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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 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 Number)
26220 ENTERPRISE COURT, LAKE FOREST, CA 92630
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (949) 639-2000
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
There were 54,882,530 shares of common stock, $.001 par value, outstanding at
November 7, 2002.
APRIA HEALTHCARE GROUP INC.
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2002
PART I. FINANCIAL INFORMATION
- -----------------------------------
Item 1. Financial Statements (unaudited)
- Condensed Consolidated Balance Sheets
- Condensed Consolidated Income Statements
- Condensed Consolidated Statements of Cash Flows
- Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
- -------------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
- ----------
CERTIFICATIONS
- --------------
Chief Executive Officer
Chief Financial Officer
EXHIBITS
- --------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
SEPTEMBER 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001
- ---------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................................................... $ 12,732 $ 9,359
Accounts receivable, less allowance for doubtful accounts of $33,764
and $32,073 at September 30, 2002 and December 31, 2001, respectively ........ 176,656 162,092
Inventories, net ............................................................... 22,823 25,084
Deferred income taxes .......................................................... 28,476 33,017
Prepaid expenses and other current assets ...................................... 13,407 10,271
--------- ---------
TOTAL CURRENT ASSETS ................................................... 254,094 239,823
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $367,394
and $342,010 at September 30, 2002 and December 31, 2001, respectively ......... 181,304 165,471
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ........................................ 54,002 47,312
DEFERRED INCOME TAXES ............................................................ 2,198 37,838
GOODWILL ......................................................................... 239,365 193,458
INTANGIBLE ASSETS, NET ........................................................... 6,489 4,863
OTHER ASSETS ..................................................................... 7,027 7,017
--------- ---------
$ 744,479 $ 695,782
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................................... $ 55,513 $ 71,198
Accrued payroll and related taxes and benefits ................................. 41,361 33,907
Accrued insurance .............................................................. 10,280 10,376
Income taxes payable ........................................................... 3,638 9,060
Other accrued liabilities ...................................................... 36,857 34,754
Current portion of long-term debt .............................................. 28,093 15,455
--------- ---------
TOTAL CURRENT LIABILITIES .............................................. 175,742 174,750
LONG-TERM DEBT, net of current portion ........................................... 257,468 278,234
COMMITMENTS AND CONTINGENCIES (Note I)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value: 10,000,000 shares authorized;
none issued .................................................................. - -
Common stock, $.001 par value: 150,000,000 shares authorized;
56,296,149 and 54,690,267 shares issued at September 30, 2002 and
December 31, 2001, respectively; 54,758,849 and 54,604,167
outstanding at September 30, 2002 and December 31, 2001, respectively ........ 56 55
Additional paid-in capital ..................................................... 392,928 368,231
Treasury stock, at cost; 1,537,300 and 86,100 shares at September 30, 2002
and December 31, 2001, respectively .......................................... (32,485) (961)
Accumulated deficit ............................................................ (48,936) (124,554)
Accumulated other comprehensive (loss) income .................................. (294) 27
--------- ---------
311,269 242,798
--------- ---------
$ 744,479 $ 695,782
========= =========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Net revenues ................................................. $ 312,046 $ 284,025 $ 923,816 $ 838,859
Costs and expenses:
Cost of net revenues:
Product and supply costs ............................... 56,004 50,300 167,917 152,002
Patient service equipment depreciation ................. 24,826 23,127 72,668 66,568
Nursing services ....................................... 221 270 720 930
Other .................................................. 3,182 2,780 9,530 8,830
--------- --------- --------- ---------
TOTAL COST OF NET REVENUES ......................... 84,233 76,477 250,835 228,330
Selling, distribution and administrative .................. 169,797 158,750 503,818 465,241
Provision for doubtful accounts ........................... 11,476 9,873 34,534 29,092
Amortization of goodwill and intangible assets ............ 667 3,244 2,003 9,206
--------- --------- --------- ---------
TOTAL COSTS AND EXPENSES ........................... 266,173 248,344 791,190 731,869
--------- --------- --------- ---------
OPERATING INCOME ................................... 45,873 35,681 132,626 106,990
Interest expense, net ........................................ 3,528 5,093 11,637 21,528
--------- --------- --------- ---------
INCOME BEFORE TAXES AND
EXTRAORDINARY CHARGE ............................... 42,345 30,588 120,989 85,462
Income tax expense ........................................... 15,880 11,455 45,371 32,006
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY CHARGE ................. 26,465 19,133 75,618 53,456
Extraordinary charge on debt refinancing, net of taxes ....... - 1,528 - 1,528
--------- --------- --------- ---------
NET INCOME ......................................... $ 26,465 $ 17,605 $ 75,618 $ 51,928
========= ========= ========= =========
Basic net income per common share:
Income before extraordinary charge ........................ $ 0.48 $ 0.35 $ 1.39 $ 0.99
Extraordinary charge on debt refinancing, net of taxes .... - (0.03) - (0.03)
--------- --------- --------- ---------
Net income ......................................... $ 0.48 $ 0.32 $ 1.39 $ 0.96
========= ========= ========= =========
Diluted net income per common share:
Income before extraordinary charge ........................ $ 0.48 $ 0.34 $ 1.36 $ 0.96
Extraordinary charge on debt refinancing, net of taxes .... - (0.03) - (0.03)
--------- --------- --------- ---------
Net income ......................................... $ 0.48 $ 0.31 $ 1.36 $ 0.93
========= ========= ========= =========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
(DOLLARS IN THOUSANDS) 2002 2001
- -----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income ................................................................... $ 75,618 $ 51,928
Items included in net income not requiring cash:
Extraordinary charge on debt refinancing .................................. - 2,442
Provision for doubtful accounts ........................................... 34,534 29,092
Depreciation and amortization ............................................. 87,569 87,676
Amortization of deferred debt issuance costs .............................. 967 1,552
Deferred income taxes and other ........................................... 41,130 28,415
Changes in operating assets and liabilities, exclusive of effects of
acquisitions:
Accounts receivable ....................................................... (49,407) (44,773)
Inventories, net .......................................................... 3,232 729
Prepaid expenses and other assets ......................................... (3,694) (5,173)
Accounts payable, exclusive of outstanding checks ......................... (8,829) 594
Accrued payroll and related taxes and benefits ............................ 7,454 9,828
Income taxes payable ...................................................... 3,572 1,070
Accrued expenses .......................................................... (3,289) 3,281
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................ 188,857 166,661
INVESTING ACTIVITIES
Purchases of patient service equipment and property,
equipment and improvements, exclusive of effects of acquisitions .......... (88,857) (99,775)
Proceeds from disposition of assets .......................................... 239 235
Cash paid for acquisitions, including payments of deferred consideration ..... (59,566) (49,745)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................................ (148,184) (149,285)
FINANCING ACTIVITIES
Proceeds from revolving credit facilities .................................... 141,000 72,300
Payments on revolving credit facilities ...................................... (146,100) (56,300)
Proceeds from term loans ..................................................... - 300,000
Payments on term loans ....................................................... (6,812) (140,000)
Payment on redemption of senior subordinated notes ........................... - (200,000)
Payments on other long-term debt ............................................. (2,239) (1,653)
Outstanding checks included in accounts payable .............................. (6,856) (561)
Capitalized debt issuance costs ......................................... (666) (5,597)
Repurchases of common stock .................................................. (31,524) -
Issuances of common stock .................................................... 15,897 15,123
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES ................................ (37,300) (16,688)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...................................... 3,373 688
Cash and cash equivalents at beginning of period ............................... 9,359 16,864
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 12,732 $ 17,552
========= =========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Apria Healthcare Group Inc. ("Apria" or "the company") and its
subsidiaries. Intercompany transactions and accounts have been eliminated.
In the opinion of management, all adjustments, consisting of normal recurring
accruals necessary for a fair presentation of the results of operations for the
interim periods presented, have been reflected herein. The unaudited results of
operations for interim periods are not necessarily indicative of the results to
be expected for the entire year. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended
December 31, 2001, included in the company's 2001 Form 10-K.
NOTE B - RECLASSIFICATIONS, ACCOUNTING ESTIMATES AND RECENT ACCOUNTING
PRONOUNCEMENTS
Reclassifications: Certain amounts from prior periods have been reclassified to
conform to the current period presentation.
Use of Accounting Estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates.
Recent Accounting Pronouncements: Effective January 1, 2002, Apria adopted
Statement of Financial Accounting Standards ("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 effect of
adoption of SFAS No. 142 on the consolidated financial statements is shown in
Note E - Goodwill and Intangible Assets.
Effective January 1, 2002, Apria was required to adopt SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." This statement supercedes
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and amends other guidance related to the
accounting and reporting 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 did not have a
material effect on Apria's consolidated financial statements.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" was issued. SFAS
No. 145 updates and clarifies existing accounting pronouncements related to
gains and losses from the extinguishment of debt and requires that certain lease
modifications be accounted for in the same manner as sale-leaseback
transactions. Apria will be required to adopt the provisions of SFAS No. 145 for
its fiscal year beginning January 1, 2003. Adoption of this statement is not
expected to have a material effect on the company's consolidated financial
statements.
In July 2002, SFAS No. 146, "Accounting for Costs Associated With Exit or
Disposal Activities" was issued. This statement addresses the financial
accounting and reporting for costs associated with exit or disposal activities
and requires that a liability for such costs be recognized when the liability is
incurred rather than at the date of an entity's commitment to an exit plan. SFAS
No. 146 also establishes that the liability should be measured and recorded at
fair value. Apria will be required to adopt the provisions of SFAS No. 146 for
exit and disposal activities that are initiated after December 31, 2002.
Adoption of this statement is not expected to have a material effect on the
company's consolidated financial statements.
NOTE C - REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
Net revenues are recognized on the date services and related products are
provided to patients and are recorded at amounts expected to be received under
reimbursement arrangements with third-party payors, including private insurers,
prepaid health plans, Medicare and Medicaid. Approximately 33% of the company's
revenues are reimbursed under arrangements with Medicare and Medicaid. No other
third-party payor group represents 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 represent less than 10% of total net revenues.
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 various 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. Management also performs focused reviews of certain large
and/or problematic payors. Because of continuing changes in the healthcare
industry and third-party reimbursement, management's estimates may change from
time to time, which could have a material 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.
NOTE D - BUSINESS COMBINATIONS
Apria periodically makes acquisitions of complementary businesses in specific
geographic markets. The results of operations of the acquired companies are
included in the accompanying consolidated income statements from the date of
acquisition. During the nine-month period ended September 30, 2002, cash paid
for acquisitions was $59,566,000, which included amounts deferred from prior
years of $2,523,000. At September 30, 2002, outstanding deferred consideration
totaled $8,103,000 and is included on the balance sheet in other accrued
liabilities.
For the 13 transactions that were completed during the nine-month period ended
September 30, 2002, $46,844,000 was allocated to goodwill, $3,172,000 to other
intangible assets and $12,529,000 to patient service equipment. This allocation
is inclusive of amounts not yet paid.
The following supplemental unaudited pro forma information presents the combined
operating results of Apria and the businesses that were acquired by Apria during
the nine-month period ended September 30, 2002, 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 at the beginning of the
periods presented or that may be achieved in the future.
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
(IN THOUSANDS) 2002 2001
--------------------------------------------------------------------------
Net revenues.................................. $ 953,472 $ 887,387
Income before extraordinary charge............ $ 75,551 $ 49,141
Net income.................................... $ 75,551 $ 47,613
Diluted income per common share:
Income before extraordinary charge........... $ 1.36 $ 0.88
Extraordinary charge on debt refinancing,
net of taxes............................... - (0.03)
------- -------
Net income.............................. $ 1.36 $ 0.85
======= =======
NOTE E - GOODWILL AND INTANGIBLE ASSETS
In July 2001, Apria adopted SFAS No. 141, "Business Combinations", which
requires that the purchase method of accounting be applied to all business
combinations completed after June 30, 2001 and which also addresses the criteria
for initial recognition of intangible assets and goodwill. Effective January 1,
2002, the company 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
and 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. If the carrying value of goodwill or an
intangible asset exceeds its fair value, an impairment loss shall be recognized.
In the year of adoption, SFAS No. 142 requires that a transitional goodwill
impairment test be performed and that the results be measured as of the
beginning of the year. The test is conducted at a "reporting unit" level and
compares each reporting unit's fair value to its carrying value. The company has
determined that its geographic regions are reporting units under SFAS No. 142.
The measurement of fair value for each region was based on an evaluation of
future discounted cash flows and was further tested using a multiple of earnings
approach. The transitional test, which has been completed, indicated that no
impairment exists and, accordingly, no loss was recognized.
In conjunction with the transitional impairment test and based on the criteria
established in SFAS No. 141, management reviewed the useful lives and the
amounts previously recorded for intangible assets and determined that no
adjustments were necessary.
The following table sets forth the reconciliation of net income and earnings per
share as adjusted for the non-amortization provisions of SFAS No. 142:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------
Reported net income .......................... $ 26,465 $ 17,605 $ 75,618 $ 51,928
Add: goodwill amortization, net of taxes .... - 1,626 - 4,566
-------- -------- -------- --------
Adjusted net income .......................... $ 26,465 $ 19,231 $ 75,618 $ 56,494
======== ======== ======== ========
BASIC INCOME PER COMMON SHARE:
Reported net income ..................... $ 0.48 $ 0.32 $ 1.39 $ 0.96
Goodwill amortization, net of taxes ..... - 0.03 - 0.09
-------- -------- -------- --------
Adjusted net income ..................... $ 0.48 $ 0.35 $ 1.39 $ 1.05
======== ======== ======== ========
DILUTED INCOME PER COMMON SHARE:
Reported net income ..................... $ 0.48 $ 0.31 $ 1.36 $ 0.93
Goodwill amortization, net of taxes ..... - 0.03 - 0.08
-------- -------- -------- --------
Adjusted net income ..................... $ 0.48 $ 0.34 $ 1.36 $ 1.01
======== ======== ======== ========
For the nine months ended September 30, 2002, the net change in the carrying
amount of goodwill of $45,907,000 is the result of business combinations. All of
the goodwill recorded in conjunction with business combinations completed after
June 30, 2001 is expected to be deductible for tax purposes.
Intangible assets consist of the following:
(DOLLARS IN THOUSANDS) SEPTEMBER 30, 2002 DECEMBER 31, 2001
- -----------------------------------------------------------------------------------------------------------------------------
AVERAGE GROSS GROSS
LIFE IN CARRYING ACCUMULATED NET BOOK CARRYING ACCUMULATED NET BOOK
YEARS AMOUNT AMORTIZATION VALUE AMOUNT AMORTIZATION VALUE
----- ------ ------------ ----- ------ ------------ -----
Intangible assets subject to
amortization:
Covenants not to compete....... 4.5 $ 9,595 $ (4,320) $ 5,275 $16,181 $(11,318) $ 4,863
Tradename...................... 2.0 1,324 (110) 1,214 - - -
---- ------- -------- ------- ------- -------- -------
3.9 $10,919 $ (4,430) $ 6,489 $16,181 $(11,318) $ 4,863
==== ======= ======== ======= ======= ======== =======
Amortization expense amounts to $2,003,000 for the nine months ended September
30, 2002. Estimated amortization expense for each of the fiscal years ending
December 31, is presented below:
FOR THE YEAR ENDING
(DOLLARS IN THOUSANDS) DECEMBER 31,
------------------------------------------------------------------
2002........................................... $ 2,693
2003........................................... 2,566
2004........................................... 1,869
2005........................................... 731
2006........................................... 488
2007........................................... 145
NOTE F - LONG-TERM DEBT
Apria's credit agreement with Bank of America and a syndicate of lenders was
amended and restated effective June 7, 2002. The amendment extended the maturity
date, reduced the applicable interest rate margins and modified the repayment
schedule for the company's $175,000,000 six-year term loan. The term loan, which
was amended to mature in seven years, had a balance of $173,250,000 at September
30, 2002. It is now repayable in 20 remaining consecutive quarterly installments
of $437,500 each, followed by three consecutive quarterly installments of
$41,125,000 each, and a final payment of $41,125,000 due on July 20, 2008.
Interest rates on outstanding balances under the credit agreement are determined
by adding a margin to the Eurodollar or base rate existing at each interest
calculation date. Applicable margins for the seven-year term loan were lowered
and are currently fixed at 2.0% for Eurodollar loans and at 1.0% for base rate
loans.
At September 30, 2002, borrowings under the revolving credit facility were
$2,700,000, outstanding letters of credit totaled $5,155,000, credit available
under the revolving facility was $92,145,000, and Apria was in compliance with
all of the financial covenants required by the credit agreement.
Apria utilizes interest rate swap agreements to moderate its exposure to
interest rate fluctuations on its underlying variable rate long-term debt. Apria
does not use derivative financial instruments for trading or other speculative
purposes. At September 30, 2002, Apria had two interest rate swap agreements
with a total notional amount of $100,000,000 that fix its LIBOR-based variable
rate debt at 2.58% (before the applicable margin). The swap agreements, which
terminate March 2003, 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 nine months ended
September 30, 2002, Apria paid a net settlement amount of $478,000. The swap
agreements are recorded as a liability at their fair value of $469,000 and
unrealized losses of $321,000 on their fair value are reflected, net of taxes,
in other comprehensive loss. Apria's exposure to credit loss under the swap
agreements is limited to the interest rate spread in the event of counterparty
non-performance.
NOTE G - STOCKHOLDERS' EQUITY
For the nine months ended September 30, 2002, changes to stockholders' equity
are comprised of the following amounts:
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------
Net income.................................................. $ 75,618
Proceeds from the exercise of stock options................. 15,897
Tax benefit related to the exercise of stock options........ 8,801
Other comprehensive loss, net of taxes...................... (321)
Repurchased common shares held in treasury.................. (31,524)
---------
$ 68,471
=========
For the nine months ended September 30, 2002, net income and comprehensive
income differed by $321,000 which is attributable to unrealized losses on two
interest rate swap agreements. There was no difference between net income and
comprehensive income for the same period of the previous year.
Pursuant to its credit agreement, Apria can repurchase up to $35,000,000 worth
of its outstanding common stock during this calendar year. The company
repurchased 1,451,200 shares for $31,524,000, during the nine-month period ended
September 30, 2002. Subsequently, the company purchased 145,800 shares for
$3,476,000, thereby reaching its maximum for the year.
NOTE H - INCOME TAXES
Income taxes for the nine months ended September 30, 2002 and 2001 have been
provided at the effective tax rates expected to be applicable for the respective
year.
At December 31, 2001, Apria had federal net operating loss carryforwards of
approximately $98,000,000, expiring in varying amounts in the years 2003 through
2018, and various state net operating loss carryforwards that began to expire in
1997. Additionally, the company has an alternative minimum tax credit
carryforward of approximately $7,600,000. 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. In 2002, for federal tax purposes, the company expects to utilize
its entire net operating loss carryforward amount not subject to limitation.
NOTE I - COMMITMENTS AND CONTINGENCIES
Apria and certain of its present and former officers and/or directors were
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). The complaint alleged,
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. Two similar class actions were filed during July 1998 in the
Superior Court for the State of California for the County of Orange, which were
consolidated by a court order dated October 22, 1998 (Master Case No. 797060).
Following a series of settlement discussions, the parties reached an agreement
to settle both the federal and state class actions for $42 million. Under the
terms of the settlement, Apria has paid $1 million and its insurance carriers
have paid $41 million. Pursuant to the settlement: (1) the State Court class
actions were concluded on August 20, 2002 by entry of an Order and Final
Judgment; and (2) the District Court class action was dismissed on August 21,
2002 by entry of an Order dismissing the action with prejudice.
On August 27, 2001, a class action lawsuit was filed against Apria and its
former Chief Executive Officer in the U.S. District Court for the Central
District of California, Southern Division (Case No. SACV01-5160 PA), entitled
J.E.B. Capital Partners, LP v. Apria Healthcare Group Inc. and Philip L. Carter.
Among other things, the complaint alleged 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. The
defendants' motion to dismiss the complaint was granted with leave to amend on
June 14, 2002. Plaintiff elected not to amend its complaint, but filed a notice
of appeal on July 15, 2002. The appeal was dismissed as premature. On October
10, 2002, the District Court entered a judgment in favor of the defendants and
dismissed the action with prejudice. On November 8, 2002, the plaintiff filed an
appeal of the Order of dismissal. 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.
NOTE J - PER SHARE AMOUNTS
The following table sets forth the computation of basic and diluted per share
amounts:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------
NUMERATOR:
Net income ............................................. $26,465 $17,605 $75,618 $51,928
Numerator for basic and diluted per share amounts -
income available to common stockholders .............. $26,465 $17,605 $75,618 $51,928
DENOMINATOR:
Denominator for basic per share
amounts - weighted average shares .................... 54,745 54,231 54,490 53,790
Effect of dilutive securities:
Employee stock options -
dilutive potential common shares ................... 623 1,737 979 1,943
------- ------- ------- -------
Denominator for diluted per share amounts -
adjusted weighted average shares ..................... 55,368 55,968 55,469 55,733
======= ======= ======= =======
Basic net income per common share ........................ $ 0.48 $ 0.32 $ 1.39 $ 0.96
======= ======= ======= =======
Diluted net income per common share ...................... $ 0.48 $ 0.31 $ 1.36 $ 0.93
======= ======= ======= =======
Employee stock options excluded from the computation
of diluted per share amounts:
Shares for which exercise price exceeds
average market price of common stock ................. 2,595 1,827 2,560 1,827
Average exercise price per share that exceeds
average market price of common stock ................... $ 25.29 $ 27.08 $ 25.32 $ 27.08
======= ======= ======= =======
================================================================================
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995: Apria's business is subject to a
number of risks which are partly or entirely beyond the company's control. The
company has described certain of those risks in its Form 10-K for the fiscal
year ended December 31, 2001, as filed with the Securities and Exchange
Commission on April 1, 2002. This report may be used for purposes of the Private
Securities Litigation Reform Act of 1995 as a readily available document
containing meaningful cautionary statements identifying 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. Those risks
include:
- trends and developments affecting the collectibility of accounts
receivable;
- the effectiveness of the company's operating systems and controls;
- healthcare reform and the effect of federal and state healthcare
regulations;
- government legislative and budget developments which could affect
reimbursement levels for products and services provided by Apria;
- the ongoing government investigations regarding patients covered by
Medicare and other federal programs;
- pricing pressures from large payors; and
- the successful implementation of the company's acquisition strategy and
integration of acquired businesses.
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 the increased pressure to reduce
government expenditures for other purposes, including governmentally-funded
programs such as Medicare.
================================================================================
ITEM 2. 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 405 branch locations.
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.
These policies are presented in detail in Apria's 2001 Form 10-K - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
SEGMENT REPORTING. Apria's branch locations are organized into geographic
regions. Each region consists of a number of branches and a regional office that
provides key support services, such as billing, purchasing, patient service
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 Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
RECENT ACCOUNTING PRONOUNCEMENTS. 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. Upon adoption, a transitional goodwill impairment test must be
performed. The test is conducted at the "reporting unit" level and compares each
reporting unit's fair value to its carrying value. Apria's management has
determined that its geographic regions are reporting units under SFAS No. 142.
Apria's transitional goodwill impairment test utilized a discounted cash flow
approach in determining fair value, which was further tested by a multiple of
earnings approach. The transitional test has been completed; no goodwill
impairment is indicated at any of Apria's reporting units. 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 did not have a
material effect on Apria's financial statements.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued.
SFAS No. 145 updates and clarifies existing accounting pronouncements related to
gains and losses from the extinguishment of debt and requires that certain lease
modifications be accounted for in the same manner as sale-leaseback
transactions. Apria will be required to adopt the provisions of SFAS No. 145 for
its fiscal year beginning January 1, 2003. Adoption of this statement is not
expected to have a material effect on the company's consolidated financial
statements.
In July 2002, SFAS No. 146, "Accounting for Costs Associated With Exit or
Disposal Activities" was issued. This statement addresses the financial
accounting and reporting for costs associated with exit or disposal activities
and requires that a liability for such costs be recognized when the liability is
incurred rather than at the date of an entity's commitment to an exit plan. SFAS
No. 146 also establishes that the liability should be measured and recorded at
fair value. Apria will be required to adopt the provisions of SFAS No. 146 for
exit and disposal activities that are initiated after December 31, 2002.
Adoption of this statement is not expected to have a material effect on the
company's consolidated financial statements.
RESULTS OF OPERATIONS
NET REVENUES. Net revenues were $312.0 million and $923.8 million in the
third quarter and first nine months of 2002, respectively, compared to $284.0
million and $838.9 million for the corresponding periods in 2001. This
represents increases of 9.9% and 10.1% for the three and nine month periods,
respectively. The growth is 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 generally results in 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's management
estimates that approximately one-third of the revenue growth between the nine
month periods presented was derived from acquisitions.
The following table sets forth a summary of net revenues by service line:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- -------------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- -----------------
(DOLLARS IN THOUSANDS) $ % $ % $ % $ %
- ----------------------------------------------------------------------------------------------------------------------
Respiratory therapy......... $205,319 65.8% $186,069 65.5% $613,814 66.4% $549,480 65.5%
Infusion therapy............ 58,785 18.8% 54,570 19.2% 170,204 18.5% 161,829 19.2%
HME/other................... 47,942 15.4% 43,386 15.3% 139,798 15.1% 127,550 15.3%
-------- ------ -------- ------ -------- ------ -------- ------
Total net revenues $312,046 100.0% $284,025 100.0% $923,816 100.0% $838,859 100.0%
======== ====== ======== ====== ======== ====== ======== ======
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 by 10.3% and 11.7% in the third
quarter and first nine months of 2002, respectively, as compared to the same
periods in 2001. Apria's focus on acquiring respiratory therapy businesses
contributed to this growth.
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 by 7.7% and 5.2% in the third
quarter and first nine months of 2002, respectively, when compared to the
corresponding periods in 2001. The nine month 2002 period reflects the effect of
a 12.8% increase in enteral nutrition attributable to a renewed focus on this
product offering, that resulted from a program initiated in mid-2001 that
centralized the enteral intake and distribution functions at the regional level.
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 10.5% and 9.6% in
the third quarter and first nine months of 2002, respectively, as compared to
the same periods in 2001. The increase between periods is partially due to the
fact that the full Medicare cost of living adjustment (COLA) for certain durable
medical equipment products and services was restored in 2001. The COLA had been
frozen since 1998 pursuant to the Balanced Budget Act of 1997. Substantially all
of this adjustment was provided through a transitional allowance applied to
amounts reimbursed during the second half of the year. The 2002 reimbursement
amounts incorporate the 2001 adjustments as if they had been applied evenly
throughout the year. Medicare reimbursement amounts for 2002 include only
minimal increases which are significantly below the cost of living increase.
Revenue Recognition and Certain Concentrations. 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, which could have an impact on the
consolidated financial statements.
Approximately 33% of Apria's revenues are reimbursed under arrangements
with Medicare and Medicaid. No other third-party payor represents 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 represent less than 10% of total net
revenues for all periods presented.
Medicare and Medicaid Reimbursement. 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.
In June 2002, the U.S. House of Representatives passed the Medicare
Modernization and Prescription Drug Act of 2002. The bill provides for a
nationwide competitive bidding program for an as-yet-undertermined list of
durable medical equipment ("DME") items covered by Medicare Part B. A Senate
bill providing for a version of competitive bidding different than what was
introduced in the House was proposed by Senators Baucus and Grassley but not
introduced for Senate consideration prior to recess for the November 2002
elections. It is unclear whether competitive bidding for DME or other issues
that may have an impact on Apria will be passed by the Senate in a "lame duck"
session scheduled to convene November 22, 2002.
GROSS PROFIT. Gross margins for the third quarter of 2002 and the first
nine months of 2002 were 73.0% and 72.8%, respectively, compared to 73.1% and
72.8% for the corresponding periods in the prior year. These margins reflect the
general period-to-period consistency of product costs and reimbursement levels
of products and services.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts was
3.7% of net revenues for both the third quarter of 2002 and for the first nine
months of 2002 compared to 3.5% for both corresponding periods in 2001. The
provision for doubtful accounts results from management's estimate of the net
realizable value of accounts receivable after considering actual write-offs of
specific receivables. The increase in the provision between the years can be
largely attributed to the impact of acquisitions; specifically two large fourth
quarter acquisitions and those acquisitions effected to date in 2002. Such
acquisitions result in the integration of a significant amount of patient
information into Apria's information systems and document files which can delay
the billing and collection process.
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. Certain expenses, such as facility lease and fuel
costs, are also very sensitive to market-driven price fluctuations. 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 54.4%
and 54.5% for the third quarter and first nine months of 2002, respectively,
versus 55.9% and 55.5% for the corresponding periods in 2001. In 2002, the first
quarter included $2.6 million in contract termination costs related to the
departure of the former Chief Executive Officer and the second quarter included
approximately $2.2 million in merit compensation increases. Despite these
additional expenses, management was able to leverage its expense structure
against the revenue growth.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS. Amortization of intangible
assets for the third quarter and the nine months ended September 30, 2002 were
$667,000 and $2.0 million, respectively, compared to $3.2 million and $9.2
million for the same periods last year (which included goodwill amortization).
Upon adoption of SFAS No. 142 on January 1, 2002, goodwill amortization ceased.
Amortization of goodwill was $2.6 million for the third quarter and $7.3 million
for the first nine months of 2001. The effect of adding this amount back as
though SFAS No. 142 were adopted at the beginning of the prior year would have
resulted in net income increases of $1.6 million and $4.6 million and increases
in diluted income per common share of $0.03 and $0.08 for the third quarter and
first nine months of 2001, respectively. See "Recent Accounting Pronouncements",
"Business Combinations" and Note C to the Condensed Consolidated Financial
Statements.
INTEREST EXPENSE. Interest expense was $3.5 million for the third quarter
of 2002, down from $5.1 million in the third quarter of 2001. For the nine
months ended September 30, 2002 interest expense was $11.6 million compared to
$21.5 million in the same period in 2001. The significant decrease between the
periods is due to several factors. From September 30, 2001 to September 30,
2002, long-term debt decreased by $34.1 million. The July 2001 refinancing
replaced the 9 1/2% senior subordinated notes with debt at significantly more
favorable interest rates and resulted in lower rates on the bank loans. In
connection with the refinancing, deferred debt issuance costs on the 9 1/2%
notes and former bank debt were written off; the issuance costs incurred upon
refinancing resulted in a lower monthly amortization expense. Also, the June
2002 credit agreement amendment included a reduction in the applicable interest
rate margin for the $175 million term loan. Finally, the decreases in
market-driven interest rates over the course of 2001 contributed to the overall
decrease in Apria's interest expense. See "Long-Term Debt."
INCOME TAXES. Income taxes for the nine months ended September 30, 2002 and
in the corresponding period of 2001, have been provided at the effective tax
rates expected to be applicable for the respective year.
At December 31, 2001, Apria had federal net operating loss carryforwards of
approximately $98 million, expiring in varying amounts in the years 2003 through
2018 and various state net operating loss carryforwards that began to expire in
1997. Additionally, the company has an alternative minimum tax credit
carryforward of approximately $7.6 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 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. In 2002, for federal tax purposes, the company expects to utilize
its entire net operating loss carryforward not subject to limitation.
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. 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 was $188.9 million in the
first nine months of 2002 compared with $166.7 million in the corresponding
period in 2001. The increase between periods in net income (before items not
requiring cash) was partially offset by the increase in accounts receivable and
increases in payments against accounts payable and other expense accruals.
Cash used in investing activities decreased to $148.2 million for the first
nine months of 2002 compared to $149.3 million during the same period last year.
The reduction in patient service and other equipment purchases between the
periods was largely offset by the increase in acquisition activity.
Cash used in financing activities was $37.3 million during the first nine
months of 2002 compared to $16.7 million during the same period last year. The
difference is mainly due to the repurchase of the company's stock in 2002. The
activity in 2002 and 2001 in the revolving credit facility and term loan line
items reflects the June 2002 credit agreement amendment and the July 2001
refinancing, respectively. See "Long-term Debt" and "Treasury Stock."
CONTRACTUAL CASH OBLIGATIONS. The following table summarizes Apria's long
term cash payment obligations to which the company is contractually bound (the
years presented below represent twelve-month rolling periods ending September
30):
(DOLLARS IN MILLIONS) YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEARS 6+ TOTALS
------------------------------------------------------------------------------------------------------------------
Term loans.............................. $ 26 $ 26 $ 29 $ 32 $ 1 $165 $279
Capitalized lease obligations........... 2 3 2 - - - 7
Operating leases........................ 53 44 35 28 16 23 199
Deferred acquisition payments........... 8 - - - - - 8
---- ---- ---- ---- ---- ---- ----
Total contratual cash obligations... $89 $73 $66 $60 $17 $188 $493
==== ==== ==== ==== ==== ==== ====
ACCOUNTS RECEIVABLE. Accounts receivable before allowance for doubtful
accounts increased to $210.4 million at September 30, 2002 from $194.2 million
at December 31, 2001, which is attributable to the revenue increases. 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 51 at September 30, 2002, and 50 at December 31, 2001. Accounts
aged in excess of 180 days decreased to 19.4% at September 30, 2002 from 19.8%
at December 31, 2001. See "Provision for Doubtful Accounts."
Evaluation of Net Realizable Value. 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 governmental 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
necessary.
Unbilled Receivables. Included in accounts receivable are earned but
unbilled receivables of $27.2 million and $26.9 million at September 30, 2002
and December 31, 2001, 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 net realizable value. The increase is
partially due to acquisitions made in late 2001 and during 2002. 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. Continued revenue growth is
directly dependent on Apria's ability to fund its inventory and patient service
equipment requirements.
LONG-TERM DEBT. Apria's credit agreement with Bank of America and a
syndicate of lenders was amended and restated effective June 7, 2002. The
amendment extended the maturity date, reduced the applicable interest rate
margins and modified the repayment schedule for the company's $175 million
six-year term loan. The term loan, which was amended to mature in seven years,
had a balance of $173.3 million at September 30, 2002. It is now repayable in 20
remaining consecutive quarterly installments of $437,500 each, followed by three
consecutive quarterly installments of $41.1 million each, and a final payment of
$41.1 million due on July 20, 2008.
Interest rates on outstanding balances under the credit agreement are
determined by adding a margin to the Eurodollar or base rate existing at each
interest calculation date. Applicable margins for the seven-year term loan were
lowered to 2.0% for Eurodollar loans and 1.0% for base rate loans.
On September 30, 2002, total borrowings under the credit agreement were
$279.0 million. Outstanding letters of credit totaled $5.2 million and credit
available under the revolving facility was $92.1 million. At September 30, 2002,
the company was in compliance with all of the financial covenants required by
the credit agreement.
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.
Apria has two interest rate swap agreements with a total notional amount of
$100 million that fix its LIBOR-based variable rate debt at 2.58% (before the
applicable margin). The swap agreements terminate March 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 first nine months of 2002, Apria paid a
net settlement amount of $478,000. At September 30, 2002, the swap agreements
are reflected in the accompanying consolidated balance sheet in other accrued
liabilities at their fair value of $469,000. Unrealized losses on the fair value
of the swap agreements are reflected, net of taxes, in other comprehensive loss.
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. Apria's credit agreement limits common stock repurchases to
$35 million in any fiscal year and $100 million in the aggregate. During the
first nine months of 2002, Apria repurchased 1.5 million shares of its
outstanding common stock for $31.5 million. Subsequently, the company purchased
additional shares for $3.5 million thereby reaching its maximum for the year.
All repurchased common shares are being held in treasury.
BUSINESS COMBINATIONS. Pursuant to one of its primary growth strategies,
Apria periodically acquires complementary businesses in specific geographic
markets. The results of operations of the acquired companies are included in the
accompanying consolidated income statements from the dates of acquisition.
Effective with the adoption of SFAS No. 142, goodwill is no longer being
amortized. Covenants not to compete are being amortized over the life of the
respective agreements.
The aggregate consideration for acquisitions that closed during the first
nine months of 2002 was $64.7 million. Allocation of this amount includes $46.8
million to goodwill, $3.2 million to intangible assets and $12.5 million to
patient service equipment. During the first nine months of 2001, the aggregate
consideration for acquisitions was $51.7 million. Cash paid for acquisitions,
which includes amounts deferred from prior year acquisitions, totaled $59.6
million and $49.7 million in the first nine months of 2002 and 2001,
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 and on the company's ability to integrate the acquired operations
successfully.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Apria is exposed to interest rate fluctuations on its underlying variable
rate long-term debt. Apria utilizes interest rate swap agreements to moderate
such exposure. Apria does not use derivative financial instruments for trading
or other speculative purposes.
At September 30, 2002, Apria's term loan borrowings totaled $276.3 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 September 30, 2002, all of
Apria's outstanding term debt was tied to LIBOR. Apria has two interest rate
swap agreements with a total notional amount of $100 million that fix its
LIBOR-based debt at 2.58% (before application of the interest margin). Both
agreements expire March 2003.
Based on the term debt outstanding and the swap agreements in place at
September 30, 2002, a 100 basis point change in LIBOR would increase or decrease
Apria's annual cash flow and pretax earnings by approximately $1.8 million.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Within the 90 days
prior to the date of this report, the company carried out an evaluation, under
the supervision and with the participation of the company's management,
including the company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the company's disclosure
controls and procedures. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the company that is required to be included in the company's
periodic Securities and Exchange Commission filings.
(b) Changes in internal controls. No significant changes to the company's
internal controls, or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, have been made during the
periods covered by this report.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Apria and certain of its present and former officers and/or directors were
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). The complaint alleged,
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. Two similar class actions were filed during July 1998 in the
Superior Court for the State of California for the County of Orange, which were
consolidated by a court order dated October 22, 1998 (Master Case No. 797060).
Following a series of settlement discussions, the parties reached an agreement
to settle both the federal and state class actions for $42 million. Under the
terms of the settlement, Apria has paid $1 million and its insurance carriers
have paid $41 million. Pursuant to the settlement: (1) the State Court class
actions were concluded on August 20, 2002 by entry of an Order and Final
Judgment; and (2) the District Court class action was dismissed on August 21,
2002 by entry of an Order dismissing the action with prejudice.
On August 27, 2001, a class action lawsuit was filed against Apria and its
former Chief Executive Officer in the U.S. District Court for the Central
District of California, Southern Division (Case No. SACV01-5160 PA), entitled
J.E.B. Capital Partners, LP v. Apria Healthcare Group Inc. and Philip L. Carter.
Among other things, the complaint alleged 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. The
defendants' motion to dismiss the complaint was granted with leave to amend on
June 14, 2002. Plaintiff elected not to amend its complaint, but filed a notice
of appeal on July 15, 2002. The appeal was dismissed as premature. On October
10, 2002, the District Court entered a judgment in favor of the defendants and
dismissed the action with prejudice. On November 8, 2002, the plaintiff filed an
appeal of the Order of dismissal. 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 2. Not applicable
ITEM 3. Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Meeting of Stockholders of the company on July 18, 2002.
(b) Directors reelected at the Annual Meeting for a term of one year:
David H. Batchelder
David L. Goldsmith
Lawrence M. Higby
Richard H. Koppes
Philip R. Lochner, Jr.
Beverly Benedict Thomas
Ralph V. Whitworth
(c) Matters Voted Upon at Annual Meeting:
Election of Directors
---------------------
As of July 18, 2002, the company's Board of Directors
consisted of seven members who will serve for one year or
until the election and qualification of their successors. The
results of the stockholder voting were as follows:
FOR WITHHOLD
---------- --------
David H. Batchelder 50,598,611 822,462
David L. Goldsmith 50,615,489 805,584
Lawrence M. Higby 51,058,494 362,579
Richard H. Koppes 51,056,490 364,583
Philip R. Lochner, Jr. 50,573,489 847,584
Beverly Benedict Thomas 51,058,494 362,579
Ralph V. Whitworth 51,056,612 364,461
ITEM 5. OTHER INFORMATION
Apria's bylaws were amended, effective September 3, 2002, to increase the
number of directors from seven to eight. Vicente Anido, Jr. was elected to the
open director position effective with the amendment of the bylaws. He will serve
on the Board of Directors until the next annual meeting of stockholders or until
his successor is elected and qualified.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Reference
------- ---------
3.1 Amended and Restated Bylaws of registrant, as amended on
September 3, 2002.
10.1 Amended and Restated Employment Agreement effective
February 12, 2002, between registrant and Lawrence M.
Higby.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which this
report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APRIA HEALTHCARE GROUP INC.
---------------------------
Registrant
November 14, 2002 /s/ JAMES E. BAKER
------------------------------------
James E. Baker
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION - CHIEF EXECUTIVE OFFICER
I, Lawrence M. Higby, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Apria Healthcare Group
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ LAWRENCE M. HIGBY
---------------------------------------
Lawrence M. Higby
Chief Executive Officer
CERTIFICATION - CHIEF FINANCIAL OFFICER
I, James E. Baker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Apria Healthcare Group
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ JAMES E. BAKER
---------------------------------------
James E. Baker
Chief Financial Officer