a $7.5 million whistleblower lawsuit with the U.S. government. HME