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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-14316
APRIA HEALTHCARE GROUP INC.
(Exact name of Registrant as specified in its charter)
Delaware 33-0488566
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)
3560 Hyland Avenue 92626
Costa Mesa, CA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 427-2000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value per share
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
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 X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 17, 2000, there were outstanding 52,245,202 shares of the
Registrant's common stock, par value $0.001, which is the only class of common
stock of the Registrant. As of March 17, 2000 the aggregate market value of the
shares of common stock held by non-affiliates of the Registrant, computed based
on the closing sale price of $15.1875 per share as reported by the New York
Stock Exchange, was approximately $618,242,453.
Documents Incorporated by Reference
None.
PART I
ITEM 1. BUSINESS
GENERAL
Apria Healthcare Group Inc. provides comprehensive home healthcare services
through approximately 350 branch locations which serve patients in all 50
states. Apria has three major service lines: home respiratory therapy, home
infusion therapy and home medical equipment. The following table provides
examples of the services and products in each:
SERVICE LINE EXAMPLES OF SERVICES AND PRODUCTS
- ------------------------ -------------------------------------------------
Home respiratory therapy Provision of oxygen systems, home ventilators,
sleep apnea equipment, nebulizers and respiratory
medications and related services
Home infusion therapy Administration of total parenteral or enteral
nutrition, anti-infectives, pain management,
chemotherapy and other medications and related
services
Home medical equipment Provision of patient room equipment, principally
hospital beds, wheelchairs, ambulatory and safety
aids
Apria was formed through the merger in 1995 of Homedco Group, Inc. into
Abbey Healthcare Group Incorporated. Abbey was incorporated in 1991 in the State
of Delaware.
BUSINESS STRATEGY
Apria adopted and began implementing the following strategic plan in
mid-1998. The strategy is aimed at maximizing profitability through five key
elements:
REMAIN IN CORE BUSINESSES, WITH INCREASED EMPHASIS ON HOME RESPIRATORY
THERAPY. Apria intends to remain in its core businesses of home respiratory
therapy, home infusion therapy and home medical equipment. However, Apria
expects to continue to increase the percentage of net revenues generated by
respiratory therapy with a corresponding reduction in the percentage of net
revenues generated by infusion therapy and home medical equipment. Net revenues
for home respiratory therapy, as percentages of total net revenues, were 64%,
59% and 51% for 1999, 1998 and 1997, respectively. Apria's home respiratory
therapy service line historically has produced higher margins than its home
infusion therapy and home medical equipment service lines.
DIVEST OR CLOSE, ON A SELECTIVE BASIS, UNPROFITABLE SERVICE LINES IN
PARTICULAR GEOGRAPHIC AREAS. During late 1998 and early 1999 Apria exited the
infusion therapy business in Texas, California, Louisiana, West Virginia,
western Pennsylvania and downstate New York. Apria then reorganized its
remaining infusion operations in 1999, realizing improvement in profitability,
contract performance and therapy mix. Apria continues to evaluate the
profitability of all its contracts, service lines and locations.
REDUCE COSTS IN CORPORATE AND FIELD OPERATIONS. Apria seeks to reduce costs
both at its corporate headquarters and in its field operations. In late 1998,
the following steps were taken:
- consolidation and closure of smaller branches, billing centers and field
support facilities throughout the United States
- reduction of labor costs at its corporate and field locations
- reduction of office space at its headquarters
In late 1999, Apria completed the centralization, at the region level, of its
purchasing, patient service equipment repair and maintenance, warehouse and
oxygen transfill functions. Cost savings from this regional centralization are
being realized through improved efficiency and tighter control over costs. Apria
continues to focus resources on identifying and implementing more cost-effective
and efficient methods of delivering products and services.
IMPROVE APRIA'S CAPITAL STRUCTURE. In accordance with its credit agreement
that was amended and restated in November 1998, Apria made a $50 million
prepayment on its revolving loan. The agreement was further amended in 1999.
Pursuant to one of the 1999 amendments, Apria made an additional $50 million
prepayment from available cash. Other amendments permit acquisitions with an
aggregate purchase price of up to $125 million through the maturity date of the
agreement, and permit Apria to repurchase up to $50 million of its common stock
through the maturity date of the agreement. In February 2000, Apria announced
that its Board of Directors authorized such a repurchase of common stock
depending on market conditions and other considerations.
Apria's credit agreement matures August 2001 and its $200 million 9 1/2%
senior subordinated notes mature November 2002. Apria may need to refinance all
or a portion of its indebtedness on or before the respective maturity dates.
Apria will continue to pursue the optimal capital structure to meet its business
needs and to implement its strategy.
EXPAND THROUGH INTERNAL GROWTH AND ACQUISITIONS. Apria intends to continue
to expand through internal growth and acquisitions in its target markets. In
1999, Apria completed a number of acquisitions with an aggregate consideration
of $56.3 million. Apria plans to continue to pursue acquisitions in 2000 subject
to the availability of attractive opportunities and limitations contained in
Apria's credit agreement. Apria also intends to focus its internal growth
primarily in the home respiratory therapy service line.
Achieving Apria's objectives is subject to competitive and other factors
outside of Apria's control. See "Business - Risk Factors".
SERVICE LINES
Apria derives substantially all of its revenue from the home healthcare
segment of the healthcare market in principally three service lines: home
respiratory therapy, including home-delivered respiratory medications, home
infusion therapy and home medical equipment. In all three lines, Apria provides
patients with a variety of clinical services, related products and supplies,
most of which are prescribed by a physician as part of a care plan. These
services include:
- providing high-tech infusion nursing, respiratory care and pharmacy
services
- educating patients and their caregivers about the illness and instructing
them on self-care and the proper use of products in the home
- monitoring patient compliance with individualized treatment plans
- reporting to the physician and/or managed care organization
- maintaining equipment
- processing claims to third-party payors
Apria provides numerous services directly to its patients, and purchases or
rents the products needed to complement the service.
The following table sets forth a summary of net revenues by service line,
expressed as percentages of total net revenues:
Year Ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
Respiratory therapy................. 64% 59% 51%
Infusion therapy.................... 19% 23% 24%
Home medical equipment/other........ 17% 18% 25%
---- ---- ----
Total net revenues............ 100% 100% 100%
==== ==== ====
RESPIRATORY THERAPY. Apria provides home respiratory therapy services to
patients with a variety of conditions, including:
- chronic obstructive pulmonary disease ("COPD") such as emphysema, chronic
bronchitis and asthma
- nervous system-related respiratory conditions
- congestive heart failure
- lung cancer
Apria employs a clinical staff of respiratory care professionals to provide
support to its home respiratory therapy patients, according to
physician-directed treatment plans and a proprietary acuity program.
Approximately 63% of Apria's respiratory therapy revenues are derived from
the provision of oxygen systems, home ventilators and nebulizers, which are
devices to aerosolize medication. The remaining respiratory revenues are
generated from the provision of:
- apnea monitors used to monitor the vital signs of newborns
- continuous positive airway pressure devices used to control adult sleep
apnea
- noninvasive positive pressure ventilation
- other respiratory therapy products, including medications
Apria has developed a home respiratory medication service, which is
fulfilled through the Apria Pharmacy Network. Apria maintains a pharmacy license
in all states in which it is required. Through the network, Apria offers its
patients in all 50 states physician-prescribed medications to accompany the
nebulizer through which they are administered. This comprehensive program offers
patients and payors a broad base of services from one source, including the home
delivery of medications in premixed unit dose form, pharmacy services, patient
education and claims processing. Apria has developed a secure internet
application that will allow physicians to prescribe and order medications
through Apria's web site. The application is currently being tested and Apria
intends to launch it in 2000.
INFUSION THERAPY. Home infusion therapy involves the administration of, and
24-hour access to:
- parenteral and enteral nutrition
- anti-infectives
- chemotherapy
- other intravenous and injectable medications
Depending on the therapy, a broad range of venous access devices and pump
technology may be used to facilitate homecare and patient independence. Apria
employs licensed pharmacists and registered high-tech infusion nurses who have
specialized skills in the delivery of home infusion therapy. Apria currently
operates 27 pharmacy locations to serve its home infusion patients.
A number of factors have impacted the profitability of Apria's infusion
therapy service line. Increased managed care penetration has exposed Apria to
the intense price competition of these markets. The expectations of managed care
customers are very high, however, many are unwilling to tightly control their
network of providers. Hospitals, traditionally a major referral source, are
expanding their own infusion services. In response to these factors, Apria
performed a comprehensive review of its infusion therapy business in the second
and third quarters of 1998. By early 1999, Apria had substantially completed the
process of exiting the infusion service line in certain geographic areas where
it was not meeting profitability thresholds. In 1999, Apria launched
standardization and other profitability improvement initiatives that resulted in
better inventory utilization, growth in higher margin business and increased
profitability.
HOME MEDICAL EQUIPMENT/OTHER. Apria's primary emphasis in the home medical
equipment service line is on the provision of patient room equipment,
principally hospital beds and wheelchairs. Apria's integrated service approach
allows patients and managed care systems accessing either respiratory or
infusion therapy services to also access needed home medical equipment through a
single source.
As Apria's managed care organization customer base has grown, management
has recognized the need to expand its ability to provide value-added services to
these customers. Rather than directly provide certain non-core services itself,
Apria aligns itself with other segment leaders, such as medical supply
distributors and home health nursing organizations, through formal relationships
or ancillary networks. Such networks must be credentialed and qualified by
Apria's Clinical Services department.
ORGANIZATION AND OPERATIONS
ORGANIZATION. Apria's approximately 350 branch locations are organized into
four geographic divisions, which are further divided into 15 geographic regions.
Each region is operated as a separate business unit and consists of a number of
branches and a regional office. The regional office provides each of its
branches with key support services such as sales, billing, purchasing, and
equipment maintenance, repair and warehousing. Each branch delivers home
healthcare products and services to patients in their homes and other care sites
through the branch's delivery fleet and qualified personnel. This structure is
designed to create operating efficiencies associated with centralized services
while promoting responsiveness to local market needs.
Although Apria continues to operate with a large network of regional
operations, in late 1998 the company implemented a vertically-integrated
management organization in certain key functional areas, including sales,
logistics, operations and revenue management with direct reporting and
accountability to corporate headquarters. Apria believes that this structure
provides more control and consistency among its regions and branches and helps
to develop standard policies and procedures while eliminating many of the
problems inherent with a decentralized network. Its earliest implementation was
in the area of sales and operations. Previously, each regional manager was
responsible for all aspects of sales and operations, including generating new
business, operating branches and overseeing reimbursement. Under the current
structure, the sales organization is responsible for generating new business
from both traditional and managed care markets, while the operations
organization is responsible for customer service, reimbursement and asset
management. In addition to the sales and operations functional areas, Apria
established a centralized revenue management functional area. Revenue
management, based at Apria's headquarters, works with the network of branches
and regions to standardize the processes of order intake, billing and
collections. Apria has also established a coordinated purchasing structure to
obtain lower prices, reduce inventory levels and improve the distribution of
inventory items to the company's branch locations.
CORPORATE COMPLIANCE. As a leader in the home healthcare industry, Apria
has made a commitment to providing quality home healthcare services and products
while maintaining high standards of ethical and legal conduct. Apria believes
that operating its business with honesty and integrity is essential. Apria's
Corporate Compliance Program is designed to accomplish these goals through
employee education, a confidential disclosure program, written policy
guidelines, periodic reviews, compliance audits and other programs. See
"Business - Risk Factors - Federal Investigations".
OPERATING SYSTEMS AND CONTROLS. The company's business is dependent, to a
substantial degree, upon the quality of its operating and field information
systems for the establishment of accurate and profitable contract terms,
accurate order entry and pricing, billing and collections, and effective
monitoring and supervision. Difficulties encountered in the conversion to a
common system of the previously separate operations of Abbey and Homedco,
following their 1995 merger, led to a high level of accounts receivable
write-offs. Also contributing to the write-offs were functional deficiencies of
the information systems. Examples of such deficiencies included decentralized
pricing tables which forced reliance on personnel at the numerous branches and
billing centers to enter pricing updates on a timely basis, and the inability to
aggregate data at a regional or company-wide level, thereby inhibiting
management's ability to quickly identify negative trends. During 1997, the
company committed to a two-year plan to implement a large-scale fully-integrated
enterprise resource planning system to address year 2000 issues and to
facilitate correction of the functional shortcomings referred to above.
Following a reevaluation of the costs, benefits and risks of the development
project, the plan was canceled in 1998 except for the work required to resolve
year 2000 issues. As a part of the decision to cancel the new system, management
performed an evaluation of its current systems. A significant conclusion of that
evaluation was that the platform on which the respiratory/home medical equipment
system operates is adequate but the infusion billing system operates on an
obsolete platform which is no longer supported by the computer industry. To
mitigate this particular risk, address certain other weaknesses of the current
systems and to position itself to meet future needs, Apria embarked on a
reengineering of the systems with the primary focus on order entry, billing and
accounts receivable. Some of the various projects include a rewriting of the
order entry, billing and accounts receivable modules and the installation of
supply chain management software to replace the inventory and purchasing
modules. The processing of transactions for all product lines, including
infusion therapy, will be addressed by these changes. Apria believes that the
implementation of these changes, many of which were completed in 1999, will
substantially improve its systems. Nonetheless, such implementations could have
a disruptive effect on billing and collection activity. See "Business -
Organization and Operations - Receivables Management".
Management is currently giving a high priority to the implementation of
optimal operating standards throughout Apria. Apria has established performance
indicators which measure operating results against expected thresholds for the
purpose of allowing all levels of management to monitor, identify and adjust
areas requiring improvement. Operating models with strategic targets have been
developed to move Apria toward more effectively managing labor expenses and the
customer service, accounts receivable, clinical and distribution areas of its
business. Apria's management team is compensated using performance-based
incentives focused on quality revenue growth, gross profit and improvement in
operating income.
Failure to resolve the systems and operational problems experienced in
prior periods and to implement optimal operating standards successfully would
have a significant negative impact on results of operations.
PAYORS. Apria derives substantially all its revenues from third-party
payors, including private insurers, managed care organizations, Medicare and
Medicaid. For 1999, approximately 24% of Apria's net revenues were derived from
Medicare and 8% from Medicaid. Generally, each third-party payor has specific
claims requirements. Apria has policies and procedures in place to manage the
claims submission process, including verification procedures to facilitate
complete and accurate documentation.
RECEIVABLES MANAGEMENT. Apria operates in an environment with complex
requirements governing billing and reimbursement for its products and services.
Subsequent to the 1995 merger of Abbey and Homedco, Apria had difficulties in a
number of areas relating to billing and subsequent collection of accounts
receivable. The merger resulted in a restructuring plan which included a very
rapid consolidation of operating locations and the conversion of all locations
to standardized information systems. There were over 100 branch
closures/consolidations and 496 systems conversions. The branch
closures/consolidations were effected soon after the June 1995 merger, but the
system conversions were not completed until September 1996. Together with very
high employee turnover during this period, the consolidations and system
conversions had a major impact on the processes of order taking, product
identification, billing and collections, and ultimately, led to a high level of
accounts receivable write-offs.
Apria believes that the primary factors contributing to the unusually high
level of revenue adjustments post-merger included:
- subsequent changes to estimated revenue amounts or denials for services
not covered due to changes in patient's coverage
- failure to document initial service authorizations or continued service
authorizations in required timeframes
- differences in contract prices due to complex contract terms or a
customer service representative's lack of familiarity with a contract,
payor or system price
- high turnover of customer service and billing representatives
The high level of bad debt write-offs post-merger can be partially
attributable to Apria's concentration and focus on managed care business. Apria
had difficulties collecting its receivables from many managed care payors.
The effects of all these factors necessitated charges to increase Apria's
allowance for revenue adjustments of $18.3 million and $40.0 million in 1998 and
1997, respectively, and charges to increase the allowance for doubtful accounts
of $13.6 million and $61.4 million in 1998 and 1997, respectively.
Although management addressed these issues with a number of initiatives
during 1996 and 1997, improvement in timely and accurate billings was slow.
During 1998, Apria took several additional steps to address the most significant
factors contributing to revenue adjustments and write-offs which included:
- software enhancements to simplify the order-intake process and
specifically the process of selecting products/services and payors
- enhanced quality assurance programs designed to improve workflow and
billing accuracy
- realignment of responsibility for revenue qualification, billing and
collections within a defined functional group reporting to the corporate
office
In 1999, accounts receivable write-offs decreased significantly from the
levels experienced in the last few years. Additionally, days sales outstanding
("DSO") have been 56 days or fewer for each of the last five quarters, compared
to a range of 87 to 111 days during 1996 and 1997. Apria believes the lower
write-offs and improved DSO in 1999 are attributable to its focus on order
entry, billing and collections by its centralized revenue management function as
well as to a number of new system improvements and enhanced functionality
designed to automate and centralize certain processes and to provide more timely
error identification.
Despite the improvements in accounts receivable in 1999, collection of its
accounts receivable remains one of Apria's biggest challenges. Two factors
impacting the performance of accounts receivable are (1) continued high turnover
among accounts receivable personnel in many of Apria's locations and (2) the
inability to collect contractually-due receivables from certain large managed
care payors on a timely basis, or at all. To address the high turnover,
management is seeking to upgrade certain of its accounts receivable management
positions to gain more stability at that level and to centralize certain
functions that require a higher level of expertise and training. To address
collection issues with certain large managed care payors, Apria is developing
centralized processing groups and is designing customized electronic interfaces
with certain large payors to facilitate improved communications and electronic
order intake and claims adjudication. In certain cases, Apria may choose not to
renew contracts with payors who do not pay on a timely basis. Apria will also
take legal action to enforce its contractual rights, if necessary. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
MARKETING
Through its field sales force, Apria markets its services primarily to
managed care organizations, physicians, hospitals, medical groups and home
health agencies and case managers. The following sample marketing initiatives
address the requirements of its referring customers:
AUTOMATED CALL ROUTING THROUGH A SINGLE TOLL-FREE NUMBER. This allows
select managed care organizations to reach any of Apria's locations and to
access the full range of Apria services through a single central telephone
number: 1-800-APRIA-88.
ACCREDITATION BY THE JOINT COMMISSION ON ACCREDITATION OF HEALTHCARE
ORGANIZATIONS. The Joint Commission on Accreditation of Healthcare Organizations
is a nationally recognized organization which develops standards for various
healthcare industry segments and monitors compliance with those standards
through voluntary surveys of participating providers. As the home healthcare
industry has grown, the need for objective quality measurements has increased.
Accreditation by the Joint Commission on Accreditation of Healthcare
Organizations entails a lengthy review process which is conducted every three
years. Accreditation is increasingly being considered a prerequisite for
entering into contracts with managed care organizations at every level. Because
accreditation is expensive and time consuming, not all providers choose to
undergo the process. Due to its leadership role in establishing quality
standards for home healthcare and its active and early participation in this
process, Apria is viewed favorably by referring healthcare professionals. All of
Apria's branch locations are accredited by or in the process of receiving
accreditation from the Joint Commission on Accreditation of Healthcare
Organizations. Apria's triennial survey cycle began in late 1999.
CLINICAL MANAGEMENT SERVICES. As more alternate site healthcare is managed
and directed by various managed care organizations, new methods and systems are
sought to simultaneously control costs and improve outcomes. Apria has developed
a series of programs designed to proactively manage patients in conjunction with
a managed care partner and the patient's physician in an alternate site setting.
These services may include:
- patient and/or environmental assessments
- screening/diagnostics
- patient education
- clinical monitoring
- pharmacological management
- utilization and outcome reporting
PHYSICIAN RELATIONS. Apria's physician relations group places phone calls
to physician offices in an effort to increase and enhance awareness of Apria's
services and to stimulate interest in Apria. Physician relations representatives
work closely with sales professionals throughout the country to identify,
develop and maintain quality relationships.
PATIENT SATISFACTION. In 1999, Apria centralized its patient satisfaction
survey function. Previously, Apria relied on its distributed branch network to
mail surveys to its discharged patients. Centralization of the function ensures
the validity of the sampling methodology and has served to increase the survey
response rate from approximately 4% to a more statistically-meaningful 30%. The
program also meets the Joint Commission on Accreditation of Healthcare
Organizations' new requirements for outcome data. Targeted member satisfaction
studies for key managed care organizations are also conducted periodically.
APRIA GREAT ESCAPES TM TRAVEL PROGRAM. Apria's 350-branch network
facilitates travel for patients who are on oxygen or other therapies. The
company coordinates equipment and service needs for thousands of patients each
quarter, which enhances their mobility and quality of life.
SALES
Apria employs approximately 380 sales professionals whose primary
responsibility is to target key customers for all service lines. Key customers
include but are not limited to hospital-based healthcare professionals,
physicians and their staffs, and managed care organizations. Sales professionals
are afforded the necessary clinical and technical training to represent Apria's
major service offerings of home respiratory therapy, home infusion therapy and
home medical equipment. As larger segments of the marketplace become involved
with managed care, specific portions of the sales force's working knowledge of
pricing, contracting and negotiating, and specialty-care management programs are
being enhanced as well.
An integral component of Apria's overall sales strategy is to increase
volume through managed care organizations and traditional referral channels. As
Apria's various served markets evolve, the ultimate decision makers for
healthcare services vary greatly from closed model managed care organizations to
preferred provider networks which are controlled by more traditional means.
Apria's selling structure and strategies are driven largely by these changing
market factors and will continue to adjust as further changes in the industry
occur. Managed care organizations continue to represent a significant portion of
Apria's business in several of its primary metropolitan markets. No single
account, however, represented more than 8% of Apria's total net revenues for
1999. Among its more significant managed care agreements, the company has
contracts with Aetna/U.S. Healthcare/Prudential Health Plans, Gentiva Health
Services, Kaiser Permanente and United Healthcare Corporation. Apria also offers
discount agreements and various fee-for-service arrangements to hospitals or
hospital systems whose patients have home healthcare needs.
COMPETITION
The segment of the healthcare market in which Apria operates is highly
competitive. In each of its service lines there are a limited number of national
providers and numerous regional and local providers. The competitive factors
most important in the regional and local markets are:
- reputation with referral sources, including local physicians and
hospital-based professionals
- access and responsiveness
- price of services
- overall ease of doing business
- quality of care and service
- range of home healthcare services
The competitive factors most important in the larger, national markets are
the foregoing factors and:
- wide geographic coverage
- ability to develop and maintain contractual relationships with managed
care organizations
- access to capital
It is increasingly important to be able to integrate a broad range of home
healthcare services through a single source. Apria believes that it competes
effectively in each of its service lines with respect to all of the above
factors and that it has an established record as a quality provider of home
respiratory therapy and home infusion therapy as reflected by the Joint
Commission on Accreditation of Healthcare Organizations accreditation of its
branches.
Other types of healthcare providers, including hospitals, home health
agencies and health maintenance organizations, have entered, and may continue to
enter, Apria's various service lines. Depending on their individual situations,
it is possible that Apria's competitors may have, or may obtain, significantly
greater financial and marketing resources than Apria.
GOVERNMENT REGULATION
Apria is subject to extensive government regulation, including numerous
laws directed at preventing fraud and abuse and laws regulating reimbursement
under various governmental programs, as more fully described below. See
"Business - Risk Factors - Federal Investigations".
MEDICARE AND MEDICAID REIMBURSEMENT. As part of the Social Security
Amendments of 1965, Congress enacted the Medicare program which provides for
hospital, physician and other statutorily-defined health benefits for qualified
individuals such as persons over 65 and the disabled. The Medicaid program, also
established by Congress in 1965, is a joint federal and state program that
provides certain statutorily-defined health benefits to financially needy
individuals who are blind, disabled, aged, or members of families with dependent
children. In addition, Medicaid generally covers financially needy children,
refugees and pregnant women. A substantial portion of Apria's revenue is
attributable to payments received from third-party payors, including the
Medicare and Medicaid programs. In 1999, approximately 24% of Apria's net
revenue was derived from Medicare and 8% from Medicaid.
Medicare Legislation. The Medicare Reform Act of 1997 contains a number of
provisions that are affecting, or could potentially affect, Medicare
reimbursement levels to Apria. On November 29, 1999, the Medicare Balanced
Budget Refinement Act of 1999 was passed, which provides Apria and the
healthcare industry with some relief from the effects of the Medicare Reform Act
of 1997.
Pursuant to the provisions of the Medicare Reform Act of 1997, the Medicare
reimbursement rates for home oxygen therapy and respiratory drugs were reduced
by 25% and 5%, respectively. This reduction was effective January 1, 1998 and
was followed by an additional reimbursement reduction of 5% on home oxygen
therapy that became effective on January 1, 1999. The estimated decreases to
Apria's 1999 and 1998 revenues and operating income resulting from these
reimbursement reductions were approximately $10 million and $57 million,
respectively. Other provisions of the Medicare Reform Act of 1997 that have
affected, or are affecting, levels of reimbursement to Apria for equipment and
services include:
- a reduction of the Medicare update, or inflation factor, to zero for home
medical equipment, including oxygen, and home infusion therapy for each
of the years 1998 through 2002; some relief to this was provided through
the Medicare Balanced Budget Refinement Act of 1999 with limited
reimbursement increases for durable medical equipment, supplies and
oxygen in 2001 and 2002
- a reduction of the Medicare reimbursement for drugs and biologicals
- a payment freeze between 1998 and 2002 for parenteral and enteral
nutrients, supplies and equipment at 1995 payment amounts
Another provision of the Medicare Reform Act of 1997 that may affect
reimbursement levels is the authority it granted to the Secretary of the Health
and Human Services Department to increase or reduce the reimbursement for home
medical equipment, including oxygen, by 15% each year under an inherent
reasonableness procedure. However, under the provisions of the Medicare Balanced
Budget Refinement Act of 1999, any reimbursement reductions proposed under the
inherent reasonableness procedure have been delayed until (1) the General
Accounting Office has conducted a study to evaluate the impact of the authority
granted under this procedure, and (2) the Health Care Financing Administration
has promulgated a final rule implementing the inherent reasonableness authority
based on a reevaluation of the appropriateness of the criteria included in the
interim regulations.
The Medicare Reform Act of 1997 mandates that the Health Care Financing
Administration conduct competitive bidding demonstrations for Medicare Part B
items and services. Pursuant to this mandate, the Health Care Financing
Administration issued notices to providers, including Apria, in Polk County,
Florida, of the structure and conditions for submitting bids to provide Medicare
beneficiaries with five categories of home medical equipment, including oxygen,
hospital beds, enteral products, surgical and urological supplies. The
demonstration commenced October 1, 1999. The competitive bidding demonstration,
the first of its kind by the Health Care Financing Administration and the first
of five authorized by the Medicare Reform Act of 1997, could provide the Health
Care Financing Administration and Congress with a model for implementing
competitive pricing in all Medicare Programs. If such a competitive bidding
system were implemented, it could result in lower reimbursement rates, exclude
certain items and services from coverage or impose limits on increases in
reimbursement rates. The Health Care Financing Administration recently announced
that the San Antonio, Texas area will be the site of the second demonstration.
This demonstration, which will commence January 1, 2001, will cover the counties
of Bexar, Comal and Guadalupe.
The United States General Accounting Office was directed by the Medicare
Reform Act of 1997 to report in 18 months on the effect of the reductions in
oxygen reimbursement on accessibility to patients of home oxygen services. The
General Accounting Office's report was released on April 5, 1999. The conclusion
of the report is that the reduction in Medicare payment rates for home oxygen
has not had a major impact on patients' access to home oxygen equipment and
services. The Secretary of Health and Human Services was directed to arrange for
peer review organizations to evaluate the access to, and quality of, home oxygen
equipment.
The Medicare Reform Act of 1997 also proposed that suppliers of home
medical equipment be required to post surety bonds equal to 15% of their
previous year's Medicare revenues, in a minimum amount of $50,000 and up to a
maximum of $3 million, as a condition of participation in the Medicare program.
The bonds would be used to secure suppliers' performance and compliance with
Medicare program rules and requirements. The deadline for securing such bonds
has been extended indefinitely, as the Health Care Financing Administration is
reviewing the bonding requirements pursuant to a recommendation by the General
Accounting Office.
Claims Audits. Durable medical equipment regional carriers are private
organizations that contract to serve as the government's agents for the
processing of claims for items and services provided under Part B of the
Medicare program. These carriers and Medicaid agencies also periodically conduct
pre-payment and post-payment reviews and other audits of claims submitted.
Medicare and Medicaid agents are under increasing pressure to scrutinize
healthcare claims more closely. In addition, the home healthcare industry is
generally characterized by long collection cycles for accounts receivable due to
the complex and time-consuming requirements, including collection of medical
necessity documentation, for obtaining reimbursement from private and
governmental third-party payors. Such long collection cycles or reviews and/or
similar audits or investigations of Apria's claims and related documentation
could result in denials of claims for payment submitted by Apria or in
government demands for significant refunds or recoupments of amounts paid by the
government for claims which, upon subsequent investigation, are determined by
the government to be inadequately supported by the required documentation.
THE ANTI-KICKBACK STATUTE. As a provider of services under the Medicare and
Medicaid programs, Apria is subject to the Medicare and Medicaid fraud and abuse
laws (sometimes referred to as the "anti-kickback statute"). At the federal
level, the anti-kickback statute prohibits any bribe, kickback or rebate in
return for the referral of patients, products or services covered by federal
healthcare programs. Federal healthcare programs have been defined to include
plans and programs that provide health benefits funded by the United States
Government, including Medicare, Medicaid, and the Civilian Health and Medical
Program of the Uniformed Services, among others. Violations of the anti-kickback
statute may result in civil and criminal penalties and exclusion from
participation in the federal healthcare programs. In addition, a number of
states in which Apria operates have laws that prohibit certain direct or
indirect payments (similar to the anti-kickback statute) or fee-splitting
arrangements between healthcare providers, if such arrangements are designed to
induce or encourage the referral of patients to a particular provider. Possible
sanctions for violation of these restrictions include exclusion from state
funded healthcare programs, loss of licensure and civil and criminal penalties.
Such statutes vary from state to state, are often vague and have seldom been
interpreted by the courts or regulatory agencies.
PHYSICIAN SELF-REFERRALS. Certain provisions of the Omnibus Budget
Reconciliation Act of 1993, commonly known as "Stark II", prohibit Apria,
subject to certain exceptions, from submitting claims to the Medicare and
Medicaid programs for "designated health services" if Apria has a financial
relationship with the physician making the referral to Apria for such services
or with a member of such physician's immediate family. The term "designated
health services" includes several services commonly performed or supplied by
Apria, including durable medical equipment, home health services and parenteral
and enteral nutrition. In addition, "financial relationship" is broadly defined
to include any ownership or investment interest or compensation arrangement
pursuant to which a physician receives remuneration from the provider at issue.
Violations of Stark II may result in loss of Medicare and Medicaid
reimbursement, civil penalties and exclusion from participation in the Medicare
and Medicaid programs. Stark II is broadly written and, at this point, only
proposed regulations have been issued to clarify its meaning and application.
Regulations for a predecessor law, Stark I, were published in August 1995 and
remain in effect, but provide little guidance on the application of Stark II to
Apria's business. While the proposed Stark II regulations do not have the force
and effect of law, they provide some guidance as to what may be included in the
final version. Issued on January 9, 1998, the proposed regulations purport to
define previously undefined key terms, clarify prior definitions and create new
exceptions for certain "fair market value" transactions, de minimis compensation
arrangements and discounts, among others. It is unclear when these regulations
will be finalized and, until such time, they cannot be relied upon in
structuring transactions. In addition, a number of the states in which Apria
operates have similar prohibitions on physician self-referrals. Finally, recent
enforcement activity and resulting case law developments have increased the
legal risks of physician compensation arrangements that do not satisfy the terms
of an exception to Stark II, especially in the area of joint venture
arrangements with physicians.
FALSE CLAIMS. The False Claims Act imposes civil and criminal liability on
individuals or entities that submit false or fraudulent claims for payment to
the government. Violations of the False Claims Act may result in treble damages,
civil monetary penalties and exclusion from the Medicare and Medicaid programs.
The False Claims Act also allows a private individual to bring a qui tam
suit on behalf of the government against a healthcare provider for violations of
the False Claims Act. A qui tam suit may be brought by, with only a few
exceptions, any private citizen who has material information of a false claim
that has not yet been previously disclosed, and even if disclosed, the original
source of the information leading to the public disclosure may still pursue such
a suit. The private plaintiff in such a suit is often a corporate insider who
decides to become a whistleblower. However, the law does not prohibit outsiders
from pursuing such suits and there has been an increase in outsiders pursuing
them.
In a qui tam suit, the private plaintiff is responsible for initiating a
lawsuit that may eventually lead to the government recovering money of which it
was defrauded. After the private plaintiff has initiated the lawsuit, the
government must decide whether to intervene in the lawsuit and become the
primary prosecutor. In the event the government declines to join the lawsuit,
the private plaintiff may choose to pursue the case alone, in which case the
private plaintiff's counsel will have primary control over the prosecution
(although the government must be kept apprised of the progress of the lawsuit
and will still receive at least 70% of any recovered amounts). In return for
bringing the suit on the government's behalf, the statute provides that the
private plaintiff is to receive up to 30% of the recovered amount from the
litigation proceeds if the litigation is successful. Recently, the number of qui
tam suits brought against healthcare providers has increased dramatically. In
addition, at least five states - California, Illinois, Florida, Tennessee, and
Texas - have enacted laws modeled after the False Claims Act that allow those
states to recover money which was fraudulently obtained by a healthcare provider
from the state (e.g., Medicaid funds provided by the state).
OTHER FRAUD AND ABUSE LAWS. The Health Insurance Portability and
Accountability Act of 1996 created in part, two new federal crimes: "Health Care
Fraud" and "False Statements Relating to Health Care Matters." The Health Care
Fraud statute prohibits knowingly and willfully executing a scheme or artifice
to defraud any healthcare benefit program. A violation of this statute is a
felony and may result in fines and/or imprisonment. The False Statements statute
prohibits knowingly and willfully falsifying, concealing or covering up a
material fact by any trick, scheme or device or making any materially false,
fictitious or fraudulent statement in connection with the delivery of or payment
for healthcare benefits, items or services. A violation of this statute is a
felony and may result in fines and/or imprisonment.
Recently, the federal government has made a policy decision to
significantly increase the financial resources allocated to enforcing the
healthcare fraud and abuse laws. In addition, private insurers and various state
enforcement agencies have increased their level of scrutiny of healthcare claims
in an effort to identify and prosecute fraudulent and abusive practices in the
healthcare area.
INTERNAL CONTROLS. Apria maintains several programs designed to minimize
the likelihood that Apria would engage in conduct or enter into contracts
violative of the fraud and abuse laws. Contracts of the types subject to these
laws are reviewed and approved by the corporate contract services and/or legal
departments. Apria also maintains various educational programs designed to keep
its managers updated and informed on developments with respect to the fraud and
abuse laws and to remind all employees of Apria's policy of strict compliance in
this area. While Apria believes its discount agreements, billing contracts, and
various fee-for-service arrangements with other healthcare providers comply with
applicable laws and regulations, Apria cannot provide any assurance that further
judicial interpretations of existing laws or legislative enactment of new laws
will not have a material adverse effect on Apria's business. See "Business -
Risk Factors - Federal Investigations".
HEALTHCARE REFORM LEGISLATION. Economic, political and regulatory
influences are subjecting the healthcare industry in the United States to
fundamental change. Healthcare reform proposals have been formulated by members
of Congress and by the current administration. In addition, some of the states
in which Apria operates periodically consider various healthcare reform
proposals. Apria anticipates that Congress and state legislatures will continue
to review and assess alternative healthcare delivery systems and payment
methodologies and public debate of these issues will continue in the future. Due
to uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, Apria cannot predict which, if any, of such reform
proposals will be adopted or when they may be adopted or that any such reforms
will not have a material adverse effect on Apria's business and results of
operations.
Healthcare is an area of extensive and dynamic regulatory change. Changes
in the law or new interpretations of existing laws can have a dramatic effect on
permissible activities, the relative costs associated with doing business and
the amount of reimbursement by government and other third-party payors.
Recommendations for changes may result from an ongoing study of patient access
by the General Accounting Office and from the potential findings of the National
Bipartisan Commission on the Future of Medicare.
EMPLOYEES
As of March 1, 2000, Apria had 8,622 employees, of which 7,345 were
full-time and 1,277 were part-time. The company's employees are not currently
represented by a labor union or other labor organization, except for
approximately 17 employees in the State of New York. Apria believes that its
employee relations are good.
In February 2000, Apria's full-time equivalents in the functional areas of
sales, operations and administration totaled 380, 6,831 and 866, respectively.
Full-time equivalents are computed by dividing the actual number of hours worked
in a given period by the "normal" number of hours for that period based on a
40-hour week.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles with Apria and present and past
positions of the persons serving as executive officers of Apria as of March 20,
2000:
Name and Age Office and Experience
Philip L. Carter, 51............... Chief Executive Officer and Director. Mr. Carter has been Chief Executive Officer and
a Director of Apria since May 1998. Prior to joining Apria, Mr. Carter was President
and Chief Executive Officer of Mac Frugal's Bargains -- Close-Outs Inc., a chain of
retail discount stores, since 1995 and had held the positions of Executive Vice
President and Chief Financial Officer of Mac Frugal's from 1991 through 1995.
Lawrence M. Higby, 54.............. President and Chief Operating Officer. Mr. Higby joined Apria in November 1997
as President and Chief Operating Officer. Prior to joining Apria, Mr. Higby served
as President and Chief Operating Officer of Unocal's 76 Products Company and Group
Vice President of Unocal Corporation from 1994 to 1997. From 1986 to 1994, Mr. Higby
held various positions with the Times Mirror Company, including Executive Vice
President, Marketing of the Los Angeles Times and Chairman of the Orange County Edition
from 1992 to 1994.
Michael R. Dobbs, 50 .............. Executive Vice President, Logistics. Mr. Dobbs was promoted to Executive Vice President,
Logistics in January 1999. He served as Senior Vice President, Logistics from June 1988
to January 1999. Prior to joining Apria, Mr. Dobbs served as Senior Vice President of
Distribution for Mac Frugal's Bargains -- Close-Outs Inc. from 1991 to January 1998.
John C. Maney, 40 ................. Executive Vice President and Chief Financial Officer. Mr. Maney has been Executive Vice
President and Chief Financial Officer since joining Apria in November 1998. Prior to
joining Apria, Mr. Maney was employed by Arthur Andersen LLP since 1992 and was a
partner of such firm from 1995 to 1998.
Lawrence A. Mastrovich, 38 ........ Executive Vice President, Revenue Management. Mr. Mastrovich was promoted to Executive
Vice President, Revenue Management in October 1998. He served as Division Vice
President, Operations of the Northeast Division from December 1997 to October 1998.
Prior to that time he had served as a Regional Vice President for Apria and Homedco
since 1994 and in various other capacities from 1987 to 1994.
George J. Suda, 41 ................ Executive Vice President, Information Services. Mr. Suda was promoted to Executive Vice
President, Information Systems in March 2000. Prior to his most recent promotion, he
served as Senior Vice President, Information Systems since July 1998, as Vice President,
Information Services Technology from June 1997 to July 1998 and as Director, Technology
from January 1997 to June 1997. From July 1994 to January 1997, Mr. Suda was a
self-employed information services consultant, providing services to Abbey and Apria.
Dennis E. Walsh, 50................ Executive Vice President, Sales. Mr. Walsh was promoted to Executive Vice President,
Sales in January 1998. Mr. Walsh served as Senior Vice President, Western Zone from
March 1997 to January 1998. From June 1995 to March 1997, he served as Senior Vice
President, Sales and Marketing. He served as Vice President, Sales of Homedco from
November 1987 to June 1995.
Frank Bianchi, 55.................. Senior Vice President, Human Resources. Mr. Bianchi joined Apria in May 1998 as its
Senior Vice President, Human Resources. Prior to joining Apria, Mr. Bianchi served as
Senior Vice President, Human Resources for Mac Frugal's Bargains -- Close-Outs Inc. from
1989 until January 1998.
Lisa M. Getson, 38................. Senior Vice President, Business Development and Clinical Services. Ms. Getson was named
Senior Vice President, Business Development and Clinical Services in August 1998. Ms.
Getson was promoted to Senior Vice President, Marketing in August 1997 after serving as
Vice President, Marketing from November 1995 to August 1997. She served as Director of
Marketing, Infusion from June 1995 to November 1995. From May 1994 to June 1995, she
served as Director of Business Development of Abbey. From 1989 to 1994, Ms. Getson held
various positions with Critical Care America, including Director of Marketing and
Business Development from January 1993 to May 1994.
Robert S. Holcombe, 57............. Senior Vice President, General Counsel and Secretary. Mr. Holcombe was promoted to
Senior Vice President, General Counsel and Secretary in August 1997. He served
as Vice President, General Counsel and Secretary from May 1996 to August 1997. Prior
to joining Apria, Mr. Holcombe served as Senior Vice President and General Counsel
for The Cooper Companies, Inc., a diversified specialty healthcare company, from
December 1989 to April 1996.
James E. Baker, 48 ................ Vice President, Controller. Mr. Baker has served as Vice President, Controller of
Homedco and, subsequently, Apria, since August 1991. He served as Corporate Controller
of Homedco from November 1987 to August 1991.
RISK FACTORS
This report contains forward-looking statements, which are subject to
numerous factors (many of which are beyond the company's control) which could
cause actual results to differ materially from those in the forward-looking
statements. Such forward looking statements include, but are not limited to,
statements as to anticipated future results, developments and occurrences set
forth or implied:
- - under the caption "Business - Business Strategy" and elsewhere in this report
as to measures being undertaken to improve profitability, and plans for the
future
- - under the caption "Business - Organization and Operations - Operating Systems
and Controls"
- - under the caption "Business - Organization and Operations - Receivables
Management"
- - under the caption "Business - Government Regulation - Medicare and Medicaid
Reimbursement"
- - under the caption "Business - Government Regulation - Internal Controls"
- - under the caption "Legal Proceedings" and elsewhere in this report concerning
the outcome of pending legal proceedings
- - under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations"
- - under the caption "Quantitative and Qualitative Disclosures about Market Risk"
- - under the caption "Notes to Consolidated Financial Statements - Notes 1,7 and
11"
Apria has identified below important factors that could cause actual
results to differ materially from those projected in any forward-looking
statements the company may make from time to time.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE - APRIA'S FAILURE TO MAINTAIN OR IMPROVE
ITS CONTROLS AND PROCESSES OVER BILLING AND COLLECTING OR THE DETERIORATION OF
THE FINANCIAL CONDITION OF ITS PAYORS COULD HAVE A SIGNIFICANT NEGATIVE IMPACT
ON RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Apria had experienced high levels of accounts receivable write-offs
subsequent to the 1995 Abbey/Homedco merger caused by the disruptive effects of
system conversions and process changes. In 1999, accounts receivable write-offs
decreased significantly from the levels experienced in the last few years.
Additionally, days sales outstanding have been 56 days or fewer for each of the
last five quarters, compared to a range of 87 to 111 days during 1996 and 1997.
Despite these improvements, collection of accounts receivable remains one of
Apria's biggest challenges, requiring constant focus and involvement by senior
management and ongoing enhancements to information systems and billing center
operating procedures. Further, some of Apria's payors may experience financial
difficulties, or may otherwise not pay accounts receivable when due, resulting
in increased write-offs. There can be no assurance that Apria will be able to
maintain its current levels of collectability and days sales outstanding in
future periods. If Apria is unable to properly bill and collect its accounts
receivable, results will be adversely affected. See "Business - Organization and
Operations - Receivables Management" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources".
MEDICARE REIMBURSEMENT RATES - CONTINUED REDUCTIONS IN MEDICARE REIMBURSEMENT
RATES COULD HAVE A MATERIAL ADVERSE EFFECT ON RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Pursuant to the provisions of the Medicare Reform Act of 1997, the Medicare
reimbursement rates for home oxygen therapy and respiratory drugs were reduced
by 25% and 5%, respectively, effective January 1, 1998. An additional
reimbursement reduction of 5% on home oxygen therapy was effective on January 1,
1999. Also included in the Medicare Reform Act of 1997 was a freeze on Consumer
Price Index-based reimbursement rate increases for 1998 through 2002 as well as
other provisions which may impact reimbursement rates in the future. The
Medicare Balanced Budget Refinement Act of 1999, which was passed on November
29, 1999, provides some relief from the Consumer Price Index-based reimbursement
rate freeze and other provisions contained in the Medicare Reform Act of 1997.
However, there can be no assurance that further reimbursement reductions will
not be made. See "Business - Government Regulation - Medicare and Medicaid
Reimbursement".
FEDERAL INVESTIGATIONS - THE OUTCOME OF THE INVESTIGATIONS OF APRIA'S MEDICARE,
MEDICAID AND OTHER BILLING PRACTICES THAT THE U.S. GOVERNMENT IS CURRENTLY
CONDUCTING COULD HAVE A NEGATIVE IMPACT ON APRIA'S OPERATIONS AND FINANCIAL
CONDITION.
Apria has received a number of subpoenas and document requests from U.S.
Attorneys' offices and from the U.S. Department of Health and Human Services.
The subpoenas and requests generally ask for documents, such as patient files,
billing records and other documents relating to billing practices, related to
the company's patients whose healthcare costs are paid by Medicare and other
federal programs. Apria is cooperating with the government in connection with
these investigations and is responding to the document requests and subpoenas.
On July 8, 1999, Apria announced that the company had received notification that
the U.S. Attorney's office in Sacramento has closed its criminal investigation
file relating to eight subpoenas that had been issued by that office.
Apria has acknowledged that there may be errors and omissions in supporting
documentation affecting a portion of its billings. If the U.S. Department of
Justice were to conclude that such errors and omissions constituted criminal
violations, or were to conclude that such errors and omissions resulted in the
submission of false claims to federal healthcare programs or significant
overpayments by the government, Apria could face criminal charges and/or civil
claims for refunds, administrative sanctions and penalties for amounts that
would be highly material to its business, results of operations and financial
condition, including exclusion of Apria from participation in federal healthcare
programs. Apria believes that the assertion of criminal charges would be
unwarranted and that the company would be in a position to assert numerous
meritorious defenses in the event that any material civil claims are asserted.
However, no assurance can be provided as to whether any such charges or claims
will be asserted or as to the outcome of any possible proceedings that may
result from any such assertion of charges or claims.
OPERATING SYSTEMS AND CONTROLS - APRIA'S IMPLEMENTATION OF SIGNIFICANT SYSTEM
MODIFICATIONS TO ADDRESS SYSTEM PROBLEMS EXPERIENCED IN PRIOR PERIODS COULD
HAVE A DISRUPTIVE EFFECT ON BILLING AND COLLECTION ACTIVITY AND COULD
ULTIMATELY HAVE A SIGNIFICANT NEGATIVE IMPACT ON RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Following the 1995 merger of Apria's two predecessor corporations, the
company has been adversely affected by difficulties in establishing a common
field information system for accurate order entry, pricing, billing, collections
and monitoring, as well as by ongoing operational problems such as high turnover
and training issues. To address these issues, management performed an evaluation
of its systems. A significant determination of the evaluation is that Apria is
at some risk in continuing to run its infusion billing system on its current
platform, which is no longer supported by the computer industry. To mitigate
this particular risk, address certain other weaknesses of the current systems
and to position itself to meet future needs, Apria embarked on a reengineering
of the systems with the primary focus on order entry, billing and accounts
receivable. Some of the various projects include a rewriting of the order entry,
billing and accounts receivable modules and the installation of supply chain
management software to replace the inventory and purchasing modules. The
processing of transactions for all product lines, including infusion therapy,
will be addressed by these changes. There can be no assurance that the system
modifications will resolve the problems experienced in prior periods and the
implementation of these system changes could have a disruptive effect on billing
and collection activity. See "Business - Organization and Operations - Operating
Systems and Controls".
GOVERNMENT REGULATION; HEALTHCARE REFORM - NON-COMPLIANCE WITH LAWS AND
REGULATIONS APPLICABLE TO APRIA'S BUSINESS AND FUTURE CHANGES IN THOSE LAWS AND
REGULATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON APRIA.
Apria is subject to stringent laws and regulations at both the federal and
state levels, requiring compliance with burdensome and complex billing,
substantiation and record-keeping requirements. Financial relationships between
Apria and physicians and other referral sources are subject to strict and
ambiguous limitations. In addition, the provision of services, pharmaceuticals
and equipment are subject to strict licensing and safety requirements.
Violations of these laws and regulations could subject Apria to severe fines,
facility shutdowns and possible exclusion from participation in federal
healthcare programs such as Medicare and Medicaid.
Government officials and the public will continue to debate healthcare
reform. Changes in healthcare law, new interpretations of existing laws, or
changes in payment methodology may have a dramatic effect on Apria's business
and results of operations. See "Business - Government Regulation".
PRICING PRESSURES - APRIA BELIEVES THAT CONTINUED PRESSURE TO REDUCE
HEALTHCARE COSTS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY.
The current market continues to exert pressure on healthcare companies to
reduce healthcare costs, resulting in reduced margins for home healthcare
providers such as Apria. Larger buyer and supplier groups exert additional
pricing pressure on home healthcare providers. These include managed care
organizations, which control an increasing portion of the healthcare economy.
Apria has a number of contractual arrangements with managed care organizations
and other parties, although no individual arrangement accounted for more than 8%
of Apria's net revenues in 2000. Certain competitors of Apria may have or may
obtain significantly greater financial and marketing resources than Apria. In
addition, relatively few barriers to entry exist in local home healthcare
markets. As a result, Apria could encounter increased competition in the future
that may increase pricing pressure and limit its ability to maintain or increase
its market share. See "Business - Sales" and "Business - Competition".
ACQUISITION STRATEGY - APRIA MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT ITS
ACQUISITION STRATEGY WHICH COULD HAVE AN ADVERSE EFFECT ON RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
In pursuing its acquisition strategy, Apria may have difficulty identifying
appropriate acquisition candidates and consummating transactions, and the
process of integrating newly acquired businesses may be costly and disruptive.
In addition, Apria may not have sufficient available funds to pursue its
acquisition strategy. Apria's credit agreement was recently amended to permit
additional acquisitions with an aggregate purchase price of up to $125 million
through August 9, 2001, the scheduled maturity date of the agreement. Through
March 20, 2000, Apria had expended approximately $25 million of its acquisition
limit. If Apria is not successful in integrating acquired businesses, results
will be adversely affected. See "Business - Business Strategy".
UPCOMING MATURITY OF LONG-TERM DEBT - APRIA MAY NOT BE ABLE TO SUCCESSFULLY
REFINANCE ITS LONG-TERM DEBT ON OR BEFORE MATURITY, WHICH COULD ADVERSELY AFFECT
THE FINANCIAL HEALTH OF APRIA.
Apria's credit agreement, under which it had total borrowings of $219
million at December 31, 1999, matures on August 9, 2001. Apria's $200 million 9
1/2% senior subordinated notes are due November 1, 2002. Apria may need to
refinance all or a portion of its indebtedness on or before maturity. Apria
cannot provide assurance that it will be able to refinance any of its
indebtedness on commercially reasonable terms or at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources".
ITEM 2. PROPERTIES
Apria's headquarters are located in Costa Mesa, California and consist of
approximately 112,000 square feet of office space. The lease expires in 2001.
Apria has approximately 350 branch facilities serving patients in all 50 states.
These branch facilities are typically located in light industrial areas and
average approximately 10,500 square feet. The typical facility is a combination
warehouse and office, with approximately 50% of the square footage consisting of
warehouse space. Apria leases substantially all of its facilities with lease
terms of ten years or less.
ITEM 3. LEGAL PROCEEDINGS
Apria and certain of its present and former officers and/or directors are
defendants in a class action lawsuit, In Re Apria Healthcare Group Securities
Litigation, filed in the U.S. District Court for the Central District of
California, Southern Division (Case No. SACV98-217 GLT). This case is a
consolidation of three similar class actions filed in March and April, 1998.
Pursuant to a court order dated May 27, 1998, the plaintiffs in the original
three class actions filed a Consolidated Amended Class Action Complaint on
August 6, 1998. The amended complaint purports to establish a class of plaintiff
shareholders who purchased Apria's common stock between May 22, 1995 and
January 20, 1998. No class has been certified at this time. The amended
complaint alleges, among other things, that the defendants made false and/or
misleading public statements regarding Apria and its financial condition in
violation of federal securities laws. The amended complaint seeks compensatory
and punitive damages as well as other relief.
Two similar class actions were filed during July, 1998 in the Superior
Court for the State of California for the County of Orange: Schall v. Apria
Healthcare Group Inc., et al. (Case No. 797060) and Thompson v. Apria Healthcare
Group Inc., et al. (Case No. 797580). These two actions were consolidated by a
court order dated October 22, 1998 (Master Case No. 797060). On June 14, 1999,
the plaintiffs filed a Consolidated Amended Class Action Complaint asserting
claims founded on state law and on Sections 11 and 12(2) of the 1933 Securities
Act.
Apria believes that it has meritorious defenses to the plaintiffs' claims,
and it intends to vigorously defend itself in both the federal and state cases.
In the opinion of Apria's management, the ultimate disposition of these class
actions will not have a material adverse effect on the company's results of
operations or financial condition.
Apria has received a number of subpoenas and inquiries from government
agencies requesting documents related to the company's billing for patients
whose healthcare costs are paid by Medicare and other federal programs. See
"Business - Risk Factors - Federal Investigations".
Apria is also engaged in the defense of certain claims and lawsuits arising
out of the ordinary course and conduct of its business, the outcomes of which
are not determinable at this time. Apria has insurance policies covering such
potential losses where such coverage is cost effective. In the opinion of
management, any liability that might be incurred by Apria upon the resolution of
these claims and lawsuits will not, in the aggregate, have a material adverse
effect on the company's results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Apria's stockholders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Apria's common stock is traded on the New York Stock Exchange under the
symbol AHG. The table below sets forth, for the calendar periods indicated, the
high and low sales prices per share of Apria common stock:
High Low
---- ---
Year ended December 31, 1999
- ----------------------------
First Quarter $12.0000 $ 7.1250
Second Quarter 22.0625 11.5000
Third Quarter 20.5000 12.5625
Fourth Quarter 18.0000 12.3125
Year ended December 31, 1998
- ----------------------------
First Quarter $14.1250 $ 8.3125
Second Quarter 10.0000 6.0625
Third Quarter 7.1875 4.0000
Fourth Quarter 9.0625 2.5625
As of March 15, 2000 there were 751 holders of record of Apria common
stock. Apria has not paid any dividends since its inception and does not intend
to pay any dividends on its common stock in the foreseeable future. Apria has a
credit agreement which prohibits the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of Apria for the five
years ended December 31, 1999. The data set forth below have been derived from
the audited Consolidated Financial Statements of Apria and are qualified by
reference to, and should be read in conjunction with, the Consolidated Financial
Statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in this report.
Year Ended December 31,
-----------------------------------------------------------------
1999(1) 1998(2,3) 1997(2,4) 1996(2,5) 1995(5,6,7)
---------- ------------ ----------- ----------- -----------
(in thousands, except per share amounts)
Statements of Operations Data:
Net revenues ........................................ $ 940,024 $ 933,793 $1,180,694 $1,181,143 $1,133,600
Gross profit ........................................ 672,110 603,098 729,512 780,468 772,601
Income (loss) from continuing operations
before extraordinary items ....................... 204,135 (207,938) (272,608) 33,300 (71,478)
Net income (loss) ................................... 204,135 (207,938) (272,608) 33,300 (74,476)
Per share amounts:
Income (loss) from continuing operations
before extraordinary items ................... $ 3.93 $ (4.02) $ (5.30) $ 0.66 $ (1.52)
Basic income (loss) per common share ............ $ 3.93 $ (4.02) $ (5.30) $ 0.66 $ (1.58)
Per share amounts - assuming dilution:
Income (loss) from continuing operations
before extraordinary items ................... $ 3.81 $ (4.02) $ (5.30) $ 0.64 $ (1.52)
Diluted income (loss) per common share .......... $ 3.81 $ (4.02) $ (5.30) $ 0.64 $ (1.58)
Balance Sheet Data:
Working capital ..................................... $ 79,644 $ 14,929 $ 169,090 $ 311,991 $ 198,630
Total assets ........................................ 629,051 496,598 757,170 1,149,110 979,985
Long-term obligations, including current maturities.. 417,729 488,586 548,905 634,864 500,307
Stockholders' equity (deficit) ...................... 75,469 (131,657) 74,467 342,935 284,238
(1) As described in Item 7 and in Note 7 to the Consolidated Financial
Statements, net income for 1999 reflects an income tax benefit of $131.0
million that was primarily attributable to the release of the company's
valuation allowance in the fourth quarter of 1999.
(2) As described in Item 7, Apria recorded significant charges to provide for
estimated losses related to accounts receivable. In 1998, $18.3 million was
recorded to increase the allowance for revenue adjustments and $22.7
million was charged to increase the allowance for doubtful accounts. These
charges relate primarily to changes in collection policies and in
conjunction with certain portions of the business from which the company
exited. Apria recorded charges of $40.0 million and $32.3 million in 1997
and 1996, respectively, to increase the allowance for revenue adjustments
and $61.4 million and $9.0 million in 1997 and 1996, respectively, to
increase the allowance for doubtful accounts. These charges were due
primarily to the residual effects of the 1995 and 1996 facility
consolidations and system conversions effected in conjunction with the
1995 Abbey/Homedco merger.
(3) As described in Item 7 and in Notes 3, 4 and 13 to the Consolidated
Financial Statements, the operations data for 1998 include impairment
charges of $76.2 million to write down the carrying values of intangible
assets and $22.2 million to write-off information systems hardware,
internally-developed software and assets associated with the exit of
portions of the business.
(4) As described in Item 7 and in Notes 3, 4, 7 and 13 to the Consolidated
Financial Statements, the operations data for 1997 include significant
adjustments and charges to write down the carrying values of intangible
assets and information systems hardware and internally-developed software
of $133.5 million and $26.8 million, respectively, to increase the
valuation allowance on deferred tax assets by $30.0 million, and to provide
for estimated shortages related to patient service assets inventory of
$33.1 million.
(5) The per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, Earnings
per Share. For further discussion, see Note 8 to the Consolidated Financial
Statements.
(6) In 1995, Apria incurred charges related to merger, restructuring and
integration activities in conjunction with the 1995 Abbey/Homedco merger.
(7) The Statements of Operations and Balance Sheet Data reflect the June 28,
1995 Abbey/Homedco merger using the pooling-of-interests method of
accounting.
Apria did not pay any cash dividends on its common stock during any of the
periods set forth in the table above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Apria operates in the home healthcare segment of the healthcare industry
and provides services in the home respiratory therapy, home infusion therapy and
home medical equipment areas. In all three lines, Apria provides patients with a
variety of clinical services and related products and supplies, most of which
are prescribed by a physician as part of a care plan. Apria provides these
services to patients in the home throughout the United States through its
approximately 350 branch locations. Management measures operating results on a
geographic basis and, therefore, views each branch as an operating segment. All
the branches offer the same services, except that infusion services are not
offered in all the geographic markets in which the company operates. For
financial reporting purposes, all the company's operating segments are
aggregated into one reportable segment.
BACKGROUND. In July 1998, after an evaluation of the business, Apria's
management adopted a strategic plan designed to improve the company's
performance. The key elements of the strategy are: (1) remain in the core
businesses, with an increased emphasis on respiratory therapy, (2) withdraw from
unprofitable components of the business, including the infusion therapy service
line in certain geographic areas, (3) institute a comprehensive cost reduction
and capital conservation program, (4) pursue expansion through internal growth
and acquisitions, and (5) reexamine the debt and capital structure of the
company. Significant actions taken by management since it adopted the strategic
plan include the sale of the California component of the infusion therapy
service line ("the infusion sale"), the exit of the infusion therapy service
line in Texas, Louisiana, West Virginia, western Pennsylvania and downstate New
York and the consolidation or closure of certain small branch locations
throughout the United States. Other significant actions include the termination
of plans to proceed with the capital-intensive implementation of an enterprise
resource planning system, a significant reduction of corporate and regional
labor and general administrative costs and the development of a comprehensive
plan to capture cost savings in the areas of purchasing, distribution and
inventory management. Further, amendments to Apria's credit agreement resulted
in, among other items, significant prepayments against its bank loans to reduce
long-term debt and the ability to complete up to $125 million in acquisitions
and repurchase up to $50 million of Apria's common stock.
TAX BENEFIT. Net income for 1999 reflects a tax benefit of $131.0 million
attributable to the release of a previously established valuation allowance. The
recognition of the tax benefit is a non-recurring item and while it does not
impact cash flow or operating income, it does have the effect of increasing
reported net income and net income per common share. See "Results of Operations
- - Income Taxes".
RESULTS OF OPERATIONS
NET REVENUES. Substantially all of Apria's revenues are reimbursed by third
party payors, including Medicare, Medicaid and managed care organizations. Due
to the nature of the industry and the reimbursement environment in which Apria
operates, certain estimates are required in recording net revenues. Inherent in
these estimates is the risk that they will have to be revised or updated, and
the changes recorded in subsequent periods, as additional information becomes
available to management.
Net revenues increased to $940.0 million in 1999, up from $933.8 million in
1998. The primary reasons for the increase are new contracts with regional and
national payors, the acquisition of complementary businesses and price increases
in certain managed care agreements. Net revenues increased in 1999 despite the
third quarter 1998 exit from the infusion therapy service line in certain
geographic markets, the 5% reduction in Medicare reimbursement rates in 1999 for
home oxygen therapy, and the exit from contractual arrangements that were not
meeting minimum profitability standards. These factors are discussed more fully
in the service line sections below.
Net revenues for 1998 decreased 21% from 1997 levels. A number of factors
contributed to the decline, including the 25% reduction in Medicare
reimbursement rates for home oxygen therapy. Further, in June of 1997, Apria
determined that its strategy to focus on increasing the managed care market
share had negatively impacted its financial performance, particularly for
infusion therapy, because of significant managed care price compression,
difficulties in billing and collecting from managed care organizations and
related losses of traditional referral business. In response to these
conditions, management reevaluated its strategies and began efforts to exit
certain managed care contracts not meeting minimum profitability thresholds, as
well as certain lower-margin service lines and began to reemphasize traditional
referral-based business from sources such as physicians, hospitals, medical
groups and home health agencies.
Service lines targeted for exit in 1997 included medical supplies, women's
health and nursing management, which represented annual revenues of
approximately $55.8 million. Some portion of the medical supply and nursing
business is continuing due to core service line customer requirements. Through
the end of 1997, Apria had exited contracted business representing approximately
$25 million in annual revenues. The contract review process continued into 1998
resulting in the termination of additional contracts totaling approximately $19
million in annual revenues. A consequence of the initiatives to exit certain
service lines and to exit certain low-margin managed care contracts was the loss
of related business that Apria would have preferred to retain.
In addition to the specific quantifiable reductions to revenue mentioned
above, 1998 revenues were adversely impacted by various other factors. In
mid-1997 Apria began a process to explore the feasibility of entering into a
transaction such as a sale, merger or recapitalization. Apria entered into an
agreement for a recapitalization transaction during the first quarter of 1998
which was subsequently terminated. The entire process created an environment of
uncertainty, both within Apria and with its customers and business partners.
During this same period there were a number of changes in senior management and
to the Board of Directors, which added to the distraction and raised more
uncertainty. These issues led Apria to be characterized in a very negative light
in articles appearing in various newspapers and trade journals. Also, during
this period of turmoil, Apria found it very difficult to attract and retain
quality sales personnel, which left many geographic sales territories lacking
sufficient coverage to compete effectively. All of these factors adversely
impacted 1998 revenues, but attributing dollar amounts to each is not feasible.
The following table sets forth a summary of net revenues by service line:
Year Ended December 31,
-----------------------------
1999 1998 1997
---- ---- ----
(in millions)
Respiratory therapy................... $ 599 $ 553 $ 606
Infusion therapy...................... 179 211 281
Home medical equipment/other.......... 162 170 294
------ ------ ------
Total net revenues.............. $ 940 $ 934 $1,181
====== ====== ======
Respiratory Therapy. Pursuant to the provisions of the Medicare Reform Act
of 1997, the Medicare reimbursement rates for home oxygen therapy and
respiratory drugs were reduced by 25% and 5%, respectively. This reduction was
effective January 1, 1998 and was followed by an additional 5% reduction in
reimbursement rates for home oxygen therapy that became effective January 1,
1999. The estimated decrease in 1999 and 1998 revenues and operating income
resulting from these reimbursement reductions is approximately $10 million and
$57 million, respectively. Also included in the Medicare Reform Act of 1997 was
a freeze on Consumer Price Index-based increases from January 1, 1998 until
2002. A provision of the Medicare Balanced Budget Refinement Act of 1999, which
is discussed more fully below, provides some relief from this freeze through
limited reimbursement increases in 2001 and 2002.
Despite the additional 5% Medicare reimbursement rate reduction,
respiratory therapy revenues increased by 8.3% in 1999. This increase is largely
due to a sales focus on the higher-margin respiratory service line and the
impact of acquisitions consummated in 1999. See "Liquidity & Capital Resources -
Business Combinations".
Infusion Therapy. The decrease in infusion therapy revenues in 1999 as
compared to 1998 is directly attributable to the exit of the infusion service
line in selected areas. The exit reduced 1999 revenues by approximately $40
million. The infusion line in 1999 was also impacted by the termination of
low-margin contracts. These decreases were offset somewhat by growth in the
remaining geographic areas in which Apria engages in the infusion business.
The decrease in infusion therapy revenues in 1998, as compared to 1997, is
primarily due to the termination of unprofitable contracts and formidable
competition at the local and national levels. Also impacting 1998 infusion
therapy revenues was the exit of the infusion service line in certain geographic
markets. The decision was made at the end of the third quarter of 1998 and the
transition out of the service line in substantially all of the selected areas
took place in the fourth quarter of 1998. The impact on 1998 revenues during the
transition period was a reduction of approximately $9.5 million.
Home Medical Equipment/Other. Home medical equipment/other revenues
decreased by 4.7% in 1999 when compared to 1998. The decrease was primarily
attributable to the sales focus on the higher-margin respiratory therapy service
line, the contract review process and to, a lesser extent, decreases in the
medical supply and nursing lines that Apria began exiting in late 1997.
Home medical equipment/other revenues decreased significantly in 1998 as
compared to 1997. The primary causes were due to discontinuing the medical
supply, women's health and nursing management service lines and terminating
unprofitable contracts. Further, the termination of contracts or loss of
business in the respiratory and infusion therapy lines resulted in the loss of
collateral business within the home medical equipment/other line.
The Consumer Price Index-based Medicare reimbursement issues discussed
above are also applicable to the home medical equipment/other line.
Revenue Adjustments. Due to the complexity of many third-party billing
arrangements and uncertainty of reimbursement amounts for certain services
and/or from certain payors, adjustments to billed amounts are fairly common and
are typically identified and recorded at the point of cash application, claim
denial or upon account review. Examples of such revenue adjustments include
subsequent changes to estimated revenue amounts or denials for services not
covered due to changes in the patient's coverage, failure subsequent to service
delivery to obtain written confirmation of authorization or other necessary
documentation, and differences in contract prices due to complex contract terms
or a biller's lack of familiarity with a contract or payor. Further, increases
in average collection periods result in a high level of unidentified revenue
adjustments accumulating in accounts receivable. Subsequent to the system
conversions and branch consolidations effected in 1995 and 1996, Apria
experienced increasing levels of revenue adjustments. The related disruptions
and employee turnover impeded normal processing and account reviews and resulted
in a high rate of billing problems. Although management took a number of steps
to address the billing and collection problems, the high levels of revenue
adjustments persisted. Due to the existence of unidentified revenue adjustments
in accounts receivable, management estimates and records an allowance for such
adjustments. In 1998 and 1997, management recorded adjustments to reduce
revenues and accounts receivable by $18.3 million and $40.0 million,
respectively. In 1999, the level of revenue adjustments decreased significantly
from the levels experienced in the last few years and days sales outstanding
have been 56 days or fewer for each of the last five quarters, compared to a
range of 87 to 111 days during 1996 and 1997. Management is continuing to take a
number of steps to further reduce the frequency of revenue adjustments as
discussed below. See "Liquidity and Capital Resources - Accounts Receivable".
Medicare Reimbursement Update. The Medicare Balanced Budget Refinement Act
of 1999 provides Apria and the home healthcare industry with some relief from
the effects of certain provisions contained in the Medicare Reform Act of 1997.
Among the relief items included in the Medicare Balanced Budget Refinement Act
of 1999 that are pertinent to Apria is a limited increase in Medicare
reimbursement for durable medical equipment, supplies and oxygen in 2001 and
2002. Also included is a provision that will delay any reimbursement reductions
for home medical equipment that may result from an inherent reasonableness
procedure. Further, the Medicare Balanced Budget Refinement Act of 1999 includes
a provision that excludes home medical equipment, including oxygen, from changes
in payment rules related to products and services provided through home health
agencies.
GROSS PROFIT. Gross margins were 71.5% in 1999, 64.6% in 1998 and 61.8% in
1997. Much of the improvement in 1999 is attributable to the continued exit from
low-profit service lines and contracts and the increase in the share of the
higher-margin respiratory therapy line relative to total business. Also,
improved pricing negotiated for inventory, patient service equipment and related
goods improved margins in 1999. Further, in early 1999, management began
implementing standardization initiatives and optimal operating models intended
to achieve cost savings and operational efficiencies in the functional areas of
purchasing and supply management, inventory management and vehicle fleet and
delivery management. By the end of 1999, the implementation was substantially
complete.
Gross margin improvement in 1999 was also impacted by the following charges
recorded at September 30, 1998 and reflected in the 1998 gross margins: $5.4
million to settle certain procurement contracts, $3.5 million to provide for
oxygen cylinder losses, $2.8 million to provide for losses and obsolescence in
inventory and patient service equipment and $3.5 million related to the exit of
the infusion service line in selected markets. Despite these charges, Apria's
gross margin improved in 1998, when compared to 1997. This improvement was
primarily attributable to eliminating contracts not meeting profitability
standards and was realized despite the decrease in revenues due to the Medicare
reimbursement rate reductions and the third quarter charges listed above.
Reflected in Apria's gross margins for 1997 were charges of $23.0 million and
$10.1 million recorded in the second and fourth quarters, respectively, to
increase the inventory and patient service equipment reserves.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts as a
percentage of net revenues was 3.7%, 8.1% and 10.3% in 1999, 1998 and 1997,
respectively. The decrease in 1999 in the provision for doubtful accounts, as a
percentage of net revenues, is largely attributable to an improvement in the
aging of accounts receivable. This improvement is demonstrated by a decrease in
the 12-month average of accounts aged in excess of 180 days from 29.2% of total
accounts receivable in 1998 to 22.2% in 1999, which management believes is due
to the process and system improvements it has implemented. See "Liquidity and
Capital Resources - Accounts Receivable".
The 1998 provision for doubtful accounts includes: $12.1 million to
increase the allowance for doubtful accounts due to a change in management's
collection policy, $1.5 million for specific uncollectible accounts and $9.1
million to increase the allowance for doubtful accounts on accounts receivable
associated with the infusion sale and other business closures. In August 1998,
management reviewed the historic performance and collectibility of Apria's
accounts receivable portfolio. Management considered the continued high-level of
bad debt write-offs and reviewed its existing policies and procedures for
estimating the collectibility of its accounts receivable. In response,
management decided to change the collection policy and formally shifted the
focus of the collection function to the more current balances and assigned the
older accounts to outside collection agencies. Management believes this
concentration on more current balances limits the amount of receivables that
age. Consequently, the accounts that do age will undoubtedly be receivables
where collection will be difficult. With this change in collection policy,
management revised its estimate of the allowance for doubtful accounts in 1998
by increasing the allowance related to balances over 180 days outstanding.
Accordingly, management recorded an adjustment in the third quarter of 1998 to
increase the allowance for doubtful accounts by $12.1 million. See "Liquidity
and Capital Resources - Accounts Receivable".
The 1997 provision for doubtful accounts included adjustments of $55.0
million and $6.4 million recorded in the second and fourth quarters,
respectively, to increase the allowance for doubtful accounts. The second
quarter adjustment was necessary because improvement in the aging of accounts
receivable and in collection timing and rates did not meet expectations.
Management had expected the impact of the 1996 field information system
conversions and high turnover among billing and collection personnel to
substantially reverse by the middle of 1997. However, the dollar amount and
percentage of accounts aged over 180 days at May 31, 1997 remained comparable to
the December 31, 1996 amount and days sales outstanding had decreased by only
five days. Additionally, Apria had just changed its business strategy to review
its managed care contracts and exit those not meeting profitability standards
and to exit unprofitable service lines such as supplies and nursing that were
attractive to many managed care customers. These strategies put Apria's
relationship with certain of its managed care customers in jeopardy, which when
coupled with the company's poor experience in collecting receivables with
managed care payors, heightened management's concerns. Due to the managed care
issues and the failure to realize the expected increases in collections and
improvement in the aging, management increased its allowance estimate for
accounts aged over 180 days to provide for write-offs of older accounts expected
to be taken in the ensuing months. The adjustment also provided for an increased
allowance estimate for accounts aged less than 180 days, necessitated by billing
and collection difficulties that continued into early 1997. The fourth quarter
adjustment resulted primarily from refinements to Apria's allowance estimation
procedures made in conjunction with management's year-end analysis of accounts
receivable. Specifically, based on tests of subsequent realization and review of
patient billing files at selected billing locations, further increases were made
to the percentages applied to Apria's accounts receivable aging to estimate
allowance amounts. In addition, due to an increasing tendency for certain
managed care payors to accumulate significant amounts of patient balances, a
specific review and allowance estimation was performed for payors with large
aggregate patient balances. See "Liquidity and Capital Resources - Accounts
Receivable".
SELLING, DISTRIBUTION AND ADMINISTRATIVE. Selling, distribution and
administrative expenses as a percentage of net revenues was 54.7%, 61.6% and
52.2% for 1999, 1998, and 1997, respectively. The improvement in 1999, as
compared to 1998 is largely attributable to the realization of the benefit for a
full year in 1999 of various cost reduction measures that were effected in 1998,
such as labor force reductions and facility consolidations. Further, as
discussed more fully above, the standardization initiatives implemented in 1999
in the functional areas of purchasing and supply management and vehicle fleet
and delivery management improved the selling, distribution and administrative
line.
Also contributing to the decrease in selling, distribution and
administrative expenses in 1999, as compared to 1998, are the following charges
that were recorded in the third quarter of 1998: $3.8 million loss on the
infusion sale, $1.8 million to record certain costs associated with business
closures, $3.9 million in severance, stay bonuses and other employee costs and
$2.0 million in lease liability on vacant facilities due to facility
consolidation activities.
The increase in selling, distribution and administrative expenses as a
percent of revenue from 1997 to 1998 is directly attributable to the lower
revenue base in 1998. Actual expenses for 1998 decreased $41.2 million from the
previous year. In response to the reduction in revenues, management took steps
to reduce costs, the most significant of which was a reduction in the company's
labor force which commenced in the fourth quarter of 1997 and continued
throughout 1998. From September 30, 1997 to December 31, 1998, Apria reduced its
full-time equivalent employees by approximately 1,700. The majority of the labor
reductions made in 1998 resulted from the third quarter reorganization of
Apria's field operations into 16 geographic regions (previously 23, currently
15) and through the elimination of positions at the company's corporate
headquarters.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets was
$8.0 million, $12.5 million and $16.8 million in 1999, 1998 and 1997,
respectively. The decreases in 1999 and 1998 are due to the write-off of
impaired goodwill of $76.2 million in the third quarter of 1998 and $133.5
million in the fourth quarter of 1997. The resulting reduction in amortization
expense was offset slightly by a reduction in the amortization period for
infusion-related goodwill from 40 years to 20 years as of the beginning of 1998.
The reduction in amortization expense in 1999 was further offset by additional
amortization expense that was incurred due to the intangible assets recorded in
conjunction with acquisitions effected in 1999. See "Liquidity & Capital
Resources - Business Combinations".
IMPAIRMENT OF INTANGIBLE ASSETS. In 1998, the deterioration in the infusion
therapy industry and Apria's decision to withdraw from the infusion service line
in certain geographic markets served as indicators of potential intangible asset
impairment. Other indicators of potential impairment identified by management
included the company's depressed common stock price, failure to meet its already
lowered financial expectations, the threat of continued Medicare reimbursement
reductions, government investigations against the company, slower than expected
progress in improving its revenue management process, and collection
difficulties resulting from reported financial problems within major managed
care organizations with which the company does business. Therefore, management
conducted an evaluation of the carrying value of the company's recorded
intangible assets and considered current and anticipated industry conditions,
recent changes in its business strategies, and current and anticipated operating
results. The evaluation resulted in an impairment charge of $76.2 million which
was recorded in the third quarter of 1998. The charge included a write-off of
$4.8 million in intangible assets associated with the exit of the infusion
service line in certain areas.
Certain 1997 conditions, including Apria's failure to meet projections and
expectations, declining gross margins, recurring operating losses, significant
downward adjustment to the company's projections for 1998 and a depressed common
stock value, were identified by management as indicators of potential intangible
asset impairment. In the fourth quarter of 1997, management conducted an
evaluation of the carrying value and amortization periods of recorded intangible
assets. Management considered current and anticipated industry conditions,
recent changes in its business strategies and current and anticipated operating
results. The evaluation resulted in an impairment charge of $133.5 million which
was recorded in the fourth quarter of 1997. In conjunction with the impairment
evaluation, management reduced the amortization period for goodwill related to
acquired infusion therapy businesses from 40 years to 20 years. The remaining
infusion-related goodwill is being amortized over the years remaining assuming a
20-year life from date of acquisition.
For purposes of assessing impairment, assets were grouped at the branch
level, which is the lowest level for which there are identifiable cash flows
that are largely independent. A branch location was deemed to be impaired if the
company's estimate of undiscounted cash flows was less than the carrying amount
of the long-lived assets and goodwill at the branch. In estimating future cash
flows, management used its best estimates of anticipated operating results over
the remaining useful life of the assets where, in the case of the 1997
computation, the useful life is the amortization period before giving effect to
the reduction in the infusion goodwill from 40 to 20 years. For those branches
identified as impaired, the amount of impairment was measured by comparing the
carrying amount of the long-lived assets and goodwill to the estimated fair
value for each branch. Fair value was estimated using a valuation technique
based on the present value of the expected future cash flows.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTERNALLY-DEVELOPED SOFTWARE. One of
the actions taken in 1998 was the termination of the project to implement an
enterprise resource planning system. Accordingly, Apria wrote off related
software and other capitalized costs of $7.5 million in the third quarter of
1998. As part of the decision to terminate the enterprise resource planning
project, management evaluated its current systems to determine their long-term
viability in the context of Apria's new overall strategic direction. It was
determined that Apria was at some risk in continuing to run the infusion billing
system on a platform which is no longer supported by the computer industry. To
mitigate the risk, Apria is converting the infusion system to an
industry-supported operating platform. Also, Apria effected a number of
enhancements to the systems which rendered certain previously-developed modules
obsolete. Further, pharmacy and branch consolidations and closures rendered a
variety of computer equipment obsolete. Due to its age and technological
obsolescence, it was deemed to have no future value. As a result of these
actions, Apria recorded an impairment charge of $11.9 million at September 30,
1998. Apria also recognized additional asset impairments during 1998 of $1.4
million in conjunction with the exited service lines and $1.4 million related to
other facility closures and consolidations.
During 1997, management reevaluated its current information systems in
light of year 2000 risks and ongoing operational difficulties and concluded that
significant additional costs would be necessary to adequately correct system
deficiencies and improve functionality. Accordingly, the decision was made to
replace Apria's systems, including internally-developed software, with a large
scale, fully-integrated enterprise resource planning system. A two-year
development and implementation plan was approved by the Board of Directors in
December 1997. The project was subsequently terminated as discussed above. In
light of the evaluation and decisions made during 1997, management reviewed the
carrying value of the capitalized software and recorded an impairment charge of
$20.2 million. The charge included (1) a $3.9 million reduction to the carrying
value of Apria's branch information system ("ACIS") program development costs,
(2) an $11.4 million write-off of costs associated with ACIS implementation and
conversion, and (3) a $4.9 million write-off of costs of a specialized
telecommunications software program developed for ApriaDirect, a clinical
program that was discontinued in December 1997. In connection with management's
evaluation of Apria's internally-developed software, management also conducted a
review of the company's computer hardware, including telecommunications
equipment. Equipment with a carrying value of $6.6 million was identified as
functionally obsolete or no longer in use and was written off in 1997.
INTEREST EXPENSE. Interest expense was $42.5 million in 1999, $46.9 million
in 1998 and $50.4 million in 1997. The decrease in 1999 is directly attributable
to the reduction in long-term debt, but was offset by higher interest rates
incurred on the bank loans as a result of the amended and restated credit
agreement that was placed into effect in November 1998. Primarily due to
payments of $74.8 million made on its long-term debt in 1999, Apria's cash
balances have decreased from $75.5 million at December 31, 1998 to $20.5 million
at December 31, 1999, which resulted in a decrease in interest income.
The decrease in 1998, when compared to 1997, was also due to lower
long-term debt levels as offset by higher interest rates. Apria's effective
interest rate increased steadily during 1998 because the company did not meet
the required levels of funded indebtedness to consolidated earnings before
interest, taxes, depreciation and amortization ("EBITDA"), which was the
financial ratio that governed the applicable interest rate margin available to
the company. Apria's cash balances increased from $16.3 million at December 31,
1997 to $75.5 million at December 31, 1998. The interest income from the
accumulated cash reserves helped to mitigate the impact of higher effective
interest rates. See "Liquidity and Capital Resources - Long-term Debt".
INCOME TAXES. The income tax benefit for 1999 is $131.0 million, and is
primarily attributable to the release of the company's $158.9 million valuation
allowance. Management evaluated the available evidence in determining the
realizability of the net deferred tax assets at December 31, 1999. Management
concluded it is more likely than not that the company will realize its net
deferred tax assets. In reaching this conclusion, significant weight was given
to the company's continued quarterly and 1999 annual profitability under new
management. Additional positive evidence consisted of the divestiture of
unprofitable service lines, the stabilization of reimbursement rates in the
current year, and management's ability to develop and achieve internal financial
forecasts.
At December 31, 1999, Apria had net operating loss carryforwards ("NOLs")
for federal income taxes of approximately $225 million, expiring in varying
amounts in the years 2003 through 2013 and other net deductible items of
approximately $125 million that are expected to be realized in future periods.
Management believes that its strategies will result in sufficient taxable income
during the carryforward period to utilize Apria's NOLs.
Income tax expense for 1998 amounted to $3.0 million, which was primarily
state taxes payable on a basis other than, or in addition to, taxable income.
The remaining amount of income tax expense included estimated settlement amounts
for in-progress state tax audits. Certain of these tax expense items resulted in
increases to deferred tax assets for which no benefit was recorded in 1998 due
to offsetting increases to the valuation allowance.
Income tax expense for 1997 amounted to $36.6 million and included $30.0
million to increase the valuation allowance for deferred tax assets due to
recurring tax losses and lower estimates of future taxable income. The remaining
amount of income tax expense included estimated state taxes payable based on
factors other than income, estimated settlement amounts for in-progress state
tax audits, foreign taxes related to the sale in 1997 of Apria's 15% equity
interest in a United Kingdom-based company and the settlement amount paid on an
examination of Apria's federal tax returns for 1992 through 1995. Certain of
these tax expense items resulted in increases to deferred tax assets for which
no benefit was recorded in 1997 due to offsetting increases to the valuation
allowance.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING CASH FLOW. Cash provided by operating activities in 1999 was
$80.0 million as compared to $133.9 million in 1998 and $104.1 million in 1997.
In addition to the significant increase in net income in 1999, operating cash
flow in 1999 compared to 1998 was impacted by changes in working capital
requirements and expenditures for capitalized patient service equipment. With
the implementation of the new strategy in late 1998, Apria experienced
consecutive quarter-over-quarter growth in revenues and increases in net income
and EBITDA throughout 1999. With this growth, Apria's working capital needs
increased. In 1999, operating assets and liabilities had a net increase of $60.4
million, compared to a net decrease of $43.6 million in 1998. Purchases of
capitalized patient service equipment increased by $28.3 million in 1999
compared to 1998 to support growth in the respiratory therapy patient base.
The primary reasons for the improvement in operating cash flow in 1998, as
compared to 1997, was the decrease in accounts receivable as compared to a
significant increase in 1997. Also contributing to the increase in 1998
operating cash flow was a reduction in net purchases of patient service
equipment over 1997 levels and the fact that less cash was used in 1998 due to
the timing of payments against accounts payable.
ACCOUNTS RECEIVABLE. Accounts receivable before allowance for doubtful
accounts increased by $26.8 million during 1999. The increase is largely
attributable to a trend of quarter-over-quarter revenue increases that began in
the fourth quarter of 1998 and continued throughout all of 1999. Also, cash
collected was 98.9% of net revenues in 1999, down from 110.8% in 1998 and days
sales outstanding (calculated as of each period end by dividing accounts
receivable, less allowance for doubtful accounts, by the 90-day rolling average
of net revenues) was 56 days at December 31, 1999 compared to 53 days at
December 1998.
Other accounts receivable indicators monitored by management show
improvement in 1999 when compared to recent years. As indicated above in
"Results of Operations - Provision for Doubtful Accounts", the 12-month average
of accounts aged in excess of 180 days as a percentage of total accounts
receivable decreased in 1999 when compared to 1998. Write-offs of accounts
receivable totaled $128 million in 1999, down from $246 million written-off in
1998.
Despite the improvements in accounts receivables in 1999, collection of its
accounts receivables remains one of Apria's biggest challenges. Two factors
impacting the performance of accounts receivable are (1) continued high turnover
among accounts receivable personnel in many of Apria's locations and (2) the
inability to collect contractually-due receivables from certain large managed
care payors on a timely basis, or at all.
Historical Issues. In 1996, 1997, and 1998 Apria recorded significant
charges to increase its allowances for doubtful accounts and revenue adjustments
due to problems originating with the 1995 Abbey/Homedco merger. The merger
resulted in a restructuring plan that included a very rapid consolidation of
operating locations and the conversion of all locations to standardized
information systems. During the last six months of 1995, over 1,100 employees
were terminated and over 100 branch locations were closed or consolidated with
other branches. Beginning with the consummation of the merger, each branch
information system was first converted to the predominant system in place within
its region. Conversion of the branches to the standard, company-wide systems
then occurred on a region-by-region basis. Because of the conversion to interim
systems prior to final conversion, locations representing approximately 80% of
Apria's net revenues underwent conversion. Ultimately, a total of 496 system
conversions were completed; 232 were completed during 1995 and 264 during the
first three quarters of 1996.
The disruptions caused by the branch consolidations and systems conversions
had a major impact on the functions of order taking, product delivery, billing
and collections. Existing employees challenged with learning new systems and
high turnover during this period created serious training issues. Further,
familiarity with the complex and payor-specific billing requirements is critical
to ensure proper and timely billing and collections. Much of this expertise was
lost due to the high turnover among billing and collection personnel.
Improvement Actions. In response to these problems and the resulting high
rates of bad debt write-offs and revenue adjustments, management instituted a
number of measures in 1996 and 1997 designed to help resolve the billing and
collection difficulties. Subsequent to their implementation, improvements were
noted in several receivables-related statistics. However, management recognized
that many problems still persisted, and therefore, instituted further
improvement measures. During the first quarter of 1998, management reorganized
its field operations to create a separate "revenue management" organization
which encompasses the functions of order-taking, patient qualification,
documentation coordination, timely filing and prompt follow-up. The revenue
management organization reports directly to corporate headquarters and
specifically to an Executive Vice President position. The organization structure
was intended to facilitate improved communications and accountability. In
conjunction with the reorganization, processes and procedures were reviewed to
identify additional opportunities for improvement. As a result, additional
personnel were placed in quality assurance positions to help ensure that
products and services were billed more accurately and timely and
responsibilities were consolidated to allow specifically qualified personnel to
support, direct and train the revenue management staff. Task forces were formed
to visit the billing centers to ensure compliance with policies and standard
procedures. Also, software enhancements to simplify the order-intake process
were introduced.
Apria believes the lower write-offs and improved aging in 1999, when
compared to recent years, are attributable to its focus on order entry, billing
and collections by its centralized revenue management function and to new system
improvements and functionality designed to automate and centralize certain
processes and to provide more timely error identification. Further, to address
the high turnover, management is seeking to upgrade certain of its accounts
receivable management positions to gain more stability at that level and to
centralize certain functions that require a higher level of expertise and
training. To address collection issues with certain large managed care payors
Apria is developing centralized processing groups and is designing customized
electronic interfaces to facilitate improved communications and electronic order
intake and claims adjudication. In certain cases Apria may choose not to renew
contracts with payors who do not pay on a timely basis. Apria will also take
legal action to enforce its contractual rights, if necessary.
Allowance Evaluation. Accounts receivable is reduced by an allowance for
estimated revenue adjustments and further netted by an allowance for doubtful
accounts to reflect accounts receivable in the financial statements at net
realizable value. Bad debt and revenue adjustment allowances are analyzed on a
combined basis. Management uses actual write-off classifications in conjunction
with historical experience and account reviews to determine the appropriate
categorization of revenue adjustments and bad debts, both reserved and expensed.
Apria's methodology for estimating allowances for uncollectible accounts and
providing for the related revenue adjustments and bad debt expense involves an
extensive, balanced evaluation of operating statistics, historical realization
data and accounts receivable aging trends. Also considered are relevant business
conditions such as system conversions, facility consolidations, business
combinations, Medicare carrier conditions and the extent of contracted business.
Finally, specific reviews of certain large and/or problematic payors are
performed. Management periodically refines the analysis and allowance estimation
process to consider any changes in related policies and procedures and adjusts
the combined allowance to reflect its best estimate of the allowance required at
each reporting date.
Unbilled Receivables. Included in accounts receivable are earned but
unbilled receivables of $23.0 million and $25.3 million at December 31, 1999 and
1998, respectively. There is a delay of approximately a day or two, up to
several weeks or more in some cases, between the date of service and billing due
to delays in obtaining certain required payor-specific documentation from
internal and external sources. Such documentation would include internal records
of proof of service and written authorizations from physicians and other
referral sources. Earned but unbilled receivables are aged from date of service
and are considered in Apria's analysis of historical performance and
collectibility.
LONG-TERM DEBT. Apria's credit agreement with a syndicate of banks was
amended and restated in November of 1998 and further amended in January,
February, April and October of 1999. The November 1998 amendment required a $50
million permanent repayment of the loan upon execution. The remaining
indebtedness under the credit agreement was restructured into a $288 million
term loan and a $30 million revolving credit facility with a maturity date of
August 9, 2001. Pursuant to the April 1999 amendment, Apria made an additional
$50 million payment against the term loan.
Term loan principal payments are payable quarterly, in varying amounts,
from March 31, 1999 through June 30, 2001. Further, from the effective date of
the November 1998 amended and restated credit agreement to December 31, 1998,
and during the first quarter of 1999, Apria was subject to prepayment
requirements on the term loan based on excess cash flow (as defined by the
agreement). The resulting prepayments of $6.9 million reduced the required
amount of the quarterly term loan payment that was due March 31, 1999 to zero.
No additional prepayments based on excess cash flow are required.
The amended and restated credit agreement, as further amended by the four
amendments in 1999, allows Apria to make acquisitions with an aggregate purchase
price of up to $125 million effective October 22, 1999 through the maturity date
of the agreement. At March 20, 2000, Apria had $99.5 million remaining on its
acquisition allotment. The agreement, as amended, also provides Apria with the
ability to repurchase up to $50 million of its common stock through the credit
agreement maturity date, subject to annual limitations.
The amended and restated credit agreement permits Apria to elect one of two
variable rate interest options at the time an advance is made. The first option
is a rate expressed as 2.5% plus the higher of the Federal Funds Rate plus 0.50%
per annum or the Bank of America "reference" rate. The second option is a rate
based on the London Interbank Offered Rate ("LIBOR") plus an additional
increment of 3.5% per annum. The agreement requires payment of commitment fees
of 0.75% on the unused portion of the revolving credit facility.
Borrowings under the credit agreement are secured by substantially all of
Apria's assets and the agreement also imposes numerous restrictions, including,
but not limited to, covenants requiring the maintenance of certain financial
ratios, limitations on additional borrowings, capital expenditures, mergers,
acquisitions and investments, and restrictions on cash dividends, loans and
other distributions.
At December 31, 1999, total borrowings under the credit agreement totaled
$219.1 million, none of which were advanced from the revolving credit facility.
At December 31, 1999, outstanding letters of credit totaled $3.8 million (as
reduced from $10.3 million at December 31, 1998) and credit available under the
revolving credit facility was $26.2 million. On March 10, 2000, the outstanding
letter of credit total was further reduced to $1.0 million.
Under the indenture governing Apria's $200 million 9 1/2% senior
subordinated notes, which mature November 1, 2002, Apria must satisfy a 3.0 to
1.0 fixed charge coverage ratio test in order to incur most types of additional
indebtedness. At December 31, 1999, Apria's fixed charge coverage ratio exceeds
the required minimum.
DISPOSITIONS AND BUSINESS COMBINATIONS. During 1998, management performed
an extensive profitability study to identify service lines and/or geographic
markets as potential candidates for exit. Most significant of the decisions
arising from the study was the decision to withdraw from the infusion service
line in California, Texas, Louisiana, West Virginia, western Pennsylvania and
downstate New York. Shortly after Apria announced its plans to exit the infusion
line in these geographic markets, a buyer emerged for the California locations.
Crescent Healthcare, Inc. purchased substantially all the assets and business,
excluding accounts receivable, of the California infusion locations. Apria
recorded a $3.8 million loss on the sale in the third quarter of 1998. The
transition out of the service line in substantially all of the selected areas
took place in the fourth quarter of 1998. The operations of these infusion
locations had revenues of $41.5 million and $72.7 million in 1998 and 1997,
respectively. Gross profits were $14.9 million and $32.1 million, respectively,
for the same periods.
Apria periodically makes acquisitions of complementary businesses in
specific geographic markets. The transactions are accounted for as purchases and
the results of operations of the acquired companies are included in the
accompanying statement of operations from the date of acquisition. The aggregate
consideration of the acquisitions that closed during 1999 was $56.3 million
(cash paid for acquisitions and related contingent consideration was $53.4
million in 1999). Allocation of the total consideration includes $49.3 million
to intangible assets, $4.4 million to patient service equipment and $2.0 million
to accounts receivable. Goodwill is being amortized over 20 years and covenants
not to compete are being amortized over the life of the respective agreements.
YEAR 2000 COMPLIANCE. The year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Date-sensitive application software programs and operating
systems may recognize a date using "00" as 1900 rather than 2000. This could
result in system failure or miscalculations, which could cause a disruption of
operations. Apria's management began the process of evaluating its systems in
late 1997 and completed the necessary modifications on schedule. Management also
identified certain potential risks with external agents such as vendors, payors
and suppliers with whom Apria conducts business via electronic interface.
Testing of the more significant interfaces was completed on schedule. Also,
Apria faced a potential risk with certain of its patient service equipment items
that have microprocessors with date functionality. Management requested and
obtained year-2000 compliance certification letters from substantially all its
primary vendors.
Apria did not experience any significant issues during the actual
transition to the year 2000. The few minor issues that were encountered were
resolved within hours. Further, Apria has successfully completed two monthly
business cycles in 2000 without any significant issues. The year 2000 task force
will remain intact until at least the end of the first quarter to monitor the
company's business processes and ensure they continue to function properly.
Apria does not believe the costs of its year 2000 remediation efforts were
material. To date, such costs have been expensed as incurred.
OTHER. Apria's management believes that cash provided by operations and
amounts available under its existing credit facilities together with cash
invested in its money market account will be sufficient to finance its current
operations for at least the next year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Apria currently utilizes no material derivative financial instruments that
may expose the company to significant market risk. However, Apria is subject to
interest rate changes on its variable rate term loan under the company's bank
credit agreement that may affect the fair value of that debt and cash flow and
earnings. Based on the term debt outstanding at December 31, 1999 and the
current market perception, a 50 basis point increase in the applicable interest
rates would decrease Apria's annual cash flow and earnings by approximately $1.2
million. Conversely, a 50 basis point decrease in the applicable interest rates
would increase annual cash flow and earnings by $1.2 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Reports of Independent Auditors, Consolidated Financial Statements and
Consolidated Financial Statement Schedule listed in the "Index to Consolidated
Financial Statements and Financial Statement Schedule" are filed as part of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS
Information regarding Apria's executive officers is set forth under the
caption "Executive Officers of the Registrant" in Item 1 hereof.
DIRECTORS
Set forth below are the names, ages and past and present positions of the
persons serving as Apria's Directors as of March 1, 2000:
Business Experience During Last Director Term
Name and Age Five Years and Directorships Since Expires
------------ ------------------------------- -------- -------
David H. Batchelder, 50 Principal and Managing Member of Relational Investors, LLC 1998 2000
since March 1996. Since 1998 he has served as the
Chairman and Chief Executive Officer of Batchelder &
Partners, Inc., a financial advisory and investment
banking firm based in San Diego, California, which is a
registered broker-dealer under Section 15(b) of the
Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc.. Mr.
Batchelder also serves as a director of Morrison Knudsen
Corporation, Nuevo Energy Company and ICN Pharmaceuticals,
Inc.
Philip L. Carter, 51 Chief Executive Officer and a Director of Apria since May 1998 2000
1998. Prior to joining Apria, Mr. Carter was President
and Chief Executive Officer of Mac Frugal's Bargains --
Close-Outs Inc., a chain of retail discount stores, since
1995 and had held the positions of Executive Vice
President and Chief Financial Officer of Mac Frugal's from
1991 through 1995.
David L. Goldsmith, 51 Managing Director of RS Investment Management, an 1987* 2000
investment management firm. Prior to joining RS Investment
Management in February 1999, he served as Managing
Director of Robertson, Stephens Investment Management, an
investment management firm owned by Bank of America
National Trust and Savings Association. He was affiliated
with Robertson, Stephens & Company LLC and its
predecessors from 1981 through 1999. Mr. Goldsmith is
also a director of Balanced Care Corporation.
Richard H. Koppes, 53 Of Counsel to Jones, Day, Reavis & Pogue, a law firm, and 1998 2000
a Consulting Professor of Law and Co-Director of Education
Programs at Stanford University School of Law. He served
as a principal of American Partners Capital Group, a
venture capital and consulting firm, from August 1996 to
December 1998. From May 1986 through July 1996, Mr. Koppes
held several positions with the California Public
Employees' Retirement System, including General Counsel,
Interim Chief Executive Officer and Deputy Executive
Officer. Mr. Koppes is also a director of Mercy Healthcare,
a non-profit hospital system.
Philip R. Lochner, Jr., 57 Senior Vice President - Administration of Time Warner Inc. 1998 2000
from July 1991 to July 1998. From March 1990 to June
1991, Mr. Lochner was a Commissioner of the Securities and
Exchange Commission. He is a member of the Advisory
Council of Republic New York Corporation and of the Board
of Directors of Clarcor, Inc. He is also a Trustee of The
Canterbury School.
Beverly Benedict Thomas, 57 Principal of BBT Strategies, a consulting firm 1998 2000
specializing in public affairs and strategic planning.
Previously, Ms. Thomas was a principal of UT Strategies,
Inc., a public affairs firm, from 1995 to 1997 and
Assistant Treasurer of the State of California from 1991
to 1995. In addition to serving as a director of Catellus
Real Estate Development Corporation, a diversified real
estate operating company, Ms. Thomas also serves as a
Commissioner of the Los Angeles City Employees' Retirement
System. From 1993 to 1995, Ms. Thomas served on the
Boards of the California Public Employees' Retirement
System and the California State Teachers Retirement System.
Ralph V. Whitworth, 44 Chairman of the Board of Directors of Apria since April 1998 2000
28, 1998. Mr. Whitworth is also a principal and Managing
Member of Relational Investors, LLC, a private investment
company. He is also a partner in Batchelder & Partners,
Inc., a financial advisory and investment-banking firm
based in San Diego, California which is registered as a
broker-dealer under Section 15(b) of the Securities
Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc. From 1988 until
1996, Mr. Whitworth was president of Whitworth and
Associates, a corporate advisory firm. Mr. Whitworth is
also a director of Sirius Radio, Inc., Tektronix, Inc.,
Mattel, Inc. and Waste Management, Inc.
____________
* Director of Homedco Group, Inc., from the date shown until the date of the
merger. Director of Apria from the date of the merger until the present.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT BY CERTAIN COMPANY AFFILIATES
Section 16(a) of the Exchange Act requires Apria's Directors and officers,
and persons who own more than 10% of a registered class of Apria's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and The New York Stock Exchange, Inc.
Directors, officers and greater than 10% stockholders are required by the
Securities and Exchange Commission to furnish the company with copies of the
reports they file.
Based solely on its review of the copies of such reports and written
representations from certain reporting persons that certain reports were not
required to be filed by such persons, the company believes that, except as
provided below, all of its Directors, officers and greater than 10% beneficial
owners complied with all filing requirements applicable to them with respect to
transactions during the 1999 fiscal year. The one exception to complete
compliance with such filing requirements is that a Form 4 filing for Relational
Investors, LLC and its affiliated entities reflecting the acquisition of
4,066,500 shares of the company's common stock on various dates in April 1999
was not filed until May 17, 1999.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF EXECUTIVE COMPENSATION
The following table sets forth all compensation for the 1999, 1998 and 1997
fiscal years paid to or earned by Apria's Chief Executive Officer, as well as
the four other most highly compensated executive officers during the 1999 fiscal
year.
Summary Compensation Table
Long-Term(1)
Compensation
Annual Compensation Options All Other
Salary(2) Bonus Granted(3) Compensation
Name Year ($) ($) (#) ($)
- ------------------------------------- ------- ------------- ------------ ------------------- ------------------
Philip L. Carter..................... 1999 613,694 480,000 75,000 3,430(5)
Chief Executive Officer (4) 1998 330,499 300,000 750,000 -
1997 - - - -
Lawrence M. Higby.................... 1999 418,386 329,600 40,000 3,295(5)
President and Chief 1998 424,113 20,000 300,000 -
Operating Officer (6) 1997 40,969 - 150,000 -
John C. Maney........................ 1999 358,522 280,000 30,000 1,615(5)
Executive Vice President 1998 37,347 100,000 225,000 -
and Chief Financial Officer (7) 1997 - - - -
Dennis E. Walsh...................... 1999 234,702 182,160 30,000 2,890(5)
Executive Vice President, 1998 237,971 18,750 100,000 3,940(5)
Sales 1997 188,962 - - 10,720(8)
Robert S. Holcombe................... 1999 292,439 228,800 20,000 3,160(5)
Senior Vice President, 1998 292,869 19,500 40,000 3,940(5)
General Counsel and 1997 263,162 4,410 - 6,571(9)
Secretary
(1) Apria has not issued stock appreciation rights or restricted stock awards.
The company has made no payments under any "long-term incentive plan" (as
that term is defined in the applicable rules) during the fiscal years in
question.
(2) These amounts include an automobile allowance which is paid as salary.
Salary is paid on the basis of bi-weekly pay periods, with payment for each
period being made during the week following its termination. Due to the
fact that 1998 contained a payment date for a pay period which ended in
1997, amounts reported as salary paid for 1998 vary slightly from the
actual amounts of the 1998 salaries of the executive officers listed above.
(3) The option grants for 1999 were awarded by the company's Board of Directors
in October 1999 but did not become effective and were not fixed as to price
until January 3, 2000.
(4) Mr. Carter was first employed by the company in May 1998.
(5) Annual contribution by Apria to the company's 401(k) Savings Plan in the
name of the individual.
(6) Mr. Higby was first employed by the company in November 1997.
(7) Mr. Maney was first employed by the company in November 1998.
(8) This amount includes a $4,750 contribution to Apria's 401(k) Savings Plan
in the name of the individual and a $5,520 cash award for individual
achievement called the "Chairman's Circle Award".
(9) This amount includes a $4,750 annual contribution to Apria's 401(k) Savings
Plan in the name of the individual and a reimbursement of $1,821 for tax
liabilities incurred in connection with the reimbursement of relocation
costs.
SUMMARY OF OPTION GRANTS
The following table provides information with respect to grants of options
to Apria's Chief Executive Officer and the four other most highly compensated
executive officers of the company, during the 1999 fiscal year. The options
granted in 1999 were awarded by the company's Board of Directors in October
1999, but the grants did not become effective and the option price was not fixed
until January 3, 2000.
Option Grants Table
Number of Potential Realizable
Securities % of Total Expiration Value at Accrual Rate
Underlying Options Granted Date of of Stock Appreciation
Options to Employees in Exercise Options for Option Term ($)
--------------------------
Name Granted Fiscal Year(1) Price ($) Granted 5% 10%
- -------------------------- ------------- ----------------- ----------- ------------- ------------ ------------
Philip L. Carter 75,000 5.0% 16.9375 1/03/10 798,891 2,024,550
Lawrence M. Higby 40,000(1) 2.6% 16.9375 1/03/10 426,076 1,079,753
John C. Maney 30,000 2.0% 16.9375 1/03/10 319,557 809,814
Dennis E. Walsh 30,000 2.0% 16.9375 1/03/10 319,557 809,814
Robert S. Holcombe 20,000 1.3% 16.9375 1/03/10 213,038 539,822
- ----------------------
(1) This amount or calculation does not include an option for 40,000 shares
approved in 1998, which did not become effective until January 4, 1999.
SUMMARY OF OPTIONS EXERCISED
The following table provides information with respect to the exercise of
stock options by Apria's Chief Executive Officer and the four other most highly
compensated executive officers of the company during the 1999 fiscal year,
together with the fiscal year-end value of unexercised options.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at The-Money Options at
Shares Fiscal Year-End Fiscal Year-End(1)
Acquired on Value(1) ---------------------------- -----------------------------
Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
-------------- ----------- ----------------------------- -----------------------------
Name (#) ($) (#)/(#) ($)/($)
- --------------------------- -------------- ----------- ----------------------------- -----------------------------
Philip L. Carter 0 0 562,500/187,500 $5,027,344/$1,675,781
Lawrence M. Higby 0 0 90,000/360,000 $318,750/$2,530,000
John C. Maney 0 0 168,750/56,250 $2,235,937/$745,312
Dennis E. Walsh 48,000 366,000 40,800/111,200 $1,350/$1,144,650
Robert S. Holcombe 0 0 21,000/54,000 $11,812/$465,375
- ----------------------
(1) Market value of the securities underlying the options at exercise date or
year-end, as the case may be, minus the exercise or base price of
"in-the-money" options. The market value of a share of Apria's common stock
at the close of trading on December 31, 1999 was $17.9375.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee since January 1, 1999, was either
an officer or employee of the company.
DIRECTORS' FEES
All Directors of Apria are reimbursed for their out-of-pocket expenses
incurred in connection with attending Board and related Committee meetings.
During 1999, all non-employee Directors received: (i) $1,000 per Board or
Committee meeting attended in person ($1,500 per Committee meeting for the
Director who is the Committee's chairperson) and (ii) $500 per Board or
Committee meeting attended via telephone. Beginning on January 1, 2000,
Committee chairpersons receive $2,000 for each Committee meeting attended in
person. In addition, for services rendered during 1999, the non-employee
Chairman of the Board was granted an option to purchase 20,000 shares of the
company's common stock, and each non-employee Director was granted an option to
purchase 10,000 shares. The amount of the annual stock option grant to
non-employee directors (other than the Chairman) is expected to increase to
15,000 shares beginning in 2000. The options are granted at a purchase or
exercise price equal to the fair market value on the date of grant.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Apria has employment or severance agreements with the following executive
officers listed in the Summary Compensation Table.
PHILIP L. CARTER. Pursuant to an employment agreement dated May 5, 1998,
Mr. Carter serves as Apria's Chief Executive Officer. The agreement, as amended,
provides that Mr. Carter is to receive an annual salary of $650,000 and is
entitled to participate in Apria's annual bonus, incentive, stock and other
benefit plans generally available to executive officers of the company. Mr.
Carter is entitled to receive performance bonuses of up to 80% of his annual
salary. Mr. Carter is also entitled to receive (i) reasonable access to the
company's accountants for financial planning, (ii) an annual car allowance, and
(iii) reimbursement of certain other expenses. If the company terminates Mr.
Carter's employment without cause, or if he terminates his employment with good
reason (including upon a change in control), Mr. Carter shall receive a lump sum
severance payout equal to three times the sum of (i) his annual salary, (ii) the
average of his two most recent annual bonuses, (iii) his annual car allowance,
and (iv) an additional amount estimated at $5,000. In addition, the company
shall be required to provide an office and secretarial support at a cost of not
more than $50,000 during the year following termination. Finally, upon any such
termination not for cause or with good reason, all stock options held by Mr.
Carter shall vest and remain exercisable for a period of three years.
LAWRENCE M. HIGBY. Pursuant to an employment agreement which is scheduled
to expire on January 18, 2001, Mr. Higby serves as Apria's President and Chief
Operating Officer. The agreement provides that Mr. Higby is to receive an annual
salary of not less than $400,000 (his current annual salary is $440,000),
subject to annual increases at the discretion of the Compensation Committee, and
is entitled to participate in Apria's stock option plans and all other benefit
programs generally available to executive officers of the company. Mr. Higby is
also entitled to receive (i) such bonuses as the Compensation Committee may,
from time to time, in its sole discretion award, (ii) an automobile allowance
and (iii) reimbursement of certain other expenses. He is also provided
reasonable access to Apria's accountants for personal financial planning. If the
company terminates Mr. Higby's employment without cause, or if Mr. Higby
terminates his employment with good reason (including upon a change in control),
Mr. Higby is entitled to a lump sum severance payment equal to three times the
sum of (i) his annual salary, (ii) the average of his two most recent annual
bonuses, (iii) his annual car allowance, and (iv) an additional amount estimated
at $5,000. In addition, all unvested stock options from the 150,000 share grant
issued to Mr. Higby on January 26, 1998, will immediately become exercisable,
and all of his vested options will remain exercisable for a period of three
years following such termination.
JOHN C. MANEY. Pursuant to an employment agreement which is scheduled to
expire on April 30, 2002, Mr. Maney serves as Apria's Executive Vice President
and Chief Financial Officer. The agreement provides for an annual salary of not
less than $350,000, subject to annual increases at the discretion of the
company, except that the increases for 2000, 2001 and 2002 shall not be less
than 5% for each year. Mr. Maney's current annual salary is $375,000. Mr. Maney
is entitled to participate in Apria's annual bonus, incentive, stock and other
benefit programs generally available to the Chief Executive Officer of the
company, including an incentive bonus of up to 80% of his annual salary.
Mr. Maney is also entitled to (i) such bonuses as the Compensation Committee
may, from time to time, in its sole discretion award, (ii) an automobile
allowance, and (iii) reimbursement of certain other expenses. If the company
terminates Mr. Maney's employment without cause, or if he terminates his
employment with good reason (including upon a change in control), Mr. Maney
shall receive a lump sum severance payout equal to two times the sum of (i) his
annual salary, (ii) the average of his two most recent annual bonuses, (iii) his
annual car allowance, and (iv) an additional amount estimated at $5,000. In
addition, the vested portion of the 225,000 share stock option grant issued to
Mr. Maney in 1998 will remain exercisable for a period of three years following
such termination.
ROBERT S. HOLCOMBE AND DENNIS WALSH. In June 1997, Messrs. Holcombe and
Walsh (each referred to as "Executive" below) entered into executive severance
agreements with the company. Pursuant to each agreement, each Executive serves
in a position and undertakes duties at Apria's discretion. As of December 31,
1999, Mr. Holcombe served as Senior Vice President, General Counsel and
Secretary of the company and Mr. Walsh served as Executive Vice President,
Sales. Each agreement provides that the Executive's salary shall be at the
company's discretion. Currently, Mr. Holcombe's annual salary is $300,000 and
Mr. Walsh's annual salary is $240,000. Each Executive is entitled to participate
in Apria's stock option plans and all other benefit programs generally available
to executive officers of the company at the company's discretion. Each Executive
is also entitled to receive (i) such bonuses as the Compensation Committee may,
from time to time, in its sole discretion award, and (ii) reimbursement of
certain other expenses at the company's discretion. If the company terminates an
Executive's employment without cause, each Executive is entitled to a payment
equal to the sum of (i) his annual salary, (ii) the average of his two most
recent annual bonuses, (iii) his annual car allowance, and (iv) an additional
amount estimated at $5,000. However, if such termination occurs during the
two-year period following a change of control of the company, Messrs. Holcombe
and Walsh shall each be entitled to a payment equal to twice such sum. Such
payments shall be payable in periodic installments over one or two years.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 29, 2000, with
respect to the beneficial ownership of Apria's common stock by each person who
is known by the company to beneficially own more than 5% of Apria's common
stock, each Director of the company, Apria's Chief Executive Officer, the four
other most highly compensated executive officers who were serving in such
capacity as of December 31, 1999, and all Directors and executive officers as a
group. Except as otherwise indicated, beneficial ownership includes both voting
and investment power with respect to the shares shown.
Security Ownership Table
Amount and Nature of Percent of
Name of Beneficial Owner Beneficial Ownership Class
- ------------------------ -------------------- -------
Relational Investors, LLC (1) 10,981,900 21.02%
David H. Batchelder (1) 11,091,900 21.23
Ralph V. Whitworth (1) 11,028,566 21.11
Joel L. Reed (1) 10,981,900 21.02
Barclay's Global Investors, N.A. (2) 3,129,569 5.99
Barclays Global Fund Advisors (2) 28,183 *
Peter C. Cooper (3) 2,836,900 5.43
Gilbert E. LeVasseur (3) 2,836,900 5.43
Cooper & LeVasseur (3) 2,836,900 5.43
Cooper Capital, LLC (3) 2,836,900 5.43
George L. Argyros (4) 2,770,434 5.30
Philip L. Carter (5) 587,500 1.12
David L. Goldsmith (6) 361,902 *
Lawrence M. Higby (7) 229,998 *
Dennis E. Walsh (8) 107,466 *
John C. Maney (9) 176,750 *
Richard H. Koppes (10) 37,000 *
Philip R. Lochner, Jr. (11) 36,000 *
Beverly Benedict Thomas (12) 35,000 *
Robert S. Holcombe (13) 65,366 *
All current directors and executive officers as a group 13,235,489 25.33
(17 persons) (14)
__________________
* Less than 1%
(1) According to a Schedule 13D Amendment, dated April 19, 1999, and Form 4
filings dated May 14 and December 16, 1999, all of which have been filed
with the Securities and Exchange Commission, Relational Investors, LLC
("RILLC"), its affiliated companies and Messrs. Batchelder, Whitworth and
Reed, individually and as Managing Members of RILLC, have sole voting and
dispositive power as to 11,138,566 shares, which amount includes 81,666
shares subject to options that are currently exercisable. 10,981,900 of the
shares are held by RILLC or by limited partnerships (Relational Coast
Partners, L.P., Relational Investors, L.P., Relational Fund Partners, L.P.,
or Relational Partners, L.P.) of which RILLC is the sole general partner.
Mr. Whitworth, who is the non-employee Chairman of the company's Board of
Directors, holds currently exercisable options to acquire 46,666 shares,
and Mr. Batchelder, who also serves as a non-employee member of the
company's Board of Directors, holds 75,000 shares in a personal account and
currently exercisable options to acquire 35,000 shares. Mr. Reed's holdings
are all through RILLC. The mailing address of Relational Investors, LLC and
each of Messrs. Whitworth, Batchelder and Reed is 11975 El Camino Real,
Suite 300, San Diego, California 92130.
(2) According to a Schedule 13G, dated February 10, 2000, filed with the
Securities and Exchange Commission, Barclays Global Investors, N.A.
("BGI"), a bank as defined in Section 3(a)(6) of the Securities Exchange
Act of 1934, has sole voting power as to 2,975,069 shares and sole
dispositive power as to 3,129,569 shares. A related entity, Barclays Global
Fund Advisors ("BGF"), which is also a bank, has sole dispositive and
voting power as to 28,183 shares. The mailing address of BGI and BGF is 45
Fremont Street, San Francisco, California 94105.
(3) According to a Schedule 13D dated March 17, 1999, filed with the Securities
and Exchange Commission, Peter C. Cooper ("Cooper"), Gilbert E. LeVasseur
("LeVasseur"), Cooper & LeVasseur, LLC ("C&L") and Cooper Capital, LLC
("Cooper Capital") reported beneficial ownership of 2,836,900 shares.
Cooper and LeVasseur are private investors. Cooper Capital is a limited
liability company of which Cooper is the sole manager, serves as a general
partner or managing member of certain private investment funds and is the
general partner of a private investment fund limited partnership called
Clifton Investments, L.P. ("Clifton"). C&L is a limited liability company
managed by Cooper Capital and LeVasseur and is the sole general partner of
two private investment fund limited partnerships called C&L Capital
Partners, L.P. ("Fund I") and C&L Capital Partners II, L.P. ("Fund II").
LeVasseur also serves as the Trustee of a revocable trust ("LeVasseur
Trust"). Based on the foregoing relationships, Cooper, Cooper Capital,
LeVasseur and C&L report that they share dispositive and voting power with
respect to 1,089,000 shares beneficially owned by Fund I and Fund II,
Cooper and Cooper Capital report that they have sole dispositive and voting
power with respect to 948,940 shares beneficially owned by Clifton and
LeVasseur reports that he holds sole dispositive and voting power with
respect to 789,950 shares owned by the LeVasseur Trust. The remaining 9,010
shares do not appear to have been accounted for specifically in the filing.
Cooper, LeVasseur, Cooper Capital and C&L list their mailing address as
2010 Main Street, Suite 1220, Irvine, CA 92614.
(4) According to a Schedule 13D Amendment, dated June 25, 1998, filed with the
Securities and Exchange Commission, Mr. Argyros has sole investment and
dispositive power as to all 2,770,434 shares. This number includes 6,666
shares subject to options that are currently exercisable. This number
includes 2,430,670 shares owned by HBI Financial, Inc., of which Mr.
Argyros is the sole shareholder. This number also includes (1) 280,912
shares held in trust by two private charitable foundations of which Mr.
Argyros is a vice president and director with respect to which he disclaims
beneficial ownership, (2) 500 shares held in a charitable trust of which
Mr. Argyros is a trustee but not a beneficiary with respect to which he
disclaims beneficial ownership, (3) 31,050 shares held in a trust for the
benefit of Mr. Argyros' children, for which Mr. Argyros disclaims
beneficial ownership and (4) 20,636 shares held by Mr. Argyros
individually. The amount listed does not include 3,450 shares held in a
trust of which Mr. Argyros is not a trustee for the benefit of certain of
Mr. Argyros' adult children who do not share his household for which he
disclaims beneficial ownership and 2,400 shares held in a trust of which
Mr. Argyros is not a trustee for the benefit of Mr. Argyros' mother-in-law
for which he disclaims beneficial ownership. Mr. Argyros resigned his
position as Chairman of the Board effective as of May 27, 1998. The mailing
address for Mr. Argyros is c/o Arnel Development Company, 949 South Coast
Drive, Suite 600, Costa Mesa, California 92626.
(5) Includes 562,500 shares subject to options that are currently exercisable.
(6) Includes 300,236 held in a shared trust with Mr. Goldsmith's wife and
61,666 shares subject to options that are currently exercisable.
(7) Includes 219,998 shares subject to options that are currently exercisable.
(8) Includes 107,466 shares subject to options that are currently exercisable.
(9) Includes 168,750 shares subject to options that are currently exercisable.
(10) Includes 35,000 shares subject to options that are currently exercisable.
(11) Includes 35,000 shares subject to options that are currently exercisable.
(12) Includes 34,000 shares subject to options that are currently exercisable.
(13) Includes 47,666 shares subject to options that are currently exercisable.
Also includes 200 shares held by Mr. Holcombe's wife.
(14) Includes shares owned by certain trusts. Also includes 1,697,604 shares
subject to options that are currently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. The documents described in the "Index to Consolidated Financial
Statements and Financial Statement Schedule" are included in this
report starting at page F-1.
2. The financial statement schedule described in the "Index to
Consolidated Financial Statements and Financial Statement Schedule"
is included in this report starting on page S-1.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
3. Exhibits included or incorporated herein:
See Exhibit Index.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of the
fiscal year covered by this report.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Auditors......................................................................... F-1
Consolidated Balance Sheets - December 31, 1999 and 1998................................................ F-3
Consolidated Statements of Operations - Years ended December 31, 1999, 1998 and 1997.................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) - Years ended December 31, 1999,
1998 and 1997......................................................................................... F-5
Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997.................... F-6
Notes to Consolidated Financial Statements.............................................................. F-7
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts......................................................... S-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Apria Healthcare Group Inc.
We have audited the accompanying consolidated balance sheets of Apria
Healthcare Group Inc. and subsidiaries (the company) as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years then ended. Our audits also
included the financial statement schedule as of and for the years ended December
31, 1999 and 1998, included in the Index at Item 14(a)(2). These consolidated
financial statements and this financial statement schedule are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements and this financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Apria Healthcare Group Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
February 17, 2000
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Apria Healthcare Group Inc.
We have audited the consolidated balance sheet of Apria Healthcare Group
Inc. as of December 31, 1997 (not separately presented herein), and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. Our audit also included the financial statement schedule
listed in the Index at Item 14(a) insofar as it relates to the year ended
December 31, 1997. These financial statements and schedule are the
responsibility of the management of Apria Healthcare Group Inc. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by Management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Apria Healthcare Group Inc. at December 31, 1997, and the consolidated results
of its operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule insofar as it relates to the
year ended December 31, 1997, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
March 11, 1998
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
1999 1998
---- ----
ASSETS (in thousands)
CURRENT ASSETS
Cash and cash equivalents...................................................... $ 20,493 $ 75,475
Accounts receivable, less allowance for doubtful accounts of $44,652 and
$35,564 at December 31, 1999 and 1998, respectively.......................... 149,767 132,028
Inventories, net............................................................... 18,505 16,617
Deferred income taxes.......................................................... 42,595 -
Prepaid expenses and other current assets...................................... 7,665 4,917
-------- --------
TOTAL CURRENT ASSETS.................................................... 239,025 229,037
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of
$277,915 and $249,921 at December 31, 1999 and 1998, respectively............. 126,486 130,652
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET........................................ 41,503 51,996
DEFERRED INCOME TAXES............................................................ 95,974 -
INTANGIBLE ASSETS, NET........................................................... 125,641 84,365
OTHER ASSETS..................................................................... 422 548
-------- --------
$629,051 $496,598
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable............................................................... $ 47,202 $ 46,573
Accrued payroll and related taxes and benefits................................. 26,478 25,455
Accrued insurance.............................................................. 10,866 13,092
Other accrued liabilities...................................................... 51,307 54,549
Current portion of long-term debt.............................................. 23,528 74,439
-------- --------
TOTAL CURRENT LIABILITIES............................................... 159,381 214,108
LONG-TERM DEBT................................................................... 394,201 414,147
COMMITMENTS AND CONTINGENCIES.................................................... - -
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, $.001 par value:
10,000,000 shares authorized; none issued.................................... - -
Common Stock, $.001 par value:
150,000,000 shares authorized; 52,054,974 and 51,785,263 shares issued
and outstanding at December 31, 1999 and 1998, respectively.................. 52 52
Additional paid-in capital..................................................... 328,894 325,903
Accumulated deficit............................................................ (253,477) (457,612)
-------- --------
75,469 (131,657)
-------- --------
$629,051 $496,598
======== ========
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------
1999 1998 1997
---- ---- ----
(in thousands, except per share data)
Net revenues........................................... $ 940,024 $ 933,793 $1,180,694
Costs and expenses:
Cost of net revenues:
Product and supply costs......................... 183,406 238,656 334,766
Patient service equipment depreciation........... 73,138 76,974 84,932
Nursing services................................. 2,011 2,309 15,973
Other............................................ 9,359 12,756 15,511
---------- ---------- ---------
267,914 330,695 451,182
Provision for doubtful accounts..................... 34,314 75,319 121,908
Selling, distribution and administrative............ 514,041 574,895 616,113
Amortization of intangible assets................... 8,048 12,496 16,833
Impairment of intangible assets..................... - 76,223 133,542
Impairment of long-lived assets and
internally-developed software..................... - 22,187 26,781
---------- ---------- ---------
824,317 1,091,815 1,366,359
---------- ---------- ---------
OPERATING INCOME (LOSS)............................ 115,707 (158,022) (185,665)
Interest expense....................................... 42,526 46,916 50,393
---------- ---------- ---------
INCOME (LOSS) BEFORE TAXES......................... 73,181 (204,938) (236,058)
Income tax (benefit) expense........................... (130,954) 3,000 36,550
---------- ---------- ---------
NET INCOME (LOSS).................................. $ 204,135 $ (207,938) $ (272,608)
========== ========== ==========
Basic income (loss) per common share................... $ 3.93 $ (4.02) $ (5.30)
========== ========== ==========
Diluted income (loss) per common share................. $ 3.81 $ (4.02) $ (5.30)
========== ========== ==========
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Additional Accumulated Total
--------------------- Paid-in (Deficit) Stockholders'
Shares Par Value Capital Earnings Equity(Deficit)
--------------------- ---------- --------- ---------------
(in thousands)
Balance at December 31, 1996............ 51,203 $ 51 $319,950 $ 22,934 $ 342,935
Exercise of stock options............... 365 4,013 4,013
Other................................... 127 127
Net loss ............................... (272,608) (272,608)
------ ------- -------- ---------- ----------
Balance at December 31, 1997............ 51,568 51 324,090 (249,674) 74,467
Exercise of stock options............... 217 1 1,685 1,686
Other................................... 128 128
Net loss................................ (207,938) (207,938)
------ ------- -------- ---------- ----------
Balance at December 31, 1998............ 51,785 52 325,903 (457,612) (131,657)
Exercise of stock options............... 270 2,671 2,671
Tax benefits related to stock options... 235 235
Other................................... 85 85
Net income.............................. 204,135 204,135
------ ------- -------- ---------- ----------
Balance at December 31, 1999............ 52,055 $ 52 $328,894 $ (253,477) $ 75,469
====== ======= ======== ========== ==========
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
OPERATING ACTIVITIES
Net income (loss)..................................................................... $ 204,135 $(207,938) $(272,608)
Items included in net income (loss) not requiring (providing) cash:
Provision for doubtful accounts................................................... 34,314 75,319 121,908
Provision for revenue adjustments................................................. - 18,302 40,000
Provision for inventory and patient service equipment shortages/obsolescence...... 3,968 23,305 35,300
Depreciation...................................................................... 92,312 104,031 118,054
Amortization of intangible assets................................................. 8,048 12,496 16,833
Amortization of deferred debt costs............................................... 4,471 1,747 1,197
Impairment of intangible assets................................................... - 76,223 133,542
Impairment of long-lived assets and internally-developed software................. - 22,187 26,781
Deferred income taxes............................................................. (138,569) - 29,963
Other, net........................................................................ (1,444) 3,113 (1,917)
Change in operating assets and liabilities, net of effects of acquisitions:
(Increase) decrease in accounts receivable........................................ (49,802) 31,733 (80,229)
(Increase) decrease in inventories................................................ (3,668) (612) 2,722
(Increase) decrease in prepaids and other current
assets (including prepaid income taxes)........................................ (1,086) 7,262 32,758
Decrease in other non-current assets.............................................. 126 525 508
Increase (decrease) in accounts payable........................................... 629 5,276 (34,503)
Decrease in accrued expenses...................................................... (6,589) (564) (2,680)
Net purchases of patient service equipment, net of effects of acquisitions ........... (66,825) (38,461) (63,519)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................... 80,020 133,944 104,110
INVESTING ACTIVITIES
Purchases of property, equipment and
improvements, net of effects of acquisitions.................................... (8,294) (14,607) (21,047)
Proceeds from disposition of assets............................................... 1,038 3,170 8,212
Acquisitions and payments of contingent consideration............................. (53,427) (2,727) (11,283)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES........................................ (60,683) (14,164) (24,118)
FINANCING ACTIVITIES
Payments on term loan............................................................. (68,938) - -
Proceeds under revolving credit facility.......................................... - - 129,950
Payments under revolving credit facility.......................................... - (50,000) (211,950)
Payments on other long-term debt.................................................. (5,826) (8,773) (11,793)
Capitalized debt costs, net....................................................... (2,226) (3,535) (825)
Issuances of common stock......................................................... 2,671 1,686 4,013
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES........................................ (74,319) (60,622) (90,605)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................................. (54,982) 59,158 (10,613)
Cash and cash equivalents at beginning of year........................................ 75,475 16,317 26,930
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR..................................... $ 20,493 $ 75,475 $ 16,317
======== ======== ========
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of Apria Healthcare Group Inc. ("Apria" or "the company")
and its subsidiaries. All significant intercompany transactions and accounts
have been eliminated.
Company Background and Segment Reporting: Apria operates in the home
healthcare segment of the healthcare industry and provides services including
home respiratory therapy, home infusion therapy, home medical equipment and
other services to patients in the home throughout the United States through its
approximately 350 branch locations. Respiratory therapy, infusion therapy and
home medical equipment/other represented approximately 64%, 19% and 17% of total
1999 revenues, respectively. The gross margins in 1999 for respiratory therapy,
infusion therapy and home medical equipment/other were 79%, 59% and 58%,
respectively.
As of December 31, 1998, Apria adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which became effective for fiscal years beginning
after December 15, 1997. Management measures operating results on a geographic
basis and, therefore, views each branch as an operating segment. All the
branches offer the same services, except that infusion services are not offered
in all the geographic markets in which the company operates. For financial
reporting purposes, all the company's operating segments are aggregated into one
reportable segment. Consequently, SFAS No. 131 had no effect on the company's
consolidated financial statement disclosure.
Revenue Recognition and Concentration of Credit Risk: Revenues are
recognized on the date services and related products are provided to patients
and are recorded at amounts estimated to be received under reimbursement
arrangements with a large number of third-party payors, including private
insurers, prepaid health plans, Medicare and Medicaid. Approximately 32% of the
company's 1999 revenues are reimbursed under arrangements with Medicare and
Medicaid. In 1999, no other third-party payor group represented 8% or more of
the company's revenues. The majority of the company's revenues are derived from
fees charged for patient care under fee-for-service arrangements. Revenues
derived from capitation arrangements represented 9% of total net revenues for
1999.
Apria establishes allowances for revenue adjustments which are normally
identified and recorded at the point of cash application or upon account review.
Revenue adjustments result from differences between estimated and actual
reimbursement amounts, failures to obtain authorizations acceptable to the payor
or other specified billing documentation, changes in coverage or payor and other
reasons unrelated to credit risk. The allowance for revenue adjustments is
deducted directly from gross accounts receivable. Management also establishes
allowances for doubtful accounts for those accounts from which payment is not
expected to be received, although services were provided and revenue was earned.
Management performs various analyses to estimate the revenue adjustment
allowance and the allowance for doubtful accounts. Specifically, management
considers historical realization data, accounts receivable aging trends,
operating statistics and relevant business conditions. Apria periodically
refines its procedures for estimating the allowances for revenue adjustments and
doubtful accounts based on experience with the estimation process and changes in
circumstances. The estimation process was modified in 1997 to include an
evaluation of the collectibility of amounts owed by third-party payors with
aggregate patient balances exceeding a specified amount and further modified in
1998 to reflect changes in the company's collection policies and procedures.
Because of continuing changes in the healthcare industry and third-party
reimbursement, it is reasonably possible that management's estimates of net
collectible revenues could change in the near term, which could have a favorable
or unfavorable impact on operations and cash flows.
Use of Accounting Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Due to the nature of the industry and the reimbursement environment
in which the company operates, certain estimates are required in recording net
revenues. Inherent in these estimates is the risk that they will have to be
revised or updated, and the changes recorded in subsequent periods, as
additional information becomes available to management.
Cash and Cash Equivalents: Apria maintains cash with various financial
institutions. These financial institutions are located throughout the United
States and the company's cash management practices limit exposure to any one
institution. Outstanding checks in excess of bank balances, which are reported
as a component of accounts payable, were $14,229,000 and $15,102,000 at December
31, 1999 and 1998, respectively. Management considers all highly liquid
instruments purchased with a maturity of less than three months to be cash
equivalents.
Accounts Receivable: Included in accounts receivable are earned but
unbilled receivables of $22,987,000 and $25,262,000 at December 31, 1999 and
1998, respectively.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market and consist primarily of disposables used in
conjunction with patient service equipment and pharmaceuticals.
Patient Service Equipment: Patient service equipment consists of medical
equipment provided to in-home patients and is stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
equipment, which range from one to 10 years.
Property, Equipment and Improvements: Property, equipment and improvements
are stated at cost. Depreciation is provided using the straight-line method over
the estimated useful lives of the property. Included in property and equipment
are assets under capitalized leases which consist solely of computer equipment.
Depreciation for equipment under capitalized leases is provided using the
straight-line method over the estimated useful life. Estimated useful lives for
each of the categories presented in Note 3 are as follows: land improvements -
seven years; building and leasehold improvements - the shorter of the remaining
lease term or seven years; equipment and furnishings - three to 15 years;
information systems - three to four years.
Capitalized Software: Included in property, equipment and improvements are
costs related to internally-developed and purchased software that are
capitalized and amortized over periods not exceeding four years. Capitalized
costs include direct costs of materials and services incurred in developing or
obtaining internal-use software and payroll and payroll-related costs for
employees directly involved in the development of internal-use software.
The carrying value of capitalized software is reviewed if the facts and
circumstances suggest that it may be impaired. Indicators of impairment may
include a subsequent change in the extent or manner in which the software is
used or expected to be used, a significant change to the software is made or
expected to be made or the cost to develop or modify internal-use software
exceeds that expected amount. If events and circumstances indicate that the
software is impaired, management applies its policy for measuring and recording
impairment of its intangible and other long-lived assets, as described below.
Intangible and Other Long-lived Assets: Intangible assets consist of
covenants not to compete and goodwill arising from business combinations (see
Note 2). The values assigned to intangible assets are amortized on a
straight-line basis. Covenants are amortized over contractual terms, which range
from two to 10 years. Goodwill, representing the excess of the purchase price
over the estimated fair value of the net assets of the acquired business, is
amortized over the period of expected benefit. The amortization period for
substantially all of the company's goodwill is 20 years. Prior to December 31,
1997 the amortization period for goodwill related to acquired infusion therapy
businesses was 40 years.
Management reviews for impairment of long-lived assets and intangible
assets to be held and used in the company's operations whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For purposes of assessing impairment, assets are grouped at the
branch level which is the lowest level for which there are identifiable cash
flows that are largely independent of the cash flows of other groups of assets.
Goodwill is generally separately identified by acquisition and branch location.
However, for multi-location acquisitions, goodwill is allocated to branches on
the basis of annual revenues as of the acquisition date. Management deems the
long-lived and/or intangible assets of a branch to be impaired if estimated
expected undiscounted future cash flows are less than the carrying amount of the
assets. Estimates of expected future cash flows are based on management's best
estimates of anticipated operating results over the remaining useful life of the
assets. For those branches identified as containing impaired assets, the company
measures the impairment as the amount by which the carrying amount of the asset
exceeds the fair value of the asset. In estimating the fair value of the asset,
management utilizes a valuation technique based on the present value of expected
future cash flows. Management does not believe any impairment of its long-lived
assets or intangible assets existed at December 31, 1999.
Fair Value of Financial Instruments: The fair value of long-term debt and
letters of credit is determined by reference to borrowing rates currently
available to Apria for loans with similar terms and average maturities. The
carrying amounts of cash and cash equivalents, accounts receivables, trade
payables and accrued expenses approximate fair value because of their short
maturity.
Advertising: Advertising costs amounting to $2,528,000, $3,295,000 and
$4,088,000 for 1999, 1998 and 1997, respectively, are expensed as incurred and
included in "Selling, distribution and administrative expenses."
Income Taxes: Apria provides for income taxes under the liability method.
Accordingly, deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities. These differences will result in taxable or deductible amounts in
the future, based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to
amounts which are more likely than not to be realized. The provision for income
taxes represents the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.
Per Share Amounts: Basic net income (loss) per share is computed by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding. Diluted net income (loss) per share
includes the effect of the potential shares outstanding, including dilutive
stock options and warrants, using the treasury stock method.
Stock-based Compensation: Apria grants options to employees for a fixed
number of shares with an exercise price equal to the fair value of the shares at
the date of grant. The company accounts for stock option grants in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and, accordingly, recognizes no compensation expense
for the stock option grants to employees. Apria has adopted the disclosure
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-based Compensation" ("SFAS No. 123") (see Note 6).
Comprehensive Income: As of December 31, 1998, Apria adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which became effective for fiscal years beginning after December 15,
1997. Adoption of SFAS No. 130 had no effect on the company's consolidated
financial statements.
Recent Accounting Pronouncements: AICPA Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), was issued in March 1998 and was effective for the
company beginning in fiscal 1999. SOP 98-1 broadly defines and provides guidance
on accounting for the costs of computer software developed or obtained for
internal use. SOP 98-1 requires that computer software costs incurred in the
preliminary project stage be expensed as incurred. The provisions of SOP 98-1
apply to internal-use software costs incurred in those fiscal years for all
projects, including those projects in progress upon initial application of the
statement. Costs incurred prior to initial application of this statement,
whether capitalized or not, should not be adjusted to the amounts that would
have been capitalized had this SOP been in effect when those costs were
incurred. Apria had already adopted substantially all of the provisions of SOP
98-1, therefore formal adoption did not have a material impact on Apria's
consolidated financial statements.
Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of SFAS No. 133", issued in June 1999, defers the effective date of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which was issued in June 1998. SFAS
No. 133 establishes accounting and reporting standards for hedging activities
and for derivative instruments, including certain derivative instruments
embedded in other contracts. It requires that an entity recognize all
derivatives as either assets or liabilities in the statements of financial
position and measure those instruments at fair value. Adoption is required for
fiscal years beginning after June 15, 2000. Apria's management believes that
adoption of SFAS No. 133 will not have a material impact on its financial
statements.
Reclassifications: Certain amounts for prior periods have been reclassified
to conform to the current year presentation.
NOTE 2 -- BUSINESS COMBINATIONS AND DISPOSITIONS
During 1999, 1998 and 1997, Apria acquired a number of complementary
businesses in specific geographic markets and were purchased for cash. The
transactions were accounted for as purchases and, accordingly, the operations of
the acquired businesses are included in the consolidated statements of
operations from the dates of acquisition. The purchase prices were allocated to
the various underlying tangible and intangible assets and liabilities on the
basis of estimated fair value.
The following table summarizes the allocation of the purchase prices of
acquisitions made by the company, including non-cash financing activities and
payments of contingent consideration:
Year Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Fair value of assets acquired........ $56,313 $ 2,610 $11,729
Liabilities paid (assumed), net...... (2,886) 117 (446)
------- ------- -------
Cash paid...................... $53,427 $ 2,727 $11,283
======= ======= =======
The fair value of assets acquired during 1999, 1998 and 1997 includes
intangible assets of $49,324,000, $1,653,000 and $7,368,000, respectively.
During the third quarter of 1998, Apria sold its infusion business in
California to Crescent Healthcare, Inc. and exited the infusion business in
Texas, Louisiana, West Virginia, western Pennsylvania and downstate New York.
Charges of $7,263,000 related to the wind-down of exited infusion operations and
a $3,798,000 loss on sale of the California business were recorded. The
operations of these infusion locations had revenues of $41,480,000 and
$72,677,000 for the years 1998 and 1997, respectively.
In January 1997, Apria sold all of its 15% equity interest in Omnicare plc,
a United Kingdom-based public limited company, to a former director of Apria.
Cash proceeds from the sale were $2,791,000 which resulted in a gain of
$1,232,000.
In March 1997, Apria sold its Medicare-certified home health agency, M&B
Ventures, Inc., for cash proceeds of $2,400,000 and recorded a loss on sale of
$784,000. The company also disposed of several branch locations in California
and Arizona in the latter part of 1997. Cash proceeds from these sales were
$1,189,000 which resulted in a net gain of $386,000. The operations of M&B
Ventures and the disposed branches had revenues of approximately $4,648,000 in
1997.
In September 1997, Apria exercised its warrants to purchase 247,500 shares
of common stock of Living Centers of America, Inc. The subsequent sale of the
shares netted cash proceeds and a gain of $1,350,000.
NOTE 3 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following:
December 31,
-------------------
1999 1998
---- ----
(in thousands)
Land and improvements........................ $ - $ 53
Buildings and leasehold improvements......... 20,787 20,561
Equipment and furnishings.................... 44,960 47,413
Information systems.......................... 43,391 38,091
-------- --------
109,138 106,118
Less accumulated depreciation................ (67,635) (54,122)
-------- --------
$ 41,503 $ 51,996
======== ========
In 1998, Apria discontinued the implementation of an enterprise resource
planning system. Accordingly, Apria wrote off related software and other
capitalized costs of $7,548,000 in the third quarter of 1998. As part of the
decision to terminate the enterprise resource planning project, management
evaluated its current systems to determine their long-term viability in the
context of the company's new overall strategic direction. It was determined that
the company was at some risk in continuing to run the infusion billing system on
its current platform, which is no longer supported by the computer industry. To
mitigate this risk, Apria is in the process of converting the infusion system to
an industry-supported operating platform. The company also installed a number of
enhancements to the systems, rendering certain previously-developed modules
obsolete. Additionally, pharmacy and branch consolidations and closures resulted
in a variety of computer equipment that was no longer needed. Due to its age and
technological obsolescence, it was deemed to have no future value. As a result
of these actions, Apria recorded an impairment charge of $11,843,000 in the
third quarter of 1998. In the fourth quarter of 1997, Apria wrote down the
carrying value of internally-developed software by $20,225,000 and computer
equipment by $6,556,000. The software impairment charge consisted of $15,305,000
of capitalized development and implementation costs related to the company's
branch information system which management had committed to replace and
$4,920,000 of capitalized development costs related to specialized
telecommunications software for ApriaDirect, a clinical program that was
discontinued in December 1997. The computer equipment impairment charge
consisted of computer and telecommunications equipment identified as
functionally obsolete or no longer in use.
NOTE 4 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31,
------------------------
1999 1998
---- ----
(in thousands)
Covenants not to compete........... $ 16,034 $ 17,780
Goodwill........................... 149,352 101,365
-------- --------
165,386 119,145
Less accumulated amortization...... (39,745) (34,780)
-------- --------
$125,641 $ 84,365
======== ========
1998 Impairment of Intangible Assets: The deterioration in the infusion
therapy industry and management's decision in 1998 to withdraw from the infusion
service line in certain geographic markets served as indicators of potential
intangible asset impairment. Other indicators of potential impairment identified
by management included, among other issues, the company's declining common stock
price, failure to meet its already lowered financial expectations, the threat of
continued Medicare reimbursement reductions, government investigations against
the company, slower than expected progress in improving its billing and
collection process, and collection difficulties resulting from reported
financial problems within major managed care organizations with which Apria does
business. In the third quarter of 1998, management conducted an evaluation of
the carrying value of the company's recorded intangible assets. Management
considered current and anticipated industry conditions, recent changes in its
business strategies, and current and anticipated operating results. The
evaluation resulted in an impairment charge of $76,223,000, which includes a
write-off of $4,771,000 in intangible assets associated with the exit of the
infusion service line in certain areas.
1997 Impairment of Intangible Assets: Certain 1997 conditions, including
Apria's failure to meet projections and expectations, declining gross margins,
recurring operating losses, significant downward adjustment to the company's
projections for 1998 and a declining common stock value, were identified by
management as indicators of potential intangible asset impairment. In the fourth
quarter of 1997, management conducted an evaluation of the carrying value and
amortization periods of recorded intangible assets. Management considered
current and anticipated industry conditions, recent changes in its business
strategies and current and anticipated operating results. The evaluation
resulted in an impairment charge of $133,542,000 which was recorded in the
fourth quarter of 1997. In conjunction with the impairment evaluation,
management reduced the amortization period for goodwill related to acquired
infusion therapy businesses from 40 years to 20 years. The remaining
infusion-related goodwill is being amortized over the years remaining assuming a
20-year life from date of acquisition.
Measurement of Impairment: For purposes of assessing impairment, assets
were grouped at the branch level, which is the lowest level for which there are
identifiable cash flows that are largely independent. A branch location was
deemed to be impaired if management's estimate of undiscounted cash flows was
less than the carrying amount of the long-lived assets and goodwill at the
branch. In estimating future cash flows, management used its best estimates of
anticipated operating results over the remaining useful life of the assets
where, in the case of the 1997 computation, the useful life is the amortization
period before giving effect to the reduction in the estimated useful life of the
infusion service line goodwill from 40 to 20 years. For those branches
identified as impaired, the amount of impairment was measured by comparing the
carrying amount of the long-lived assets and goodwill to the estimated fair
value for each branch. Fair value was estimated using a valuation technique
based on the present value of the expected future cash flows.
NOTE 5 -- CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
------------------------
1999 1998
---- ----
(in thousands)
Term loan payable......................... $219,062 $288,000
9.5% senior subordinated notes............ 200,000 200,000
Capital lease obligations (see Note 9).... 4,032 8,196
-------- --------
423,094 496,196
Less: Current maturities.................. (23,528) (74,439)
Unamortized deferred debt costs..... (5,365) (7,610)
-------- --------
$394,201 $414,147
======== ========
Credit Agreement: Apria's credit agreement with Bank of America and a
syndicate of banks was amended and restated in November of 1998 and further
amended in January, February, April and October of 1999. The November amendment
required a $50,000,000 permanent repayment of the loan upon execution. The
remaining indebtedness under the credit agreement was restructured into a
$288,000,000 term loan and a $30,000,000 revolving line of credit with a
maturity date of August 9, 2001. Pursuant to the April amendment, the company
made a required $50,000,000 payment against the term loan.
Term loan principal payments are payable quarterly commencing on March 31,
1999 and continuing through June 30, 2001. Repayments of the term loan in 1999
totaled $68,938,000 and included $6,938,000 in excess cash flow payments,
$12,000,000 in scheduled quarterly payments and a $50,000,000 mandatory
repayment related to the April amendment. Between the effective date of the
November amendment and the date of the April amendment, the company was subject
to prepayments of the term loan based on excess cash flow (as defined by the
agreement). The resulting prepayments of $6,938,000 reduced the required amount
of the quarterly payment due March 31, 1999 to zero. No additional prepayments
based on excess cash flow are required.
The April amendment removed the requirement that Apria issue $50,000,000 in
senior subordinated convertible debentures by April 23, 1999 and the requirement
that the company maintain minimum cash balances of $35,000,000 through the
consummation of the debt offering.
The October amendment permits acquisitions with an aggregate purchase price
of up to $125,000,000 through the maturity date of the agreement. The October
amendment also relaxes other limitations associated with acquisitions and
provides the company with the ability to repurchase up to $50,000,000 of its
common stock through the credit agreement maturity date, subject to annual
limitations and compliance with Apria's other debt instruments.
The amended agreement permits Apria to elect one of two variable rate
interest options at the time an advance is made. The first option is expressed
as 2.50% plus the higher of (a) the Bank of America "reference rate" and (b) the
Federal Funds Rate plus 0.50% per annum. The second option is a rate based on
the London Interbank Offered Rate plus 3.50% per annum. The effective interest
rate at December 31, 1999 was 10.00% for term loan borrowings of $219,062,000.
The credit agreement requires payment of commitment fees of 0.75% on the unused
portion of the revolving credit facility.
Borrowings under the credit facility are collateralized by substantially
all of the assets of Apria. The agreement contains numerous restrictions,
including but not limited to, covenants requiring the maintenance of certain
financial ratios, limitations on additional borrowings, capital expenditures,
mergers, acquisitions and investments and restrictions on cash dividends, loans
and other distributions. At December 31, 1999, the company is in compliance with
the financial covenants required by the credit agreement.
The carrying value of the term loan approximates fair market value because
the underlying instruments are variable notes that reprice frequently.
Apria had no derivative securities as of December 31, 1999. The company is
exposed to changes in interest rates through its bank credit facility which
offers the variable rate interest options discussed above.
At December 31, 1999, the company's outstanding letters of credit amounted
to $3,800,000 and credit available under the revolving credit facility was
$26,200,000.
9 1/2% Senior Subordinated Notes: Apria's $200,000,000 9 1/2% senior
subordinated notes mature November 1, 2002 and are subordinated to all senior
debt of the company and are senior in right of payment to subordinated debt of
the company. The fair value of these notes, as determined by reference to quoted
market prices, is $196,080,000 and $199,260,000 at December 31, 1999 and 1998,
respectively.
Under the indenture governing Apria's senior subordinated notes, the
company's ability to incur additional indebtedness becomes restricted when the
company's fixed charge coverage ratio (as defined in the indenture) is less than
3.0 to 1.0. At December 31, 1999, the company's fixed charge coverage ratio
exceeds the minimum required by the indenture.
Maturities of long-term debt, exclusive of capital lease obligations are as
follows:
(in thousands)
2000................................................... $ 20,000
2001................................................... 199,062
2002................................................... 200,000
--------
$419,062
========
Total interest paid in 1999, 1998 and 1997 amounted to $37,923,000,
$44,989,000 and $53,222,000, respectively.
NOTE 6 -- STOCKHOLDERS' EQUITY
Common Stock: Apria has granted registration rights to certain holders of
common stock under which the company is obligated to pay the expenses associated
with those registration rights.
Stock Compensation Plans: Apria has various stock-based compensation plans,
which are described below. Management applies the provisions of APB No. 25 and
related interpretations in accounting for its plans. No compensation expense has
been recognized upon granting of options under its fixed stock option plans or
its performance-based plans. Had compensation expense for the company's
stock-based compensation plans been recognized based on the fair value of awards
at the date of grant, consistent with the method of SFAS No. 123, Apria's net
income (loss) and per share amounts would have been adjusted to the pro forma
amounts indicated below. The provisions of SFAS No. 123 have been applied to
awards with grant dates beginning January 1, 1995 through December 31, 1999,
only. Therefore, until the rules are applied to all outstanding, nonvested
awards, the compensation expense reflected in the pro forma amounts presented
below is not indicative of future amounts.
1999 1998 1997
---- ---- ----
(in thousands, except per share data)
Net income (loss):
As reported........................ $ 204,135 $(207,938) $(272,608)
Pro forma.......................... $ 196,971 $(212,518) $(276,213)
Basic net income (loss) per share:
As reported........................ $ 3.93 $ (4.02) $ (5.30)
Pro forma.......................... $ 3.79 $ (4.11) $ (5.37)
Diluted net income (loss) per share:
As reported........................ $ 3.81 $ (4.02) $ (5.30)
Pro forma.......................... $ 3.71 $ (4.11) $ (5.37)
For purposes of pro forma disclosure, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in 1999, 1998
and 1997: risk-free interest rates ranging from 6.81% to 6.89%, 5.72% to 4.16%
and 6.45% to 5.82%, respectively; dividend yield of 0% for all years; expected
lives of 5.08 years for 1999, 5.36 years for 1998 and 6.50 years for 1997; and
volatility of 64% for 1999, 63% for 1998 and 55% for 1997.
Fixed Stock Options: Apria has various fixed stock option plans that
provide for the granting of incentive or non-statutory options to its key
employees and non-employee members of the Board of Directors. In the case of
incentive stock options, the exercise price may not be less than the fair market
value of the company's stock on the date of the grant, and may not be less than
110% of the fair market value of the company's stock on the date of the grant
for any individual possessing 10% or more of the voting power of all classes of
stock of the company. The options become exercisable at any time from and after
the date of grant to five years and expire not later than 10 years from the date
of grant.
A summary of the status of Apria's fixed stock options as of December 31,
1999, 1998 and 1997, and the activity during the years ending on those dates is
presented below:
1999 1998 1997
------------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- --------- --------------
Outstanding at beginning of year.......... 2,300,969 $14.73 2,803,952 $ 17.46 3,431,472 $ 17.12
Granted:
Exercise price equal to fair value...... 563,332 $18.06 774,994 $ 8.78 201,000 $ 15.86
Exercise price greater than fair value.. 50,000 $18.45 75,000 $ 12.56 53,000 $ 18.25
Exercised................................. (189,241) $10.24 (104,638) $ 4.33 (304,635) $ 9.95
Forfeited................................. (105,977) $17.59 (1,248,339) $ 17.90 (576,885) $ 18.94
--------- ---------- ---------
Outstanding at end of year................ 2,619,083 $15.73 2,300,969 $ 14.73 2,803,952 $ 17.46
========= ========== =========
Exercisable at end of year................ 1,792,519 $15.14 1,701,287 $ 14.20 1,469,113 $ 16.19
========= ========== =========
Weighted-average fair value of options
granted during the year................... $10.79 $ 5.30 $ 9.91
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
----------------------------------------------- -------------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Outstanding Contractual Average Exercisable Average
Range of Exercise Prices As of 12/31/99 Life (in years) Exercise Price As of 12/31/99 Exercise Price
- ------------------------ -------------- --------------- -------------- -------------- --------------
$ 1.50 - $ 6.69 269,676 8.08 $ 5.67 269,676 $ 5.67
$ 7.68 - $ 9.00 309,033 8.18 $ 8.97 309,033 $ 8.97
$ 9.06 - $12.25 281,502 6.22 $11.91 161,502 $11.70
$13.69 - $16.63 310,006 7.18 $15.67 205,006 $15.89
$16.94 - $18.50 794,520 8.20 $17.85 247,740 $17.33
$18.69 - $29.00 654,346 6.04 $22.18 599,562 $22.34
--------- ---------
$ 1.50 - $29.00 2,619,083 7.31 $15.73 1,792,519 $15.14
========= =========
Performance-Based Stock Options: Included in Apria's stock-based
compensation plans are provisions for the granting of performance-based stock
options. In 1998, Apria granted such stock option awards to its key employees
and to key members of senior management. The options become exercisable over a
period of seven years and expire not later than ten years from the date of
grant. Accelerated vesting will ensue upon the occurrence of certain events and
on designated dates on which the average fair market value of Apria's common
stock during any period of 90 consecutive calendar days subsequent to the grant
date shall not have been less than a targeted per share price. On January 1,
2000, approximately two-thirds of these non-vested performance-based stock
options vested under the accelerated provisions of the plan. The remaining
one-third of these options will vest on January 1, 2001.
Also, the company has a Long-Term Senior Management Equity Plan which
provides for the granting of non-statutory stock option awards to key members of
senior management at fair market value on the date of the grant. The plan
provides for vesting at certain time intervals and accelerated vesting upon the
occurrence of certain events and the achievement of certain cumulative and
annual earnings per share targets. As of March 1999, all outstanding options had
vested. Since 1995, no options have been granted under this plan and no further
grants are authorized. Options awarded under this plan expire 10 years from the
date of grant.
A summary of the status of the Apria's performance-based stock options as
of December 31, 1999, 1998 and 1997, and the activity during the years ending on
those dates is presented below:
1999 1998 1997
------------------------- ------------------------- -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- ------- --------------
Outstanding at beginning of year.......... 3,410,862 $ 7.55 836,602 $ 11.24 919,722 $11.24
Granted:
Exercise price equal to fair value...... 124,500 $ 13.54 2,767,000 $ 6.88 -
Exercise price greater than fair value.. 20,000 $ 6.50 136,500 $ 6.50 -
Exercised................................. (80,470) $ 11.00 (112,100) $ 11.00 (60,440) $11.15
Forfeited................................. (266,500) $ 6.50 (217,140) $ 10.85 (22,680) $11.30
--------- --------- -------
Outstanding at end of year................ 3,208,392 $ 7.77 3,410,862 $ 7.55 836,602 $11.24
========= ========= =======
Exercisable at end of year................ 871,142 $ 9.70 610,622 $ 10.53 641,842 $11.25
========= ========= =======
Weighted-average fair value of options
granted during the year................... $ 7.38 $ 4.52 -
The following table summarizes information about performance-based stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
---------------------------------------------- -------------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Outstanding Contractual Average Exercisable Average
Range of Exercise Prices As of 12/31/99 Life (in years) Exercise Price As of 12/31/99 Exercise Price
- ------------------------ -------------- --------------- -------------- -------------- --------------
$ 4.69 - $ 6.50 2,054,000 8.58 $ 6.39 68,750 $ 4.69
$ 6.75 - $ 9.00 610,000 8.41 $ 8.75 342,500 $ 8.72
$ 11.00 - $ 18.56 544,392 3.47 $ 11.90 459,892 $ 11.19
--------- -------
$ 4.69 - $ 18.56 3,208,392 7.68 $ 7.77 871,142 $ 9.70
========= =======
Approximately 9,893,000 shares of common stock are reserved for future
issuance upon exercise of stock options under these plans.
NOTE 7 -- INCOME TAXES
Significant components of Apria's deferred tax assets and liabilities are
as follows:
December 31,
---------------------------
1999 1998
---- ----
(in thousands)
Deferred tax liabilities:
Tax over book depreciation....................... $ (16,579) $ (20,361)
Intangible assets................................ - (1,855)
Other, net....................................... (559) (364
--------- ---------
Total deferred tax liabilities............. (17,138) (22,580)
Deferred tax assets:
Allowance for doubtful accounts.................. 20,860 24,353
Accruals......................................... 12,827 17,889
Asset valuation reserves......................... 11,693 6,240
Net operating loss carryforward, limited
by Section 382................................ 89,104 128,285
AMT and research credit carryovers............... 6,859 4,500
Intangible assets................................ 14,021 -
Other, net....................................... 343 305
--------- ---------
Total deferred tax assets.................. 155,707 181,572
Valuation allowance................................ - (158,992)
--------- ---------
Net deferred tax assets............... $138,569 $ -
========= =========
The company's net current deferred tax assets and net long-term deferred
tax assets are $42,595,000 and $95,974,000 respectively. The difference in the
company's deferred tax assets from 1998 to 1999 is primarily attributable to the
current year reversal of the company's previously established valuation
allowance and utilization of current year net operating loss carryforwards.
At December 31, 1999, Apria's federal net operating loss carryforwards
("NOLs") approximated $225,000,000, expiring in varying amounts in the years
2003 through 2013. Additionally, the company has various state operating loss
carryforwards that began to expire in 1997. As a result of an ownership change
in 1992 that met specified criteria of Section 382 of the Internal Revenue Code,
future use of a portion of the federal and state operating loss carryforwards
generated prior to 1992 are each limited to approximately $5,000,000 per year.
Because of the annual limitation, approximately $57,000,000 of each of Apria's
federal and state operating loss carryforwards may expire unused. The net
operating loss carryforward amount in the related deferred tax asset excludes
such amount.
Apria released its net valuation allowance of $158,992,000 in the fourth
quarter of 1999. Management evaluated the available positive and negative
evidence in determining the realizability of the net deferred tax assets at
December 31, 1999. Management concluded it is more likely than not that the
company will realize its net deferred tax assets. In reaching this conclusion,
significant weight was given to the company's continued quarterly and 1999
annual profitability under new management. Additional positive evidence
consisted of the divestiture of unprofitable service lines, the stabilization of
reimbursement rates in the current year, and management's ability to develop and
achieve internal financial forecasts.
Income tax (benefit) expense consists of the following:
Year Ended December 31,
------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Current:
Federal................................ $ 1,470 $ - $ 3,623
State.................................. 6,145 2,000 1,964
Foreign................................ - 1,000 1,000
--------- -------- ---------
7,615 3,000 6,587
Deferred:
Federal................................ (123,495) - 25,768
State.................................. (15,074) - 4,195
--------- -------- ---------
(138,569) - 29,963
--------- -------- ---------
$(130,954) $ 3,000 $ 36,550
========= ======== =========
The exercise of stock options granted under Apria's various stock option
plans gives rise to compensation that is includable as taxable income to the
employee and deductible by the company for federal and state tax purposes but is
not recognized as expense for financial reporting purposes.
Current federal income tax expense for 1999 represents the company's
expected federal alternative minimum tax liability. This amount is also
reflected as a deferred tax asset in the accompanying balance sheet. Current
federal income tax expense in 1997 represents the amount settled and paid in
connection with an audit of Apria's federal income tax returns for tax years
ending in 1992 through 1995. The amount paid represents an increase to certain
deferred tax assets for which no benefit was recorded in 1997 because an
offsetting increase to the valuation allowance was recorded.
Current state income tax expense for each period presented includes state
tax amounts accrued and paid on a basis other than income. The current liability
also includes estimated settlement amounts for state income tax examinations.
During 1999, the company settled its foreign tax liabilities associated with the
foreign tax audits.
Differences between Apria's income tax (benefit) expense and an amount
calculated utilizing the federal statutory rate are as follows:
Year Ended December 31,
-------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Income tax expense (benefit) at statutory rate........................ $ 25,613 $(71,728) $(82,621)
Non-deductible merger costs and amortization
and impairment loss on goodwill..................................... 1,628 21,000 48,783
State and foreign taxes, net of federal
benefit and state loss carryforwards................................ 4,073 422 7,159
(Decrease) increase in valuation allowance for
deferred items (currently) previously recognized.................... (158,992) - 25,768
Tax benefit of net operating loss not currently recognized............ - 53,306 33,816
Other................................................................. (3,276) - 3,645
--------- -------- --------
$(130,954) $ 3,000 $ 36,550
========= ======== ========
Net income taxes paid (refunded) in 1999, 1998 and 1997, amounted to
$2,679,000, $(3,103,000) and $(26,426,000), respectively.
NOTE 8 -- PER SHARE AMOUNTS
The following table sets forth the computation of basic and diluted per
share amounts:
Year Ended December 31,
------------------------------------
1999 1998 1997
---- ---- ----
(in thousands, except per share data)
Numerator:
Net income (loss) ..................................... $ 204,135 $(207,938) $(272,608)
Numerator for basic per share amounts - income (loss)
attributable to common stockholders ................. $ 204,135 $(207,938) $(272,608)
Numerator for diluted per share amounts - income (loss)
attributable to common stockholders ................. $ 204,135 $(207,938) $(272,608)
Denominator:
Denominator for basic per share
amounts - weighted average shares ................. 51,940 51,732 51,419
Effect of dilutive securities:
Employee stock options ............................ 1,590 - -
-------- -------- --------
Dilutive potential common shares .................. 1,590 - -
-------- -------- --------
Denominator for diluted per share amounts - adjusted
weighted average shares .......................... 53,530 51,732 51,419
======== ======== ========
Basic income (loss) per share amounts ................... $ 3.93 $ (4.02) $ (5.30)
======== ======== ========
Diluted income (loss) per share amounts ................. $ 3.81 $ (4.02) $ (5.30)
======== ======== ========
Employee stock options excluded from the
computation of diluted per share amounts:
Exercise price exceeds average market
price of common stock ............................. 1,789 5,433 1,814
Other ............................................... - 63 468
-------- -------- --------
1,789 5,496 2,282
======== ======== ========
Average exercise price per share that exceeds
average market price of common stock .................. $ 19.11 $ 10.74 $ 20.13
======== ======== ========
Because net losses were incurred in 1998 and 1997, the impact of options is
antidilutive in those years and there is no difference between basic and diluted
per share amounts. For additional disclosure regarding employee stock options,
see Note 6.
NOTE 9 -- LEASES
Apria operates principally in leased offices and warehouse facilities. In
addition, delivery vehicles and office equipment are leased. Lease terms range
from one to ten years with renewal options for additional periods. Many leases
provide that the company pay taxes, maintenance, insurance and other expenses.
Rentals are generally increased annually by the Consumer Price Index subject to
certain maximum amounts defined within individual agreements.
Apria occasionally subleases unused facility space when a lease buyout is
not a viable option. Sublease income, in amounts not considered material, is
recognized monthly and is offset against facility lease expense. Net rent
expense in 1999, 1998 and 1997 amounted to $55,465,000, $57,670,000 and
$52,802,000, respectively.
In addition, during 1999, 1998 and 1997, Apria acquired patient service
equipment, information systems and equipment and furnishings totaling
$1,662,000, $263,000 and $7,235,000, respectively, under capital lease
arrangements with lease terms ranging from two to five years. Amortization of
the leased patient service equipment, information systems and equipment and
furnishings amounted to $2,245,000, $9,562,000 and $8,578,000 in 1999, 1998 and
1997, respectively.
The following amounts for assets under capital lease obligations are
included in property, equipment and improvements:
December 31,
-------------------------
1999 1998
---- ----
(in thousands)
Information systems....................... $ 9,223 $ 33,306
Less accumulated depreciation............. (5,143) (26,044)
-------- --------
$ 4,080 $ 7,262
======== ========
Future minimum payments, by year and in the aggregate, required under
noncancellable operating leases and capital lease obligations consist of the
following at December 31, 1999:
Capital Operating
Leases Leases
------- ---------
(in thousands)
2000............................................... $ 3,655 $ 46,848
2001............................................... 518 37,230
2002............................................... - 24,020
2003............................................... - 13,967
2004............................................... - 9,644
Thereafter......................................... - 18,367
------- --------
4,173 $150,076
Less interest included in minimum lease payments... (141) ========
-------
Present value of minimum lease payments............ 4,032
Less current portion............................... (3,528)
-------
$ 504
=======
NOTE 10 -- EMPLOYEE BENEFIT PLANS
Apria has a 401(k) defined contribution plan, whereby eligible employees
may contribute up to 16% of their annual basic earnings. The company matches 50%
of the first 8% of employee contributions. Total expenses related to the defined
contribution plan were $3,405,000, $3,539,000 and $3,791,000 in 1999, 1998 and
1997, respectively.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
Litigation: Apria is engaged in the defense of certain claims and lawsuits
arising out of the ordinary course and conduct of its business, the outcome of
which are not determinable at this time. Apria has insurance policies covering
such potential losses where such coverage is cost effective. In the opinion of
management, any liability that might be incurred by the company upon the
resolution of these claims and lawsuits will not, in the aggregate, have a
material adverse effect on Apria's consolidated results of operations and
financial position. In 1999, 1998 and 1997, certain claims and lawsuits were
settled and the company paid amounts, including the cost of defense, totaling
approximately $3,844,000, $2,125,000 and $3,277,000, respectively. Charges to
income of $1,389,000, $6,590,000 and $2,760,000 were taken in 1999, 1998 and
1997, respectively, to provide for probable losses related to matters arising in
each period and to revise estimates for matters arising in previous periods.
Management is unable to estimate the range of possible loss for all other claims
and lawsuits.
Apria and certain of its present and former officers and/or directors are
defendants in a class action lawsuit, In Re Apria Healthcare Group Securities
Litigation, filed in the U.S. District Court for the Central District of
California, Southern Division (Case No. SACV98-217 GLT). This case is a
consolidation of three similar class actions filed in March and April, 1998.
Pursuant to a court order dated May 27, 1998, the plaintiffs in the original
three class actions filed a Consolidated Amended Class Action Complaint on
August 6, 1998. The amended complaint purports to establish a class of plaintiff
shareholders who purchased Apria's common stock between May 22, 1995 and January
20, 1998. No class has been certified at this time. The amended complaint
alleges, among other things, that the defendants made false and/or misleading
public statements regarding Apria and its financial condition in violation of
federal securities laws. The amended complaint seeks compensatory and punitive
damages as well as other relief.
Two similar class actions were filed during July, 1998 in Superior Court of
California for the County of Orange: Schall v. Apria Healthcare Group Inc., et
al. (Case No. 797060) and Thompson v. Apria Healthcare Group Inc., et al. (Case
No. 797580). These two actions were consolidated by a court order dated October
22, 1998 (Master Case No. 797060). On June 14, 1999, the plaintiffs filed a
Consolidated Amended Class Action Complaint asserting claims founded on state
law and on Sections 11 and 12(2) of the 1933 Securities Act.
Apria believes that it has meritorious defenses to the plaintiffs' claims
and it intends to vigorously defend itself in both the federal and state cases.
In the opinion of Apria's management, the ultimate disposition of these class
actions will not have a material adverse effect on the company's financial
condition or results of operations.
Certain Concentrations: Approximately 64% of Apria's revenues are derived
from the provision of respiratory therapy services, a significant portion of
which is reimbursed under the federal Medicare program. Effective January 1,
1998, reimbursement for home oxygen services and respiratory drugs was reduced
by 25% and 5%, respectively. An additional 5% reduction for home oxygen services
was effective January 1, 1999. The impact of the reductions on revenues was
approximately $10,000,000 and $57,000,000 for 1999 and 1998, respectively.
Apria currently purchases approximately 44% of its patient service
equipment and supplies from five suppliers. Although there are a limited number
of suppliers, management believes that other suppliers could provide similar
products on comparable terms. However, a change in suppliers could cause delays
in service delivery and possible losses in revenue which could adversely affect
operating results.
Other: Apria has received a number of subpoenas and document requests from
U.S. Attorneys' offices and from the U.S. Department of Health and Human
Services. The subpoenas and requests generally ask for documents, such as
patient files, billing records and other documents related to billing practices,
related to the company's patients whose healthcare costs are paid by Medicare
and other federal programs. Apria is cooperating with the government in
connection with these investigations and is responding to the document requests
and subpoenas. On July 8, 1999, Apria announced that the company had received
notification that the U.S. Attorney's office in Sacramento has closed its
criminal investigation file relating to eight subpoenas that had been issued by
that office.
Apria has acknowledged that there may be errors and omissions in supporting
documentation affecting a portion of its billings. If the U.S. Department of
Justice were to conclude that such errors and omissions constituted criminal
violations, or were to conclude that such errors and omissions resulted in the
submission of false claims to federal healthcare programs or significant
overpayments by the government, Apria could face criminal charges and/or civil
claims for refunds, administrative sanctions and penalties for amounts that
would be highly material to its business, results of operations and financial
condition, including exclusion of Apria from participation in federal healthcare
programs. Apria believes that the assertion of criminal charges would be
unwarranted and that the company would be in a position to assert numerous
meritorious defenses in the event that any material civil claims are asserted.
However, no assurance can be provided as to whether any such charges or claims
will be asserted or as to the outcome of any possible proceedings that may
result from any such assertion of charges or claims.
NOTE 12 -- SERVICE/PRODUCT LINE DATA
The following table sets forth a summary of net revenues by service line:
Year Ended December 31,
------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Respiratory....................... $ 598,901 $ 552,725 $ 605,387
Infusion therapy.................. 179,148 211,176 281,178
Home medical equipment/other...... 161,975 169,892 294,129
--------- --------- ----------
Total net revenues...... $ 940,024 $ 933,793 $1,180,694
========= ========= ==========
NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (unaudited)
QUARTER
------------------------------------------------------
First Second Third Fourth
----- ------ ----- ------
(in thousands, except per share data)
1999
Net revenues................................... $228,294 $232,040 $ 237,367 $242,323
Gross profit................................... $162,225 $165,291 $ 170,761 $173,833
Operating income............................... $ 27,274 $ 28,307 $ 29,385 $ 30,741
Net income..................................... $ 15,562 $ 17,804 $ 18,895 $151,874
Basic income per common share.................. $ 0.30 $ 0.34 $ 0.36 $ 2.92
Diluted income per common share................ $ 0.30 $ 0.33 $ 0.35 $ 2.83
1998
Net revenues................................... $250,538 $240,627 $ 219,367 $223,261
Gross profit................................... $164,680 $159,830 $ 122,371 $156,217
Operating income (loss)........................ $ 5,375 $ 3,109 $(180,378) $ 13,872
Net (loss) income.............................. $ (6,607) $ (8,956) $(194,701) $ 2,326
Basic (loss) income per common share........... $ (0.13) $ (0.17) $ (3.76) $ 0.04
Diluted (loss) income per common share......... $ (0.13) $ (0.17) $ (3.76) $ 0.04
Fourth Quarter - 1999: Net income for the fourth quarter of 1999 includes
an income tax benefit of $131,357,000 which is primarily attributable to the
release of the company's valuation allowance. Management evaluated the available
positive and negative evidence in determining the realizability of the net
deferred tax assets at December 31, 1999. Management concluded it is more likely
than not that the company will realize its net deferred tax assets. In reaching
this conclusion, significant weight was given to the company's continued
quarterly profitability since the fourth quarter of 1998. Additional positive
evidence consisted of the divestiture of unprofitable service lines, the
stabilization of reimbursement rates in the current year, and management's
ability to develop and achieve internal financial forecasts (see Note 7).
Third Quarter - 1998: The operating results for the third quarter of 1998
included adjustments to reduce revenue and accounts receivable by $14,642,000
and to increase bad debt expense and the allowance for doubtful accounts by
$12,065,000. During the third quarter of 1998, a new management team reviewed
the effect of certain procedural initiatives and system enhancements introduced
earlier in the year to improve billing procedures and reduce write-offs.
Although cash collections in excess of trailing revenues were strong, write-offs
increased from the second quarter. Also, specific payor reviews indicated that
collectibility of certain receivables was in question, particularly those aged
in excess of 180 days. Based upon these reviews, a definitive change in
collection strategy was implemented which shifted the focus from efforts to
collect aged accounts receivable to the more current outstanding amounts.
Management believes a concerted effort that focuses on current accounts will
better utilize the company's resources to collect the receivables before they
age, when they undoubtedly become more difficult to collect. As a result of this
change in collection procedure and policy, management increased its allowance
for account balances over 180 days. The adjustment to revenue represents the
estimated amount of accounts receivable that will ultimately be written off due
to reasons unrelated to credit risk. Also recorded was a provision for specific
accounts identified as uncollectible totaling $1,529,000 and an increase to the
allowance for doubtful accounts related to the infusion sale and the exited
businesses totaling $9,128,000.
During the third quarter of 1998, Apria sold its infusion service line in
California and exited the infusion service line in certain geographic markets.
Charges of $7,263,000 related to the wind-down of exited infusion operations
were recorded in addition to a $3,798,000 loss on sale of the California
business.
One of the actions taken as part of management's strategic direction was
the termination of the project to implement an enterprise resource planning
system. Accordingly, Apria wrote-off related software and other capitalized
costs of $7,548,000 in the third quarter of 1998. As part of the decision to
terminate the enterprise resource planning project, management evaluated its
current systems to determine their long-term viability in the context of the
company's overall strategic direction. It was determined that the company was at
some risk in continuing to run the infusion billing system on its current
platform which was no longer supported by the computer industry. To mitigate
this risk, the company is in the process of converting the infusion system to an
industry-supported operating platform. Apria also proceeded with a number of
enhancements to the systems which rendered certain previously-developed modules
obsolete. Additionally, pharmacy and branch consolidations and closures rendered
a variety of computer equipment obsolete. Due to its age and technological
obsolescence, it was deemed to have no future value. As a result of these
actions, Apria recorded an impairment charge of $11,843,000 at September 30,
1998.
Based on management's third quarter evaluation of the carrying value of
intangible assets, an impairment charge of $76,223,000 was recorded. The charge
reduced the carrying value of the company's intangible assets to reflect
management's estimate of fair value. Also included in the impairment charge is
the write-off of $4,771,000 in intangible assets primarily associated with the
exit of the infusion service line in certain areas (see Note 4).
In the third quarter of 1998, Apria also recorded charges totaling
$3,939,000 for severance and other employee costs, $5,400,000 to settle issues
related to several procurement contracts, $3,476,000 to provide for estimated
oxygen cylinder losses, $2,841,000 to write-off obsolete inventory and patient
service equipment and $2,068,000 for lease liability due to facility
consolidation activities.
APRIA HEALTHCARE GROUP INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
---------- ---------- ---------- ---------- ----------
Year ended December 31, 1999
Deducted from asset accounts:
Allowance for revenue adjustments................ $ 38,400 $ - $ - $ 8,487 $ 29,913
Allowance for doubtful accounts.................. 35,564 34,314 827 (a) 26,053 44,652
Reserve for inventory shortages.................. 7,660 2,919 (1,206)(c) 5,504 3,869
Reserve for patient service equipment shortages.. 8,137 1,049 1,206 (c) 3,902 6,490
-------- -------- -------- -------- --------
Totals............................ $ 89,761 $ 38,282 $ 827 $ 43,946 $ 84,924
======== ======== ======== ======== ========
Year ended December 31, 1998
Deducted from asset accounts:
Allowance for revenue adjustments................ $ 38,058 $ - $ 18,302 (b) $ 17,960 $ 38,400
Allowance for doubtful accounts.................. 58,413 75,319 71 (a) 98,239 35,564
Reserve for inventory shortages.................. 6,373 8,598 (2,000)(c) 5,311 7,660
Reserve for patient service equipment shortages.. 3,900 14,707 2,000 (c) 12,470 8,137
-------- -------- -------- -------- --------
Totals............................ $106,744 $ 98,624 $ 18,373 $133,980 $ 89,761
======== ======== ======== ======== ========
Year ended December 31, 1997
Deducted from asset accounts:
Allowance for revenue adjustments................ $ 32,300 $ - $ 40,000 (b) $ 34,242 $ 38,058
Allowance for doubtful accounts.................. 73,809 121,908 1,697 (a) 139,001 58,413
Reserve for inventory shortages.................. 1,825 26,716 - 22,168 6,373
Reserve for patient service equipment shortages.. 4,812 8,584 - 9,496 3,900
-------- -------- -------- -------- --------
Totals............................ $112,746 $157,208 $ 41,697 $204,907 $106,744
======== ======== ======== ======== ========
- ---------------------------------------------------------------------
(a) Includes amounts added in conjunction with business acquisitions.
(b) Amount charged against net revenues. See Note 11 to the Consolidated
Financial Statements.
(c) Transfers between reserves.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 2000
APRIA HEALTHCARE GROUP INC.
By: /s/ PHILIP L. CARTER
--------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ PHILIP L. CARTER
- -----------------------
Philip L. Carter Chief Executive Officer March 27, 2000
/s/ JOHN C. MANEY
- -----------------------
John C. Maney Executive Vice President and March 27, 2000
Chief Financial Officer
(Principal Financial Officer)
/s/ JAMES E. BAKER
- -----------------------
James E. Baker Vice President, Controller March 27, 2000
(Principal Accounting Officer)
/s/ RALPH V. WHITWORTH
- -----------------------
Ralph V. Whitworth Director, Chairman of the Board March 27, 2000
/s/ DAVID H. BATCHELDER
- -----------------------
David H. Batchelder Director March 27, 2000
/s/ DAVID L. GOLDSMITH
- -----------------------
David L. Goldsmith Director March 27, 2000
/s/ RICHARD H. KOPPES
- -----------------------
Richard H. Koppes Director March 27, 2000
/s/ PHILIP R. LOCHNER
- -----------------------
Philip R. Lochner Director March 27, 2000
/s/ BEVERLY B. THOMAS
- -----------------------
Beverly B. Thomas Director March 27, 2000
EXHIBIT INDEX
Exhibit
Number Description Reference
- ------- ----------- ---------
3.1 Restated Certificate of Incorporation of Registrant. (d)
3.2 Certificate of Ownership and Merger merging Apria Healthcare Group Inc. into Abbey and amending Abbey's
Restated Certificate of Incorporation to change Abbey's name to "Apria Healthcare Group Inc." (f)
3.3 Amended and Restated Bylaws of Registrant, as amended on May 5, 1998. (k)
3.4 Certificate of Amendment of Certificate of Incorporation of Apria Healthcare Group Inc. (o)
3.5 Amended and Restated Bylaws of Registrant, as amended on October 29, 1999. (p)
4.1 Form of 9 1/2% Senior Subordinated Note due 2002. (b)
4.2 Indenture dated November 1, 1993, by and among Abbey, certain Subsidiary Guarantors defined therein and
U.S. Trust Company of California, N.A., as filed on Form SE.
4.3 Specimen Stock Certificate of the Registrant. (h)
4.4 Certificate of Designation of the Registrant. (d)
10.1 1991 Stock Option Plan. (a)
10.2 Schedule of Registration Procedures and Related Matters. (c)
10.3 401(k) Savings Plan, restated effective October 1, 1993, amended December 28, 1994. (g)
10.4 Stock Incentive Plan, dated June 28, 1995. (e)
10.5 Amended and Restated 1992 Stock Incentive Plan. (g)
10.6 Amendment Number Two to the 401(k) Savings Plan, dated June 28, 1995. (h)
10.7 Amendment Number Three to the 401(k) Savings Plan, dated January 1, 1996. (h)
10.8 Amendment 1996-1 to the 1991 Stock Option Plan, dated October 28, 1996. (m)
10.9 Amendment 1996-1 to the Amended and Restated 1992 Stock Incentive Plan, dated October 28, 1996. (m)
10.10 Resignation and General Release Agreement dated January 19, 1998, between Registrant and Jeremy M. Jones. (i)
10.11 Security Agreement dated March 13, 1998, between Registrant, Apria Healthcare, Inc., and certain of its
subsidiaries and Bank of America National Trust & Savings Association. (i)
10.12 First Amendment to Security Agreement dated April 15, 1998, among Registrant and certain of its
subsidiaries, Bank of America National Trust & Savings Association, NationsBank of Texas, N.A. and other
financial institutions party to the Credit Agreement. (i)
10.13 Employment Agreement dated May 5, 1998, between Registrant and Philip L. Carter. (k)
10.14 Non-qualified Stock Option Agreement dated May 5, 1998, between Registrant and Philip L. Carter. (m)
10.15 Amended and Restated 1997 Stock Incentive Plan, dated February 27, 1997, as amended through June 30, 1998. (m)
10.16 Employment Agreement dated October 19, 1998, between Registrant and John C. Maney. (m)
10.17 Amended and Restated Credit Agreement dated November 13, 1998, between Registrant and certain of its
subsidiaries and Bank of America National Trust and Savings Association, and other financial institutions
party to the Credit Agreement. (l)
10.18 Amended and Restated Guaranty dated November 13, 1998, made by various Guarantors defined therein in favor
of Bank of America National Trust and Savings Association. (m)
10.19 Second Amendment to Security Agreement dated November 13, 1998, among Registrant and certain of its
subsidiaries and Bank of America National Trust and Savings Association and other financial institutions
party to the Credit Agreement. (m)
10.20 1998 Non-qualified Stock Incentive Plan, dated December 15, 1998. (m)
10.21 Amendment to Employment Agreement dated January 1, 1999, between Registrant and Philip L. Carter. (m)
10.22 First Amendment to Amended and Restated Credit Agreement and Consent dated January 15, 1999, among
Registrant and certain of its subsidiaries, Bank of America National Trust and Savings Association and
other financial institutions party to the Credit Agreement. (m)
10.23 Second Amendment to Amended and Restated Credit Agreement dated February 23, 1999, among Registrant and
certain of its subsidiaries, Bank of America National Trust and Savings Association and other financial
institutions party to the Credit Agreement. (m)
10.24 Amended and Restated Executive Severance Agreement dated February 26, 1999, between Registrant and Frank
Bianchi. (m)
10.25 Amended and Restated Executive Severance Agreement dated February 26, 1999, between Registrant and Michael
R. Dobbs. (m)
10.26 Amended and Restated Employment Agreement dated February 26, 1999, between Registrant and Lawrence M.
Higby. (m)
10.27 Third Amendment to Amended and Restated Credit Agreement dated April 22, 1999, among Registrant and
certain of its subsidiaries, Bank of America National Trust and Savings Association and other financial
institutions party to the Credit Agreement. (n)
10.28 Fourth Amendment to Amended and Restated Credit Agreement dated October 22, 1999, among Registrant and
certain of its subsidiaries, Bank of America National Association and other financial institutions party
to the Credit Agreement. (p)
10.29 Second Amendment to Employment Agreement dated October 29, 1999, between Registrant and Philip L. Carter.
16.1 Letter dated July 8, 1998 from Ernst & Young, LLP addressed to the Securities and Exchange Commission. (j)
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Deloitte & Touche LLP, Independent Auditors.
27.1 Financial Data Schedule.
References - Documents filed with the Securities and Exchange Commission
(a) Incorporated by reference to Registration Statement on Form S-1
(Registration No. 33-44690), as filed on December 23, 1991.
(b) Incorporated by reference to Registration Statement on Form S-1
(Registration No. 33-69078), as filed on September 17, 1993.
(c) Incorporated by reference to Registration Statement on Form S-4
(Registration No. 33-69094), as filed on September 17, 1993.
(d) Incorporated by reference to Registration Statement on Form S-4
(Registration No. 33-90658), and its appendices, as filed on March 27,
1995.
(e) Incorporated by reference to Registration Statement on Form S-8
(Registration No. 33-94026), as filed on June 28, 1995.
(f) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30,
1995, as filed on August 14, 1995.
(g) Incorporated by reference to Registration Statement on Form S-8
(Registration No. 33-80581), as filed on December 19, 1995.
(h) Incorporated by reference to Annual Report on Form 10-K for the year ended
December 31, 1995.
(i) Incorporated by reference to Annual Report on Form 10-K for the year ended
December 31, 1997.
(j) Incorporated by reference to Current Report on Form 8-K, as filed on July
6, 1998.
(k) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30,
1998, as filed on August 14, 1998.
(l) Incorporated by reference to Quarterly Report on Form 10-Q dated September
30, 1998, as filed on November 16, 1998.
(m) Incorporated by reference to Annual Report on Form 10-K for the year ended
December 31, 1998.
(n) Incorporated by reference to Quarterly Report on Form 10-Q dated March 31,
1999, as filed on May 14, 1999.
(o) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30,
1999, as filed on August 12, 1999.
(p) Incorporated by reference to Quarterly Report on Form 10-Q dated September
30, 1999, as filed on November 12, 1999.
COPIES OF EXHIBITS
Copies of exhibits will be provided upon written request and payment of a fee
of $.25 per page plus postage. The written request should be directed to the
Financial Reporting Department (Attn: Ms. Donna Draper), at the address of the
company set forth on the first page of this Form 10-K.