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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 March 31, 2003
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 55,042,799 shares of common stock, $.001 par value, outstanding at
May 9, 2003.
APRIA HEALTHCARE GROUP INC.
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2003
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)
MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................................................... $ 19,646 $ 26,383
Accounts receivable, less allowance for doubtful accounts of $34,290
and $32,206 at March 31, 2003 and December 31, 2002, respectively ............ 197,259 185,298
Inventories, net ............................................................... 30,417 27,067
Deferred income taxes .......................................................... 34,315 37,205
Prepaid expenses and other current assets ...................................... 15,630 14,408
--------- ---------
TOTAL CURRENT ASSETS ................................................... 297,267 290,361
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $376,623
and $368,420 at March 31, 2003 and December 31, 2002, respectively ............. 197,117 186,210
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ........................................ 53,013 54,134
DEFERRED INCOME TAXES ............................................................ 3,328 3,446
GOODWILL ......................................................................... 266,713 248,863
INTANGIBLE ASSETS, NET ........................................................... 6,140 6,142
OTHER ASSETS ..................................................................... 6,196 6,500
--------- ---------
$ 829,774 $ 795,656
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................................... $ 61,997 $ 65,514
Accrued payroll and related taxes and benefits ................................. 40,514 38,212
Accrued insurance .............................................................. 8,450 8,021
Income taxes payable ........................................................... 18,946 10,285
Other accrued liabilities ...................................................... 33,988 39,968
Current portion of long-term debt .............................................. 28,147 21,713
--------- ---------
TOTAL CURRENT LIABILITIES .............................................. 192,042 183,713
LONG-TERM DEBT, net of current portion ........................................... 240,631 247,655
DEFERRED INCOME TAXES ............................................................ 17,481 12,979
COMMITMENTS AND CONTINGENCIES (Note G)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value: 10,000,000 shares authorized;
none issued .................................................................. - -
Common stock, $.001 par value: 150,000,000 shares authorized;
56,666,037 and 56,580,677 shares issued at March 31, 2003 and
December 31, 2002, respectively; 54,932,181 and 54,897,521
outstanding at March 31, 2003 and December 31, 2002, respectively ............ 56 56
Additional paid-in capital ..................................................... 399,064 397,417
Treasury stock, at cost: 1,733,856 and 1,683,156 shares at March 31, 2003
and December 31, 2002, respectively .......................................... (37,081) (35,961)
Retained earnings (accumulated deficit) ........................................ 18,867 (8,959)
Accumulated other comprehensive loss ........................................... (1,286) (1,244)
--------- ---------
379,620 351,309
--------- ---------
$ 829,774 $ 795,656
========= =========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
--------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
- ------------------------------------------------------------------------------------
Net revenues .............................................. $335,069 $301,345
Costs and expenses:
Cost of net revenues:
Product and supply costs ............................ 61,466 55,162
Patient service equipment depreciation .............. 27,095 23,417
Nursing services .................................... 215 271
Other ............................................... 3,385 3,269
-------- --------
TOTAL COST OF NET REVENUES ...................... 92,161 82,119
Provision for doubtful accounts ........................ 12,801 11,511
Selling, distribution and administrative ............... 180,972 166,108
Amortization of intangible assets ...................... 696 671
-------- --------
TOTAL COSTS AND EXPENSES ........................ 286,630 260,409
-------- --------
OPERATING INCOME ................................ 48,439 40,936
Interest expense, net ..................................... 3,481 4,144
-------- --------
INCOME BEFORE TAXES ............................. 44,958 36,792
Income tax expense ........................................ 17,132 13,797
-------- --------
NET INCOME ...................................... $ 27,826 $ 22,995
======== ========
Basic net income per common share ......................... $ 0.51 $ 0.42
======== ========
Diluted net income per common share ....................... $ 0.50 $ 0.41
======== ========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------
(DOLLARS IN THOUSANDS) 2003 2002
- ---------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income ............................................................................ $ 27,826 $ 22,995
Items included in net income not requiring cash:
Provision for doubtful accounts .................................................... 12,801 11,511
Depreciation and amortization ...................................................... 32,948 28,111
Amortization of deferred debt issuance costs ....................................... 308 325
Deferred income taxes and other .................................................... 7,900 9,080
Changes in operating assets and liabilities, exclusive of effects of acquisitions:
Accounts receivable ................................................................ (24,762) (24,999)
Inventories, net ................................................................... (2,825) (165)
Prepaid expenses and other assets .................................................. (1,220) 71
Accounts payable, exclusive of outstanding checks .................................. (166) (5,315)
Accrued payroll and related taxes and benefits ..................................... 2,301 2,333
Income taxes payable ............................................................... 8,661 4,696
Accrued expenses ................................................................... (5,242) (7,384)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ..................................... 58,530 41,259
INVESTING ACTIVITIES
Purchases of patient service equipment and property,
equipment and improvements, exclusive of effects of acquisitions ................... (38,521) (27,083)
Proceeds from disposition of assets ................................................... 201 94
Cash paid for acquisitions, including payments of deferred consideration .............. (23,107) (3,320)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ......................................... (61,427) (30,309)
FINANCING ACTIVITIES
Proceeds from revolving credit facilities ............................................. 14,100 89,200
Payments on revolving credit facilities ............................................... (14,100) (78,100)
Payments on term loans ................................................................ - (438)
Payments on other long-term debt ...................................................... (590) (660)
Outstanding checks included in accounts payable ....................................... (3,350) (3,512)
Repurchases of common stock ........................................................... (1,120) (21,670)
Issuances of common stock ............................................................. 1,220 2,260
-------- --------
NET CASH USED IN FINANCING ACTIVITIES ......................................... (3,840) (12,920)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................................... (6,737) (1,970)
Cash and cash equivalents at beginning of period ........................................ 26,383 9,359
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............................................. $ 19,646 $ 7,389
======== ========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - CERTAIN SIGNIFICANT ACCOUNTING POLICIES
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, 2002, included in the company's 2002 Form 10-K.
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.
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 34% 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 periodic analyses to evaluate accounts receivable balances
to ensure that recorded amounts reflect estimated net realizable value.
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. Due to continuing changes in the healthcare industry and
with third-party reimbursement, it is possible that management's estimates may
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.
Recent Accounting Pronouncements: Effective January 1, 2003, Apria adopted
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." 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. Adoption of this statement did not have a material
effect on Apria's consolidated financial statements.
Effective January 1, 2003, Apria adopted SFAS No. 146, "Accounting for Costs
Associated With Exit or Disposal Activities." 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. Adoption of this statement did not have a material
effect on the company's consolidated financial statements.
In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123," was issued.
This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition and guidance for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The company has complied
with the expanded financial statement disclosure requirements in its
consolidated financial statements.
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of
Others," an interpretation of SFAS Nos. 5, 57 and 107 and rescission of FIN No.
34, "Disclosure of Indirect Guarantees of Indebtedness of Others." FIN No. 45
elaborates on the disclosure requirements for the annual and interim financial
statements of the guarantor. It also requires that a guarantor recognize a
liability at the inception of the guarantee for the fair value of the obligation
undertaken. Apria adopted the recognition and measurement provisions of FIN No.
45 beginning January 1, 2003, while the disclosure provisions became effective
at December 31, 2002. Adoption of this interpretation did not have a material
effect on Apria's consolidated financial statements as the company did not issue
any guarantees during the three month period ended March 31, 2003.
In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities," an
interpretation of Accounting Research Bulletin No. 51, was issued. FIN No. 46
requires that a company consolidate variable interest entities if that company
is subject to a majority of the risk of loss from the entity's activities or the
company receives a majority of the entity's residual returns. FIN No. 46 also
requires certain disclosures about variable interest entities in which a company
has a significant interest, regardless of whether consolidation is required.
Apria adopted the consolidation provisions of FIN No. 46 beginning January 1,
2003, while certain disclosure requirements became effective for all financial
statements issued after January 31, 2003, regardless of when the variable
interest entities were established. The company currently has no variable
interest entities, therefore the adoption of this interpretation is not expected
to have a material effect on the company's consolidated financial statements.
Stock-based Compensation: The company accounts for its stock-based compensation
plans under the recognition and measurement principles of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Apria has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123." No stock-based employee compensation
expense is recognized in net income for any of the periods presented. Had
compensation expense for the company's stock-based compensation awards been
recognized based on the fair value recognition provisions of SFAS No. 123,
Apria's net income and per share amounts would have been adjusted to the pro
forma amounts indicated below.
THREE MONTHS ENDED
MARCH 31,
--------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2003 2002
- --------------------------------------------------------------------------------
Net income as reported................................... $ 27,826 $ 22,995
Deduct: total stock-based compensation expense
determined for all awards under fair value-based
method, net of related tax effects................... 2,022 2,306
-------- --------
Pro forma net income..................................... $ 25,804 $ 20,689
======== ========
Basic net income per share:
As reported............................................. $ 0.51 $ 0.42
Pro forma............................................... $ 0.47 $ 0.38
Diluted net income per share:
As reported............................................. $ 0.50 $ 0.41
Pro forma............................................... $ 0.47 $ 0.37
For purposes of the 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 the three-month
period ended March 31, 2003 and 2002: risk-free interest rates ranging from
2.36% to 2.81% and 4.27% to 4.71%, respectively; dividend yield of 0% for both
periods; expected lives ranging from 4.02 to 4.42 years and 4.13 years,
respectively; and volatility of 59% for both periods.
NOTE B - 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 dates of
acquisition. During the three-month period ended March 31, 2003, cash paid for
acquisitions was $23,107,000, which included deferred payments of $3,504,000
that were related to prior year acquisitions. At March 31, 2003, outstanding
deferred consideration totaled $6,011,000 and is included on the balance sheet
in other accrued liabilities.
During the three months ended March 31, 2003, Apria acquired seven companies
comprised entirely of home respiratory therapy businesses. Pending receipt of
valuation information, amounts preliminarily allocated to goodwill, other
intangible assets and patient service equipment were $18,332,000, $695,000 and
$3,450,000, respectively. 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 three-month period ended March 31, 2003, 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.
THREE MONTHS ENDED
ENDED MARCH 31,
--------------------
(IN THOUSANDS) 2003 2002
----------------------------------------------------------------------------
Net revenues...................................... $336,859 $306,206
Net income........................................ $ 27,793 $ 22,511
Basic net income per common share................. $ 0.51 $ 0.41
Diluted net income per common share............... $ 0.50 $ 0.40
NOTE C - GOODWILL AND INTANGIBLE ASSETS
Apria accounts for intangible assets and goodwill under the initial recognition
provisions of SFAS No. 141, "Business Combinations" and the financial accounting
and reporting provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets." Goodwill and other intangible assets with indefinite lives are no
longer amortized, but are tested for impairment annually, or more frequently if
circumstances indicate that the possibility of impairment exists. If the
carrying value of goodwill or an intangible asset exceeds its fair value, an
impairment loss is recognized.
For the quarter ended March 31, 2003, the net change in the carrying amount of
goodwill of $17,850,000 is the result of business combinations. All of the
goodwill recorded in conjunction with business combinations completed during the
periods presented is expected to be deductible for tax purposes.
Intangible assets, all of which are subject to amortization, consist of the
following:
(DOLLARS IN THOUSANDS) MARCH 31, 2003 DECEMBER 31, 2002
- --------------------------------------------------------------------------------------------------------------------------------
AVERAGE GROSS GROSS
LIFE IN CARRYING ACCUMULATED NET BOOK CARRYING ACCUMULATED NET BOOK
YEARS AMOUNT AMORTIZATION VALUE AMOUNT AMORTIZATION VALUE
----- ------ ------------ ----- ------ ------------ -----
Covenants not to compete.... 4.7 $ 10,329 $(5,072) $5,257 $ 9,664 $(4,571) $5,093
Tradename................... 2.0 1,324 (441) 883 1,324 (275) 1,049
---- -------- ------- ------ -------- ------- ------
4.0 $ 11,653 $(5,513) $6,140 $ 10,988 $(4,846) $6,142
==== ======== ======= ====== ======== ======= ======
Amortization expense amounts to $696,000 for the three months ended March 31,
2003. Estimated amortization expense for each of the fiscal years ending
December 31, is presented below:
FOR THE YEAR ENDING
(DOLLARS IN THOUSANDS) DECEMBER 31,
---------------------------------------------------------------------------
2003............................................... $ 2,698
2004............................................... 2,047
2005............................................... 980
2006............................................... 721
2007............................................... 368
2008............................................... 22
NOTE D - LONG-TERM DEBT
At March 31, 2003, there were no borrowings under the revolving credit facility,
outstanding letters of credit totaled $5,155,000, credit available under the
revolving facility was $94,845,000, 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. Until their March 31, 2003 expiration, Apria had two interest rate
swap agreements with a total notional amount of $100,000,000 and a fixed-rate of
2.58% (before applicable margin). In December 2002, Apria entered into four
interest rate swap agreements with a total notional amount of $100,000,000 that
fix an equivalent amount of its variable rate debt at rates ranging from 2.43%
to 3.42% (before the applicable margin). The terms of the new swap agreements
range from two to four years. The swap agreements are being accounted for as
cash flow hedges under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." Accordingly, the difference between the interest received
and interest paid is reflected as an adjustment to interest expense. For the
three-month periods ended March 31, 2003 and 2002, Apria paid net settlement
amounts of $653,000 and $153,000, respectively. At March 31, 2003, the aggregate
fair value of the swap agreements was a deficit of $2,091,000 and is reflected
in the accompanying balance sheet in other accrued liabilities. Unrealized gains
and losses on the fair value of the swap agreements are reflected, net of taxes,
in other comprehensive loss (See Note E - "Stockholders' Equity"). 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 E - STOCKHOLDERS' EQUITY
For the three months ended March 31, 2003, changes to stockholders' equity are
comprised of the following amounts:
(DOLLARS IN THOUSANDS)
---------------------------------------------------------------------------
Net income................................................ $ 27,826
Proceeds from the exercise of stock options............... 1,220
Tax benefit related to the exercise of stock options...... 428
Other comprehensive loss, net of taxes.................... (42)
Repurchased common shares held in treasury................ (1,120)
--------
$ 28,312
For the three months ended March 31, 2003 and 2002, net income and comprehensive
income differed by unrealized gains and losses related to interest rate swap
agreements. In the first quarter of 2003, unrealized losses amounted to $42,000,
and for the same period of 2002, unrealized gains were $229,000.
Pursuant to its credit agreement, Apria can repurchase up to $35,000,000 worth
of its outstanding common stock during this calendar year. In March 2003, Apria
announced that its Board of Directors had authorized the repurchase program for
fiscal year 2003. The company repurchased 50,700 shares for $1,120,000 during
the quarter ended March 31, 2003.
NOTE F - INCOME TAXES
Income taxes for the three months ended March 31, 2003 and 2002 have been
provided at the effective tax rates expected to be applicable for the respective
year. The annual rate for 2002 was reduced by a benefit of $11,073,000 that
resulted from prior year tax examinations that were settled in the fourth
quarter.
At December 31, 2002, Apria had federal net operating loss carryforwards of
$15,348,000, of which $10,000,000 are limited to $5,000,000 of usage per year
under Internal Revenue Code Section 382 and are expected to be fully utilized
during 2003 and 2004. The remaining $5,348,000 is a carryforward of unused
unlimited losses expected to be utilized during 2003. The company has an
alternative minimum tax credit carryforward of $9,614,000 which is expected to
be utilized during 2003. Additionally, the company has various state net
operating loss carryforwards that began to expire in 1997.
NOTE G - COMMITMENTS AND CONTINGENCIES
As previously reported, since mid-1998 Apria has been the subject of an
investigation conducted by the U.S. Attorney's office in Los Angeles and the
U.S. Department of Health and Human Services. The investigation concerns 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 and has responded to various document requests
and subpoenas.
Apria has been informed that the investigation 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.
Government representatives and counsel for the plaintiffs in the qui tam actions
asserted in July 2001 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, 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.
Apria has been exchanging information and having discussions with government
representatives in an attempt to explore whether it will be possible to resolve
this matter on a basis that would be considered fair and reasonable by all
parties. Apria cannot provide any assurances as to the outcome of these
discussions, however, or as to the outcome of the qui tam litigation in the
absence of a settlement. 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 H - PER SHARE AMOUNTS
The following table sets forth the computation of basic and diluted per share
amounts:
THREE MONTHS ENDED
MARCH 31,
------------------
(in thousands, except per share data) 2003 2002
- --------------------------------------------------------------------------------------------------------------
NUMERATOR:
Net income ............................................................................ $27,826 $22,995
Numerator for basic and diluted per share amounts - income
available to common stockholders .................................................... $27,826 $22,995
DENOMINATOR:
Denominator for basic per share amounts - weighted average shares ..................... 54,932 54,292
Effect of dilutive securities:
Employee stock options - dilutive potential common shares .......................... 460 1,326
------- -------
Denominator for diluted per share amounts - adjusted weighted average shares .......... 55,392 55,618
======= =======
Basic net income per common share ....................................................... $ 0.51 $ 0.42
======= =======
Diluted net income per common share ..................................................... $ 0.50 $ 0.41
======= =======
Employee stock options excluded from the computation of diluted per share
amounts:
Shares for which exercise price exceeds average market price of common stock .......... 2,593 2,641
Average exercise price per share that exceeds average market price of common stock .... $ 25.15 $ 25.51
================================================================================
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, 2002, as filed with the Securities and Exchange
Commission on March 31, 2003. 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 investigation 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, including the conflict in Iraq, have and
could continue to have significant impacts on the United States economy and
government spending priorities. The effects of any further such developments,
including but not limited to a prolonged occupation in Iraq, pose significant
risks and uncertainties to Apria's business. 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 and efforts in
Iraq, Syria, North Korea and elsewhere could lead to increased pressure to
reduce government expenditures for other purposes, including government-funded
programs such as Medicare and Medicaid.
================================================================================
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 410 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 long-lived
assets. These policies are presented in detail in Apria's 2002 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 of Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
RECENT ACCOUNTING PRONOUNCEMENTS. In April 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statement Nos.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
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 adopted the provisions of SFAS No. 145 January 1, 2003.
Adoption of this statement did not 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. Adoption of the provisions of SFAS No. 146 is required for exit and
disposal activities that are initiated after December 31, 2002.
In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123," was issued.
This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition and guidance for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The company has complied
with the expanded financial statement disclosure requirements in its
consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others," an interpretation of SFAS Nos.
5, 57 and 107 and rescission of FIN No. 34, "Disclosure of Indirect Guarantees
of Indebtedness of Others." FIN No. 45 elaborates on the disclosure requirements
for the interim and annual financial statements of the guarantor. It also
requires that a guarantor recognize a liability at the inception of the
guarantee for the fair value of the obligation undertaken. The disclosure
provisions became effective at December 31, 2002 while the recognition
provisions of FIN No. 45 became effective January 1, 2003. Adoption of this
interpretation did not have a material effect on Apria's consolidated financial
statements as the company did not issue any guarantees during the three month
period ended March 31, 2003.
In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities,"
an interpretation of Accounting Research Bulletin No. 51, was issued. FIN No. 46
requires that a company consolidate variable interest entities if that company
is subject to a majority of the risk of loss from the entity's activities or the
company receives a majority of the entity's residual returns. FIN No. 46 also
requires certain disclosures about variable interest entities in which a company
has a significant interest, regardless of whether consolidation is required.
Adoption of the provisions of FIN No. 46 was required January 1, 2003. The
company currently has no variable interest entities, therefore the adoption of
this interpretation is not expected to have a material effect on the company's
consolidated financial statements.
RESULTS OF OPERATIONS
NET REVENUES. Net revenues were $335.1 million in the first quarter of
2003, compared to $301.3 million for the corresponding period in 2002. This
represents an increase of 11.2%. The growth is due to volume increases including
new contracts with regional and national payors and the acquisition of
complementary businesses.
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 analysis, Apria's management
estimates that approximately one third to one half of the revenue growth between
the quarters presented was derived from acquisitions.
The following table sets forth a summary of net revenues by service line:
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2003 2002
---------------- ----------------
(DOLLARS IN THOUSANDS) $ % $ %
- --------------------------------------------------------------------------------
Respiratory therapy............... $224,214 66.9% $203,232 67.4%
Infusion therapy.................. 58,803 17.6% 53,783 17.9%
Home medical equipment/other...... 52,052 15.5% 44,330 14.7%
-------- ------ -------- ------
Total net revenues $335,069 100.0% $301,345 100.0%
======== ====== ======== ======
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% in the first quarter of 2003, as
compared to the first quarter of 2002. This growth was primarily driven by
volume increases as well as Apria's focus on acquiring respiratory therapy
businesses. As a percentage of total net revenues, the respiratory therapy
service line declined slightly due to the growth in the home medical
equipment/other line.
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,
antibiotics, pain management, chemotherapy and other medications and related
services. Infusion therapy also includes enteral nutrition, which is the
administration of nutrients directly into the gastrointestinal tract through a
feeding tube. Infusion therapy revenues increased by 9.3% in the first quarter
of 2003, when compared to the corresponding periods in 2002. This growth was
primarily in the enteral nutrition and antibiotic therapies. The infusion line
continues to benefit from the increased sales focus placed on enteral nutrition
in conjunction with the centralization, at the regional level, of the related
intake and distribution functions. This centralization commenced in mid-2001 and
was completed early in the second quarter of 2003.
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 17.4% in the first
quarter of 2003 versus the same period in 2002. Much of the growth in this
revenue line is from volume increases in core product areas such as wheelchairs
and hospital beds and due to a geographic expansion of the company's
rehabilitation business.
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 34% 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
contained several provisions that have affected Apria's Medicare reimbursement
levels. Subsequent legislation - the Medicare Balanced Budget Refinement Act of
1999 and the Medicare Medicaid and SCHIP Benefits Improvement and Protection Act
of 2000 - mitigated some of the effects of the original legislation. However,
there are some pending issues that may further impact Medicare reimbursement to
Apria in the future.
The Balanced Budget Act of 1997 granted streamlined authority to the
Secretary of the U.S. Department of Health and Human Services ("HHS") to
increase or reduce the reimbursement for home medical equipment, including
oxygen, by up to 15% each year under an inherent reasonableness authority. In
December 2002, the Centers for Medicare and Medicaid Services ("CMS") issued an
interim final rule that establishes a process by which such adjustments may be
made. The rule applies to all Medicare Part B services except those paid under a
physician fee schedule or a prospective payment system.
Further, the Balanced Budget Act of 1997 mandated that CMS conduct up to
five competitive bidding market demonstrations for Medicare Part B-covered items
and services. CMS conducted demonstration projects in Polk County, Florida and
San Antonio, Texas. These demonstration projects have been completed. The
demonstrations could provide CMS and Congress with a model for implementing
competitive pricing in all Medicare programs. Initial reports from government
agencies allege cost savings that vary by product line, but the reports do not
include costs incurred by the government to administer the program. 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. Although not included in the
President's budget, the administration may seek authority to implement
nationwide competitive bidding for all Medicare Part B products and services
other than physicians' services. There are members of Congress who support
legislation to create a national competitive bidding system for durable medical
equipment. The homecare industry is currently working with members of Congress
and the administration to ensure that the negative impact of competitive bidding
on patient choice, small businesses, the economy and other aspects are fully
understood. The industry is also working with the same groups to ensure that the
total costs for the government to establish an infrastructure to administer such
a complicated program as has been proposed are studied and quantified in detail.
It is not clear under what timeframe the government will conduct such analyses,
or whether such initiatives will move ahead.
During 2000, the Secretary of HHS wrote to the durable medical equipment
regional carriers and recommended, but did not mandate, that Medicare and
Medicaid claims processors base their payments for covered outpatient drugs and
biologicals on pricing schedules other than the normally calculated Average
Wholesale Prices, 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. Clinical services, 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 within
the reimbursement for the drug. The healthcare industry has taken issue with
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 to
homecare may be jeopardized. The Medicare, Medicaid and SCHIP Benefits
Improvement and Protection Act of 2000 provided for a moratorium on decreasing
the payment rates in effect as of January 1, 2001, for drugs and biologicals
under the current Medicare payment methodology. This legislation also required
the General Accounting Office to conduct a thorough study, by September 2001, of
the adequacy of current payments. The General Accounting Office was also
directed to recommend revised payment methodologies and report to Congress and
the Secretary of HHS. 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 aspects 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. There is interest in Congress in
legislation that would replace Average Wholesale Price as the basis for Medicare
drug reimbursement, but to date there has been no agreement within Congress as
to what the alternative should be.
Some states have already adopted, or are contemplating adopting, some form
of the proposed alternate pricing methodology for certain drugs and biologicals
under the Medicaid program. In at least 20 states, these changes have reduced
the level of reimbursement received by Apria without a corresponding offset or
increase to compensate for the service costs incurred. In several of 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. Proportionally,
Medicaid represents a very small percentage of Apria's home infusion and
home-delivered respiratory medication revenues.
GROSS PROFIT. Gross margins were 72.5% and 72.7% for the first quarter of
2003 and the first quarter of 2002, respectively. The respiratory medications
margin has deteriorated somewhat due to an increased demand for more expensive
brand name inhalation medications without a corresponding increase in
reimbursement and due to reimbursement reductions for certain drugs in some
states' Medicaid programs. Also affecting the gross margin is an increase in
depreciation expense, particularly in the respiratory therapy line, resulting
from increased patient service equipment expenditures. See "Cash Flow."
PROVISION FOR DOUBTFUL ACCOUNTS. 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
provision was 3.8% of net revenues for both the first quarter of 2003 and the
first quarter of 2002. See "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. 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% in
the first quarter of 2003, down from 55.1% in the first quarter of 2002. The
first quarter of 2002 included $2.8 million in contract termination costs
related to the departure of the former Chief Executive Officer, which, if
excluded, would result in selling, distribution and administrative expenses at
54.2% of net revenues.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets for
the first quarter of 2003 was $696,000, compared to $671,000 in the first
quarter of 2002. See "Business Combinations."
INTEREST EXPENSE. Interest expense was $3.5 million for the first quarter
of 2003, down from $4.1 million in the first quarter of 2002. Two factors
primarily contributed to the decrease. Long-term debt decreased by $37 million
from the end of the first quarter of 2002 to the end of the first quarter of
2003 and the applicable interest rate margin for the $175 million term loan was
reduced as a result of the June 2002 credit agreement amendment.
INCOME TAXES. Income taxes for the three months ended March 31, 2003 and
2002 have been provided at the effective tax rates expected to be applicable for
the respective year. The annual rate for 2002 was reduced by a benefit of $11.1
million that resulted from prior year tax examinations that were settled in the
fourth quarter.
At December 31, 2002, Apria had federal net operating loss carryforwards of
$15 million, of which $10 million are limited to $5 million of usage per year
under Internal Revenue Code Section 382 and are expected to be fully utilized
during 2003 and 2004. The remaining $5 million is a carryforward of unused
unlimited losses expected to be utilized during 2003. The company has an
alternative minimum tax credit carryforward of $9.6 million, which is expected
to be utilized during 2003. Additionally, the company has various state net
operating loss carryforwards that began to expire in 1997.
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 $58.5 million in the
first three months of 2003 compared with $41.3 million in the corresponding
period in 2002. The improvement is mainly due to the increase between periods in
net income (before items not requiring cash) and the timing of payments against
accounts payable and other expense accruals.
Cash used in investing activities increased to $61.4 million for the first
quarter of 2003 compared to $30.3 million during the same period last year. The
increase is primarily due to increased acquisition activity during the first
quarter of 2003. Purchases of patient service equipment also increased between
the periods. Often, the patient service equipment acquired in business
combinations does not meet Apria's standards or is not adequate to support the
company's delivery models, resulting in incremental equipment purchases. Another
factor contributing to the increase in patient service equipment expenditures is
an increase in purchases of specialized ambulatory liquid oxygen units that are
being marketed by the manufacturer in an effort to increase market share for
both the manufacturer and Apria.
Cash used in financing activities was $3.8 million during the first quarter
of 2003 compared to $12.9 million during the first quarter of 2002. The primary
reason for the difference is the higher level of repurchases of the company's
stock in the first quarter of 2002 than in the same period in 2003.
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 March 31.
(DOLLARS IN MILLIONS) YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEARS 6+ TOTALS
------------------------------------------------------------------------------------------------------------------
Term loans.............................. $ 26 $ 27 $ 29 $ 16 $ 83 $ 82 $263
Capitalized lease obligations........... 2 2 1 - - - 5
Operating leases........................ 56 49 42 30 18 23 218
Deferred acquisition payments........... 6 - - - - - 6
---- ---- ---- ---- ---- ---- ----
Total contractual cash obligations... $ 90 $ 78 $ 72 $ 46 $101 $105 $492
==== ==== ==== ==== ==== ==== ====
ACCOUNTS RECEIVABLE. Accounts receivable before allowance for doubtful
accounts increased to $231.5 million at March 31, 2003 from $217.5 million at
December 31, 2002, which is primarily attributable to the increase in revenues.
Also, patient deductible requirements and patient payor and/or benefit changes,
which generally coincide with the start of a new calendar year, typically delay
the collection process, thereby increasing accounts receivable, days sales
outstanding and the provision for doubtful accounts.
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 53 at March 31, 2003, 51 at December 31, 2002 and
52 at March 31, 2002. Accounts aged in excess of 180 days were 16.6% at March
31, 2003, 18% at December 31, 2002 and 18.5% at March 31, 2002.
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 $33.9 million and $29.2 million at March 31, 2003 and
December 31, 2002, respectively. Delays, ranging from a day up to several
months, 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
largely due to recent acquisitions. 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. On March 31, 2003, total borrowings under the credit
agreement were $263.4 million, outstanding letters of credit totaled $5.2
million and credit available under the revolving facility was $94.8 million. The
company continues to be 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.
In December 2002, Apria entered into four interest rate swap agreements to
fix its variable rate debt. The terms of such agreements are as follows: two
two-year agreements with an aggregate notional amount of $50 million and a fixed
rate of 2.43%; a three-year agreement with a notional amount of $25 million and
a fixed rate of 3.04%; and a four-year agreement with a notional amount of $25
million and a fixed rate of 3.42%. Two existing swap agreements with an
aggregate notional amount of $100 million and a fixed rate of 2.58% expired on
March 31, 2003. All rates are stated before application of the interest margins
specified in the credit agreement.
The swap agreements are being accounted for as cash flow hedges under SFAS
No. 133, "Accounting for Derivative and Hedging Activities." Accordingly, the
difference between the interest received and interest paid is reflected as an
adjustment to interest expense. During the first quarters of 2003 and 2002,
Apria paid net settlement amounts of $653,000 and $153,000, respectively.
Unrealized gains and losses on the fair value of the swap agreements are
reflected, net of taxes, in other comprehensive income. At March 31, 2003, the
aggregate fair value of the swap agreements was a deficit of $2.1 million and,
accordingly, is reflected in the accompanying balance sheet in other accrued
liabilities. Apria does not anticipate losses due to counterparty nonperformance
as its counterparties to the various swap agreements are nationally-recognized
financial institutions with strong credit ratings.
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 quarter of 2003, Apria repurchased 50,700 shares of its outstanding common
stock for $1.1 million. 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.
Covenants not to compete, typically effected in these transactions, are being
amortized over the life of the respective agreements.
The aggregate consideration for acquisitions that closed during the first
quarter of 2003 was $22.9 million. Pending receipt of valuation information, the
preliminary allocation of this amount includes $18.3 million to goodwill,
$695,000 to other intangible assets and $3.5 million to patient service
equipment. Cash paid for acquisitions, which includes amounts deferred from
prior year acquisitions, totaled $23.1 million and $3.3 million in the first
quarters of 2003 and 2002, 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
acquisitions and on the company's ability to integrate the acquired operations
successfully.
FEDERAL INVESTIGATION. As previously reported, since mid-1998 Apria has
been the subject of an investigation conducted by the U.S. Attorney's office in
Los Angeles and the U.S. Department of Health and Human Services. The
investigation concerns 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 and has responded to
various document requests and subpoenas.
Apria has been informed that the investigation 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.
Government representatives and counsel for the plaintiffs in the qui tam
actions asserted in July 2001 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, 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.
Apria has been exchanging information and having discussions with
government representatives in an attempt to explore whether it will be possible
to resolve this matter on a basis that would be considered fair and reasonable
by all parties. Apria cannot provide any assurances as to the outcome of these
discussions, however, or as to the outcome of the qui tam litigation in the
absence of a settlement. 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.
OFF-BALANCE SHEET ARRANGEMENTS
Apria is not a party to "off-balance sheet arrangements" as defined by the
Securities and Exchange Commission. However, from time to time the company
enters into certain types of contracts that contingently require the company to
indemnify parties against third party claims. The contracts primarily relate to:
(i) certain asset purchase agreements, under which the company may provide
customary indemnification to the seller of the business being acquired; (ii)
certain real estate leases, under which the company may be required to indemnify
property owners for environmental and other liabilities, and other claims
arising from the company's use of the applicable premises; and (iii) certain
agreements with the company's officers, directors and employees, under which the
company may be required to indemnify such persons for liabilities arising out of
their employment relationship.
The terms of such obligations vary by contract and in most instances a
specific or maximum dollar amount is not explicitly stated therein. Generally,
amounts under these contracts cannot be reasonably estimated until a specific
claim is asserted. Consequently, no liabilities have been recorded for these
obligations on the company's balance sheets for any of the periods presented.
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 March 31, 2003, Apria's term loan borrowings totaled $263.4 million. The
bank credit agreement governing the term loans provides interest rate options
based on the following indices: Federal Funds Rate, Prime Rate or the London
Interbank Offered Rate ("LIBOR"). All such interest rate options are subject to
the application of an interest margin as specified in the bank credit agreement.
At March 31, 2003, all of Apria's outstanding term debt was tied to LIBOR.
Until their March 31, 2003 expiration, Apria had two interest rate swap
agreements with a total notional amount of $100 million to pay a fixed rate of
2.58% (before application of interest margin). In December 2002, Apria entered
into four additional interest rate swap agreements with a total notional amount
of $100 million to pay fixed rates ranging from 2.43% to 3.42% (before
application of interest margin). The terms of the new swap agreements range from
two to four years.
Based on the term debt outstanding and the swap agreements in place at
March 31, 2003 (excluding those just expired), a 100 basis point change in the
applicable interest rates would increase or decrease Apria's annual cash flow
and pretax earnings by approximately $1.6 million. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Long-term Debt -
Hedging Activities."
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
As previously reported, since mid-1998 Apria has been the subject of an
investigation conducted by the U.S. Attorney's office in Los Angeles and the
U.S. Department of Health and Human Services. The investigation concerns 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 and has responded to various document requests
and subpoenas.
Apria has been informed that the investigation 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.
Government representatives and counsel for the plaintiffs in the qui tam
actions asserted in July 2001 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, 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.
Apria has been exchanging information and having discussions with
government representatives in an attempt to explore whether it will be possible
to resolve this matter on a basis that would be considered fair and reasonable
by all parties. Apria cannot provide any assurances as to the outcome of these
discussions, however, or as to the outcome of the qui tam litigation in the
absence of a settlement. 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.
ITEMS 2-5. Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Reference
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10.1 Form of Stock Ownership Requirements Agreement, dated
February 18, 2003, between Registrant and its executive
officers, and Exhibit A thereto, Stock Ownership
Requirements for Senior Executive Officers.
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350.
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350.
(b) Reports on Form 8-K:
Apria filed a Current Report on Form 8-K on January 23, 2003 to
report the issuance of a press release announcing the final dismissal
of a previously reported class action litigation against Apria.
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
May 15, 2003 /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: May 15, 2003
/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: May 15, 2003
/s/ JAMES E. BAKER
-------------------------------------------
James E. Baker
Chief Financial Officer