UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
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)
26220 ENTERPRISE COURT 92630-8400
LAKE FOREST, CA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (949) 639-2000
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. [X]
As of March 20, 2002, there were outstanding 53,768,638 shares of the
Registrant's common stock, par value $0.001, which is the only class of common
stock of the Registrant. As of February 28, 2002 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 $21.59 per share as reported by the New York
Stock Exchange, was approximately $1,131,685,426.
DOCUMENTS INCORPORATED BY REFERENCE: None
PART I
ITEM 1. BUSINESS
Apria Healthcare Group Inc. provides comprehensive home healthcare services
through approximately 400 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 Intravenous administration of anti-infectives,
pain management, chemotherapy, nutrients (also
administered through a feeding tube) and other
medications and related services
Home medical equipment Provision of patient safety items, and
ambulatory and room equipment, such as
hospital beds and wheelchairs
STRATEGY
Apria is pursuing an operating strategy to increase its market share and
improve its profitability. Key elements of its strategy are as follows:
MAINTAIN DISCIPLINED FOCUS ON EXISTING SERVICE OFFERINGS AND INCREASE
EMPHASIS ON HOME RESPIRATORY THERAPY. Apria intends to remain in its core
businesses of home respiratory therapy, home infusion therapy and home medical
equipment. Offering a comprehensive range of services gives Apria a competitive
advantage with its core managed care customers and enables it to maintain a
diversified revenue base. However, Apria plans on increasing the percentage of
net revenues generated by home respiratory therapy, which historically has
produced higher gross margins than the other service lines.
SUPPLEMENT INTERNAL GROWTH WITH SELECTIVE ACQUISITIONS. Apria intends to
continue to expand through internal growth in the home respiratory service line
and through acquisitions. Apria operates in a highly fragmented market, which
provides an attractive opportunity to drive growth through acquisitions. During
2001, Apria completed a number of acquisitions comprised largely of respiratory
therapy businesses for an aggregate consideration of $81.7 million.
REDUCE COSTS AND ENHANCE MARGINS AND CASH FLOWS. Apria's management team
will continue to implement "best practices" programs throughout the company with
the aim of achieving greater standardization, reduced costs, enhanced margins
and cash flow. Apria's receivables management program has reduced days sales
outstanding to 50 at December 31, 2001. Additionally, Apria has developed and
implemented standardized clinical and delivery models, billing practices and
common operating procedures in its field locations and has centralized
purchasing for inventory, patient service equipment and supplies. Apria
continues to focus resources on identifying opportunities for further
productivity improvements.
SERVICE LINES
Apria derives substantially all of its revenue from the home healthcare
segment of the healthcare market in three principal service lines: home
respiratory therapy, 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. Apria purchases or rents the products needed to complement
its services. These services include:
- providing respiratory care, pharmacy services and high-tech infusion
nursing;
- educating patients and their caregivers about illnesses and instructing
them on self-care and the proper use of products in the home;
- monitoring patient's individualized treatment plans;
- reporting to the physician and/or managed care organization;
- maintaining equipment; and
- processing claims to third-party payors.
The following table sets forth a summary of net revenues by service line,
expressed as percentages of total net revenues:
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Home respiratory therapy.............. 66% 65% 64%
Home infusion therapy................. 19% 19% 19%
Home medical equipment/other.......... 15% 16% 17%
---- ---- ----
Total net revenues.............. 100% 100% 100%
==== ==== ====
HOME RESPIRATORY THERAPY. Apria provides home respiratory therapy services
to patients with a variety of conditions, including:
- chronic obstructive pulmonary disease such as emphysema, chronic
bronchitis and asthma;
- nervous system-related respiratory conditions;
- congestive heart failure; and
- 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.
Apria derives approximately 58% of its respiratory therapy revenues from
the provision of oxygen systems, home ventilators and nebulizers, which are
devices to aerosolize medication. The company derives its remaining respiratory
revenues from the provision of:
- apnea monitors used to monitor the vital signs of newborns;
- continuous positive airway pressure devices used to treat obstructive
sleep apnea;
- noninvasive positive pressure ventilation;
- respiratory medications in pre-mixed unit dose form; and
- other respiratory therapy products.
HOME INFUSION THERAPY. Home infusion therapy involves the administration of
a drug or nutrient directly into the body intravenously through a needle or a
catheter. Examples include:
- total parenteral (intravenous) nutrition;
- anti-infectives;
- chemotherapy;
- pain management; and
- other intravenous and injectable medications.
The home infusion therapy service line also includes enteral nutrition which is
the administration of nutrients directly into the gastrointestinal tract through
a feeding tube.
Depending on the therapy, a broad range of venous access devices and pump
technologies 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. They are available
to respond to emergencies and questions regarding therapy and to provide
training and education to the patient and caregiver. Other support services
include patient service, assistance with insurance questions, pump management,
preventive maintenance, direct billing of Medicare, Medicaid and other payors,
outcome reporting and claims processing. Apria currently operates 31 pharmacy
locations to serve its home infusion patients.
HOME MEDICAL EQUIPMENT/OTHER. Apria's primary emphasis in the home medical
equipment service line is on the provision of patient safety items and
ambulatory and patient room equipment. The company is also expanding its
rehabilitation product offering in selective markets in the United States.
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, Apria's
management has recognized the need to expand its ability to provide value-added
services to these customers. Rather than directly providing certain non-core
services itself, Apria aligns itself with other segment leaders, such as 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 400 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 billing, purchasing, equipment
maintenance, repair and warehousing. The branch delivers home healthcare
products and services to patients in their homes and other care sites through
the company's delivery fleet, clinical employees and qualified delivery
professionals. This structure is designed to create operating efficiencies
associated with centralized services while promoting responsiveness to local
market needs.
To manage its large regional network, Apria's organization is
vertically-integrated in the functional areas of sales and operations. The
operations function is then further divided between revenue management, clinical
services and logistics. Through this structure, all functional areas performed
by the regional network have direct reporting and accountability to corporate
headquarters. Apria believes that this structure provides control over and
consistency among its regions and branches and enables implementation of
standardized policies and procedures, thereby eliminating many of the problems
inherent with a decentralized network.
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, frequent reinforcement, compliance audits, a
formal disciplinary component and other programs. See "Business - Risk Factors -
Federal Investigations".
OPERATING SYSTEMS AND CONTROLS. Apria's business is dependent, to a
substantial degree, upon the quality of its operating and field information
systems for the maintenance of accurate contract terms, accurate order entry and
pricing, billing and collections. These systems provide reporting that enables
management to effectively monitor and evaluate contract profitability. Apria's
information services department works closely with all of the corporate
departments to ensure that Apria's systems are compliant with government
regulations and payor requirements and to support their business improvement
initiatives with technological solutions. The following are some of the more
significant projects currently underway:
- Over the last 18 months, Apria has been developing the necessary
functionality to support the infusion therapy business on the platform on
which the respiratory/home medical equipment application operates. The
current infusion therapy application is based on an operating system that
has limited support. The new system is currently in the quality assurance
phase and management expects to begin the testing phase in the third
quarter of 2002. Upon completion of the testing, the nationwide rollout
will commence and is expected to continue into late 2003.
- Apria expects to complete the implementation and integration of supply
chain management software by the second quarter of 2002. Apria is
currently planning the second phase of this project, which is the
implementation of the software's distribution requirements planning
module and the customer routing module to gain further efficiencies in
the delivery of products to patients.
- Over the last few years Apria has been centralizing and consolidating the
respiratory/home medical equipment billing system data from the field
locations to the corporate office. This process thus far has reduced the
number of IBM AS400 data servers in the field locations from 175 to fewer
than 40. To mitigate the risks associated with such a centralization,
Apria has implemented a "hot site" that mirrors the corporate data site
at a remote location which would serve as a backup in case of a disaster
or other equipment failure.
- The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
contains standardization provisions that apply to health information
created or maintained by healthcare providers who engage in certain
electronic transactions. Functions common to healthcare businesses such
as billing, reimbursement and insurance eligibility verification that are
performed electronically are subject to the rules. The transaction
standardization rules require, among other things, the use of specific
file formats and transaction codes for electronic transmissions between
healthcare business affiliates. Apria's management has been focusing
resources on the standardization rules for the last year and expects to
begin testing with the durable medical equipment regional carriers during
the second quarter of 2002. See "Business - Government Regulation -
HIPAA".
Management believes that the implementation of these changes will
substantially improve its systems. Nonetheless, such implementations could have
a disruptive effect on related transaction processing. See "Business - Risk
Factors - Operating Systems and Controls".
Apria has established performance indicators which measure operating
results against expected thresholds for the purpose of allowing all levels of
management to identify and modify areas requiring improvement and to monitor
progress. Operating models with strategic targets have been developed to move
Apria toward more effectively managing 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 and improvement in operating income.
PAYORS. Apria derives substantially all its revenues from third-party
payors, including private insurers, managed care organizations, Medicare and
Medicaid. For 2001, approximately 23% of Apria's net revenues were derived from
Medicare and 7% 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.
Initiatives focused specifically on receivables management such as system
enhancements, process refinements and organizational changes have resulted in
improvement and consistency in key accounts receivable indicators. Days sales
outstanding at December 31, 2001 and 2000 were 50 and 51, respectively.
Apria is utilizing its information systems expertise to increase
utilization of technology such as electronic claims submission and electronic
funds transfer with managed care organizations. This can expedite claims
processing and reduce the administrative cost associated with this activity for
both Apria and its customer/payors. Management is also focusing resources on
certain large third-party payors to develop internal expertise with the payors'
unique reimbursement requirements, thereby reducing subsequent denials and
shortening the related collection periods.
MARKETING
Through its field sales force, Apria markets its services primarily to
managed care organizations, physicians, hospitals, medical groups, home health
agencies and case managers. Following are examples of Apria's marketing
initiatives:
AUTOMATED CALL ROUTING THROUGH A SINGLE TOLL-FREE NUMBER. This marketing
initiative 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
("JCAHO") 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 JCAHO entails a lengthy review process that 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, including acquired locations,
are accredited by or in the process of receiving accreditation from JCAHO.
Apria's most recent triennial survey cycle concluded in the fall of 2001.
ESSENTIAL CARE MODEL ("ECM"). Apria has devloped a proprietary model that
defines the services, supplies and products delivered in conjunction with
prescribed homecare equipment and therapies. The ECM is used to establish
consistent and clear expectations for referral sources, payors and patients.
PHYSICIAN RELATIONS. Apria's physician relations group places phone calls
to physician offices in an effort to educate them about homecare 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. Apria has a centralized patient satisfaction survey
function that periodically conducts targeted member satisfaction studies for key
managed care organizations as specified by the various contractual arrangements.
The program also meets JCAHO's requirements for outcome data to be used in
performance improvement initiatives.
APRIA GREAT ESCAPES TM TRAVEL PROGRAM. Apria's 400-branch network
facilitates travel for patients who require oxygen or other therapies. Apria
coordinates equipment and service needs for thousands of patients annually,
which enhances their mobility and quality of life.
SALES
Apria employs approximately 461 sales professionals whose primary
responsibility is to target key customers for all of its service lines. Key
customers include but are not limited to hospital-based healthcare
professionals, physicians and their staffs and managed care organizations. Apria
provides its sales professionals with 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
the markets that Apria serves continue to 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 10% of Apria's total
net revenues for 2001. Among its more significant managed care agreements, Apria
has contracts with Aetna, Gentiva's CareCentrix group, Kaiser Health Plans and
United HealthCare Group. Apria also offers discount agreements and various
fee-for-service arrangements to hospitals or hospital systems whose patients
have home healthcare needs. See "Business - Risk Factors - Pricing Pressures".
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; and
- 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; and
- accreditation by JCAHO.
It is increasingly important to be able to integrate a broad range of home
healthcare services to provide customers access 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 JCAHO 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. See "Business - Risk
Factors - Pricing Pressures".
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 2001, approximately 23% of Apria's net
revenue was derived from Medicare and 7% from Medicaid.
Medicare Legislation. In December 2000, federal legislators enacted the
Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000.
Among other items, this legislation provides the home healthcare industry with
some relief from the effects of the Balanced Budget Act of 1997, which contained
a number of provisions that are affecting, or could potentially affect, Apria's
Medicare reimbursement levels. The Medicare Balanced Budget Refinement Act of
1999 also mitigated some of the effects of the Balanced Budget Act of 1997.
The Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of
2000 provided reinstatement in 2001 of the full annual cost of living adjustment
for durable medical equipment and provides minimal increases in 2002 for durable
medical equipment and oxygen. The Balanced Budget Act of 1997 had frozen such
adjustments for each of the years 1998 through 2002.
During 2000, the Secretary of the U.S. Department of Health and Human
Services ("HHS") wrote to the durable medical equipment regional carriers and
recommended, but did not mandate, that Medicare claims processors base their
payments for covered outpatient drugs and biologicals on pricing schedules other
than the Average Wholesale Price listing, which historically has been the
industry's basis for drug reimbursement. The suggested alternative pricing
methodology was offered in an effort to reduce reimbursement levels for certain
drugs to more closely approximate a provider's acquisition cost, but it would
not have covered the costs that homecare pharmacies incur to prepare, deliver or
administer the drugs to patients. Billing, collection and other overhead costs
also would have been excluded. Under current government reimbursement schedules,
these costs are not clearly defined but are implicitly covered in the
reimbursement for the drug cost. The healthcare industry has taken issue with
the HHS's approach for several reasons, primarily because it fails to consider
the accompanying costs of delivering and administering these types of drug
therapies to patients in their homes. Further, if providers choose to
discontinue providing these drugs due to inadequate reimbursement, patient
access may be jeopardized. The Medicare, Medicaid and SCHIP Benefits Improvement
and Protection Act of 2000 delayed the adoption of proposed drug price changes
and directed the General Accounting Office to conduct a thorough study, by
September 2001, to examine the adequacy of current payments and to recommend
revised payment methodologies. The study was completed but the authors
acknowledged that 1) the limited scope and deadline associated with the study
did not allow for a thorough analysis of the homecare pharmacy aspect of covered
services, 2) legitimate service components and related costs do exist, and 3)
different methods of determining drug delivery and administration payments may
be necessary for different types of drugs. Currently, the timing and impact of
such pricing methodology revisions are not known.
In addition, some states have adopted, or are contemplating adopting, some
form of the proposed alternate pricing methodology for certain drugs and
biologicals under the Medicaid program. In several states, these changes have
reduced the level of reimbursement received by Apria to an unacceptable level
without a corresponding offset or increase to compensate for the service costs
incurred. In those states, Apria has elected to stop accepting new Medicaid
patient referrals for the affected drugs. The company is continuing to provide
services to patients already on service, and for those who receive other
Medicaid-covered respiratory, home medical equipment or infusion therapies.
The Balanced Budget Act of 1997 granted authority to the Secretary of HHS
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,
reimbursement reductions proposed under the inherent reasonableness procedure
have been delayed pending (1) a study by the General Accounting Office to
examine the use of the authority granted under this procedure (completed July
2000), and (2) promulgation by the Centers for Medicare & Medicaid Services
(formerly the Health Care Financing Administration), of a final rule
implementing the inherent reasonableness authority. This regulation has not yet
been issued.
Further, the Balanced Budget Act of 1997 mandated that the Centers for
Medicare & Medicaid Services conduct competitive bidding demonstrations for
Medicare Part B items and services. The competitive bidding demonstrations,
currently in progress, could provide the Centers for Medicare & Medicaid
Services 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
administration is seeking authority to implement nationwide competitive bidding
for all Part B products and services (except physician's services). Congress has
rejected similar proposals in the past. It is not clear whether Congress will
adopt this latest proposal.
Claims Audits. Durable medical equipment regional carriers are private
organizations that contract to serve as the federal 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
complex and time-consuming requirements 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.
Further, the government could demand 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. See "Business - Risk Factors - Federal Investigations" and
"Business - Risk Factors - Medicare Reimbursement Rates".
HIPAA. The Health Insurance Portability and Accountability Act mandates the
adoption of standards for the exchange of electronic health information in an
effort to encourage overall administrative simplification and to enhance the
effectiveness and efficiency of the healthcare industry. Ensuring privacy and
security of patient information - "accountability" - is one of the key factors
driving the legislation. The other major factor - "portability" - refers to
Congress' intention to ensure that individuals can take their medical and
insurance records with them when they change employers.
In August 2000, HHS issued final regulations establishing electronic data
transmission standards that healthcare providers must use when submitting or
receiving certain healthcare data electronically. All affected entities,
including Apria, are required to comply with these regulations by October 16,
2002 unless the entity files a readiness plan by October 16, 2002, in which case
it will have until October 16, 2003 to comply.
In December 2000, HHS issued final regulations concerning the privacy of
healthcare information. These regulations regulate the use and disclosure of
individuals' healthcare information, whether communicated electronically, on
paper or orally. All affected entities, including Apria, are required to comply
with these regulations by April 14, 2003. The regulations also provide patients
with significant new rights related to understanding and controlling how their
health information is used or disclosed. In March 2002, HHS issued proposed
amendments to the final regulations which, if ultimately adopted, would make
Apria's compliance with certain of the requirements less burdensome.
In addition, in the Spring of 2002, HHS is expected to issue final
regulations concerning the security of healthcare information maintained or
transmitted electronically. Security regulations proposed by HHS in August 1998
would require healthcare providers to implement organizational and technical
practices to protect the security of such information. Once the security
regulations are finalized, the company will have approximately two years to
comply with such regulations.
Although the enforcement provisions of HIPAA have not yet been finalized,
sanctions are expected to include criminal penalties and civil sanctions. At
this time, the company anticipates that it will be fully able to comply with the
HIPAA regulations that have been issued by their respective mandatory compliance
dates. Based on the existing and proposed HIPAA regulations, the company
believes that the cost of its compliance with HIPAA will not have a material
adverse effect on its business, financial condition or results of operations.
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 TRICARE (formerly known as 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 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 and home health services. 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. In January
2001, the Centers for Medicare & Medicaid Services issued the first of two
phases of final regulations to clarify the meaning and application of Stark II.
Officials of the Centers for Medicare & Medicaid Services have stated that they
expect Phase II to be issued by August, 2002, however, Phase I addresses the
primary substantive aspects of the prohibition and several key exceptions.
Significantly, the final regulations define previously undefined key terms,
clarify prior definitions, and create several new exceptions for certain
"indirect compensation arrangements", "fair market value" transactions,
arrangements involving non-monetary compensation up to $300, and risk-sharing
arrangements, among others. The regulations also create a new "knowledge"
exception that permits providers to bill for items provided in connection with
an otherwise prohibited referral, if the provider does not know, and does not
act in reckless disregard or deliberate ignorance of, the identity of the
referring physician. The effective date for the bulk of Phase I of the final
regulations was January 4, 2002. 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. Even if disclosed, the original
source of the information leading to the public disclosure may still pursue such
a suit. Although a corporate insider is often the plaintiff in such actions, an
increasing number of outsiders are pursuing such suits.
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 entitled 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). See "Business -
Risk Factors - Federal Investigations".
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 it would engage in conduct or enter into contracts in
violation 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
administrative or 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 the
legislative and administrative branches of the federal government. In addition,
some of the states in which Apria operates periodically consider various
healthcare reform proposals. Apria anticipates that federal and state
governmental bodies 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. See "Business - Risk Factors -
Government Regulation; Healthcare Reform".
EMPLOYEES
As of February 15, 2002, Apria had 9,696 employees, of which 8,600 were
full-time and 1,096 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.
In February 2002, Apria's full-time equivalents in the functional areas of
sales, operations and administration totaled 461, 7,762 and 1,036, respectively.
Full-time equivalents are computed by dividing the actual number of hours worked
in a given period by the typical number of hours for that period based on a
40-hour week.
EXECUTIVE OFFICERS
Set forth below are the names, ages, titles with Apria and past and present
positions of the persons serving as Apria's executive officers as of March 20,
2002:
NAME AND AGE OFFICE AND EXPERIENCE
- --------------------------------------------------------------------------------
Lawrence M. Higby, 56........ Chief Executive Officer, President and Director.
Mr. Higby was appointed Chief Executive Officer
and Director in February 2002. He 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.
Michael R. Dobbs, 52 ........ 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 1998 to January
1999. Prior to joining Apria, Mr. Dobbs served
as Senior Vice President of Distribution for Mac
Frugal's Bargains o Close-Outs Inc. from 1991 to
January 1998.
James E. Baker, 50 .......... Chief Financial Officer. Mr. Baker was promoted
to Chief Financial Officer in October 2001. He
served as Vice President, Controller of Homedco
and, subsequently, Apria, since August 1991.
Michael J. Keenan, 44 ....... Executive Vice President, Business Operations. Mr.
Keenan was promoted to Executive Vice President,
Business Operations in April 2001. He served as
Division Vice President of Operations for the
Pacific Division from December 1997 to April 2001.
Prior to that, Mr. Keenan served as Regional Vice
President of the Northwest Region.
George J. Suda, 43 .......... Executive Vice President, Information Services.
Mr. Suda was promoted to Executive Vice President,
Information Services in March 2000. Prior to this
he served as Senior Vice President, Information
Services 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.
Anthony S. Domenico, 44...... Executive Vice President, Sales. Mr. Domenico
joined Apria as Executive Vice President, Sales in
August 2001. From 1998 to 2001, Mr. Domenico
served as Chief Operating Officer and Senior Vice
President of Sales and Operations of Perigon
Medical Distribution, Inc. From June 1995 to
January 1998, Mr. Domenico served as Regional Vice
President of Apria's Southern California Region.
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. Readers of this report can identify these statements by the use of
words like "may", "will", "could", "should", "project", "believe", "anticipate",
"expect", "plan", "estimate", "forecast", "potential", "intend", "continue" and
variations of these words or comparable words. Such forward-looking statements
include, but are not limited to, statements as to anticipated future results,
developments and occurrences set forth or implied herein.
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 ITS
CONTROLS AND PROCESSES OVER BILLING AND COLLECTING OR THE DETERIORATION OF THE
FINANCIAL CONDITION OF ITS PAYORS COULD REDUCE ITS CASH COLLECTIONS AND INCREASE
ITS ACCOUNTS RECEIVABLE WRITE-OFFS.
The collection of accounts receivable is one of Apria's most significant
challenges and requires constant focus and involvement by 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. Apria can provide no assurance that it will be able to
maintain its current levels of collectibility and days sales outstanding in
future periods. If Apria is unable to properly bill and collect its accounts
receivable, its results and financial condition will be adversely affected. See
"Business -- Organization and Operations -- Receivables Management" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
OPERATING SYSTEMS AND CONTROLS -- APRIA'S IMPLEMENTATION OF SIGNIFICANT SYSTEM
MODIFICATIONS COULD HAVE A DISRUPTIVE EFFECT ON RELATED TRANSACTION PROCESSING
AND COULD ULTIMATELY DISRUPT THE COLLECTION OF REVENUES AND INCREASE ACCOUNTS
RECEIVABLE AND INVENTORY WRITE-OFFS.
Over the last 18 months, Apria has been developing the necessary
functionality to support the infusion business on the platform on which the
respiratory/home medical equipment application operates. The current infusion
therapy billing application is based on an operating system that has limited
support. The new system is currently in the quality assurance phase and is
expected to be moved to the testing phase in the third quarter of 2002. Upon
completion of the testing, the nationwide rollout will commence and is expected
to continue into late 2003.
Another project Apria has been working on is the implementation and
integration of supply chain management software. Completion is expected in the
second quarter of 2002. Apria is currently planning the second phase of this
project, which is the implementation of the distribution requirements planning
module and the customer routing module of the software to gain further
efficiencies in the delivery of products to patients. The implementation of
these system changes could have a disruptive effect on related transaction
processing. See "Business -- Organization and Operations -- Operating Systems
and Controls".
FEDERAL INVESTIGATIONS -- THE OUTCOME OF THE FEDERAL GOVERNMENT'S INVESTIGATIONS
OF APRIA'S MEDICARE AND OTHER BILLING PRACTICES COULD RESULT IN THE IMPOSITION
OF MATERIAL LIABILITIES OR PENALTIES AND COULD RESULT IN APRIA'S EXCLUSION FROM
PARTICIPATION IN FEDERAL HEALTHCARE PROGRAMS.
The U.S. Attorney's office in Los Angeles is conducting an investigation of
Apria's billing documentation. The U.S. Attorney's office has informed Apria
that this investigation is the result of qui tam litigation, a private lawsuit
filed by one or more individuals on behalf of the government, but has not yet
informed Apria whether it will intervene in the qui tam actions; however, it
could reach a decision with respect to intervention at any time. If the U.S.
Attorney were to intervene in the qui tam cases, or if qui tam actions were to
proceed without such intervention, the amount of the claim could range from $4.8
billion to over $9 billion. Although Apria believes that the assertions in those
actions are unwarranted, and is prepared to vigorously defend against any
attempt to impose material liabilities or penalties, Apria can provide no
assurance as to the outcome of these proceedings. See "Legal Proceedings".
GOVERNMENT REGULATION; HEALTHCARE REFORM -- APRIA COULD BE SUBJECT TO SEVERE
FINES, FACILITY SHUTDOWNS AND POSSIBLE EXCLUSION FROM PARTICIPATION IN FEDERAL
HEALTHCARE PROGRAMS IF IT FAILS TO COMPLY WITH THE LAWS AND REGULATIONS
APPLICABLE TO ITS BUSINESS OR IF THOSE LAWS AND REGULATIONS CHANGE.
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 is subject to strict licensing and safety requirements. If Apria
is deemed to have violated these laws and regulations, Apria could be subject 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".
MEDICARE REIMBURSEMENT RATES -- CONTINUED REDUCTIONS IN MEDICARE REIMBURSEMENT
RATES COULD RESULT IN REDUCED REVENUES, EARNINGS AND CASH FLOWS.
The Balanced Budget Act of 1997 significantly reduced the Medicare
reimbursement rates for home oxygen therapy and included other provisions that
have impacted or may impact reimbursement rates in the future, such as potential
reimbursement reductions under an inherent reasonableness procedure and
competitive bidding. Also currently at issue is the potential adoption of an
alternative pricing methodology for certain drugs and biologicals. Apria can
provide no assurance to prospective investors that further reimbursement
reductions will not be made. Since Medicare accounted for approximately 23% of
Apria's net revenues for the fiscal year 2001, any further reduction in
reimbursement rates could result in lower revenues, earnings and cash flows. See
"Business -- Government Regulation -- Medicare and Medicaid Reimbursement".
In addition, the terrorist attacks of September 11, 2001 and the military
and security activities which followed, their impacts on the United States
economy and government spending priorities, and the effects of any further such
developments pose risks and uncertainties to all U.S.-based businesses,
including Apria. Among other things, deficit spending by the government as the
result of adverse developments in the economy and costs of the government's
response to the terrorist attacks could lead to increased pressure to reduce
government expenditures for other purposes, including governmentally-funded
programs such as Medicare.
PRICING PRESSURES -- CONTINUED PRESSURE TO REDUCE HEALTHCARE COSTS COULD REDUCE
APRIA'S MARGINS AND LIMIT APRIA'S ABILITY TO MAINTAIN OR INCREASE ITS MARKET
SHARE.
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. Large 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,
although no individual arrangement accounted for more than 10% of Apria's net
revenues in 2001. 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 INTEGRATE ACQUIRED
BUSINESSES, WHICH COULD RESULT IN A SLOWDOWN IN CASH COLLECTIONS AND ULTIMATELY
LEAD TO INCREASES IN APRIA'S ACCOUNTS RECEIVABLE WRITE-OFFS.
In connection with past acquisitions, Apria has found that the
labor-intensive patient qualification process and conversion of patient files
onto Apria's billing systems can shift focus away from Apria's routine
processes. These activities and the time required to obtain provider numbers
from government payors often delay billing of the newly acquired business, which
may delay cash collections. Moreover, excessive delays may make certain items
uncollectible. The successful integration of an acquired business is also
dependent on the size of the acquired business, the condition of the patient
files, the complexity of system conversions, the scheduling of multiple
acquisitions in a given geographic area and local management's execution of the
integration plan. If Apria is not successful in integrating acquired businesses,
its results will be adversely affected. See "Business -- Strategy".
ITEM 2. PROPERTIES
Apria's headquarters are located in Lake Forest, California and consist of
approximately 100,000 square feet of office space. The lease expires in 2011.
Apria has approximately 400 branch facilities that are organized into 15
regions. The region facilities usually house a branch and various regional
support functions such as warehousing, repair, billing and pharmacy. These
facilities are typically located in light industrial areas and generally range
from 20,000 to 85,000 square feet. The typical branch facility, other than those
that share a building with a region, is a combination warehouse and office, with
approximately 50% of the square footage consisting of warehouse space. These
branch facilities, also located in light industrial areas, can range from 1,000
square feet for a satellite location up to 50,000 square feet. Apria leases
substantially all of its facilities with lease terms of ten or fewer years.
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. The
consolidated amended class action 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 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 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.
Following a series of settlement discussions, the parties reached a
tentative settlement of both the consolidated federal and state class actions in
early 2002. Under the terms of the settlement, Apria has contributed $1 million
to a settlement pool, with the balance of the total settlement amount of $42
million coming from Apria's insurance carriers. Apria has also agreed to provide
various indemnities to certain current and former Apria officers and directors
who would be entitled to receive such indemnification under applicable law. The
Orange County Superior Court has required that final settlement documents be
presented to the Court on April 16, 2002. Apria cannot provide any assurances
that all of the agreements necessary to finalize the settlement, and obtain
final Court approval for such a settlement, will be obtained. However, in the
opinion of Apria's management, the ultimate disposition of these class actions
will not have a material adverse effect on Apria's results of operations or
financial condition.
Apria and its former Chief Executive Officer are also defendants in a class
action lawsuit, J.E.B. Capital Partners, LP v. Apria Healthcare Group Inc. and
Philip L. Carter, filed on August 27, 2001 in the U.S. District Court for the
Central District of California, Southern Division (Case No. SACV01-813 GLT).
Among other things, the operative complaint alleges that the defendants made
false and/or misleading public statements by not announcing until July 16, 2001
the amount of potential damages asserted by the U.S. Attorney's office in Los
Angeles and counsel for the plaintiffs in the qui tam actions referred to below.
Apria believes that it has meritorious defenses to the plaintiff's claims and it
intends to vigorously defend itself. In the opinion of Apria's management, the
ultimate disposition of this class action will not have a material adverse
effect on Apria's results of operations or financial condition.
As previously reported, since mid-1998 Apria has been the subject of
investigations conducted by several U.S. Attorneys' offices and the U.S.
Department of Health and Human Services. These investigations concern the
documentation supporting Apria's billing for services provided to 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 various document requests and subpoenas. A criminal investigation
conducted by the U.S. Attorney's office in Sacramento was closed in mid-1999
with no charges being filed. Potential claims resulting from an investigation by
the U.S. Attorney's office in San Diego were settled in mid-2001 in exchange for
a payment by Apria of $95,000.
Apria has been informed by the U.S. Attorney's office in Los Angeles that
the investigation being conducted by that office is the result of civil qui tam
litigation filed on behalf of the government against Apria. The complaints in
the litigation are under seal, however, and the government has not informed
Apria of either the identities of the plaintiffs, the court or courts where the
proceedings are pending, the date or dates instituted or the factual bases
alleged to underlie the proceedings. To date, the U.S. Attorney's office has not
informed Apria of any decision to intervene in the qui tam actions; however, it
could reach a decision with respect to intervention at any time.
On July 12, 2001, government representatives and counsel for the plaintiffs
in the qui tam actions asserted that, by a process of extrapolation from a
sample of 300 patient files to all of Apria's billings to the federal government
during the three-and-one-half year sample period, Apria could be liable to the
government under the False Claims Act for more than $9 billion, consisting of
extrapolated overpayment liability, plus treble damages and penalties of up to
$10,000 for each allegedly false claim derived from the extrapolation.
Apria has acknowledged that there may be errors and omissions in supporting
documentation affecting a portion of its billings. However, it considers the
assertions and amounts described in the preceding paragraph to be unsupported
both legally and factually and believes that most of the alleged documentation
errors and omissions should not give rise to any liability, for overpayment
refunds or otherwise. Accordingly, Apria believes that the claims asserted are
unwarranted and that it is in a position to assert numerous meritorious
defenses. Nevertheless, Apria cannot provide any assurances as to the outcome of
these proceedings. Management cannot estimate the possible loss or range of loss
that may result from these proceedings and therefore has not recorded any
related accruals.
If a judge, jury or administrative agency were to determine that false
claims were submitted to federal healthcare programs or that there were
significant overpayments by the government, Apria could face civil and
administrative claims for refunds, sanctions and penalties for amounts that
would be highly material to its business, results of operations and financial
condition, including the exclusion of Apria from participation in federal
healthcare programs.
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 Apria'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, 2001
- ----------------------------
First Quarter $30.000 $20.400
Second Quarter 29.490 23.800
Third Quarter 29.850 21.000
Fourth Quarter 25.750 19.500
Year ended December 31, 2000
- ----------------------------
First Quarter $22.000 $12.625
Second Quarter 16.375 10.500
Third Quarter 16.250 11.250
Fourth Quarter 30.625 14.000
As of March 6, 2002, there were 646 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.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents Apria's selected financial data for the five
years ended December 31, 2001. The data set forth below have been derived from
Apria's audited Consolidated Financial Statements 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,
----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 2000 1999(1) 1998(2,3) 1997(2,4)
- -------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
Net revenues.................................... $1,131,915 $1,014,201 $ 940,024 $ 933,793 $1,180,694
Income (loss) before extraordinary charge....... 73,445 57,006 204,135 (207,938) (272,608)
Net income (loss)............................... 71,917 57,006 204,135 (207,938) (272,608)
Basic income (loss) per common share:
Income (loss) before extraordinary charge..... $ 1.36 $ 1.09 $ 3.93 $(4.02) $(5.30)
Extraordinary charge on debt refinancing,
net of taxes................................ 0.03 - - - -
------ ------ ------ ------ ------
Net income (loss)..................... $ 1.33 $ 1.09 $ 3.93 $(4.02) $(5.30)
====== ====== ====== ====== ======
Diluted income (loss) per common share:
Income (loss) before extraordinary charge..... $ 1.32 $ 1.06 $ 3.81 $(4.02) $(5.30)
Extraordinary charge on debt refinancing,
net of taxes................................ 0.03 - - - -
------ ------ ------ ------ ------
Net income (loss) .................... $ 1.29 $ 1.06 $ 3.81 $(4.02) $(5.30)
====== ====== ====== ====== ======
BALANCE SHEET DATA:
Total assets.................................... $ 695,782 $ 620,332 $ 637,361 $ 504,208 $ 762,992
Long-term obligations, including
current maturities........................... 293,689 343,478 423,094 496,196 554,727
Stockholders' equity (deficit).................. 242,798 146,242 75,469 (131,657) 74,467
(1) Net income for 1999 reflects an income tax benefit of $131 million that was
attributable to the release of the company's valuation allowance in the
fourth quarter of 1999.
(2) Apria recorded a charge of $22.7 million in 1998 to increase the allowance
for doubtful accounts for changes in collection policies and in conjunction
with certain portions of the business from which the company exited. Apria
recorded a charge of $61.4 million in 1997 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) 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) 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 million, and to provide for estimated shortages related to
patient service assets inventory of $33.1 million.
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
approximately 400 branch locations.
STRATEGY. Apria is pursuing an operating strategy to increase market share
and improve profitability. Key elements of the strategy are as follows:
- Remain in its core businesses of home respiratory therapy, home infusion
therapy and home medical equipment. Offering a comprehensive range of
services gives Apria a competitive advantage with its core managed care
customers and enables it to maintain a diversified revenue base. However,
Apria plans on increasing the percentage of net revenues generated by
home respiratory therapy, which historically has produced higher gross
margins than its home infusion therapy and home medical equipment service
lines.
- Continue to expand through internal growth in the home respiratory
service line and through acquisitions. Apria operates in a highly
fragmented market, which provides an attractive opportunity to drive
growth through acquisitions.
- Standardize procedures, reduce costs, enhance margins and optimize cash
flow by implementing "best practices" programs throughout the company.
Apria's receivables management program has reduced days sales outstanding
to 50 at December 31, 2001. Additionally, Apria has developed and
implemented standardized clinical and delivery models, billing practices
and common operating procedures in its field locations and has
centralized purchasing for inventory, patient service equipment and
supplies. Apria continues to focus resources on identifying opportunities
for further productivity improvements.
CRITICAL ACCOUNTING POLICIES. Apria's management considers the accounting
policies that govern revenue recognition and the determination of the net
realizable value of accounts receivable to be the most critical in relation to
the company's consolidated financial statements. These policies require
management's most complex and subjective judgments. Other accounting policies
requiring significant judgment are those related to goodwill and income taxes.
Revenue and Accounts Receivable. 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
third-party payors, including private insurers, prepaid health plans, Medicare
and Medicaid. Due to the nature of the industry and the reimbursement
environment in which Apria operates, certain estimates are required to record
net revenues and accounts receivable at their net realizable values. Inherent in
these estimates is the risk that they will have to be revised or updated as
additional information becomes available. Specifically, the complexity of many
third-party billing arrangements and the uncertainty of reimbursement amounts
for certain services from certain payors may result in adjustments to amounts
originally recorded. Such adjustments are typically identified and recorded at
the point of cash application, claim denial or account review. Accounts
receivable are reduced by an allowance for doubtful accounts which provides 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 evaluate accounts receivable
balances to ensure that recorded amounts reflect estimated net realizable value.
Management applies specified percentages to the accounts receivable aging to
estimate the amount that will ultimately be uncollectible and therefore should
be reserved. The percentages are increased as the accounts age; accounts aged in
excess of 360 days are reserved at 100%. Management establishes and monitors
these percentages through extensive analyses of historical realization data,
accounts receivable aging trends, other operating trends, the extent of
contracted business and business combinations. Also considered are relevant
business conditions such as govenmental and managed care payor claims processing
procedures and system changes. If indicated by such analyses, management may
periodically adjust the uncollectible estimate and corresponding percentages.
Further, focused reviews of certain large and/or problematic payors are
performed to determine if additional reserves are required.
Because of the reimbursement environment in which Apria operates and the
level of subjectivity that is required in recording revenues and accounts
receivable, it is possible that management's estimates could change in the near
term, which could have an impact on the consolidated financial statements.
Goodwill. Goodwill arising from business combinations represents the excess
of the purchase price over the estimated fair value of the net assets of the
acquired business. Prior to a transition period called for by Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," goodwill was being amortized over the period of expected benefit.
Management reviewed for impairment on an ongoing basis and whenever events or
changes in circumstances indicated the possibility of impairment. In accordance
with the provisions of SFAS No. 142, goodwill is no longer amortized but is
tested annually for impairment or more frequently if circumstances indicate
potential impairment. See "Recent Accounting Pronouncements".
Income Taxes. Apria provides for income taxes in accordance with provisions
specified in SFAS No. 109, "Accounting for Income Taxes". 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 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 that are more likely than not to be
realized.
SEGMENT REPORTING. Apria's branch locations are organized into geographic
regions. Each region consists of a number of branches and a regional office
which provides key support services such as billing, purchasing, equipment
maintenance, repair and warehousing. Management evaluates operating results on a
geographic basis, and therefore views each region as an operating segment. All
regions provide the same products and services, including respiratory therapy,
infusion therapy and home medical equipment and supplies. For financial
reporting purposes, all the company's operating segments are aggregated into one
reportable segment in accordance with the aggregation criteria in paragraph 17
of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information".
RECENT ACCOUNTING PRONOUNCEMENTS. During the first quarter of 2001, Apria
adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which was amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133,
as amended, establishes accounting and reporting standards for hedging
activities and for derivative instruments, including certain derivative
instruments embedded in other contracts. Adoption of SFAS No. 133 did not have a
material effect on Apria's consolidated financial statements. See "Long Term
Debt - Hedging Activities".
In July 2001, Apria adopted SFAS No. 141, "Business Combinations". SFAS No.
141 requires that all business combinations initiated after June 30, 2001 are
accounted for under the purchase method and eliminates the pooling-of-interests
method. Adoption of SFAS No. 141 did not have a material effect on Apria's
consolidated financial statements.
Effective January 1, 2002, Apria adopted SFAS No. 142, in its entirety.
SFAS No. 142 addresses the financial accounting and reporting for goodwill and
other intangible assets. The statement provides that goodwill or other
intangible assets with indefinite lives will no longer be amortized, but shall
be tested for impairment annually, or more frequently if circumstances indicate
potential impairment. The impairment test is comprised of two steps: (1) a
reporting unit's fair value is compared to its carrying value; if the fair value
is less than its carrying value, goodwill impairment is indicated; and (2) if
impairment is indicated in the first step, it is measured by comparing the
implied fair value of goodwill to its carrying value at the reporting unit
level. In the year of adoption, SFAS No. 142 requires a transitional goodwill
impairment test; the first step must be completed within six months of adoption
and the second step, if necessary, must be completed by the end of the year.
Amounts used in the transitional test shall be measured as of the beginning of
the year. An impairment loss resulting from application of the transitional
goodwill impairment test shall be recognized as the effect of a change in
accounting principle. Apria's transitional goodwill impairment test and overall
evaluation of SFAS No. 142's impact is currently in progress, therefore it is
not presently known whether adoption will have a material effect on the
consolidated financial statements. Goodwill amortization expense for the year
ended December 31, 2001 was $9.8 million. See "Amortization of Goodwill and
Intangible Assets".
Effective January 1, 2002 Apria adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale.
Discontinued operations will be measured similarly to other long-lived assets
classified as held for sale at the lower of its carrying amount or fair value
less cost to sell. Future operating losses will no longer be recognized before
they occur. SFAS No. 144 also broadens the presentation of discontinued
operations to include a component of an entity when operations and cash flows
can be clearly distinguished, and establishes criteria to determine when a
long-lived asset is held for sale. Adoption of this statement will not have a
material effect on Apria's financial statements.
RESULTS OF OPERATIONS
NET REVENUES. Approximately 30% of Apria's 2001 revenues are reimbursed
under arrangements with Medicare and Medicaid. In 2001, no other third-party
payor represented 10% 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 9.5% of total net revenues for 2001. Because of continuing changes
in the healthcare industry and third-party reimbursement, there can be no
assurance that Apria's current revenue levels can be maintained, which could
have an impact on operations and cash flows.
Net revenues increased to $1,132 million in 2001 from $1,014 million in
2000 and $940 million in 1999. Growth rates were 11.6% and 7.9% in 2001 and
2000, respectively. The increases in both years are due to volume increases, new
contracts with regional and national payors, the acquisition of complementary
businesses and price increases in certain managed care agreements.
Apria's acquisition strategy provides for the rapid integration of acquired
businesses into existing operating locations. This limits management's ability
to separately track the amount of revenue generated by an acquired business.
Estimating the revenue contribution from acquisitions therefore requires certain
assumptions. Based on its analyses, Apria management estimates from one-fourth
to one-third of the revenue growth in 2001 was derived from acquisitions.
The following table sets forth a summary of net revenues by service line:
YEAR ENDED DECEMBER 31,
------------------------------------
(IN THOUSANDS) 2001 2000 1999
----------------------------------------------------------------------------
Home respiratory therapy.......... $ 742,805 $ 656,089 $598,901
Home infusion therapy............. 216,436 194,508 179,148
Home medical equipment/other...... 172,674 163,604 161,975
---------- ---------- --------
Total net revenues.......... $1,131,915 $1,014,201 $940,024
========== ========== ========
Home Respiratory Therapy. Respiratory therapy revenues are derived
primarily from the provision of oxygen systems, home ventilators, sleep apnea
equipment, nebulizers, respiratory medications and related services. The
respiratory therapy service line increased in 2001 by 13.2% when compared to
2000 and increased by 9.5% in 2000 when compared to 1999. Apria's strategy to
target acquisitions of respiratory therapy businesses contributed to this growth
in 2001 and 2000.
Home Infusion Therapy. The infusion therapy service line involves the
administration of a drug or nutrient directly into the body intravenously
through a needle or catheter. Examples include: parenteral nutrition,
anti-infectives, pain management, chemotherapy and other medications and related
services. The infusion line also includes enteral nutrition which is the
administration of nutrients directly into the gastrointestinal tract through a
feeding tube. Infusion therapy revenues increased 11.3% in 2001 versus 2000 and
8.6% in 2000 versus 1999. The growth in both years is largely due to volume
increases. Much of the increase in 2001 was concentrated in the enteral nutrient
products and services category.
Home Medical Equipment/Other. Home medical equipment/other revenues are
derived from the provision of patient safety items, ambulatory and patient room
equipment. Home medical equipment/other revenues increased by 5.5% in 2001 from
its level in 2000 and 1.0% in 2000 from 1999. Increases in this service line are
usually lower than the other lines because the sales focus is placed on the
higher-margin respiratory therapy service line and on the infusion line. The
increase in 2001 reflects the restoration of the full Medicare cost of living
adjustment for certain durable medical equipment products and services that had
been frozen since 1998 pursuant to the Balanced Budget Act of 1997. A minimal
increase was applied to reimbursement amounts in the first six months of 2001.
In the second half of 2001 reimbursement was increased by approximately 7%,
which included a transitional allowance that effectively compressed a full
year's Consumer Price Index update into six months. The transitional allowance
did not carry forward into the base upon which the minimal 2002 increases were
computed.
Medicare and Medicaid Reimbursement. The Balanced Budget Act of 1997
contained a number of provisions that affected, or could potentially affect in
the future, Medicare reimbursement levels to Apria. Although the Medicare
Balanced Budget Refinement Act of 1999 and the Medicare, Medicaid and SCHIP
Benefits Improvement and Protection Act of 2000 mitigated or delayed some of the
effects of the original legislation, the following significant issues are still
outstanding:
- The Balanced Budget Act of 1997 granted authority to the Secretary of
Health and Human Services 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, reimbursement reductions
proposed under the inherent reasonableness procedure have been delayed
pending (1) a study by the General Accounting Office to examine the use
of the authority granted under this procedure (completed July 2000), and
(2) promulgation by the Centers for Medicare & Medicaid Services
(formerly the Health Care Financing Administration) of a final rule
implementing the inherent reasonableness authority (not yet effected).
- The Balanced Budget Act of 1997 also mandated that the Centers for
Medicare & Medicaid Services conduct competitive bidding demonstrations
for Medicare Part B items and services. The competitive bidding
demonstrations, currently in progress, could provide the Centers for
Medicare & Medicaid Services 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.
Also at issue is a recommendation by the U.S. Department of Health and
Human Services that Medicare claims processors base their payments for covered
outpatient drugs and biologicals on pricing schedules other than the Average
Wholesale Price listing, which historically has been the industry's basis for
drug reimbursement. The suggested alternative pricing methodology was offered in
an effort to reduce reimbursement levels for certain drugs to more closely
approximate a provider's acquisition cost, but it would not have covered the
costs that homecare pharmacies incur to prepare, deliver or administer the drugs
to patients. Billing, collection and other overhead costs also would not have
been considered. Under current government reimbursement schedules, these costs
are not clearly defined but are implicitly covered in the reimbursement for the
drug cost. The healthcare industry has taken issue with the U.S. Department of
Health and Human Services' approach for several reasons, primarily because it
fails to consider the accompanying costs of delivering and administering these
types of drug therapies to patients in their homes. Further, if providers choose
to discontinue providing these drugs due to inadequate reimbursement, patient
access may be jeopardized. The Medicare, Medicaid and SCHIP Benefits Improvement
and Protection Act of 2000 delayed the adoption of proposed drug price changes
and directed the General Accounting Office to conduct a thorough study, by
September 2001, to examine the adequacy of current payments and to recommend
revised payment methodologies. The study was completed but the authors
acknowledged that 1) the limited scope and deadline associated with the study
did not allow for a thorough analysis of the homecare pharmacy aspect of covered
services, 2) legitimate service components and related costs do exist, and 3)
different methods of determining drug delivery and administration payments may
be necessary for different types of drugs. Currently, the timing and impact of
such pricing methodology revisions are not known.
In addition, some states have adopted, or are contemplating adopting, some
form of the proposed alternate pricing methodology for certain drugs and
biologicals under the Medicaid program. In several states these changes have
reduced the level of reimbursement received by Apria to an unacceptable level
without a corresponding offset or increase to compensate for the service costs
incurred. In those states, Apria has elected to stop accepting new Medicaid
patient referrals for the affected drugs. The company is continuing to provide
services to patients already on service, and for those who receive other
Medicaid-covered products and services.
Further, the terrorist attacks of September 11, 2001 and the military and
security activities which followed, their impacts on the United States economy
and government spending priorities, and the effects of any further such
developments pose risks and uncertainties to all U.S.-based businesses,
including Apria. Among other things, deficit spending by the government as the
result of adverse developments in the economy and costs of the government's
response to the terrorist attacks could lead to increased pressure to reduce
government expenditures for other purposes, including governmentally-funded
programs such as Medicare.
GROSS PROFIT. Gross margins were 72.8% in 2001, 72.5% in 2000 and 71.5% in
1999. The increase in 2001 reflects continued improvement from management's
strategy to increase the proportion of higher-margin respiratory revenues to
total revenues. Much of the increase in 2000 as compared to 1999 was
attributable to improved pricing negotiated for purchases of inventory, patient
service equipment and related goods and the increase in the share of respiratory
revenues. Further, the margins in 2001 and 2000 reflect the benefits of
standardization initiatives and optimal operating models implemented in 1999
that were intended to achieve cost savings and operational efficiencies in the
functional areas of purchasing, supply management and inventory management.
PROVISION FOR DOUBTFUL ACCOUNTS. As described in the Critical Accounting
Policies section above, accounts receivable estimated to be uncollectible are
provided for through the application of specified percentages to each
receivables aging category. For 2001, 2000 and 1999, the provision for doubtful
accounts as a percentage of net revenues was 3.3%, 3.2% and 3.7%, respectively.
The provision rate reflects consistent cash collections and improvements in the
accounts receivable aging. See "Critical Accounting Policies" and "Accounts
Receivable".
SELLING, DISTRIBUTION AND ADMINISTRATIVE. Selling, distribution and
administrative expenses are comprised of expenses incurred in direct support of
operations and those associated with administrative functions. Expenses incurred
by the operating locations include salaries and other expenses in the following
functional areas: selling, distribution, clinical, intake, reimbursement,
warehousing and repair. Many of these operating costs are directly variable with
revenue growth patterns. Some are also very sensitive to market-driven price
fluctuations such as facility lease and fuel costs. The administrative expenses
include overhead costs incurred by the operating locations and corporate support
functions. These expenses do not vary as closely with revenue growth as do the
operating costs. Selling, distribution and administrative expenses, expressed as
percentages of net revenues, were 55.8% in 2001 and 54.7% for 2000 and 1999. The
increase in 2001 is mainly due to merit and certain bonus plan increases. The
bonus plans for 2001 were adopted in late 2000, when national unemployment rates
were relatively low. As a retention strategy, the bonus plans were extended to
all employee groups and the payment provisions of these plans were enriched,
thereby resulting in the expense increase. The 2002 plans do not include such
provisions.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS. Amortization of goodwill
and intangible assets was $12.3 million, $10.2 million and $8 million in 2001,
2000 and 1999, respectively. The increases in both years were directly related
to the acquisitions that were consummated since late 1999. Pursuant to a
transition provision of SFAS No. 142, goodwill associated with business
combinations completed after June 30, 2001 was not amortized, while amortization
on goodwill existing at that date continued through the end of 2001. See "Recent
Accounting Pronouncements" and "Business Combinations".
INTEREST EXPENSE. Interest expense was $25.7 million in 2001, $40.1 million
in 2000 and $42.5 million in 1999. The significant decrease in 2001 when
compared to 2000 is due to a number of factors. Long-term debt decreased by
$49.8 million during 2001. The July 2001 refinancing replaced the 9 1/2% senior
subordinated notes with debt at significantly more favorable interest rates and
also resulted in lower rates on the bank loans. In connection with the
refinancing, deferred debt issuance costs on the 9 1/2% notes and old bank debt
were written off; the issuance costs incurred upon refinancing resulted in a
lower monthly amortization expense. And finally, the dramatic decreases in
market-driven interest rates over the course of 2001 contributed to the overall
decrease in Apria's interest expense. The decrease in 2000 versus 1999 was
primarily attributable to the $79.6 million reduction in long-term debt as
offset by higher interest rates incurred on the bank loans. See "Long-Term
Debt".
INCOME TAXES. Income taxes for 2001 and 2000 were $44.1 million and $41.1
million, respectively, and were provided at the effective tax rates expected to
be applicable for the respective year. The income tax benefit for 1999 amounted
to $131.0 million, which was primarily attributable to the release of the
company's $158.9 million valuation allowance.
At December 31, 2001, Apria had federal net operating loss carryforwards of
approximately $89 million, expiring in varying amounts in the years 2003 through
2018 and various state operating loss carryforwards that began to expire in
1997. Additionally, the company has an alternative minimum tax credit
carryforward of approximately $9.8 million. 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 million per year.
Because of the annual limitation, approximately $57 million 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. Management believes that its strategies will result in sufficient
taxable income during the carryforward period to utilize Apria's net operating
loss carryforwards that are not limited by Section 382.
LIQUIDITY AND CAPITAL RESOURCES
Apria's principal source of liquidity is its operating cash flow, which is
supplemented by a $100 million revolving credit facility. Apria's ability to
generate operating cash flows in excess of its operating needs has afforded it
the ability, among other things, to pursue its acquisition strategy and fund
patient service equipment expenditures to support revenue growth, while
continuing to reduce long-term debt. Apria's management believes that its
operating cash flow and revolving credit line will continue to be sufficient to
fund its operations and growth strategies. However, sustaining the current cash
flow levels is dependent on many factors, some of which are not within Apria's
control, such as government reimbursement levels and the financial health of its
payors.
CASH FLOW. Cash provided by operating activities in 2001 was $241.4 million
compared to $188.0 million in 2000 and $147.7 million in 1999. The cash flow
increase in 2001 was primarily attributable to the increase in net income before
items not requiring cash, plus the timing of disbursements processed through
accounts payable. Partially offsetting this is an increase in accounts
receivable due to the continued quarterly revenue increases. Increases in net
income before non-cash items, plus a reduction in the rate of increase in
accounts receivable, resulted in cash flow improvements in 2000 as compared to
1999.
Cash used in investing activities increased in 2001 when compared to 2000
due to increases in business acquisitions and increases in patient service
equipment purchases to support the growth in the respiratory service line. Cash
used in 2000 decreased from 1999 due to a decrease in acquisition activity
between the years and an increase in patient service equipment expenditures.
Cash used in financing activities decreased between 2001 and 2000 primarily
due to the following two items: (1) Apria made no scheduled term loan payments
on the former credit agreement in 2001 prior to the refinancing due to large
prepayments made in the latter part of 2000, and (2) an increase in proceeds
from the exercise of stock options in 2001.
CONTRACTUAL CASH OBLIGATIONS. The following table summarizes Apria's long
term cash payment obligations to which the company is contractually bound:
(IN MILLIONS) 2002 2003 2004 2005 2006 2007+ TOTAL
--------------------------------------------------------------------------------------------------
Term loans.............................. $ 13 $ 26 $ 26 $ 29 $ 64 $125 $283
Revolving loans......................... - - - - 8 - 8
Capitalized lease obligations........... 2 1 - - - - 3
Operating leases........................ 49 39 32 24 16 20 180
Deferred acquisition payments........... 3 - - - - - 3
---- ---- ---- ---- ---- ---- ----
Total contractual cash obligations... $ 67 $ 66 $ 58 $ 53 $ 88 $145 $477
==== ==== ==== ==== ==== ==== ====
ACCOUNTS RECEIVABLE. Accounts receivable before allowance for doubtful
accounts increased by $8.9 million during 2001 which is directly attributable to
the revenue increase. 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) were 50 at December 31, 2001 compared to
51 at December 31, 2000 and 56 at December 31, 1999. See "Critical Accounting
Policies".
Unbilled Receivables. Included in accounts receivable are earned but
unbilled receivables of $26.9 million and $17.9 million at December 31, 2001 and
2000, respectively. Delays, ranging from a day up to several weeks, between the
date of service and billing can occur due to delays in obtaining certain
required payor-specific documentation from internal and external sources. Earned
but unbilled receivables are aged from date of service and are considered in
Apria's analysis of historical performance and collectibility. The increase in
2001 from the end of 2000 is largely due to acquisitions effected during 2001.
The time-consuming processes of converting patient files onto Apria's systems
and obtaining provider numbers from government payors routinely delay billing of
the newly acquired business.
INVENTORIES AND PATIENT SERVICE EQUIPMENT. Inventories consist primarily of
pharmaceuticals and disposable articles used in conjunction with patient service
equipment. Patient service equipment consists of respiratory and home medical
equipment that is provided to in-home patients for the course of their care plan
and subsequently returned to Apria for reuse.
The branch locations serve as the primary point from which inventories and
patient service equipment are delivered to the patient. The branches are
supplied with inventory and equipment from the regional warehouses, where the
purchasing responsibility lies. The regions are also responsible for repairs and
scheduled maintenance of patient service equipment, which adds to the frequent
movement of equipment between the region and branch locations. Further, at any
given time, more than 80% of Apria's patient service equipment is located in
patients' homes. Inherent in this asset flow is the fact that shortages will
occur. Management has successfully instituted a number of controls over the
company's inventories and patient service equipment to minimize such shortages.
However, there can be no assurance that Apria will be able to maintain its
current level of control over inventories and patient service equipment.
Continued revenue growth is directly dependent on Apria's ability to fund
its inventory and patient service equipment requirements.
LONG-TERM DEBT. On July 20, 2001, Apria closed a new $400 million senior
secured credit agreement with a syndicate of lenders led by Bank of America,
N.A. The credit facilities consist of a $100 million five-year revolving credit
facility, a $125 million five-year term loan and a $175 million six-year term
loan. The $125 million term loan is repayable in 20 consecutive quarterly
installments of $5.5 million to $7 million each, commencing December 31, 2001.
The $175 million term loan is repayable in 20 consecutive quarterly installments
of $437,500 each, commencing December 31, 2001, followed by three consecutive
quarterly installments of $41.6 million each, and a final payment of $41.5
million due on July 20, 2007.
On December 28, 2001, the company made scheduled quarterly payments of $5.5
million and $437,500 on the five-year and six-year term loans, respectively. The
company further reduced the outstanding debt on the five-year term loan by
making a voluntary prepayment of $11 million on December 28, 2001. The voluntary
prepayment was applied against future scheduled quarterly payments, effectively
eliminating any pre-payment requirements on the five-year term loan until
September 2002.
The senior secured credit agreement permits Apria to select one of two
variable interest rates. One option is the base rate, which is expressed as the
higher of (a) the Federal Funds rate plus 0.50% and (b) the Prime Rate. The
other option is the Eurodollar rate, which is based on the London Interbank
Offered Rate ("LIBOR"). Interest on outstanding balances under the senior
secured credit agreement are determined by adding a margin to the Eurodollar
rate or base rate in effect at each interest calculation date. The applicable
margins for the revolving credit facility and the $125 million term loan are
based on Apria's leverage ratio, which is the ratio of its funded debt to its
last four quarters of earnings before interest, taxes, depreciation and
amortization. The applicable margin ranges from 1.50% to 2.25% for Eurodollar
loans and from 0.50% to 1.25% for base rate loans. For the $175 million term
loan, the margins are fixed at 3.00% for Eurodollar loans and at 2.00% for base
rate loans. The effective interest rate at December 31, 2001 was 4.87% on total
borrowings of $290.9 million. The senior credit agreement also requires payment
of commitment fees ranging from 0.25% to 0.50% (also based on Apria's leverage
ratio) on the unused portion of the revolving credit facility.
Borrowings under the senior secured credit facilities are collateralized by
substantially all of the assets of Apria. The credit 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. The agreement also permits Apria to
expend a maximum of $100 million per year on acquisitions. At December 31, 2001,
the company was in compliance with all of the financial covenants required by
the credit agreement.
The company's previous credit agreement and the $200 million 9 1/2% senior
subordinated notes, both of which were scheduled to mature in late 2002, were
repaid in full concurrently with the closing of the new senior secured credit
agreement. In connection with the early retirement of its debt, Apria wrote-off
the unamortized balance of deferred financing fees attributable to the
subordinated notes and the previous credit agreement. Accordingly, Apria
recorded an extraordinary charge of $1.5 million, net of tax, in the quarter
ended September 30, 2001.
On December 31, 2001, borrowings under the revolving credit facility were
$7.8 million, outstanding letters of credit totaled $1 million and credit
available under the revolving facility was $91.2 million.
Hedging Activities. Apria is exposed to interest rate fluctuations on its
underlying variable rate long-term debt. Apria's policy for managing interest
rate risk is to evaluate and monitor all available relevant information,
including but not limited to, the structure of its interest-bearing assets and
liabilities, historical interest rate trends and interest rate forecasts
published by major financial institutions. The tools Apria may utilize to
moderate its exposure to fluctuations in the relevant interest rate indices
include, but are not limited to: (1) strategic determination of repricing
periods and related principal amounts, and (2) derivative financial instruments
such as interest rate swap agreements, caps or collars. Apria does not use
derivative financial instruments for trading or other speculative purposes.
During the fourth quarter of 2001, Apria entered into two interest rate
swap agreements with a total notional amount of $100 million to fix its
LIBOR-based variable rate debt at 2.58% (before the applicable margin). The swap
agreements became effective October 30, 2001 and terminate on March 31, 2003.
The swaps are being accounted for as cash flow hedges under SFAS No. 133.
Accordingly, the difference between the interest received and interest paid is
reflected as an adjustment to interest expense. For the period between the
effective date of the swap agreements and December 31, 2001, Apria paid a net
settlement amount of $39,000. At December 31, 2001, the swap agreements are
reflected in the accompanying balance sheet in other assets at their fair value
of $44,000. Unrealized gains on the fair value of the swap agreements are
reflected, net of taxes, in other comprehensive income.
Apria does not anticipate losses due to counterparty nonperformance as its
counterparty to the swap agreements is a nationally-recognized financial
institution with a strong credit rating.
TREASURY STOCK. In mid-February 2002, Apria announced a plan to repurchase
up to $35 million of outstanding common stock during the first two quarters of
2002. Depending on market conditions and other considerations, repurchases will
be made from time to time in open market transactions. From February 15, 2002
through March 11, 2002 Apria repurchased 999,800 shares for $21.7 million. In
2000, Apria repurchased 86,000 shares of its common stock for $958,000. All
repurchased common shares are being held in treasury. Apria's credit agreement
limits common stock repurchases to $35 million in any fiscal year and $100
million in the aggregate over the term of the agreement.
BUSINESS COMBINATIONS. Pursuant to one of its primary growth strategies,
Apria periodically acquires complementary businesses in specific geographic
markets. These transactions are accounted for as purchases and the results of
operations of the acquired companies are included in the accompanying statements
of operations from the dates of acquisition. For business combinations closing
on or before June 30, 2001, goodwill was being amortized over 20 years. For
business combinations consummated between July 1, 2001 and December 31, 2001, no
goodwill amortization was recorded. Covenants not to compete are being amortized
over the life of the respective agreements.
The aggregate consideration for acquisitions that closed during 2001 was
$81.7 million. Allocation of this amount includes $73.1 million to goodwill and
intangible assets and $7.6 million to patient service equipment. During 2000,
the aggregate consideration for acquisitions was $27.3 million. Cash paid for
acquisitions, which includes amounts deferred from prior year acquisitions,
totaled $80.3 million and $26.2 million in 2001 and 2000, respectively.
The success of Apria's acquisition strategy is directly dependent on
Apria's ability to maintain and/or generate sufficient liquidity to fund such
purchases.
FEDERAL INVESTIGATIONS. As previously reported, since mid-1998 Apria has
been the subject of investigations conducted by several U.S. Attorneys' offices
and the U.S. Department of Health and Human Services. These investigations
concern the documentation supporting Apria's billing for services provided to
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 various document requests and subpoenas. A criminal
investigation conducted by the U.S. Attorney's office in Sacramento was closed
in mid-1999 with no charges being filed. Potential claims resulting from an
investigation by the U.S. Attorney's office in San Diego were settled in
mid-2001 in exchange for a payment by Apria of $95,000.
Apria has been informed by the U.S. Attorney's office in Los Angeles that
the investigation being conducted by that office is the result of civil qui tam
litigation filed on behalf of the government against Apria. The complaints in
the litigation are under seal, however, and the government has not informed
Apria of either the identities of the plaintiffs, the court or courts where the
proceedings are pending, the date or dates instituted or the factual bases
alleged to underlie the proceedings. To date, the U.S. Attorney's office has not
informed Apria of any decision to intervene in the qui tam actions; however, it
could reach a decision with respect to intervention at any time.
On July 12, 2001, government representatives and counsel for the plaintiffs
in the qui tam actions asserted that, by a process of extrapolation from a
sample of 300 patient files to all of Apria's billings to the federal government
during the three-and-one-half year sample period, Apria could be liable to the
government under the False Claims Act for more than $9 billion, consisting of
extrapolated overpayment liability, plus treble damages and penalties of up to
$10,000 for each allegedly false claim derived from the extrapolation.
Apria has acknowledged that there may be errors and omissions in supporting
documentation affecting a portion of its billings. However, it considers the
assertions and amounts described in the preceding paragraph to be unsupported
both legally and factually and believes that most of the alleged documentation
errors and omissions should not give rise to any liability, for overpayment
refunds or otherwise. Accordingly, Apria believes that the claims asserted are
unwarranted and that it is in a position to assert numerous meritorious
defenses. Nevertheless, Apria cannot provide any assurances as to the outcome of
these proceedings. Management cannot estimate the possible loss or range of loss
that may result from these proceedings and therefore has not recorded any
related accruals.
If a judge, jury or administrative agency were to determine that false
claims were submitted to federal healthcare programs or that there were
significant overpayments by the government, Apria could face civil and
administrative claims for refunds, sanctions and penalties for amounts that
would be highly material to its business, results of operations and financial
condition, including the exclusion of Apria from participation in federal
healthcare programs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Apria is exposed to interest rate fluctuations on its underlying variable
rate long-term debt. Apria is party to two interest rate swap agreements that it
utilizes to moderate such exposure. Apria does not use derivative financial
instruments for trading or other speculative purposes.
At December 31, 2001, Apria's term loan borrowings totaled $283 million.
The bank credit agreement governing the term loans provides interest rate
options based on the following indices: Federal Funds Rate, Prime Rate or LIBOR.
All such interest rate options are subject to the application of an interest
margin as specified in the bank credit agreement. At December 31, 2001, all of
Apria's outstanding term debt was tied to LIBOR. During the fourth quarter of
2001, Apria entered into two interest rate swap agreements with a total notional
amount of $100 million to fix its LIBOR-based debt at 2.58% (before application
of the interest margin). The term of both agreements is October 30, 2001 to
March 31, 2003.
Based on the term debt outstanding and the swap agreements in place at
December 31, 2001, a 100 basis point change in the applicable interest rates
would increase or decrease Apria's annual cash flow and pretax earnings by
approximately $1.8 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Report, 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" 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, 2002:
BUSINESS EXPERIENCE DURING LAST DIRECTOR TERM
NAME AND AGE FIVE YEARS AND DIRECTORSHIPS SINCE EXPIRES
- ------------------------------------- ------------------------------------------------------------- ---------- ----------
David H. Batchelder, 52 Principal and Managing Member of Relational Investors LLC 1998 2002
since 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
Washington Group International, Inc. and Nuevo Energy
Company.
David L. Goldsmith, 53 Managing Director of RS Investment Management, an 1987* 2002
investment management firm. Prior to joining RS Investment
Management in 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.
Lawrence M. Higby, 56 Chief Executive Officer and a Director of Apria since 2002 2002
February 12, 2002, and President and Chief Operating
Officer of Apria since 1997. Mr. Higby also served as
Apria's Chief Executive Officer on an interim basis from
January through May of 1998. 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. He also serves as a
director of Ross Stores, Inc.
Richard H. Koppes, 55 Of Counsel to Jones, Day, Reavis & Pogue, a law firm, and a 1998 2002
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 1996 to 1998.
Philip R. Lochner, Jr., 58 Senior Vice President - Chief Administrative Officer of 1998 2002
Time Warner Inc. from 1991 to 1998. He is a member of the
Advisory Council of Republic New York Corporation and of
the Boards of Directors of Clarcor, Inc., GTech Holdings
Corp. and The American Stock Exchange.
- --------------------------
* Director of Homedco Group Inc., from the date shown until the June 1995 merger with Abbey Healthcare Group Inc.
which formed Apria. Director of Apria from the date of the merger until the present.
BUSINESS EXPERIENCE DURING LAST DIRECTOR TERM
NAME AND AGE FIVE YEARS AND DIRECTORSHIPS SINCE EXPIRES
- ------------------------------------- ------------------------------------------------------------- ---------- ----------
Beverly Benedict Thomas, 59 Principal of BBT Strategies, a consulting firm specializing 1998 2002
in public affairs and strategic planning, since 1997.
Previously, Ms. Thomas was a principal of UT Strategies,
Inc., a public affairs firm, from 1995 to 1997.
Ralph V. Whitworth, 46 Chairman of the Board of Directors of Apria since 1998. Mr. 1998 2002
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. Mr. Whitworth is also a director of
Tektronix, Inc., Mattel, Inc. and Waste Management, Inc.
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 executive
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, executive 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 all of its
Directors, executive officers and greater than 10% beneficial owners complied
with all filing requirements applicable to them with respect to transactions
during the 2001 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF EXECUTIVE COMPENSATION
The following table sets forth all compensation for the 2001, 2000, and
1999 fiscal years paid to or earned by Apria's Chief Executive Officer and the
five other most highly compensated executive officers during the 2001 fiscal
year.
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------------------
--------------------------- ---------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION (1)
--------------------------- ---------------------------------
OPTIONS LTIP ALL OTHER
SALARY(2) BONUS GRANTED(3) PAYOUTS(4) COMPENSATION
NAME YEAR ($) ($) (#) ($) ($)
- ----------------------------------- ------- ----------- ------------- ---------------- -------------- -----------------
Philip L. Carter.....................2001 691,916 680,000 -- -- 3,313 (6)
Chief Executive Officer (5) 2000 661,538 421,354 500,000 680,000 3,330 (6)
1999 613,694 480,000 75,000 -- 3,430 (6)
Lawrence M. Higby................... 2001 463,010 460,000 -- -- 3,313 (6)
Chief Executive Officer, 2000 443,553 285,224 300,000 440,000 3,330 (6)
President and Chief 1999 418,386 329,600 40,000 -- 3,295 (6)
Operating Officer (7)
John C. Maney...................... 2001 403,171 -- -- -- 2,093,262 (9)
Executive Vice President 2000 382,921 243,089 200,000 390,000 3,330 (6)
and Chief Financial Officer (8) 1999 358,522 280,000 30,000 -- 1,615 (6)
Michael R. Dobbs.................. 2001 276,671 275,000 20,000 -- 3,313 (6)
Executive Vice President, 2000 251,492 162,059 75,000 250,020 3,330 (6)
Logistics 1999 210,332 168,000 30,000 -- 23,151 (10)
George S. Suda..................... 2001 233,024 230,000 20,000 -- 3,313 (6)
Executive Vice President, 2000 218,186 136,130 75,000 210,061 3,330 (6)
Information Services 1999 182,211 126,000 20,000 -- 2,890 (6)
Michael J. Keenan.................. 2001 205,725 163,795 20,000 -- 3,313 (6)
Executive Vice President, 2000 184,880 -- 40,000 178,880 438,784 (11)
Business Operations 1999 177,995 -- 15,000 -- 19,259 (12)
(1) Apria has not issued stock appreciation rights or restricted stock
awards.
(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 some years contain payment dates
for pay periods which begin or end in other years, amounts reported
as salary paid for a particular year may vary slightly from the
actual amounts of the salaries of the executive officers listed
above.
(3) The option grants for 1999 were approved 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. The option grants for 2000
were approved by the company's Board of Directors in October 2000
but did not become effective and were not fixed as to price until
January 2, 2001. The option grants for 2001 were approved by the
company's Board of Director in October 2001, but did not become
effective and were not fixed as to price until January 2, 2002.
(4) Payments under a two-year incentive plan adopted by the Board of
Directors in December 1998. Includes payments made in 2001 but
allocable to the 1999-2000 period covered by the plan.
(5) Mr. Carter resigned from the company on February 12, 2002.
(6) Annual contribution by Apria to the company's 401(k) Savings Plan
in the name of the individual.
(7) Mr. Higby was appointed Chief Executive Officer upon Mr. Carter's
resignation on February 12, 2002.
(8) Mr. Maney resigned from the company in October, 2001.
(9) Value realized from stock option exercises.
(10) Relocation payment.
(11) Includes annual contribution of $3,330 by Apria to the company's
401(k) Savings Plan in the name of the individual and $435,454 in
value realized from the exercise of stock options.
(12) Includes annual contribution of $2,890 by Apria to the company's
401(k) Savings Plan in the name of the individual and $16,369 in
value realized from the exercise of stock options.
SUMMARY OF OPTION GRANTS
The following table provides information with respect to grants of options
in 2001 to Apria's Chief Executive Officer and the five other most highly
compensated executive officers of the company. These amounts or calculations do
not include options approved in 2000, which did not become effective until
January 2, 2001, but do include options approved in 2001 which did not become
effective until January 2, 2002.
OPTION GRANTS TABLE
- -----------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER VALUE AT ACCRUAL RATE
SECURITIES % OF TOTAL EXPIRATION OF STOCK APPRECIATION
UNDERLYING OPTIONS DATE OF FOR OPTION TERM ($)
OPTIONS TO EMPLOYEES IN EXERCISE OPTIONS ----------------------------
NAME GRANTED FISCAL YEAR PRICE ($) GRANTED 5% 10%
- -------------------------- ------------- ----------------- ----------- ------------- ------------ --------------
Philip L. Carter -- -- -- -- -- --
Lawrence M. Higby -- -- -- -- -- --
John C. Maney -- -- -- -- -- --
Michael R. Dobbs 20,000 1.55% 24.01 01/02/12 301,995 765,315
George J. Suda 20,000 1.55% 24.01 01/02/12 301,995 765,315
Michael J. Keenan 20,000 1.55% 24.01 01/02/12 301,995 765,315
SUMMARY OF OPTIONS EXERCISED
The following table provides information with respect to the exercise of
stock options by Apria's Chief Executive Officer and the five other most highly
compensated executive officers of the company during the 2001 fiscal year,
together with the fiscal year-end value of unexercised options.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END(1) FISCAL YEAR-END(1)(2)
ACQUIRED ON VALUE ----------------------------- -----------------------------
EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
-------------- ----------- ----------------------------- -----------------------------
NAME (#) ($) (#) / (#) ($) / ($)
- -------------------------- -------------- ----------- ----------------------------- -----------------------------
Philip L. Carter -- -- 775,000/550,000 12,193,813/402,625
Lawrence M. Higby -- -- 403,333/386,667 5,361,589/982,886
John C. Maney 115,000 2,093,262 120,000/ -- 2,436,300/ --
Michael R. Dobbs -- -- 110,000/95,000 1,914,525/161,050
George J. Suda -- -- 46,666/88,334 793,278/107,372
Michael J. Keenan -- -- 53,300/50,000 897,442/80,525
- --------------------------
(1) These amounts or calculations do not include options approved in 2001 which
did not become effective until January 2, 2002.
(2) Market value of the securities underlying the options at year-end, 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 the last trading
day of 2001 (December 31) was $24.99.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee was either an officer or employee
of the company since January 1, 2001.
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 2001, all non-employee Directors received: (i) $1,000 per Board or
Committee meeting attended in person ($2,000 per Committee meeting for the
Director who is the Committee's chairperson) and (ii) $500 per Board or
Committee meeting attended via telephone. In addition, for services rendered
during 2001, the non-employee Chairman of the Board was granted an option to
purchase 25,000 shares of the company's common stock, and each other
non-employee Director was granted an option to purchase 15,000 shares. 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 agreements, nondisclosure/noncompetition agreements
and/or severance agreements with the following executive officers and other
persons listed in the Summary Compensation Table.
LAWRENCE M. HIGBY. Pursuant to an Amended and Restated Employment Agreement
which became effective January 1, 2000, and is scheduled for expiration on
January 18, 2003, Mr. Higby has served and continues to serve as Apria's
President and Chief Operating Officer. Since February 12, 2002, he has also
begun serving as Apria's Chief Executive Officer. The Agreement provides that
Mr. Higby is to receive an annual salary of not less than $400,000, subject to
increases at the discretion of the company's Board of Directors or Compensation
Committee. During 2001, Mr. Higby's annual salary was $460,000; the Board of
Directors expects to approve a salary increase to reflect his promotion to Chief
Executive Officer by the end of April 2002. Mr. Higby is also entitled to
participate in Apria's annual bonus, incentive, stock and other benefit programs
generally available to executive officers of the company. The agreement also
provides for (i) reasonable access to the company's accountants for personal
financial planning, (ii) an automobile allowance, (iii) reimbursement of certain
other expenses and (iv) an indemnification of Mr. Higby on an after-tax basis in
the event he incurs an excise tax under Section 4999 of the Internal Revenue
Code.
The company also has entered into a Nondisclosure and Noncompetition
Agreement with Mr. Higby pursuant to which, if the company terminates Mr.
Higby's employment without cause, or if he terminates his employment with good
reason (including upon a change in control), Mr. Higby shall be entitled to
receive cash payments in exchange for the performance of certain agreements
pertaining to nondisclosure and noncompetition following the termination.
Payments under the Nondisclosure and Noncompetition Agreement are required to be
made in 52 equal weekly installments following the termination, and shall equal,
in the aggregate, 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 equal to the average annual cost for company employees of
obtaining certain post-employment medical insurance. The company shall be
required to provide an office and secretarial support at a cost not to exceed
$50,000 during the year following such a termination. In addition, the vested
portion of the 150,000 share stock option grant issued to Mr. Higby in January
1998 will remain exercisable for a period of three years following such
termination.
MICHAEL R. DOBBS. Pursuant to an Amended and Restated Executive Severance
Agreement dated February 26, 1999, Mr. Dobbs serves as the company's Executive
Vice President, Logistics and undertakes duties at Apria's discretion. The
Agreement provides that Mr. Dobbs' salary shall be at the company's discretion.
Currently, Mr. Dobbs' annual salary is $275,000. Mr. Dobbs is entitled to
participate in Apria's annual bonus, incentive, stock and other benefit programs
generally available to executive officers of the company. Mr. Dobbs is also
entitled to receive reimbursement of certain other expenses at the company's
discretion. If the company terminates Mr. Dobbs' employment without cause, or if
he terminates his employment with good reason (including upon a change in
control), Mr. Dobbs is entitled to a lump sum payment 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 equal to
the average annual cost for company employees of obtaining certain
post-employment medical insurance. The Agreement also contains provisions
designed to indemnify Mr. Dobbs on an after-tax basis in the event he incurs an
excise tax under Section 4999 of the Internal Revenue Code.
MICHAEL J. KEENAN. In June 1997, Mr. Keenan entered into an executive
severance agreement with the company. Pursuant to that agreement, Mr. Keenan
serves in a position and undertakes duties at Apria's discretion. As of December
31, 2001, Mr. Keenan served as Apria's Executive Vice President, Business
Operations. The agreement provides that Mr. Keenan's salary shall be at the
company's discretion. Currently, his annual salary is $205,000. Mr. Keenan 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. He is also entitled to bonuses in accordance with the
bonus plans from time to time in effect for Apria's executives and reimbursement
of certain expenses at the company's discretion. If the company terminates his
employment without cause, or if he terminates his employment with good reason
(including upon a change in control), Mr. Keenan 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
equal to the average annual cost for company employees of obtaining certain
post-employment medical insurance. Such payments shall be payable in periodic
installments over one year.
GEORGE S. SUDA. In March 2000, Mr. Suda entered into an executive
severance agreement with the company. Pursuant to that agreement, Mr. Suda
serves as Apria's Executive Vice President, Information Services and undertakes
duties at the company's discretion. The agreement provides that Mr. Suda's
salary shall be at the company's discretion. Currently, his annual salary is
$230,000. Mr. Suda 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. He is also entitled to receive (i) bonuses
in accordance with the bonus plans from time to time in effect for Apria's
executives and (ii) reimbursement of certain expenses at the company's
discretion. If Apria terminates his employment without cause, or if he
terminates his employment with good reason (including upon a change in control),
Mr. Suda is entitled to a payment 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 equal to the average annual cost for
company employees of obtaining certain post-employment medical insurance. The
Agreement also contains provisions designed to indemnify Mr. Suda on an
after-tax basis in the event he incurs an excise tax under Section 4999 of the
Internal Revenue Code.
PHILIP L. CARTER. Mr. Carter served as Apria's Chief Executive Officer
during 2001, but resigned on February 12, 2002. Pursuant to a Resignation and
General Release Agreement which became effective February 12, 2002, Mr. Carter
received two payments during February in the respective amounts of $61,333 and
$2,606,354. Mr. Carter will also receive $1,303,177 payable in 52 equal weekly
installments under the terms of a Nondisclosure and Noncompetition Agreement
pursuant to which Mr. Carter is entitled to receive cash payments in exchange
for the performance of certain agreements pertaining to nondisclosure and
noncompetition following his resignation. Apria is also required to provide an
office and secretarial support at a cost of not more than $50,000 during the
year following his resignation. The relevant agreements also contain provisions
designed to indemnify Mr. Carter on an after-tax basis in the event he incurs an
excise tax under Section 4999 of the Internal Revenue Code.
JOHN C. MANEY. John Maney had an executive severance agreement with the
company. However, Mr. Maney resigned from Apria voluntarily under circumstances
that did not entitle him to receive any benefits under the agreement.
REPORT OF THE COMPENSATION COMMITTEE
TO: THE BOARD OF DIRECTORS
As members of the Compensation Committee, it is our duty to administer
Apria's overall compensation program for its senior and mid-level management. In
addition, the Compensation Committee evaluates the performance and specifically
establishes the compensation of the Chief Executive Officer. The Compensation
Committee is comprised entirely of independent Directors who are not officers or
employees of Apria.
COMPENSATION PHILOSOPHY AND PROGRAM FOR SENIOR MANAGEMENT
During 2001, Apria's compensation program for executive officers was
designed to:
- reward each member of senior management commensurately with the company's
overall growth and financial performance;
- attract and retain individuals who are capable of leading the company in
achieving its business objectives in an industry characterized by
competitiveness, growth and change; and
- encourage ownership of Apria's stock by executive officers.
The company believes a substantial portion of the annual compensation of
each member of senior management should relate to, and should be contingent
upon, the financial success of the company. As discussed below, the program
consists of, and is intended to strike a balance among, three elements:
- Salaries. Salaries for the Chief Executive Officer and President are
based on the Committee's evaluation of individual job performance and an
assessment of the salaries and total compensation mix paid by other
similar companies to executive officers holding equivalent positions. The
salaries for all other executive officers are approved by the
Compensation Committee pursuant to recommendations made by the Chief
Executive Officer on the basis of similar criteria.
- Executive bonuses. Executive bonuses are based on an evaluation of
company performance against qualitative and quantitative measures.
- Long-term incentive compensation. Long-term incentive awards consisting
of stock options are designed to insure that incentive compensation is
linked to the long-term performance of Apria and its common stock. Such
awards provide an incentive that focuses on managing the company from the
perspective of an owner.
In recent years, the Committee's overall compensation strategy has been
adjusted so that more than one-half of the total cash compensation earnable by
executive officers consists of bonuses based solely on the achievement of
certain financial objectives by the company. Stock option grants will also
continue to represent a significant portion of executive compensation if
managerial efforts result in continued stock price increases.
FACTORS AFFECTING THE EVALUATION OF EXECUTIVE PERFORMANCE FOR 2001
During 2001, the company continued to pursue a plan for achieving
profitable operating results through the following principal elements:
- Maintaining disciplined focus on existing service offerings and
increasing emphasis on home respiratory therapy;
- Supplementing internal growth with selective acquisitions;
- Reducing costs and enhancing margins and cash flows; and
- Improving the company's capital structure.
As those objectives have been and continue to be achieved, management has
placed increased emphasis on sales and operations and has continued its emphasis
on compliance issues. Members of senior management have been asked to adapt
their activities so as to achieve the benefits sought by the foregoing
strategies. Accordingly, members of senior management were and continue to be
evaluated in light of their contributions toward achievement of the objectives
established by the Chief Executive Officer and the Board. Future compensation
for senior management will continue to be based in large part on the company's
ability to effectively develop and implement strategies that enable Apria to
achieve those objectives and enhance stockholder value.
TOTAL COMPENSATION
Total compensation target levels for Apria executives are established with
consideration given to an analysis of competitive market compensation. The total
compensation package for each executive is broken down into the three basic
components indicated above and discussed in more detail below. This strategy is
intended to emphasize the "performance-based" component of the company's
executive compensation, and the Committee intends to continue this emphasis in
2002.
2001 TOTAL COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
During 2001, Philip L. Carter served as Apria's Chief Executive Officer. He
resigned from Apria on February 12, 2002 pursuant to a Resignation and General
Release Agreement. Although a significant portion of Mr. Carter's 2001
compensation consisted of a bonus plan based largely on company performance, the
Committee did not rely entirely on predetermined formulas or a limited set of
criteria when it evaluated the performance of the company's Chief Executive
Officer. The Committee considered:
- management's overall accomplishments;
- Mr. Carter's individual accomplishments;
- the company's financial performance; and
- other criteria discussed below.
The Committee designed a compensation package for Mr. Carter which provided
a competitive salary with the potential of significant bonus plan compensation
in the event the company performed well under his leadership. For 2001, Mr.
Carter's annual salary was $680,000 and his total bonus compensation was
$680,000. This bonus award was the maximum amount payable under the bonus plan.
Of the award, 80% was based on the company's achievement of certain financial
objectives related to earnings before interest, taxes, depreciation and
amortization ("EBITDA"), earnings per share and net revenue with a lesser
element (20%) to be paid on recommendation of the Compensation Committee based
on the implementation of certain strategic initiatives. All performance targets
and goals concerning the implementation of initiatives were met or exceeded. Mr.
Carter's long-term compensation package was also designed to couple his
long-term interests with those of Apria's stockholders. The Committee believes
that the most significant portion of the package consisted of options to
purchase up to 750,000 shares of Apria's common stock at an exercise price of
$9.00 per share granted to Mr. Carter when he was first employed by Apria in
1998. The options from Mr. Carter's initial grant became entirely vested on an
accelerated basis because certain target prices for the company's common stock
were met. Mr. Carter was granted options for an additional (i) 75,000 shares
during 1999 at a per share exercise price of $16.9375 and (ii) 500,000 shares
during 2000 at a per share exercise price of $27.125. He received no additional
option grants for 2001. As of February 12, 2002, the date of his resignation
from the company, options for 50,000 of the $16.9375 shares and 125,000 of the
$27.125 shares had vested. The unvested portions of the 1999 and 2000 option
grants were cancelled at the time of his resignation.
SALARIES FOR EXECUTIVE OFFICERS
In setting salaries, the first element of the executive compensation
program, the Committee did not use a predetermined formula. Instead, the 2001
salaries of the Chief Executive Officer, the President and the other executive
officers were based on:
- the Committee's evaluation of individual job performance;
- an assessment of the company's performance; and
- a consideration of salaries paid by similar companies to executive
officers holding equivalent positions.
Philip L. Carter. Mr. Carter's annual salary for 2001 was $680,000,
compared to a salary of $650,000 during 2000. The Committee felt the salary was
justified due to the fact that the company's profitability had continued to
improve.
Other Executive Officers. The 2001 salaries of the five other most highly
compensated executive officers are shown in the "Salary" column of the Summary
Compensation Table.
2001 EXECUTIVE OFFICER BONUSES
Bonuses for all executive officers were awarded under the 2001 Executive
Officer Incentive Compensation Plan, a plan adopted to provide each member of
senior management with significant bonus compensation (up to the full amount of
each officer's 2001 salary) upon the achievement of certain improved financial
performance levels for the 2001 fiscal year and the implementation of certain
key initiatives.
The target levels of performance as well as the key initiatives established
for the company in the 2001 Executive Officer Incentive Compensation Plan were
achieved, and the resulting 2001 bonus payments to Mr. Carter and the other most
highly compensated executive officers of the company are listed in the "Bonus"
column of the Summary Compensation Table. Because publication of sensitive and
proprietary quantifiable targets and other specific goals for the company and
its executive officers could place the company at a competitive disadvantage, it
has not been the company's practice to disclose the specific financial
performance target levels set forth in its incentive compensation plans.
However, the actual results for each of the quantifiable target factors are
publicly available and reflect an increase in 2001 net revenues of approximately
12% ($117,714,000) over the 2000 level. In addition, EBITDA increased by
approximately 7.5% ($18,206,000) and earnings per share increased by more than
21% ($.23 per share) over 2000 levels. Company management also concluded a
successful debt restructuring and reduced Apria's days sales outstanding to 50
during 2001.
LONG-TERM INCENTIVE COMPENSATION
As noted above, the company provided long-term compensation to certain
members of senior and mid-level management under various stock incentive plans.
The stock incentive plans provide the company with the ability to periodically
reward key employees, including executive officers, with options to purchase
shares of the company's common stock.
The value of stock options is tied to the future performance of the
company's common stock and provides value to the recipient only when the price
of the company's common stock increases above the option grant price.
STOCK OPTION AWARDS TO EXECUTIVE OFFICERS
Mr. Carter, Mr. Higby and Mr. Maney received no additional stock option
grants as a part of their 2001 compensation. Stock option grants for the other
three most highly compensated executive officers are shown in the "Options
Granted" column of the Summary Compensation Table.
TAX TREATMENT OF STOCK OPTIONS
The Compensation Committee has considered the anticipated tax treatment to
the company regarding the compensation and benefits paid to the executive
officers of the company in light of the enactment of Section 162(m) of the
United States Internal Revenue Code. The basic philosophy of the Compensation
Committee is to strive to provide the executive officers of the company with a
compensation package which will preserve the deductibility of such payments for
the company to the greatest extent possible. However, certain types of
compensation payments and their deductibility (e.g., the spread on exercise of
non-qualified options) depend upon the timing of an executive officer's vesting
or exercise of previously granted rights. Moreover, interpretations of and
changes in the tax laws and other factors beyond the Compensation Committee's
control may affect the deductibility of certain compensation payments. In
addition, in order to attract qualified management personnel, it has proven
necessary to grant certain long-term incentives that may not be deductible under
Section 162(m) of the Code. The Compensation Committee will consider various
alternatives to preserving the deductibility of compensation payments and
benefits to the extent reasonably practicable and to the extent consistent with
its other compensation objectives.
Date: April 1, 2002
THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
David H. Batchelder (Chairman)
Ralph V. Whitworth
Beverly Benedict Thomas
PERFORMANCE GRAPH
- --------------------------------------------------------------------------------
The following graph shows the changes over the last five-year period in the
value of $100 invested in (i) the common stock of Apria, (ii) the S&P 500 Stock
Index, and (iii) the Peer Group Index (1). The value of each investment is based
on share price appreciation, with reinvestment of all dividends. The investments
are assumed to have occurred at the beginning of the period presented.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG APRIA HEALTHCARE GROUP INC.,
THE S&P 500 INDEX AND THE PEER GROUP INDEX
[OBJECT OMITTED, graphically depicts the data presented in the table below]
12/96 12/97 12/98 12/99 12/00 12/01
- --------------------------- ----- ------ ------ ------ ------ ------
Apria Healthcare Group Inc. 100 71.67 47.67 95.67 158.67 133.28
S & P 500 100 133.36 171.47 207.56 188.66 166.24
Peer Group 100 116.02 131.53 111.06 179.50 190.49
(1) The Peer Group Index is based on the cumulative total returns of the
following companies: Coram Healthcare Corporation, Lincare Holdings,
Inc., Optioncare, Inc., and American Homepatient, Inc. In years prior to
1998, Rotech Medical Corporation (no longer publicly owned) was included
in the Peer Group Index.
It should be noted that this graph represents historical stock price
performance and is not necessarily indicative of any future stock price
performance.
The foregoing report of the Compensation Committee of the Board of
Directors regarding compensation and the performance graph that appears
immediately after such report shall not be deemed to be soliciting material or
to be filed with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, or the Exchange Act, or incorporated by reference in any
document so filed.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 28, 2002, 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, 2001, John C. Maney 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
- ----------------------------------------------------------- --------------------- ------------
Janus Capital Corporation (1) 5,115,705 9.44%
Thomas H. Bailey (1) 5,115,705 9.44
Janus Fund (1) 5,115,705 9.44
Barclays Global Investors, LTD. (2) 2,777,011 6.13
David H. Batchelder (3) 1,301,282 2.40
Ralph V. Whitworth (3) 1,257,948 2.32
Philip L. Carter (4) 900,000 1.66
Lawrence M. Higby (5) 532,666 *
David L. Goldsmith (6) 391,902 *
Michael R. Dobbs (7) 156,180 *
George S. Suda (8) 80,933 *
Michael J. Keenan (9) 71,633 *
Richard H. Koppes (10) 68,000 *
Philip R. Lochner, Jr. (11) 67,000 *
Beverly Benedict Thomas (12) 65,000 *
John C. Maney (13) 53,000 *
All current directors and executive officers as a group 2,894,289 5.34
(12 persons) (14)
- ------------------
* Less than 1%
(1) According to an amended Schedule 13G dated February 8, 2002, Janus Capital
Corporation ("Janus Capital") reported beneficial ownership as well as
sole dispositive and voting power with respect to 5,115,705 shares.
3,571,250 of the shares are held by Janus Fund, an investment company
registered under Section 8 of the Investment Company Act of 1940 for which
Janus Capital is the investment advisor. Thomas H. Bailey ("Bailey")
joined in the report stating that, as President and Chairman of the Board
of Janus Capital, he may be deemed to have the power to exercise or direct
the exercise of Janus Capital's dispositive and voting powers, even though
he disclaims beneficial ownership and the right to receive dividends from,
or the proceeds of any sale of the stock. Janus Capital is a registered
investment advisor which furnishes investment advice to several investment
companies registered under Section 8 of the Investment Company Act of 1940
and to individual and institutional clients. The mailing address for Janus
Capital, Janus Fund and Bailey is 100 Filmore Street, Denver, Colorado
80206-4923.
(2) According to a Schedule 13G, dated February 8, 2002, filed with the
Securities and Exchange Commission, Barclays Global Investors, Ltd.
("BGLTD"), a bank as defined in Section 3(a)(6) of the Securities Exchange
Act of 1934, has sole dispositive power as to 2,777,011 shares and sole
voting power as to 2,707,799 shares. BGLTD holds 4,230 of the shares
directly and has sole dispositive and voting power as to those shares. The
balance of the shares is held by two related banks: Barclays Global Fund
Advisors ("BGF"), which has sole voting and dispositive power as to
343,304 shares, and Barclays Global Investors, N.A. ("BGNA"), which has
sole voting power as to 2,360,265 shares and sole dispositive power as to
2,429,477. The mailing address for BGLTD, BGF and BGNA is 45 Fremont
Street, San Francisco, California 94105.
(3) According to a Schedule 13D Amendment, dated August 9, 2001, and Form 5
filings dated January 28, 2002 and February 1, 2002, all of which have
been filed with the Securities and Exchange Commission, Relational
Investors LLC ("RILLC"), its affiliated companies and Messrs. Batchelder
and Whitworth, individually and as Managing Members of RILLC, have sole
voting and dispositive power as to 1,322,948 shares, which amount includes
161,666 shares subject to options that are currently exercisable.
1,161,282 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 96,666 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
65,000 shares. The mailing address for both Mr. Whitworth and Mr.
Batchelder is 11975 El Camino Real, Suite 300, San Diego, California
92130.
(4) Includes 875,000 shares subject to options that are currently exercisable.
The amounts reflected in the table have been adjusted to account for the
sale during March 2002 of 50,000 shares acquired on option.
(5) Includes 521,666 shares subject to options that are currently exercisable.
(6) Includes 300,236 held in a shared trust with Mr. Goldsmith's wife and
91,666 shares subject to options that are currently exercisable.
(7) Includes 145,000 shares subject to options that are currently exercisable.
(8) Includes 78,333 shares subject to options that are currently exercisable.
(9) Includes 71,633 shares subject to options that are currently exercisable.
(10) Includes 65,000 shares subject to options that are currently exercisable.
(11) Includes 65,000 shares subject to options that are currently exercisable.
(12) Includes 64,000 shares subject to options that are currently exercisable.
(13) Includes 45,000 shares subject to options that are currently exercisable.
(14) Includes shares owned by certain trusts. Also includes 1,273,097 shares
subject to options that are currently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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
Independent Auditors' Report......................................... F-1
Consolidated Balance Sheets - December 31, 2001 and 2000............. F-2
Consolidated Statements of Income - Years ended
December 31, 2001, 2000 and 1999................................... F-3
Consolidated Statements of Stockholders' Equity - Years
ended December 31, 2001, 2000 and 1999............................. F-4
Consolidated Statements of Cash Flows - Years ended
December 31, 2001, 2000 and 1999................................... F-5
Notes to Consolidated Financial Statements........................... F-6
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, 2001 and
2000, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2001. Our audits also included the financial statement schedule as of and for
each of the three years in the period ended December 31, 2001, 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such 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
April 1, 2002
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
(in thousands) 2001 2000
- ------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................. $ 9,359 $ 16,864
Accounts receivable, less allowance for doubtful accounts of $32,073
and $39,787 at December 31, 2001 and 2000, respectively ................. 162,092 145,518
Inventories, net .......................................................... 25,084 22,404
Deferred income taxes ..................................................... 33,017 33,067
Prepaid expenses and other current assets ................................. 10,271 8,617
--------- ---------
TOTAL CURRENT ASSETS ............................................... 239,823 226,470
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of
$342,010 and $310,741 at December 31, 2001 and 2000, respectively ........ 165,471 134,812
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ................................... 47,312 40,630
DEFERRED INCOME TAXES ....................................................... 37,838 75,076
GOODWILL, NET ............................................................... 193,458 131,841
INTANGIBLE ASSETS, NET ...................................................... 4,863 6,087
OTHER ASSETS ................................................................ 7,017 5,416
--------- ---------
$ 695,782 $ 620,332
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable .......................................................... $ 71,198 $ 54,250
Accrued payroll and related taxes and benefits ............................ 33,907 28,449
Accrued insurance ......................................................... 10,376 9,980
Income taxes payable ...................................................... 9,060 13,378
Other accrued liabilities ................................................. 34,754 24,555
Current portion of long-term debt ......................................... 15,455 1,999
--------- ---------
TOTAL CURRENT LIABILITIES .......................................... 174,750 132,611
LONG-TERM DEBT, net of current portion ...................................... 278,234 341,479
COMMITMENTS AND CONTINGENCIES (Notes 9 and 11)
STOCKHOLDERS' EQUITY Preferred stock, $.001 par value:
10,000,000 shares authorized; none issued ............................... - -
Common stock, $.001 par value:
150,000,000 shares authorized; 54,690,267 and 53,153,890 shares issued
at December 31, 2001 and 2000, respectively; 54,604,167 and 53,067,790
outstanding at December 31, 2001 and 2000, respectively ................. 55 53
Additional paid-in capital ................................................ 368,231 343,621
Treasury stock, at cost; 86,100 shares at
December 31, 2001 and 2000, respectively ................................ (961) (961)
Accumulated deficit ....................................................... (124,554) (196,471)
Accumulated other comprehensive income .................................... 27 -
--------- ---------
242,798 146,242
--------- ---------
$ 695,782 $ 620,332
========= =========
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31,
----------------------------------------
(in thousands, except per share data) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Net revenues ................................................ $ 1,131,915 $ 1,014,201 $ 940,024
Costs and expenses:
Cost of net revenues:
Product and supply costs .............................. 204,666 188,581 183,750
Patient service equipment depreciation ................ 89,985 77,819 73,138
Nursing services ...................................... 1,223 1,642 2,011
Other ................................................. 11,773 10,900 9,015
----------- ----------- -----------
TOTAL COST OF NET REVENUES ........................ 307,647 278,942 267,914
Provision for doubtful accounts .......................... 37,110 32,166 34,314
Selling, distribution and administrative ................. 631,582 554,691 514,041
Amortization of goodwill and intangible assets ........... 12,349 10,205 8,048
----------- ----------- -----------
TOTAL COSTS AND EXPENSES .......................... 988,688 876,004 824,317
----------- ----------- -----------
OPERATING INCOME .................................. 143,227 138,197 115,707
Interest expense, net ....................................... 25,685 40,056 42,526
----------- ----------- -----------
INCOME BEFORE TAXES AND EXTRAORDINARY CHARGE ...... 117,542 98,141 73,181
Income tax expense (benefit) ................................ 44,097 41,135 (130,954)
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY CHARGE ................ 73,445 57,006 204,135
Extraordinary charge on debt refinancing,
net of taxes of $914 ..................................... 1,528 - -
----------- ----------- -----------
NET INCOME ........................................ $ 71,917 $ 57,006 $ 204,135
=========== =========== ===========
Basic income per common share:
Income before extraordinary charge ....................... $ 1.36 $ 1.09 $ 3.93
Extraordinary charge on debt refinancing, net of taxes.... 0.03 - -
----------- ----------- -----------
Net income ........................................ $ 1.33 $ 1.09 $ 3.93
=========== =========== ===========
Diluted income per common share:
Income before extraordinary charge ....................... $ 1.32 $ 1.06 $ 3.81
Extraordinary charge on debt refinancing, net of taxes.... 0.03 - -
----------- ----------- -----------
Net income ........................................ $ 1.29 $ 1.06 $ 3.81
=========== =========== ===========
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK ADDITIONAL TREASURY STOCK OTHER TOTAL
------------------ PAID-IN -------------- ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
(in thousands) SHARES PAR VALUE CAPITAL SHARES COST DEFICIT INCOME EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 ...... 51,785 $ 52 $ 325,906 - $(3) $(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 52 328,897 - (3) (253,477) - 75,469
Exercise of stock options ......... 1,099 1 10,735 10,736
Tax benefits related to
stock options.................... 3,989 3,989
Repurchases of common stock ....... (86) (958) (958)
Net income ........................ 57,006 57,006
------- -------- --------- ------ ----- --------- ----- ---------
Balance at December 31, 2000 ...... 53,154 53 343,621 (86) (961) (196,471) - 146,242
Exercise of stock options ......... 1,536 2 16,476 16,478
Tax benefits related to
stock options.................... 8,134 8,134
Unrealized gain on interest rate
swap agreements, net of taxes... 27 27
Net income ........................ 71,917 71,917
--------- ----- ---------
Total comprehensive income... 71,917 27 71,944
------- -------- --------- ------ ----- --------- ----- ---------
Balance at December 31, 2001 ...... 54,690 $ 55 $ 368,231 (86) $(961) $(124,554) $ 27 $ 242,798
======= ======== ========= ====== ===== ========= ===== =========
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
(in thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income ................................................................. $ 71,917 $ 57,006 $ 204,135
Items included in net income not requiring (providing) cash:
Extraordinary charge on debt refinancing ............................... 2,442 - -
Provision for doubtful accounts ........................................ 37,110 32,166 34,314
Provision for inventory and patient service equipment shortages ........ - - 3,968
Depreciation ........................................................... 106,106 95,074 92,312
Amortization of goodwill and intangible assets ......................... 12,349 10,205 8,048
Amortization of deferred debt issuance costs............................ 1,880 2,618 4,471
Deferred income taxes .................................................. 45,405 34,414 (138,334)
Other, net ............................................................. 97 (921) (1,679)
Changes in operating assets and liabilities, exclusive of effects of
acquisitions:
Accounts receivable .................................................... (53,822) (27,105) (49,802)
Inventories, net ....................................................... (2,516) (3,898) (3,668)
Prepaids and other assets .............................................. (1,718) 1,427 (3,905)
Accounts payable, exclusive of outstanding checks ...................... 11,979 (156) 4,446
Accrued payroll and related taxes and benefits ......................... 5,459 1,971 898
Income taxes payable ................................................... (4,319) 4,158 4,701
Accrued expenses ....................................................... 9,060 (18,976) (12,188)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......................... 241,429 187,983 147,717
INVESTING ACTIVITIES
Purchases of patient service equipment and property,
equipment and improvements, exclusive of effects of acquisitions...... (133,162) (96,414) (75,119)
Proceeds from disposition of assets .................................... 303 637 1,038
Cash paid for acquisitions, including
payments of deferred consideration.................................... (80,273) (26,220) (53,427)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ............................. (213,132) (121,997) (127,508)
FINANCING ACTIVITIES
Proceeds from revolving credit facilities .............................. 94,900 - -
Payments on revolving credit facilities ................................ (87,100) - -
Proceeds from term loans ............................................... 300,000 - -
Payments on term loans ................................................. (156,938) (79,062) (68,938)
Payment on redemption of senior subordinated notes ..................... (200,000) - -
Payments on other long-term debt ....................................... (2,488) (3,608) (5,826)
Outstanding checks included in accounts payable ........................ 4,969 4,259 (872)
Capitalized debt issuance costs, net ................................... (5,623) (982) (2,226)
Repurchases of common stock ............................................ - (958) -
Issuances of common stock .............................................. 16,478 10,736 2,671
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES ............................. (35,802) (69,615) (75,191)
--------- --------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................................. (7,505) (3,629) (54,982)
Cash and cash equivalents at beginning of year ............................. 16,864 20,493 75,475
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR .......................... $ 9,359 $ 16,864 $ 20,493
========= ========= =========
SUPPLEMENTAL DISCLOSURES - See Notes 5 and 7 for cash paid for interest and income taxes, respectively.
NON-CASH TRANSACTIONS - See Statements of Stockholders' Equity, Note 3 and Note 9 for tax benefit from stock option
exercises, liabilities assumed in acquisitions and purchase of property and equipment under capital leases, respectively.
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
have been prepared in accordance with accounting principles generally accepted
in the United States of America. These statements include the accounts of Apria
Healthcare Group Inc. ("Apria" or "the company") and its subsidiaries.
Intercompany transactions and accounts have been eliminated.
Company Background and Segment Reporting: Apria operates in the home
healthcare segment of the healthcare industry, providing a variety of clinical
services and related products and supplies as prescribed by a physician or
authorized by a case manager as part of a care plan. All products and services
offered by the company are provided through the company's network of
approximately 400 branch facilities, which are located throughout the United
States and are organized into 15 geographic regions. Each region consists of a
number of branches and a regional office, which provides key support services
such as billing, purchasing, equipment maintenance, repair and warehousing.
Management evaluates operating results on a geographic basis and therefore views
each region as an operating segment. All regions provide the same products and
services, including respiratory therapy, infusion therapy and home medical
equipment and supplies. For financial reporting purposes, all of the company's
operating segments are aggregated into one reportable segment in accordance with
the aggregation criteria in paragraph 17 of Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information".
Respiratory therapy, infusion therapy and home medical equipment represent
approximately 66%, 19% and 15% of total 2001 revenues, respectively. The gross
margins for these services and related products were 79%, 59% and 63%,
respectively.
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.
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 third-party payors, including private insurers, prepaid health
plans, Medicare and Medicaid. Approximately 30% of the company's 2001 revenues
are reimbursed under arrangements with Medicare and Medicaid. In 2001, no other
third-party payor group represented 10% 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 less than 10% of total net revenues for 2001, 2000 and
1999.
Due to the nature of the industry and the reimbursement environment in
which Apria operates, certain estimates are required to record net revenues and
accounts receivable at their net realizable values. Inherent in these estimates
is the risk that they will have to be revised or updated as additional
information becomes available. Specifically, the complexity of many third-party
billing arrangements and the uncertainty of reimbursement amounts for certain
services from certain payors may result in adjustments to amounts originally
recorded. Such adjustments are typically identified and recorded at the point of
cash application, claim denial or account review.
Management performs periodic analyses to evaluate the net realizable value
of accounts receivable. Specifically, management considers historical
realization data, accounts receivable aging trends, other operating trends and
relevant business conditions. Also, focused reviews of certain large and/or
problematic payors are performed. Because of continuing changes in the
healthcare industry and third-party reimbursement, it is possible that
management's estimates could change in the near term, which could have an impact
on operations and cash flows.
Accounts receivable are reduced by an allowance for doubtful accounts which
provides for those accounts from which payment is not expected to be received,
although services were provided and revenue was earned.
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, which are reported as a component of accounts
payable, were $23,457,000 and $18,488,000 at December 31, 2001 and 2000,
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 $26,925,000 and $17,863,000 at December 31, 2001 and
2000, respectively. Delays, ranging from a day up to several weeks, between the
date of service and billing can occur due to delays in obtaining certain
required payor-specific documentation from internal and external sources. Earned
but unbilled receivables are aged from date of service and are considered in
Apria's analysis of historical performance and collectibility.
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 ten years.
Property, Equipment and Improvements: Property, equipment and improvements
are stated at cost. Included in property and equipment are assets under
capitalized leases which consist solely of information systems. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets. Estimated useful lives for each of the categories presented in Note 3
are as follows: leasehold improvements -- the shorter of the remaining lease
term or seven years; equipment and furnishings -- three to fifteen 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. Management does not believe any impairment of its
capitalized software existed at December 31, 2001.
Goodwill: Goodwill arising from business combinations represents the excess
of the purchase price over the estimated fair value of the net assets of the
acquired business. Prior to a transition period called for by SFAS No. 142,
"Goodwill and Other Intangible Assets", goodwill attributable to business
combinations completed on or before June 30, 2001, was being amortized over the
period of expected benefit. The amortization period for substantially all of the
company's goodwill was 20 years. Management reviewed for impairment on an
ongoing basis and whenever events or changes in circumstances indicated the
possibility of impairment. In accordance with the provisions of SFAS No. 142,
goodwill arising from business combinations initiated after June 30, 2001, will
no longer be amortized but shall be tested annually for impairment or more
frequently if circumstances indicate potential impairment. Upon Apria's adoption
of SFAS No. 142 in its entirety on January 1, 2002, the amortization of
goodwill, including goodwill recorded in past transactions, ceased completely.
See "Recent Accounting Pronouncements".
Intangible and Other Long-lived Assets: Intangible assets consist primarily
of covenants not to compete resulting from business combinations. The values
assigned to such intangible assets are amortized on a straight-line basis over
their contractual terms, which range from two to ten years.
Management reviews for impairment of intangible assets and long-lived
assets on an ongoing basis and whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Management
does not believe any impairment of its intangible assets or long-lived assets
existed at December 31, 2001. See "Recent Accounting Pronouncements".
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 $3,044,000, $2,212,000 and
$2,528,000 for 2001, 2000 and 1999, respectively, are expensed as incurred and
included in "Selling, distribution and administrative expenses".
Income Taxes: Apria provides for income taxes in accordance with provisions
specified in SFAS No. 109, "Accounting for Income Taxes". 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 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.
Derivative Instruments and Hedging Activities: Effective January 1, 2001,
the company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133
establishes accounting and reporting standards for hedging activities and for
derivative instruments, including certain derivative instruments embedded in
other contracts. Apria's adoption of SFAS No. 133 did not have a material effect
on the company's consolidated financial statements.
Comprehensive Income: For the year ended December 31, 2001, the difference
between net income and comprehensive income is $27,000, net of taxes, which is
attributable to unrealized gains on two interest rate swap agreements. For the
years ended December 31, 2000 and 1999, there were no differences between
comprehensive income and net income.
Per Share Amounts: Basic net income per share is computed by dividing net
income available to common stockholders by the weighted-average number of common
shares outstanding. Diluted net income per share includes the effect of the
potential shares outstanding, including dilutive stock options and warrants,
using the treasury stock method.
Recent Accounting Pronouncements: In July 2001, Apria adopted SFAS No. 141,
"Business Combinations". SFAS No. 141 eliminates the pooling-of-interests method
of accounting for business combinations and requires that all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method. Adoption of SFAS No. 141 did not have a material effect on the company's
consolidated financial statements.
Effective January 1, 2002, Apria adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" in its entirety. SFAS No. 142 addresses the financial
accounting and reporting for goodwill and other intangible assets. The statement
provides that goodwill or other intangible assets with indefinite lives will no
longer be amortized, but shall be tested for impairment annually, or more
frequently if circumstances indicate potential impairment. The impairment test
is comprised of two steps: (1) a reporting unit's fair value is compared to its
carrying value; if the fair value is less than its carrying value, goodwill
impairment is indicated; and (2) if impairment is indicated in the first step,
it is measured by comparing the implied fair value of goodwill to its carrying
value at the reporting unit level. In the year of adoption, SFAS No. 142
requires a transitional goodwill impairment test; the first step must be
completed within six months of adoption and the second step, if necessary, must
be completed by the end of the year. Amounts used in the transitional test shall
be measured as of the beginning of the year. An impairment loss resulting from
application of the transitional goodwill impairment test shall be recognized as
the effect of a change in accounting principle. Apria's transitional goodwill
impairment test and overall evaluation of SFAS No. 142's impact is currently in
progress, therefore it is not presently known whether adoption will have a
material effect on the consolidated financial statements. Goodwill amortization
expense for the year ended December 31, 2001 was $9,809,000.
Effective January 1, 2002, Apria was required to adopt SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144
requires that one accounting model be used for long-lived assets to be disposed
of by sale. Discontinued operations will be measured similarly to other
long-lived assets classified as held for sale at the lower of its carrying
amount or fair value less cost to sell. Future operating losses will no longer
be recognized before they occur. SFAS No. 144 also broadens the presentation of
discontinued operations to include a component of an entity when operations and
cash flows can be clearly distinguished, and establishes criteria to determine
when a long-lived asset is held for sale. The adoption of this statement will
not have a material effect on Apria's financial statements.
Reclassifications: Certain amounts for prior periods have been reclassified
to conform to the current year presentation.
NOTE 2 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following:
DECEMBER 31,
-----------------------------
(IN THOUSANDS) 2001 2000
---------------------------------------------------------------------------
Leasehold improvements................. $ 17,809 $ 20,912
Equipment and furnishings.............. 43,565 46,136
Information systems.................... 73,597 57,408
--------- ---------
134,971 124,456
Less accumulated depreciation.......... (87,659) (83,826)
--------- ---------
$ 47,312 $ 40,630
========= =========
NOTE 3 -- BUSINESS COMBINATIONS
During 2001, 2000 and 1999, Apria acquired a number of complementary
businesses in specific geographic markets. Included are five companies acquired
after June 30, 2001. All of these companies primarily provided home respiratory
therapy services. For all periods presented, these all-cash transactions were
accounted for as purchases and, accordingly, the results of operations of the
acquired businesses are included in the consolidated income statements 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, which include payments deferred from prior
years. In 2001, such payments totaled $2,408,000. At December 31, 2001,
outstanding deferred consideration totaled $1,385,000 and $2,200,000 for
business combinations intitiated on or before June 30, 2001 and after June 30,
2001, respectively.
2001 YEAR ENDED
----------------------- DECEMBER 31,
After On or prior -----------------------
(IN THOUSANDS) June 30, to June 30, 2000 1999
--------------------------------------------------------------- -----------------------
Fair value of assets acquired......... $ 44,523 $ 37,286 $ 26,778 $ 56,313
Liabilities (assumed) paid, net....... (1,932) 396 (558) (2,886)
--------- --------- --------- ---------
Cash paid.......................... $ 42,591 $ 37,682 $ 26,220 $ 53,427
========= ========= ========= =========
The allocation of the aggregate consideration for acquisitions effected
during 2001, 2000 and 1999 includes goodwill and intangible assets of
$73,112,000, $22,492,000 and $49,324,000, respectively.
The following supplemental unaudited pro forma information presents the
combined operating results of Apria and the businesses that were acquired by
Apria during 2001, as if the acquisitions had occurred at the beginning of the
periods presented. The pro forma information is based on the historical
financial statements of Apria and those of the acquired businesses. Amounts are
not necessarily indicative of the results that may have been obtained had the
combinations been in effect on the dates indicated or that may be achieved in
the future.
YEAR ENDED DECEMBER 31,
--------------------------
(IN THOUSANDS) 2001 2000
---------------------------------------------------------------------------
Net revenues.................................. $1,164,658 $1,083,178
Income before extraordinary charge............ $ 73,197 $ 53,191
Net income.................................... $ 71,669 $ 53,191
Diluted income per common share:
Income before extraordinary charge.......... $ 1.34 $ 0.97
Extraordinary charge on debt
refinancing, net of taxes................. 0.03 -
------- -------
Net income................................ $ 1.31 $ 0.97
======= =======
NOTE 4 - GOODWILL AND INTANGIBLE ASSETS
DECEMBER 31,
-------------------------
(IN THOUSANDS) 2001 2000
---------------------------------------------------------------------------
Goodwill from business combinations
completed on or before June 30, 2001......... $ 203,077 $ 170,522
Less accumulated amortization.................. (48,490) (38,681)
--------- ---------
154,587 131,841
Goodwill from business combinations
initiated after June 30, 2001................ 38,871 -
--------- ---------
$ 193,458 $ 131,841
========= =========
Intangible assets, comprised of
covenants not to compete..................... $ 16,180 $ 16,455
Less accumulated amortization.................. (11,317) (10,368)
--------- ---------
$ 4,863 $ 6,087
========= =========
Covenants not to compete relating to business combinations completed after
June 30, 2001 have a weighted-average life of five years. All of the goodwill
recorded in conjunction with business combinations initiated after June 30, 2001
is expected to be deductible for tax purposes.
NOTE 5 -- CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
------------------------
(IN THOUSANDS) 2001 2000
---------------------------------------------------------------------------
Term loans payable............................. $283,062 $140,000
Notes payable relating to revolving
credit facilities............................ 7,800 -
9 1/2% senior subordinated notes............... - 200,000
Capital lease obligations (see Note 9)......... 2,827 3,478
-------- --------
293,689 343,478
Less: Current maturities....................... (15,455) (1,999)
-------- --------
$278,234 $341,479
======== ========
Credit Agreement: On July 20, 2001, Apria closed a new $400,000,000 senior
secured credit agreement with a syndicate of lenders led by Bank of America,
N.A. The credit facilities consist of a $100,000,000 five-year revolving credit
facility, a $125,000,000 five-year term loan and a $175,000,000 six-year term
loan. The $125,000,000 term loan is repayable in 20 consecutive quarterly
installments of $5,500,000 to $7,000,000 each, commencing December 31, 2001. The
$175,000,000 term loan is repayable in 20 consecutive quarterly installments of
$437,500 each, commencing December 31, 2001, followed by three consecutive
quarterly installments of $41,562,500 each, and a final payment of $41,562,500
due on July 20, 2007.
On December 28, 2001, the company made scheduled quarterly payments of
$5,500,000 and $437,500 on the five-year and six-year term loans, respectively.
The company further reduced the outstanding debt on the five-year term loan by
making a voluntary prepayment of $11,000,000 on December 28, 2001. The voluntary
prepayment was applied against future scheduled quarterly payments, effectively
eliminating any prepayment requirements on the five-year term loan until
September 2002.
The senior secured credit agreement permits Apria to select one of two
variable interest rates. One option is the base rate, which is expressed as the
higher of (a) the Federal Funds rate plus 0.50% and (b) the Prime Rate. The
other option is the Eurodollar rate, which is based on the London Interbank
Offered Rate ("LIBOR"). Interest on outstanding balances under the senior
secured credit agreement are determined by adding a margin to the Eurodollar
rate or base rate in effect at each interest calculation date. The applicable
margins for the revolving credit facility and the $125,000,000 term loan are
based on Apria's leverage ratio, which is the ratio of its funded debt to its
last four quarters of earnings before interest, taxes, depreciation, and
amortization. The applicable margin ranges from 1.50% to 2.25% for Eurodollar
loans and from 0.50% to 1.25% for base rate loans. For the $175,000,000 term
loan, the margins are fixed at 3.00% for Eurodollar loans and at 2.00% for base
rate loans. The effective interest rate at December 31, 2001 was 4.87% on total
borrowings of $290,862,500. The senior credit agreement also requires payment of
commitment fees ranging from 0.25% to 0.50% (also based on Apria's leverage
ratio) on the unused portion of the revolving credit facility.
Borrowings under the senior secured credit facilities are collateralized by
substantially all of the assets of Apria. The credit 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. The agreement also permits Apria to
expend a maximum of $100,000,000 per year on acquisitions. At December 31, 2001,
the company was in compliance with all of the financial covenants required by
the credit agreement.
The carrying value of the term loans and the revolver approximates fair
value because the underlying instruments are variable notes that reprice
frequently.
The company's previous credit agreement and the $200,000,000 9 1/2% senior
subordinated notes, both of which were scheduled to mature in late 2002, were
repaid in full concurrently with the closing of the new senior secured credit
agreement. In connection with the early retirement of its debt, Apria wrote-off
the unamortized balance of deferred financing fees attributable to the
subordinated notes and the previous credit agreement. Accordingly, Apria
recorded an extraordinary charge of $1,528,000, net of tax, in the quarter ended
September 30, 2001.
On December 31, 2001, borrowings under the revolving credit facility were
$7,800,000, outstanding letters of credit totaled $1,000,000 and credit
available under the revolving facility was $91,200,000.
Maturities of long-term debt, exclusive of capital lease obligations, are
as follows:
(IN THOUSANDS) DECEMBER 31, 2001
-----------------------------------------------------------
2002................................ $ 13,250
2003................................ 25,750
2004................................ 26,500
2005................................ 29,000
2006................................ 71,675
2007................................ 124,687
--------
$290,862
Total interest paid in 2001, 2000 and 1999 amounted to $27,298,000,
$37,119,000 and $37,923,000, respectively.
Hedging Activities: Apria is exposed to interest rate fluctuations on its
underlying variable rate long-term debt. Apria's policy for managing interest
rate risk is to evaluate and monitor all available relevant information,
including but not limited to, the structure of its interest-bearing assets and
liabilities, historical interest rate trends and interest rate forecasts
published by major financial institutions. The tools Apria may utilize to
moderate its exposure to fluctuations in the relevant interest rate indices
include, but are not limited to: (1) strategic determination of repricing
periods and related principal amounts, and (2) derivative financial instruments
such as interest rate swap agreements, caps or collars. Apria does not use
derivatives for trading or other speculative purposes.
During the fourth quarter of 2001, Apria entered into two interest rate
swap agreements with a total notional amount of $100,000,000 to fix its
LIBOR-based variable rate debt at 2.58% (before the applicable margin). The swap
agreements became effective October 30, 2001 and terminate on March 31, 2003.
The swaps are being accounted for as cash flow hedges under SFAS No. 133.
Accordingly, the difference between the interest received and interest paid is
reflected as an adjustment to interest expense. For the period between the
effective date of the swap agreements and December 31, 2001, Apria paid a net
settlement amount of $39,000. At December 31, 2001, the swap agreements are
reflected in the accompanying balance sheet in other assets at their fair value
of $44,000. Unrealized gains on the fair value of the swap agreements are
reflected, net of taxes, in other comprehensive income.
NOTE 6 -- STOCKHOLDERS' EQUITY
Treasury Stock: In mid-February 2002, Apria announced a plan to repurchase
up to $35,000,000 of outstanding common stock during the first two quarters of
2002. Depending on market conditions and other considerations, repurchases will
be made from time to time in open market transactions. From February 15, 2002
through March 11, 2002 Apria repurchased 999,800 shares for $21,670,000. In
2000, Apria repurchased 86,000 shares of its common stock for $958,000. All
repurchased common shares are being held in treasury.
Stock Compensation Plans: Apria has various stock-based compensation plans,
which are described below. Management applies the provisions of Accounting
Principles Board Opinion 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, Apria's net
income and per share amounts would have been adjusted to the pro forma amounts
indicated below.
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 1999
---------------------------------------------------------------------------
Net income:
As reported...................... $ 71,917 $ 57,006 $ 204,135
Pro forma........................ $ 61,761 $ 47,812 $ 196,971
Basic net income per share:
As reported...................... $ 1.33 $ 1.09 $ 3.93
Pro forma........................ $ 1.14 $ 0.91 $ 3.79
Diluted net income per share:
As reported...................... $ 1.29 $ 1.06 $ 3.81
Pro forma........................ $ 1.11 $ 0.89 $ 3.71
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 2001, 2000
and 1999: risk-free interest rates ranging from 3.83% to 5.03%, 5.99% to 6.72%
and 6.81% to 6.89%, respectively; dividend yield of 0% for all years; expected
lives of 4.25 years for 2001, 4.89 years for 2000 and 5.08 years for 1999; and
volatility of 62% for 2001, 65% for 2000 and 64% for 1999.
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 dates at which the options become exercisable range
from the date of grant to five years after the date of grant and expire not
later than 10 years after the date of grant. The weighted-average fair values of
fixed stock options granted during 2001, 2000 and 1999 were $14.06, $9.85 and
$10.79, respectively.
A summary of the status of Apria's fixed stock options as of December 31,
2001, 2000 and 1999, and the activity during the years ending on those dates is
presented below:
2001 2000 1999
-------------------------- ------------------------ --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year.......... 3,268,096 $15.87 2,619,083 $15.73 2,300,969 $14.73
Granted:
Exercise price equal to fair value...... 2,246,000 $26.65 1,136,000 $16.47 563,332 $18.06
Exercise price greater than fair value.. - $ - - $ - 50,000 $18.45
Exercised................................. (548,185) $15.45 (322,432) $15.87 (189,241) $10.24
Forfeited................................. (618,892) $23.99 (164,555) $17.69 (105,977) $17.59
--------- --------- ---------
Outstanding at end of year................ 4,347,019 $20.41 3,268,096 $15.87 2,619,083 $15.73
========= ========= =========
Exercisable at end of year................ 1,913,525 $16.02 1,868,339 $15.23 1,792,519 $15.14
========= ========= =========
The following table summarizes information about fixed stock options
outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ---------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------------------------
$ 6.69 - $12.19 625,979 6.23 $ 9.32 565,979 $ 9.02
$12.25 - $16.63 386,828 6.87 $14.64 322,826 $14.57
$16.94 - $16.94 658,631 7.94 $16.94 195,988 $16.94
$17.05 - $20.00 480,541 6.17 $18.04 382,692 $17.99
$20.50 - $26.45 686,840 6.53 $23.96 431,840 $23.73
$27.13 - $29.00 1,508,200 8.95 $27.14 14,200 $28.08
--------- ---------
$ 6.69 - $29.00 4,347,019 7.53 $20.41 1,913,525 $16.02
========= =========
Performance-Based Stock Options: Included in Apria's stock-based
compensation plans are provisions for the granting of performance-based stock
options. No such options have been granted since 1999. All options awarded under
the performance-based plans have vested and expire 10 years from the date of
grant. The weighted-average fair value of performance-based stock options
granted during 1999 was $7.38.
A summary of the status of Apria's performance-based stock options at
December 31, 2001, 2000 and 1999, and the activity during the years ending on
those dates is presented below:
2001 2000 1999
-------------------------- ------------------------ --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year.......... 2,384,402 $ 7.99 3,208,392 $ 7.77 3,410,862 $ 7.55
Granted:
Exercise price equal to fair value...... - $ - - $ - 124,500 $13.54
Exercise price greater than fair value.. - $ - - $ - 20,000 $ 6.50
Exercised................................. (988,192) $ 8.09 (776,484) $ 7.20 (80,470) $11.00
Forfeited................................. - $ - (47,506) $ 6.50 (266,500) $ 6.50
--------- --------- ---------
Outstanding at end of year................ 1,396,210 $ 7.91 2,384,402 $ 7.99 3,208,392 $ 7.77
========= ========= =========
Exercisable at end of year................ 1,396,210 $ 7.91 1,747,365 $ 8.36 871,142 $ 9.70
========= ========= =========
The following table summarizes information about performance-based stock
options outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ---------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------------------------
$ 4.69 - $ 6.50 685,126 6.61 $ 6.18 685,126 $ 6.18
$ 6.75 - $ 9.00 610,000 6.41 $ 8.75 610,000 $ 8.75
$10.75 - $18.56 101,084 5.03 $14.53 101,084 $14.53
--------- ---------
$ 4.69 - $18.56 1,396,210 6.41 $ 7.91 1,396,210 $ 7.91
========= =========
Approximately 9,328,000 shares of common stock are reserved for future
issuance upon exercise of stock options under all of Apria's active plans.
NOTE 7 -- INCOME TAXES
Significant components of Apria's deferred tax assets and liabilities are
as follows:
DECEMBER 31,
----------------------------
(IN THOUSANDS) 2001 2000
---------------------------------------------------------------------------
Deferred tax liabilities:
Tax over book depreciation.............. $ (4,122) $ (4,834)
Other, net.............................. (1,182) (878)
-------- --------
Total deferred tax liabilities....... (5,304) (5,712)
Deferred tax assets:
Allowance for doubtful accounts......... 12,028 14,636
Accruals................................ 9,309 9,251
Asset valuation reserves................ 2,181 2,766
Net operating loss carryforward,
limited by Section 382................ 35,623 70,115
AMT credit carryovers................... 9,766 8,052
Intangible assets....................... 4,823 8,126
Other, net.............................. 2,429 909
-------- --------
Total deferred tax assets............ 76,159 113,855
-------- --------
Net deferred tax assets.............. $ 70,855 $108,143
======== ========
At December 31, 2001, the company's net current deferred tax assets and net
long-term deferred tax assets are $33,017,000 and $37,838,000, respectively. The
difference in the company's deferred tax assets from 2000 to 2001 is primarily
attributable to utilization of current year net operating loss carryforwards.
At December 31, 2001, Apria had federal net operating loss carryforwards of
approximately $89,000,000, expiring in varying amounts in the years 2003 through
2018, and various state operating loss carryforwards that began to expire in
1997. Additionally, the company has an alternative minimum tax credit
carryforward of approximately $9,800,000. 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.
Income tax expense (benefit) consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------------------------
(IN THOUSANDS) 2001 2000 1999
---------------------------------------------------------------------------
Current:
Federal.................. $ 2,150 $ 1,622 $ 1,470
State.................... 1,200 5,099 6,145
-------- -------- --------
3,350 6,721 7,615
Deferred:
Federal.................. 39,049 30,116 (123,495)
State.................... 1,698 4,298 (15,074)
-------- -------- --------
40,747 34,414 (138,569)
-------- -------- --------
$ 44,097 $ 41,135 $(130,954)
======== ======== =========
During 2001, the exercise of stock options granted under Apria's various
stock option plans gave rise to $21,689,000 in 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 2001 and 2000 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.
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 expense (benefit) and an amount
calculated utilizing the federal statutory rate are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
(IN THOUSANDS) 2001 2000 1999
-----------------------------------------------------------------------------------------------------------
Income tax expense at statutory rate............... $ 41,140 $ 34,349 $ 25,613
Non-deductible amortization of goodwill............ 1,693 1,590 1,628
State and foreign taxes, net of federal
benefit and state loss carryforwards............. 2,959 3,942 4,073
Decrease in valuation allowance for
deferred items currently recognized.............. - - (158,992)
Other.............................................. (1,695) 1,254 (3,276)
-------- -------- --------
$ 44,097 $ 41,135 $(130,954)
======== ======== =========
Net income taxes paid in 2001, 2000 and 1999, amounted to $2,096,000,
$2,575,000 and $2,679,000, respectively.
NOTE 8 -- PER SHARE AMOUNTS
The following table sets forth the computation of basic and diluted per
share amounts:
YEAR ENDED DECEMBER 31,
-------------------------------------
(IN THOUSANDS) 2001 2000 1999
------------------------------------------------------------------------------------------------------------
Numerator:
Net income..................................................... $ 71,917 $ 57,006 $ 204,135
Numerator for basic and diluted per share
amounts - net income available to common stockholders........ $ 71,917 $ 57,006 $ 204,135
Denominator:
Denominator for basic per share
amounts - weighted-average shares........................... 53,971 52,375 51,940
Effect of dilutive securities:
Employee stock options...................................... 1,807 1,647 1,590
-------- -------- ---------
Total dilutive potential common shares...................... 1,807 1,647 1,590
-------- -------- ---------
Denominator for diluted per share amounts - adjusted
weighted-average shares.................................... 55,778 54,022 53,530
======== ======== =========
Basic net income per common share................................. $ 1.33 $ 1.09 $ 3.93
====== ====== ======
Diluted net income per common share............................... $ 1.29 $ 1.06 $ 3.81
====== ====== ======
Employee stock options excluded from the
computation of diluted per share amounts:
Shares for which exercise price exceeds
average market price of common stock...................... 1,853 249 1,789
====== ======== ======
Average exercise price per share that exceeds
average market price of common stock........................... $26.86 $25.52 $19.11
====== ====== ======
NOTE 9 -- LEASES
Apria operates principally in leased offices and warehouse facilities. In
addition, delivery vehicles and office equipment are leased under operating
leases. Lease terms are generally ten or fewer 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 2001, 2000 and 1999 amounted to $60,618,000, $56,243,000 and
$55,465,000, respectively.
In addition, during 2001 and 2000, Apria acquired information systems
totaling $1,837,000 and $3,054,000, respectively, under capital lease
arrangements with lease terms ranging from 24 to 30 months. No such arrangements
were effected in 1999. Amortization of the leased information systems amounted
to $811,000, $87,000 and $2,023,000 in 2001, 2000 and 1999, respectively.
The following amounts for assets under capital lease obligations are
included in property, equipment and improvements:
DECEMBER 31,
-------------------------
(IN THOUSANDS) 2001 2000
---------------------------------------------------------------------------
Information systems........................... $ 4,458 $ 3,054
Less accumulated depreciation................. (811) (87)
------- -------
$ 3,647 $ 2,967
======= =======
Future minimum payments, by year and in the aggregate, required under
capital lease obligations and noncancellable operating leases consist of the
following at December 31, 2001:
CAPITAL OPERATING
(IN THOUSANDS) LEASES LEASES
---------------------------------------------------------------------------
2002............................................ $ 2,324 $ 48,564
2003............................................ 642 39,383
2004............................................ - 31,941
2005............................................ - 23,612
2006............................................ - 16,512
Thereafter...................................... - 19,894
------- --------
2,966 $179,906
========
Less interest included in minimum
lease payments................................ (139)
-------
Present value of minimum lease payments......... 2,827
Less current portion............................ (2,205)
-------
$ 622
=======
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 $4,240,000, $3,792,000 and $3,405,000 in 2001, 2000 and
1999, 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 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 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. 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. The
consolidated amended class action 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 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 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.
Following a series of settlement discussions, the parties reached a
tentative settlement of both the consolidated federal and state class actions in
early 2002. Under the terms of the settlement, Apria has contributed $1 million
to a settlement pool, with the balance of the total settlement amount of $42
million coming from Apria's insurance carriers. Apria has also agreed to provide
various indemnities to certain current and former Apria officers and directors
who would be entitled to receive such indemnification under applicable law. The
Orange County Superior Court has required that final settlement documents be
presented to the Court on April 16, 2002. Apria cannot provide any assurances
that all of the agreements necessary to finalize the settlement, and obtain
final Court approval for such a settlement, will be obtained. However, in the
opinion of Apria's management, the ultimate disposition of these class actions
will not have a material adverse effect on Apria's results of operations or
financial condition.
Apria and its former Chief Executive Officer are also defendants in a class
action lawsuit, J.E.B. Capital Partners, LP v. Apria Healthcare Group Inc. and
Philip L. Carter, filed on August 27, 2001 in the U.S. District Court for the
Central District of California, Southern Division (Case No. SACV01-813 GLT).
Among other things, the operative complaint alleges that the defendants made
false and/or misleading public statements by not announcing until July 16, 2001
the amount of potential damages asserted by the U.S. Attorney's office in Los
Angeles and counsel for the plaintiffs in the qui tam actions referred to below.
Apria believes that it has meritorious defenses to the plaintiff's claims and it
intends to vigorously defend itself. In the opinion of Apria's management, the
ultimate disposition of this class action will not have a material adverse
effect on Apria's results of operations or financial condition.
As previously reported, since mid-1998 Apria has been the subject of
investigations conducted by several U.S. Attorneys' offices and the U.S.
Department of Health and Human Services. These investigations concern the
documentation supporting Apria's billing for services provided to 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 various document requests and subpoenas. A criminal investigation
conducted by the U.S. Attorney's office in Sacramento was closed in mid-1999
with no charges being filed. Potential claims resulting from an investigation by
the U.S. Attorney's office in San Diego were settled in mid-2001 in exchange for
a payment by Apria of $95,000.
Apria has been informed by the U.S. Attorney's office in Los Angeles that
the investigation being conducted by that office is the result of civil qui tam
litigation filed on behalf of the government against Apria. The complaints in
the litigation are under seal, however, and the government has not informed
Apria of either the identities of the plaintiffs, the court or courts where the
proceedings are pending, the date or dates instituted or the factual bases
alleged to underlie the proceedings. To date, the U.S. Attorney's office has not
informed Apria of any decision to intervene in the qui tam actions; however, it
could reach a decision with respect to intervention at any time.
On July 12, 2001, government representatives and counsel for the plaintiffs
in the qui tam actions asserted that, by a process of extrapolation from a
sample of 300 patient files to all of Apria's billings to the federal government
during the three-and-one-half year sample period, Apria could be liable to the
government under the False Claims Act for more than $9,000,000,000, consisting
of extrapolated overpayment liability, plus treble damages and penalties of up
to $10,000 for each allegedly false claim derived from the extrapolation.
Apria has acknowledged that there may be errors and omissions in supporting
documentation affecting a portion of its billings. However, it considers the
assertions and amounts described in the preceding paragraph to be unsupported
both legally and factually and believes that most of the alleged documentation
errors and omissions should not give rise to any liability, for overpayment
refunds or otherwise. Accordingly, Apria believes that the claims asserted are
unwarranted and that it is in a position to assert numerous meritorious
defenses. Nevertheless, Apria cannot provide any assurances as to the outcome of
these proceedings. Management cannot estimate the possible loss or range of loss
that may result from these proceedings and therefore has not recorded any
related accruals.
If a judge, jury or administrative agency were to determine that false
claims were submitted to federal healthcare programs or that there were
significant overpayments by the government, Apria could face civil and
administrative claims for refunds, 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.
Certain Concentrations: Approximately 66% of Apria's revenues are derived
from respiratory therapy services, a significant portion of which is reimbursed
under the federal Medicare program. The Balanced Budget Act of 1997
significantly reduced the Medicare reimbursement rates for home oxygen services
and respiratory drugs and included other provisions that have impacted or may
impact reimbursement rates in the future. Although the Medicare Balanced Budget
Refinement Act of 1999 and the Medicare, Medicaid and SCHIP Benefits Improvement
and Protection Act of 2000 mitigated or delayed some of the effects of the
original legislation, there are still significant issues outstanding that could
adversely impact future revenues and operating results.
Apria currently purchases approximately 40% of its patient service
equipment and supplies from three 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.
NOTE 12 -- SERVICE/PRODUCT LINE DATA
The following table sets forth a summary of net revenues and gross profit
by service line:
YEAR ENDED DECEMBER 31,
-----------------------------------------
(IN THOUSANDS) 2001 2000 1999
---------------------------------------------------------------------------------------
Net revenues:
Respiratory therapy...................... $ 742,805 $ 656,089 $ 598,901
Infusion therapy......................... 216,436 194,508 179,148
Home medical equipment/other............. 172,674 163,604 161,975
---------- ---------- -----------
Total net revenues............. $1,131,915 $1,014,201 $ 940,024
========== ========== ===========
Gross profit:
Respiratory therapy...................... $ 588,868 $ 521,867 $ 472,306
Infusion therapy......................... 126,778 115,352 106,162
Home medical equipment/other............. 108,622 98,040 93,642
---------- ---------- -----------
Total gross profit............. $ 824,268 $ 735,259 $ 672,110
========== ========== ===========
NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER
-------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH
----------------------------------------------------------------------------------------------------------
2001
Net revenues................................... $271,354 $283,480 $284,025 $293,056
Gross profit................................... $195,076 $207,905 $207,548 $213,739
Operating income............................... $ 35,696 $ 35,613 $ 35,681 $ 36,237
Income before extraordinary charge............. $ 17,076 $ 17,247 $ 19,133 $ 19,989
Net income..................................... $ 17,076 $ 17,247 $ 17,605 $ 19,989
Basic income per common share:
Income before extraordinary charge........... $ 0.32 $ 0.32 $ 0.35 $ 0.37
Extraordinary charge on debt refinancing,
net of taxes............................... $ - $ - $ 0.03 $ -
------ ------ ------ ------
Net income............................. $ 0.32 $ 0.32 $ 0.32 $ 0.37
Diluted income per common share:
Income before extraordinary charge........... $ 0.31 $ 0.31 $ 0.34 $ 0.36
Extraordinary charge on debt refinancing,
net of taxes............................... $ - $ - $ 0.03 $ -
------ ------ ------ ------
Net income............................. $ 0.31 $ 0.31 $ 0.31 $ 0.36
2000
Net revenues................................... $250,722 $252,570 $252,588 $258,321
Gross profit................................... $179,221 $183,189 $185,178 $187,671
Operating income............................... $ 32,637 $ 34,567 $ 35,695 $ 35,298
Net income..................................... $ 12,781 $ 14,071 $ 14,806 $ 15,348
Basic income per common share.................. $ 0.24 $ 0.27 $ 0.28 $ 0.29
Diluted income per common share................ $ 0.24 $ 0.26 $ 0.28 $ 0.28
Third Quarter - 2001: Net income for the third quarter of 2001 includes an
extraordinary charge of $1,528,000, net of tax, attributable to the write-off of
the unamortized balance of deferred financing fees related to the early
retirement of Apria's 9 1/2% senior subordinated notes and the previously
existing credit agreement. Both were scheduled to mature in late 2002, but were
repaid in full concurrently with the closing of the new senior credit agreement
in July 2001.
o o o o o o
APRIA HEALTHCARE GROUP INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
(IN THOUSANDS) OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts ............. $39,787 $37,110 $ - $44,824 $32,073
Reserve for inventory and patient
service equipment shortages .............. 7,790 - - 1,974 5,816
------- ------- ------- ------- -------
Totals ....................... $47,577 $37,110 $ - $46,798 $37,889
======= ======= ======= ======= =======
Year ended December 31, 2000
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts ............. $44,652 $32,166 $ - $37,031 $39,787
Reserve for inventory and patient
service equipment shortages .............. 10,359 - - 2,569 7,790
------- ------- ------- ------- -------
Totals ....................... $55,011 $32,166 $ - $39,600 $47,577
======= ======= ======= ======= =======
Year ended December 31, 1999
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts ............. $35,564 $34,314 $ - $25,226 $44,652
Reserve for inventory and patient
service equipment shortages .............. 15,797 3,968 - 9,406 10,359
------- ------- ------- ------- -------
Totals ....................... $51,361 $38,282 $ - $34,632 $55,011
======= ======= ======= ======= =======
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: April 1, 2002
APRIA HEALTHCARE GROUP INC.
By: /s/ LAWRENCE M. HIGBY
--------------------------------------
Chief Executive Officer and President
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/ LAWRENCE M. HIGBY April 1, 2002
- -----------------------
Lawrence M. Higby Director, Chief Executive Officer
and President
(Principal Executive Officer)
/s/ JAMES E. BAKER
- -----------------------
James E. Baker Chief Financial Officer April 1, 2002
(Principal Financial and
Accounting Officer)
/s/ RALPH V. WHITWORTH
- -----------------------
Ralph V. Whitworth Director, Chairman of the Board April 1, 2002
/s/ DAVID H. BATCHELDER
- -----------------------
David H. Batchelder Director April 1, 2002
/s/ DAVID L. GOLDSMITH
- -----------------------
David L. Goldsmith Director April 1, 2002
/s/ RICHARD H. KOPPES
- -----------------------
Richard H. Koppes Director April 1, 2002
/s/ PHILIP R. LOCHNER
- -----------------------
Philip R. Lochner Director April 1, 2002
/s/ BEVERLY B. THOMAS
- -----------------------
Beverly B. Thomas Director April 1, 2002
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION REFERENCE
- ----------- ----------- ---------
3.1 Restated Certificate of Incorporation of Registrant. (b)
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".
3.3 Amended and Restated Bylaws of Registrant, as amended on May 5, 1998. (c)
3.4 Certificate of Amendment of Certificate of Incorporation of Apria Healthcare Group Inc. (d)
3.5 Amended and Restated Bylaws of Registrant, as amended on October 29, 1999. (e)
4.1 Specimen Stock Certificate of the Registrant.
4.2 Certificate of Designation of the Registrant. (b)
10.1 Schedule of Registration Procedures and Related Matters. (a)
10.2 Executive Severance Agreement effective June 28, 1997 between Registrant and Michael J. Keenan.
10.3 Amended and Restated Executive Severance Agreement dated February 26, 1999, between Registrant and Michael
R. Dobbs, as revised in December 2000. (f)
10.4 Amended and Restated Employment Agreement effective January 1, 2000, between Registrant and Lawrence M.
Higby. (f)
10.5 Executive Severance Agreement effective March 28, 2000 between Registrant and George J. Suda.
10.6 Building Lease, dated December 6, 2000 and commencing on December 1, 2001, between MSGW California I, LLC
and Apria Healthcare, Inc. for two buildings within the MSGW/Pacific Commercentre Business Park, Lake
Forest, California. (g)
10.7 Amendment No. 1 to the 1998 Nonqualified Stock Incentive Plan, dated January 31, 2001. (f)
10.8 Credit Agreement dated July 20, 2001, among Registrant and certain of its subsidiaries, Bank of America
National Association and other financial institutions party to the Credit Agreement. (g)
10.9 Underwriting Agreement dated August 9, 2001, between Registrant and Relational Investors, LLC. (g)
10.10 Resignation and General Release Agreement effective February 12, 2002, between Registrant and Philip L.
Carter.
21.1 List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
REFERENCES - DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
(a) Incorporated by reference to Registration Statement on Form S-4 (Registration No. 33-69094), as filed on
September 17, 1993.
(b) Incorporated by reference to Registration Statement on Form S-4 (Registration No. 33-90658), and its
appendices, as filed on March 27, 1995.
(c) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30, 1998, as filed on August 14, 1998.
(d) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30, 1999, as filed on August 12, 1999.
(e) Incorporated by reference to Quarterly Report on Form 10-Q dated September 30, 1999, as filed on November
12, 1999.
(f) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2000.
(g) Incorporated by reference to Quarterly Report on Form 10-Q dated September 30, 2001, as filed on November
14, 2001.
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.