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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-14316
APRIA HEALTHCARE GROUP INC.
(Exact name of Registrant as specified in its charter)
Delaware 33-0488566
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)
3560 Hyland Avenue 92626
Costa Mesa, CA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 427-2000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value per share
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of April 1, 1999, there were outstanding 51,799,035 shares of the
Registrant's common stock, par value $0.001, which is the only class of common
stock of the Registrant. As of April 1, 1999 the aggregate market value of the
shares of common stock held by non-affiliates of the Registrant, computed based
on the closing sale price of $12.00 per share as reported by the New York
Stock Exchange, was approximately $468,383,820.
Documents Incorporated by Reference
None.
PART I
ITEM 1. BUSINESS
General
Apria Healthcare Group Inc. provides comprehensive home healthcare services
through approximately 320 branch locations which serve patients in all 50
states. Apria has three major service lines: home respiratory therapy, home
infusion therapy, and home medical equipment. The following table provides
examples of the services and products in each:
SERVICE LINE EXAMPLES OF SERVICES AND PRODUCTS
------------ ---------------------------------
Home respiratory therapy Provision of oxygen systems, home
ventilators and nebulizers, which are
devices to disperse medication as an aerosol
Home infusion therapy Administration of 24-hour access to
intravenous or enteral nutrition, anti-
infectives, chemotherapy and other medications
Home medical equipment Provision of patient room equipment,
principally hospital beds, wheelchairs and
ambulatory aids, to patients receiving care at
home
Apria was formed through the merger of Homedco Group, Inc. and Abbey
Healthcare Group Incorporated. Apria was incorporated in 1991 in the State of
Delaware.
BUSINESS STRATEGY
The management and Board of Directors of Apria changed substantially in
1998. Philip L. Carter became Chief Executive Officer in May 1998. Under Mr.
Carter's leadership, Apria is implementing a strategy aimed at achieving
profitable operating results through the following principal elements:
REMAIN IN CORE BUSINESSES, WITH INCREASED EMPHASIS ON HOME RESPIRATORY
THERAPY. Apria intends to remain in its core businesses of home respiratory
therapy, home infusion therapy and home medical equipment. However, Apria
expects to increase the percentage of net revenues generated by respiratory
therapy with a corresponding reduction in the percentage of net revenues
generated by infusion therapy and home medical equipment. Apria's home
respiratory therapy business historically has produced higher margins than its
home infusion therapy and home medical equipment businesses.
DIVEST OR CLOSE, ON A SELECTIVE BASIS, UNPROFITABLE BUSINESS OPERATIONS IN
PARTICULAR GEOGRAPHIC AREAS. As of December 31, 1998, Apria had substantially
completed the process of exiting the infusion therapy business in Texas,
California, Louisiana, West Virginia, western Pennsylvania, and downstate New
York. Apria continues to evaluate the profitability of all its contracts,
business lines and locations to determine if further divestitures or closures
are appropriate.
REDUCE COSTS IN CORPORATE AND FIELD OPERATIONS. Apria seeks to reduce costs
both at its corporate headquarters and in the field through:
-identifying improvement opportunities in specific operating procedures in
the areas of purchasing, distribution and inventory management and
implementing uniform operating thresholds in order to increase efficiency
and lower costs
-consolidating and closing smaller branches, billing centers and field
support facilities throughout the United States
-reducing labor costs at its corporate and field locations; approximately
1,500 full-time equivalent positions were eliminated during 1998
-reducing office space at its headquarters
Going forward, Apria intends to continue to focus resources on identifying and
implementing more cost-effective and efficient methods of delivering products
and services.
IMPROVE APRIA'S CAPITAL STRUCTURE. In November 1998, Apria amended its
credit agreement which resulted in a required $50 million prepayment of its
credit facility and revisions to certain provisions permitting Apria to pursue
acquisition opportunities. Pursuant to the amended credit agreement, Apria is
required to pursue a debt or equity offering to raise an additional $50 million
to further repay its term loan. The combination of these two actions is intended
to provide the company with somewhat greater flexibility to implement its
business strategy which includes growth through acquisitions.
EXPAND THROUGH INTERNAL GROWTH AND ACQUISITIONS. Apria intends to expand
through internal growth and acquisitions in its target markets subject to
limitations contained in Apria's bank credit agreement. Apria plans to increase
its acquisition activity in 1999 and intends to focus growth primarily in its
home respiratory therapy business.
Achieving Apria's objectives is subject to competitive and other
factors outside of Apria's control. See "Business - Risk Factors".
LINES OF BUSINESS
Apria derives substantially all of its revenue from the home healthcare
segment of the healthcare market in principally three service lines: home
respiratory therapy, including home-delivered respiratory medications, home
infusion therapy and home medical equipment. In all three lines, Apria provides
patients with a variety of clinical services, related products and supplies,
most of which are prescribed by a physician as part of a care plan. These
services include:
-high-tech infusion nursing, respiratory care and pharmacy services
-educating patients and their caregivers about the illness and instructing
them on self-care and the proper use of products in the home
-monitoring patient compliance with individualized treatment plans
-reporting to the physician and/or managed care organization
-maintaining equipment
-processing claims to third-party payors
Apria provides numerous services directly to its patients, and purchases or
rents the products needed to complement the service.
The following table sets forth a summary of net revenues by service line,
expressed as percentages of total net revenues:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Respiratory therapy.................. 59% 51% 50%
Infusion therapy..................... 23% 24% 25%
Home medical equipment/other......... 18% 25% 25%
---- ---- ----
Total net revenues............. 100% 100% 100%
==== ==== ====
RESPIRATORY THERAPY. Apria provides home respiratory therapy services to
patients with a variety of conditions, including:
-cystic fibrosis
-nervous system-related respiratory conditions
-chronic diseases relating to blocking or clogging of the lungs such as
emphysema, chronic bronchitis and asthma
Apria employs a clinical staff of respiratory care professionals to provide
support to its home respiratory therapy patients, according to
physician-directed treatment plans and a proprietary acuity program.
Approximately 66% of Apria's respiratory therapy revenues are derived from
the provision of oxygen systems, home ventilators and nebulizers, which are
devices to aerosolize medication. The remaining respiratory revenues are
generated from the provision of:
-apnea monitors used to monitor the vital signs of newborns
-continuous positive airway pressure devices used to control adult sleep
apnea
-noninvasive positive pressure ventilation
-other respiratory therapy products
Apria has developed a home respiratory medication service, which is
fulfilled through the Apria Pharmacy Network. Through this network, Apria offers
its patients physician-prescribed medications to accompany the nebulizer through
which they are administered. This comprehensive program offers patients and
payors a broad base of services from one source, including the delivery of
medications in premixed unit dose form, pharmacy services, patient education and
claims processing.
INFUSION THERAPY. Home infusion therapy involves the administration of, and
24-hour access to:
-parenteral and enteral nutrition
-anti-infectives
-chemotherapy
-other intravenous and injectable medications
Depending on the therapy, a broad range of venous access devices and pump
technology may be used to facilitate homecare and patient independence. Apria
employs licensed pharmacists and registered high-tech infusion nurses who have
specialized skills in the delivery of home infusion therapy. Apria currently
operates 28 pharmacy locations to serve its home infusion patients.
A number of factors have impacted the profitability of Apria's infusion
therapy business line. Increased managed care penetration has exposed Apria to
the intense price competition of these markets. The expectations of managed care
customers are becoming cost-prohibitive and nursing costs are very high.
Hospitals, traditionally a major referral source, are expanding their own
infusion services. In response to these factors, Apria performed a comprehensive
review of its infusion therapy business in the second and third quarters of
1998. By the end of 1998, Apria had substantially completed the process of
exiting the infusion business in certain geographic areas where it was not
meeting profitability thresholds. Apria is currently working to improve the
profitability of its infusion business in the remaining markets by implementing
standardization initiatives and optimal operating thresholds.
HOME MEDICAL EQUIPMENT/OTHER. Apria's primary emphasis in the home medical
equipment line of business is on the provision of patient room equipment,
principally hospital beds and wheelchairs. Apria's integrated service approach
allows patients and managed care systems accessing either respiratory or
infusion therapy services to also access needed home medical equipment through a
single source.
As Apria's managed care organization customer base has grown, management
has recognized the need to expand its ability to provide value-added services to
managed care organizations. Rather than directly provide certain non-core
services itself, Apria aligns itself with other segment leaders, such as medical
supply distributors, through formal relationships or ancillary networks. Such
networks must be credentialed and qualified by Apria's Clinical Services
department.
ORGANIZATION AND OPERATIONS
ORGANIZATION. As a result of reorganizations effected in 1998, Apria's
approximately 320 branch locations are organized into four geographic divisions,
which are further divided into 15 geographic regions. Each region is operated as
a separate business unit and consists of a number of branches and a regional
office. The regional office provides each of its branches with key support
services such as billing, purchasing and equipment repair. Each branch delivers
home healthcare products and services to patients in their homes and other care
sites through the branch's fleet and qualified personnel. This structure is
designed to create operating efficiencies associated with centralized services
while promoting responsiveness to local market needs.
Although Apria continues to operate with a large network of regional
operations, the company recently implemented a vertically-integrated management
organization in certain key functional areas, including sales, logistics,
operations and revenue management with direct reporting and accountability to
corporate headquarters. Apria believes that its new structure will provide more
controls and consistency among its regions and branches and help to develop
standard policies and procedures while eliminating many of the problems inherent
with a decentralized network of regions and branches. Its earliest
implementation was in the area of sales and operations. Previously, each
regional manager was responsible for all aspects of sales and operations,
including generating new business, operating branches and reimbursement. Under
the new structure, the sales organization is responsible for generating new
business from both traditional and managed care markets, while the operations
organization is responsible for customer service, reimbursement and asset
management. In addition to the sales and operations functional areas, Apria
established a centralized revenue management functional area. Revenue
management, based at Apria's headquarters, works with the network of branches
and regions to standardize the processes of order intake, billing and
collections. Apria has also established a coordinated purchasing structure to
obtain lower prices, reduce inventory levels and improve the distribution of
inventory items to the company's branch locations.
CORPORATE COMPLIANCE. As a leader in the home healthcare industry, Apria
has made a commitment to providing quality home healthcare services and products
while maintaining high standards of ethical and legal conduct. Apria believes
that operating its business with honesty and integrity is essential. Apria's
Corporate Compliance Program is designed to accomplish these goals through
employee education, a confidential disclosure program, written policy
guidelines, periodic reviews, compliance audits and other programs.
OPERATING SYSTEMS AND CONTROLS. The company's business is dependent, to a
substantial degree, upon the quality of its operating and field information
systems for the establishment of accurate and profitable contract terms,
accurate order entry and pricing, billing and collections, and effective
monitoring and supervision. Difficulties encountered in the conversion to a
common system of the previously separate operations of Abbey and Homedco,
following their 1995 merger, led to a high level of accounts receivable
write-offs. Also contributing to the write-offs were functional inadequacies of
the information systems. Examples of such inadequacies included decentralized
pricing tables which forced reliance on personnel at the numerous branches and
billing centers to enter pricing updates on a timely basis; and the inability to
aggregate data at a regional or company-wide level, thereby inhibiting
management's ability to quickly identify negative trends. During 1997, the
company committed to a two-year plan to implement a large-scale fully-integrated
enterprise resource planning system to address year 2000 issues and facilitate
correction of the functional shortcomings referred to above. Following a
reevaluation of the costs, benefits and risks of the development project, the
plan was canceled in 1998 except for the work required to resolve year 2000
issues, which has been substantially completed. As a part of the decision to
cancel the new system, management performed an evaluation of its current
systems. A significant conclusion of that evaluation was that the platform on
which the respiratory/home medical equipment system currently operates is
adequate but the infusion billing system operates on an obsolete platform which
is no longer supported by the computer industry. To mitigate this particular
risk, address certain other weaknesses of the current systems and to position
itself to meet future needs, Apria embarked on a reengineering of the systems.
The project includes a rewriting of the order entry, billing and accounts
receivable modules and the installation of supply chain management software to
replace the inventory and purchasing modules. The processing of transactions for
all product lines, including infusion therapy, will be addressed by these
changes. Apria believes that the implementation of these changes will
substantially improve its systems. Nonetheless, such implementation could have a
disruptive effect on billing and collection activity. See "Business -
Organization and Operations - Receivables Management".
Management is currently giving a high priority to the implementation of
optimal operating standards throughout Apria. Apria has established performance
indicators which measure operating results against expected thresholds, for the
purpose of allowing all levels of management to monitor, identify and adjust
areas requiring improvement. Operating models with strategic targets have been
developed to move Apria toward more effectively managing labor expenses and the
customer service, accounts receivable, clinical, and distribution areas of its
business. Apria's management team is compensated using performance-based
incentives focused on quality revenue growth, gross profit, timely cash
collections and improvement in operating income.
Failure to resolve the systems and operational problems experienced in
prior periods and to implement optimal operating standards successfully would
have a significant negative impact on results of operations.
PAYORS. Apria derives substantially all its revenues from third-party
payors, including private insurers, managed care organizations, Medicare and
Medicaid. For 1998, approximately 26% of Apria's net revenues were derived from
Medicare and 10% from Medicaid. Generally, each third-party payor has specific
claims requirements. Apria has policies and procedures in place to manage the
claims submission process, including verification procedures to facilitate
complete and accurate documentation.
RECEIVABLES MANAGEMENT. Apria operates in an environment with complex
requirements governing billing and reimbursement for its products and services.
Since the 1995 merger of Abbey and Homedco, Apria has had difficulties in a
number of areas relating to billing and subsequent collection of accounts
receivable. The merger resulted in a restructuring plan which included a very
rapid consolidation of operating locations and the conversion of all locations
to standardized information systems. There were over 100 branch
closures/consolidations and 496 systems conversions. The branch
closures/consolidations were effected soon after the June 1995 merger, but the
system conversions were not completed until September 1996. Together with very
high employee turnover during this period, the consolidations and system
conversions had a major impact on the revenue processes of order taking, product
delivery, billing and collections and ultimately led to a high level of accounts
receivable write-offs.
Apria believes that the primary factors contributing to the unusually
high level of revenue adjustments include:
-subsequent changes to estimated revenue amounts or denials for services
not covered due to changes in patient's coverage
-failure to document initial service authorizations or continued service
authorizations in required timeframes
-differences in contract prices due to complex contract terms or a customer
service representative's lack of familiarity with a contract, payor or
system price
-high turnover of customer service and billing representatives
The high level of bad debt write-offs can be partially attributable to
Apria's high concentration of managed care business. Apria has had difficulties
collecting its receivables from managed care payors.
The effects of all these factors necessitated charges to increase Apria's
allowance for revenue adjustments of $18.3 million, $40 million and $32.3
million in 1998, 1997 and 1996, respectively and charges to increase the
allowance for doubtful accounts of $13.6 million, $61.4 million and $9 million
in 1998, 1997 and 1996, respectively.
Although management addressed these issues with a number of initiatives
during 1996 and 1997, improvement in timely and accurate billings has been slow.
During 1998, Apria took several additional steps to address the most significant
factors contributing to revenue adjustments and write-offs which include:
-software enhancements to simplify the order-intake process and
specifically the process of selecting products/services and payors
-enhanced quality assurance programs designed to improve workflow and
billing accuracy
-aligning responsibility for revenue qualification, billing and receivables
collections within a defined functional group reporting to the corporate
office
MARKETING
Through its field sales force, Apria markets its services primarily to
managed care organizations, physicians, hospitals, medical groups and home
health agencies and case managers. The following sample marketing initiatives
address the requirements of its referring customers:
AUTOMATED CALL ROUTING THROUGH A SINGLE TOLL-FREE NUMBER. This allows
select managed care organizations and other customers to reach any of Apria's
320 locations and to access the full range of Apria services through a single
central telephone number:
1-800-APRIA-88.
JOINT COMMISSION ON ACCREDITATION OF HEALTHCARE ORGANIZATIONS. The Joint
Commission on Accreditation of Healthcare Organizations is a nationally
recognized organization which develops standards for various healthcare industry
segments and monitors compliance with those standards through voluntary surveys
of participating providers. As the home healthcare industry has grown, the need
for objective quality measurements has increased. Accreditation by the Joint
Commission on Accreditation of Healthcare Organizations entails a lengthy review
process which is conducted every three years. Accreditation is increasingly
being considered a prerequisite for entering into contracts with managed care
organizations at every level. Because accreditation is expensive and time
consuming, not all providers choose to undergo the process. Due to its
leadership role in establishing quality standards for home healthcare and its
active and early participation in this process, Apria is viewed favorably by
referring healthcare professionals. Substantially all of Apria's branch
locations are accredited by or in the process of receiving accreditation from
the Joint Commission on Accreditation of Healthcare Organizations.
CLINICAL MANAGEMENT SERVICES. As more alternate site healthcare is managed
and directed by various managed care organizations, new methods and systems are
sought to simultaneously control costs and improve outcomes. Apria has developed
a series of programs designed to proactively manage patients in conjunction with
a managed care partner and the patient's physician in an alternate site setting.
These services may include:
-patient and environmental assessments
-screening/diagnostics
-patient education
-clinical monitoring
-pharmacological management
-utilization and outcome reporting
PHYSICIAN RELATIONS. Apria's physician relations group places phone calls
to physician offices in an effort to increase and enhance awareness of Apria's
services and stimulate interest in Apria. Physician relations representatives
work closely with sales professionals throughout the country to identify,
develop and maintain quality relationships.
SALES
Apria employs approximately 380 sales professionals whose primary
responsibility is to target key customers for all lines of business. Key
customers include but are not limited to hospital-based healthcare
professionals, physicians and their staffs, and managed care organizations.
Sales professionals are afforded the necessary clinical and technical training
to represent Apria's major service offerings of home respiratory therapy, home
infusion therapy and home medical equipment. As larger segments of the
marketplace become involved with managed care, specific portions of the sales
force's working knowledge of pricing, contracting and negotiating, and
specialty-care management programs are being enhanced as well.
An integral component of Apria's overall sales strategy is to increase
volume through managed care organizations and traditional referral channels. As
Apria's various served markets evolve, the ultimate decision makers for
healthcare services vary greatly from closed model managed care organizations to
preferred provider networks which are controlled by more traditional means.
Apria's selling structure and strategies are driven largely by these changing
market factors and will continue to adjust as further consolidation occurs.
Managed care organizations continue to represent a significant portion of
Apria's business in several of its primary metropolitan markets. No single
account, however, represented more than 7% of Apria's total net revenues for
1998. Among its more significant managed care agreements, the company has
contracts with United HealthCare Corporation, Kaiser Permanente, Aetna/U.S.
Healthcare Health Plans, Olsten Network Management, Inc., Health Insurance Plan
of New York, PacifiCare Health Systems, Inc. and Humana Health Plans. Apria also
offers discount agreements and various fee-for-service arrangements to hospitals
or hospital systems whose patients have home healthcare needs.
COMPETITION
The segment of the healthcare market in which Apria operates is highly
competitive. In each of its lines of business there are a limited number of
national providers and numerous regional and local providers. The competitive
factors most important in the regional and local markets are:
-reputation with referral sources, including local physicians and
hospital-based professionals
-price of services
-ease of doing business
-quality of care and service
-range of home healthcare services
The competitive factors most important in the larger, national markets are
the foregoing factors and:
-wide geographic coverage
-ability to develop and maintain contractual relationships with managed
care organizations
-access to capital
It is increasingly important to be able to integrate a broad range of home
healthcare services through a single source. Apria believes that it competes
effectively in each of its business lines with respect to all of the above
factors and that it has an established record as a quality provider of home
respiratory therapy and home infusion therapy as reflected by the Joint
Commission on Accreditation of Healthcare Organizations accreditation of its
branches.
Other types of healthcare providers, including hospitals, home health
agencies and health maintenance organizations, have entered, and may continue to
enter, Apria's various lines of business. Depending on their individual
situation, it is possible that Apria's competitors may have, or may obtain,
significantly greater financial and marketing resources than Apria.
GOVERNMENT REGULATION
Apria is subject to extensive government regulation, including numerous
laws directed at preventing fraud and abuse and laws regulating reimbursement
under various governmental programs, as more fully described below.
MEDICARE AND MEDICAID REIMBURSEMENT. As part of the Social Security
Amendments of 1965, Congress enacted the Medicare program which provides for
hospital, physician and other statutorily-defined health benefits for qualified
individuals such as persons over 65 and the disabled. The Medicaid program, also
established by Congress in 1965, is a joint federal and state program that
provides certain statutorily-defined health benefits to financially needy
individuals who are blind, disabled, aged, or members of families with dependent
children. In addition, Medicaid generally covers financially needy children,
refugees and pregnant women.
A substantial portion of Apria's revenue is attributable to payments
received from third-party payors, including the Medicare and Medicaid programs
and private insurers. In 1998, approximately 26% of Apria's net revenue was
derived from Medicare and 10% from Medicaid. Effective January 1, 1998, the
Medicare reimbursement rates for home oxygen therapy and respiratory drugs were
reduced by 25% and 5%, respectively, pursuant to the provisions of the Balanced
Budget Act of 1997. The estimated decrease in 1998 revenues and operating income
resulting from these reimbursement reductions is approximately $57 million. A
further reimbursement reduction of 5% on home oxygen therapy became effective on
January 1, 1999. For each of the years 1998 through 2002, the Medicare update,
or inflation factor, for Medicare-covered home medical equipment, home
respiratory therapy and home infusion therapy is zero. The levels of revenues
and profitability of Apria, similar to those of other healthcare companies, have
been and will continue to be subject to the effect of changes in coverage or
payment rates by third-party payors.
Medicare carriers are private organizations that contract to serve as the
government's agents for the processing of claims for items and services provided
under Part B of the Medicare program. These carriers and Medicaid agencies also
periodically conduct pre-payment and post-payment reviews and other audits of
claims submitted. Medicare and Medicaid agents are under increasing pressure to
scrutinize healthcare claims more closely. In addition, the home healthcare
industry is generally characterized by long collection cycles for accounts
receivable due to the complex and time-consuming requirements, including
collection of medical necessity documentation, for obtaining reimbursement from
private and governmental third-party payors. Such long collection cycles or
reviews and/or similar audits of Apria's claims and related documentation could
result in significant recoupments or denials.
The Balanced Budget Act of 1997 contained other items that affect
reimbursement for home medical equipment and services under Medicare Part B,
including the provision described above to freeze the Consumer Price Index
adjustments for the years 1998 through 2002. The General Accounting Office was
directed by the Balanced Budget Act of 1997 to report in 18 months on the effect
of the reductions in oxygen reimbursement on accessibility by patients to home
oxygen services. The General Accounting Office's report is expected to be
released around April 1, 1999; home oxygen industry representatives have been
provided an opportunity to preview the draft report. The primary conclusion of
the draft report is that the reduction in Medicare payment rates for home oxygen
has not had a major impact on access to home oxygen equipment and services. The
Secretary of Health and Human Services was directed to arrange for peer review
organizations to evaluate the access to, and quality of, home oxygen equipment.
Other provisions of the Balanced Budget Act of 1997 that are likely to
affect levels of reimbursement to Apria for home medical equipment under the
Medicare program include:
-new authority of the Secretary of Health and Human Services to increase or
reduce the reimbursement for home medical equipment by 15% each year under
an inherent reasonableness procedure
-a reduction of the Medicare reimbursement for drugs and biologicals from
the current level of (a) the lower of the estimated acquisition cost or (b)
the national average wholesale price, to 95% of the national average
wholesale price with a dispensing fee paid to Apria's pharmacy
-a payment freeze between 1998 and 2002 for parenteral and enteral
nutrients, supplies and equipment at 1995 payment amounts
Under the Balanced Budget Act of 1997, some changes to the payment rules
for home health agencies may impact how Medicare payments are made to suppliers.
Currently, Apria submits Medicare bills under Medicare Part B and is paid for
certain items and services furnished to Medicare Part B patients who are being
treated by a home health agency and are under a plan of care. Under the
prospective payment system mandated by the new legislation, home health agencies
may be required to submit and receive payment for all items and services
furnished under a plan of care. Therefore, once a prospective payment system is
implemented for home health agencies, Apria's ability to continue to bill and
receive payments directly from the Medicare program, for at least those patients
who also meet the home health agency coverage requirements, may cease. Apria
will still be able to provide items and services to Medicare patients under
arrangements with the home health agencies, but Apria would be considered a
vendor and payments might be subject to contractual agreements. Although the
prospective payment system for home health agencies is scheduled to be effective
October 1, 1999, the Health Care Financing Administration has indicated that due
to implementation delays relating to the year 2000 issue, there likely will not
be any changes before 2000.
Finally, the Balanced Budget Act of 1997 proposed that suppliers of home
medical equipment be required to post surety bonds equal to 15% of their
previous year's Medicare revenues, in a minimum amount of $50,000 and up to a
maximum of $3 million, as a condition of participation in the Medicare program.
The bonds would be used to secure suppliers' performance and compliance with
Medicare program rules and requirements. The deadline for securing such bonds
has been extended indefinitely, as the Health Care Financing Administration is
reviewing the bonding requirements pursuant to a recommendation by the United
States General Accounting Office.
The Balanced Budget Act of 1997 mandates that the Health Care Financing
Administration conduct competitive bidding demonstrations for Medicare Part B
items and services. Pursuant to this mandate, the Health Care Financing
Administration has issued notice to providers, including Apria, in Polk County,
Florida, of the structure and conditions for submitting bids to provide Medicare
beneficiaries with five categories of home medical equipment, including oxygen,
hospital beds, enteral products, surgical and urological supplies. The
competitive bidding demonstration, the first of its kind by the Health Care
Financing Administration and the first of five authorized by the Medicare Reform
Act of 1997, could provide the Health Care Financing Administration and Congress
with a model for implementing competitive pricing in all Medicare Programs. If
such a competitive bidding system were implemented, it could result in lower
reimbursement rates, exclude certain items and services from coverage or impose
limits on increases in reimbursement rates.
OPERATION RESTORE TRUST. In May 1995, the federal government announced an
initiative, known as Operation Restore Trust, which would increase significantly
the financial and human resources allocated to combating healthcare fraud, waste
and abuse. Private insurers and various state enforcement agencies also have
increased their scrutiny of healthcare claims in an effort to identify and
prosecute fraudulent and abusive practices. Under Operation Restore Trust, the
Office of the Inspector General of the Department of Health and Human Services,
in cooperation with other federal and state agencies, initially focused on the
activities of home health agencies, hospices, durable medical equipment
suppliers and nursing homes in New York, Florida, Illinois, Texas, and
California, states in which Apria has significant operations. In May 1997,
Operation Restore Trust expanded to include 12 more states and, in 1998, to a
total of 24 states and Puerto Rico, with the government indicating that
Operation Restore Trust was being incorporated as a permanent operation
throughout all government healthcare organizations nationwide.
THE ANTI-KICKBACK STATUTE. As a provider of services under the Medicare and
Medicaid programs, Apria is subject to the Medicare and Medicaid fraud and abuse
laws (sometimes referred to as the "anti-kickback statute"). At the federal
level, the anti-kickback statute prohibits any bribe, kickback or rebate in
return for the referral of patients covered by federal healthcare programs.
Federal healthcare programs have been defined to include plans and programs that
provide health benefits funded by the United States Government including
Medicare, Medicaid, and the Civilian Health and Medical Program of the Uniformed
Services, among others. Violations of the anti-kickback statute may result in
civil and criminal penalties and exclusion from participation in the federal
healthcare programs. In addition, a number of states in which Apria operates
have laws that prohibit certain direct or indirect payments (similar to the
anti-kickback statute) or fee-splitting arrangements between healthcare
providers, if such arrangements are designed to induce or encourage the referral
of patients to a particular provider. Possible sanctions for violation of these
restrictions include exclusion from state funded healthcare programs, loss of
licensure and civil and criminal penalties. Such statutes vary from state to
state, are often vague and have seldom been interpreted by the courts or
regulatory agencies.
PHYSICIAN SELF-REFERRALS. Subject to certain exceptions, certain provisions
of the Omnibus Budget Reconciliation Act of 1993, commonly known as "Stark II",
prohibit a physician from referring Medicare and Medicaid patients for
"designated health services" to an entity with which the physician or a member
of such physician's immediate family has a financial relationship. The term
"designated health services" includes several services commonly performed or
supplied by Apria, including durable medical equipment, home health services and
parenteral and enteral nutrition. In addition, "financial relationship" is
broadly defined to include any ownership or investment interest or compensation
arrangement pursuant to which a physician receives remuneration from the
provider at issue. Violations of Stark II may result in loss of Medicare and
Medicaid reimbursement, civil penalties and exclusion from participation in the
Medicare and Medicaid programs. Stark II is broadly written and at this point,
only proposed regulations have been issued to clarify its meaning and
application. Regulations for a predecessor law, Stark I, were published in
August 1995 and remain in effect, but provide little guidance on the application
of Stark II to Apria's business. While the proposed Stark II regulations do not
have the force and effect of law, they provide some guidance as to what may be
included in the final version. Issued on January 9, 1998, the proposed
regulations purport to define previously undefined key terms, clarify prior
definitions and create new exceptions for certain "fair market value"
transactions, de minimis compensation arrangements and discounts, among others.
It is unclear when these regulations will be finalized and until such time, they
cannot be relied upon in structuring transactions. In addition, a number of the
states in which Apria operates have similar prohibitions on physician
self-referrals. Finally, recent enforcement activity and resulting case law
developments have increased the legal risks of physician compensation
arrangements that do not satisfy the terms of an exception to Stark II,
especially in the area of joint venture arrangements with physicians.
FALSE CLAIMS. The False Claims Act imposes civil and criminal liability on
individuals or entities that submit false or fraudulent claims for payment to
the government. Violations of the False Claims Act may result in treble damages,
civil monetary penalties and exclusion from the Medicare and Medicaid programs.
The False Claims Act also allows a private individual to bring a qui tam
suit on behalf of the government against a healthcare provider for violations of
the False Claims Act. A qui tam suit may be brought by, with only a few
exceptions, any private citizen who has material information of a false claim
that has not yet been previously disclosed, and even if disclosed, the original
source of the information leading to the public disclosure may still pursue such
a suit. The typical private plaintiff in such a suit is a corporate insider who
decides to become a whistleblower. However, the law does not prohibit outsiders
from pursuing such suits and there has been an increase in outsiders pursuing
them.
In a qui tam suit, the private plaintiff is responsible for initiating a
lawsuit that may eventually lead to the government recovering money of which it
was defrauded. After the private plaintiff has initiated the lawsuit, the
government must decide whether to intervene in the lawsuit and become the
primary prosecutor. In the event the government declines to join the lawsuit,
the private plaintiff may choose to pursue the case alone, in which case the
private plaintiff's counsel will have primary control over the prosecution
(although the government must be kept apprised of the progress of the lawsuit
and will still receive at least 70% of any recovered amounts). In return for
bringing the suit on the government's behalf, the statute provides that the
private plaintiff is to receive up to 30% of the recovered amount from the
litigation proceeds if the litigation is successful. Recently, the number of qui
tam suits brought against healthcare providers has increased dramatically. In
addition, at least five states - California, Illinois, Florida, Tennessee, and
Texas - have enacted laws modeled after the False Claims Act that allow those
states to recover money which was fraudulently obtained by a healthcare provider
from the state (e.g., Medicaid funds provided by the state). Apria is presently
named as a defendant in at least one qui tam suit, brought by Kirk Corsello in
January 1998, which alleges that the company paid illegal kickbacks to
physicians and physician groups in Florida in exchange for home oxygen
referrals. The government recently announced that it would not join Mr.
Corsello's suit at the present time; however, Mr. Corsello has indicated that he
will continue to pursue the lawsuit. It is Apria's position that the assertions
brought by Mr. Corsello with respect to the company are unwarranted. However, no
assurance can be provided as to the outcome of this litigation.
OTHER FRAUD AND ABUSE LAWS. The Health Insurance Portability and
Accountability Act of 1996 created in part, two new federal crimes: "Health Care
Fraud" and "False Statements Relating to Health Care Matters." The Health Care
Fraud statute prohibits knowingly and willfully executing a scheme or artifice
to defraud any healthcare benefit program. A violation of this statute is a
felony and may result in fines and/or imprisonment. The False Statements statute
prohibits knowingly and willfully falsifying, concealing or covering up a
material fact by any trick, scheme or device or making any materially false,
fictitious or fraudulent statement in connection with the delivery of or payment
for healthcare benefits, items or services. A violation of this statute is a
felony and may result in fines and/or imprisonment.
Recently, the federal government has made a policy decision to
significantly increase the financial resources allocated to enforcing the
general fraud and abuse laws. In addition, private insurers and various state
enforcement agencies have increased their level of scrutiny of healthcare claims
in an effort to identify and prosecute fraudulent and abusive practices in the
healthcare area.
INTERNAL CONTROLS. Apria maintains several programs designed to minimize
the likelihood that Apria would engage in conduct or enter into contracts
violative of the fraud and abuse laws. Contracts of the types subject to these
laws are reviewed and approved at the corporate level. Apria maintains an
extensive contract compliance review program established and monitored by its
legal department. Apria also maintains various educational programs designed to
keep its managers updated and informed on developments with respect to the fraud
and abuse laws and to remind all employees of Apria's policy of strict
compliance in this area. While Apria believes its discount agreements, billing
contracts, and various fee-for-service arrangements with other healthcare
providers comply with applicable laws and regulations, Apria cannot provide any
assurance that further judicial interpretations of existing laws or legislative
enactment of new laws will not have a material adverse effect on Apria's
business. See "Business - Risk Factors".
HEALTHCARE REFORM LEGISLATION. Economic, political and regulatory
influences are subjecting the healthcare industry in the United States to
fundamental change. Healthcare reform proposals have been formulated by members
of Congress and by the current administration. In addition, some of the states
in which Apria operates periodically consider various healthcare reform
proposals. Apria anticipates that Congress and state legislatures will continue
to review and assess alternative healthcare delivery systems and payment
methodologies and public debate of these issues will continue in the future. Due
to uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, Apria cannot predict which, if any, of such reform
proposals will be adopted or when they may be adopted or that any such reforms
will not have a material adverse effect on Apria's business and results of
operations.
Healthcare is an area of extensive and dynamic regulatory change. Changes
in the law or new interpretations of existing laws can have a dramatic effect on
permissible activities, the relative costs associated with doing business and
the amount of reimbursement by government and other third-party payors.
Recommendations for changes may result from an ongoing study of patient access
by the General Accounting Office and from the potential findings of the National
Bipartisan Commission on the Future of Medicare.
EMPLOYEES
As of March 1, 1999, Apria had 8,175 employees, of which 6,824 were
full-time and 1,351 were part-time. The company's employees are not currently
represented by a labor union or other labor organization, except for
approximately 20 employees in the State of New York. Apria believes that its
employee relations are good.
The following table presents the number of Apria's full-time equivalent
employees in each of Apria's functional departments for the month of February
1999. Full-time equivalents are computed by dividing the actual number of hours
worked in a given period by the "normal" number of hours for that period based
on a 40-hour week.
Functional Department FTEs
--------------------- ----
Sales 370
Respiratory therapy 651
Nursing 188
Pharmacy 228
Patient Services 1,355
Reimbursement 1,501
Repair 207
Delivery 1,850
Warehouse 297
Administrative 866
-----
Total 7,513
=====
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles with Apria and present and past
positions of the persons serving as executive officers of Apria as of March 31,
1999:
Name and Age Office and Experience
------------ ---------------------
Philip L. Carter, 50............ Chief Executive Officer and Director. Mr. Carter has been Chief Executive Officer and a
Director of Apria since May 1998. Prior to joining Apria, Mr. Carter was President and
Chief Executive Officer of Mac Frugal's Bargains o Close-Outs Inc., a chain of retail
discount stores, since 1995 and had held the positions of Executive Vice President and
Chief Financial Officer of Mac Frugal's from 1991 through 1995.
Lawrence M. Higby, 53........... President and Chief Operating Officer. Mr. Higby joined Apria in November 1997. Prior to
joining Apria, Mr. Higby served as President and Chief Operating Officer of Unocal's 76
Products Company and Group Vice President of Unocal Corporation from 1994 to 1997. From
1986 to 1994, Mr. Higby held various positions with the Times Mirror Company, including
Executive Vice President, Marketing of the Los Angeles Times and Chairman of the Orange
County Edition from 1992 to 1994.
Michael R. Dobbs, 49 ........... Executive Vice President, Logistics. Mr. Dobbs was promoted to Executive Vice President,
Logistics in January 1999. He served as Senior Vice President, Logistics from June 1988
to January 1999. Prior to joining Apria, Mr. Dobbs served as Senior Vice President of
Distribution for Mac Frugal's Bargains o Close-Outs Inc. from 1991 to January 1998.
John C. Maney, 39 .............. Executive Vice President and Chief Financial Officer. Mr. Maney has been Executive Vice
President and Chief Financial Officer since joining Apria in November 1998. Prior to
joining Apria, Mr. Maney was employed by Arthur Andersen LLP since 1992 and was a partner
of such firm from 1995 to 1998.
Lawrence A. Mastrovich, 37 ..... Executive Vice President, Business Operations. Mr. Mastrovich was promoted to Executive
Vice President, Business Operations in October 1998. He served as Division Vice
President, Operations of the Northeast Division from December 1997 to October 1998. Prior
to that time he had served as a Regional Vice President for Apria and Homedco since 1994
and in various other capacities from 1987 to 1994.
Dennis E. Walsh, 49............. Executive Vice President, Sales. Mr. Walsh was promoted to Executive Vice President,
Sales in January 1998. Mr. Walsh served as Senior Vice President, Western Zone from March
1997 to January 1998. From June 1995 to March 1997, he served as Senior Vice President,
Sales and Marketing. He served as Vice President, Sales of Homedco from November 1987 to
June 1995.
Frank Bianchi, 54............... Senior Vice President, Human Resources. Mr. Bianchi joined Apria in May 1998 as its
Senior Vice President, Human Resources. Prior to joining Apria, Mr. Bianchi served as
Senior Vice President, Human Resources for Mac Frugal's Bargains o Close-Outs Inc. from
1989 until January 1998.
Lisa M. Getson, 37.............. Senior Vice President, Business Development and Clinical Services. Ms. Getson was named
Senior Vice President, Business Development and Clinical Services in August 1998. Ms.
Getson was promoted to Senior Vice President, Marketing in August 1997 after serving as
Vice President, Marketing from November 1995 to August 1997. She served as Director of
Marketing, Infusion from June 1995 to November 1995. From May 1994 to June 1995, she
served as Director of Business Development of Abbey. From 1989 to 1994, Ms. Getson held
various positions with Critical Care America, including Director of Marketing and Business
Development from January 1993 to May 1994.
Robert S. Holcombe, 56.......... Senior Vice President, General Counsel and Secretary. Mr. Holcombe was promoted to Senior
Vice President, General Counsel and Secretary in August 1997. He served as Vice
President, General Counsel and Secretary from May 1996 to August 1997. Prior to joining
Apria, Mr. Holcombe served as Senior Vice President and General Counsel for The Cooper
Companies, Inc., a diversified specialty healthcare company, from December 1989 to April
1996.
George J. Suda, 40 ............. Senior Vice President, Information Services. Mr. Suda was promoted to Senior Vice
President, Information Systems in July 1998. He served as Vice President, Information
Services Technology from June 1997 to July 1998 and as Director, Technology from January
1997 to June 1997. From July 1994 to January 1997, Mr. Suda was a self-employed
information services consultant, providing services to Abbey and Apria.
James E. Baker, 47 ............. Vice President, Controller. Mr. Baker has served as Vice President, Controller of Homedco
and, subsequently, Apria, since August 1991. He served as Corporate Controller of Homedco
from November 1987 to August 1991.
RISK FACTORS
This report contains forward-looking statements, which are subject to
numerous factors (many of which are beyond the company's control) which could
cause actual results to differ materially from those in the forward-looking
statements. Such forward looking statements include, but are not limited to,
statements as to anticipated futute results, developments and occurrences set
forth or implied:
- under the caption "Business - Business Strategy" and elsewhere in this
report as to measures being undertaken to improve profitability, and plans
for the future
- under the caption "Business - Organization and Operations - Operating
Systems and Controls
- under the caption "Business - Government Regulation - Internal Controls
- under the caption "Legal Proceedings" and elsewhere in this report
concerning the outcome of pending legal proceedings
- under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources"
- concerning Year 2000 compliance
- under the caption "Quantitative and Qualitative Disclosures About Market
Risk"
Apria has identified below important factors that could cause actual
results to differ materially from those projected in any forward-looking
statements the company may make from time to time.
HIGH LEVERAGE AND RESTRICTIVE COVENANTS - APRIA'S SUBSTANTIAL INDEBTEDNESS COULD
ADVERSELY AFFECT THE FINANCIAL HEALTH OF APRIA.
Apria has now and will continue to have a significant amount of indebtedness. At
December 31, 1998, Apria had total indebtedness of approximately $489 million
and stockholders' deficit of approximately $132 million.
Covenants contained in Apria's bank credit agreement and the indenture governing
Apria's outstanding 9 1/2% senior subordinated notes due 2002 contain material
restrictions on Apria's operations, including its ability to incur debt, make
certain investments and encumber or dispose of assets. Pursuant to the indenture
governing the outstanding notes, Apria is not currently permitted to incur any
indebtedness (other than certain refinancing indebtedness) and does not
anticipate that it will be entitled to incur additional indebtedness through at
least the third quarter of 1999. In addition, financial covenants contained in
Apria's bank credit agreement could lead to a default in the event results of
operations do not meet Apria's plans.
Apria's substantial indebtedness could have important consequences to Apria. For
example, it could:
-increase Apria's vulnerability to general adverse economic and industry
conditions
-limit Apria's ability to fund future working capital, capital
expenditures, acquisitions and other general corporate requirements
-require Apria to dedicate a substantial portion of its cash flow from
operations to payments on its indebtedness, thereby reducing the
availability of its cash flow to fund working capital, capital
expenditures, acquisitions and other general corporate purposes
-limit Apria's flexibility in planning for, or reacting to, changes in its
business and the industry in which it operates
-place Apria at a competitive disadvantage compared to its competitors that
have less debt
-limit, along with the financial and other restrictive covenants in Apria's
indebtedness, among other things, its ability to borrow additional funds
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
ABILITY TO SERVICE DEBT - TO SERVICE ITS INDEBTEDNESS, APRIA WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. APRIA'S ABILITY TO GENERATE CASH DEPENDS ON MANY
FACTORS BEYOND APRIA'S CONTROL.
Apria's ability to make payments on and to refinance its indebtedness and to
fund planned capital expenditures will depend on its ability to generate cash in
the future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond Apria's control.
Based on its current level of operations and anticipated cost savings and
operating improvements, Apria believes its cash flow from operations, available
cash and potentially available borrowings under its bank credit agreement will
be adequate to meet its future liquidity needs for at least the next twelve
months. Apria cannot assure prospective investors, however, that its business
will generate sufficient cash flow from operations, that currently anticipated
cost savings and operating improvements will be realized on schedule or at all
or that future borrowings will be available to Apria under its bank credit
agreement in an amount sufficient to enable Apria to pay its indebtedness or to
fund Apria's other liquidity needs. Apria may need to refinance all or a portion
of its indebtedness on or before maturity. Apria cannot assure prospective
investors that it will be able to refinance any of its indebtedness, including
its bank credit agreement on commercially reasonable terms or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
CHANGES IN COMPANY'S BUSINESS STRATEGY - APRIA MAY NOT BE ABLE TO SUCCESSFULLY
IMPLEMENT ITS NEWLY DEVELOPED BUSINESS STRATEGY WHICH COULD HAVE AN ADVERSE
EFFECT ON RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The management and Board of Directors of Apria changed substantially in 1998.
Apria's new management revised business plans, management structure and
operating procedures and strategies, and plans significant further changes for
the future. These changes involve substantial costs and inevitable disruption of
business operations. Changes in operating procedures and strategies, while
designed to improve efficiency, may not produce the cost reductions and
efficiencies anticipated. In pursuing its acquisition strategy, Apria may have
difficulty identifying appropriate acquisition candidates and consummating
transactions, and the process of integrating newly acquired businesses may be
costly and disruptive. In addition, Apria may not have sufficient available
funds to pursue its acquisition strategy. Apria is currently limited to making
acquisitions not to exceed $25 million per acquisition or $62 million in the
aggregate prior to August 9, 2001, the scheduled maturity date of the company's
bank credit agreement. Results of operations in future periods will be dependent
upon the success of Apria's business strategy. If Apria is not successful in
achieving anticipated cost reductions and revenue increases, results will be
adversely affected. See "Business - Business Strategy".
SIGNIFICANT RECENT LOSSES AND LIQUIDITY LIMITATIONS - APRIA MAY NOT BE
SUCCESSFUL IN ITS EFFORTS TO SUSTAIN THE REVERSAL OF ITS RECENT HISTORICAL NET
LOSSES.
Apria has suffered significant net losses in the last two fiscal years. Although
Apria reported a profit for the fourth quarter of 1998, there can be no
assurance that Apria will be able to continue its turnaround and operate
profitably in the future. Due to restrictions in Apria's bank credit agreement
and the indenture governing the company's 9-1/2% senior subordinated notes,
Apria, at least through September 30, 1999, must successfully utilize its
existing resources in order to finance its operations and implement its business
strategy. While existing cash reserves appear sufficient to meet Apria's
identified needs for the remainder of 1999, Apria cannot assure that such
existing resources will be adequate for such purposes indefinitely. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
FEDERAL INVESTIGATIONS - THE OUTCOME OF THE INVESTIGATIONS THAT THE U.S.
DEPARTMENT OF JUSTICE IS CURRENTLY CONDUCTING ON APRIA'S MEDICARE, MEDICAID AND
OTHER BILLING PRACTICES COULD HAVE A NEGATIVE IMPACT ON APRIA'S OPERATIONS AND
FINANCIAL CONDITION.
Since June 1998, Apria has received a total of nine subpoenas from the U.S.
Attorneys' offices in Sacramento and San Diego, California, requesting documents
related to the company's billing practices. The documents requested include
those located at Apria's corporate headquarters in Costa Mesa, California, and
offices in San Diego and Sacramento, California, and Canonsburg, Pennsylvania.
Apria has substantially completed the process of complying with the subpoenas.
Apria has experienced problems as a result of errors and deficiencies in
supporting documentation affecting a portion of its billings, including billings
under the Medicare and Medicaid programs. If the U.S. Department of Justice were
to conclude that such errors and deficiencies constituted criminal violations,
or were to conclude that such errors and deficiencies resulted in the submission
of false claims to federal healthcare programs, Apria could face criminal
charges and/or civil claims, administrative sanctions and penalties for amounts
that would be highly material to its business, results of operations and
financial condition, including exclusion of Apria from participation in federal
healthcare programs. Such amounts could include claims for treble damages and
penalties of up to $10,000 per false claim submitted by Apria to a federal
healthcare program. It is the company's position that the assertion of criminal
charges or the assertion of any such claims would be unwarranted. If such
charges or claims were asserted, Apria believes that it would be in a position
to assert numerous defenses. However, no assurance can be provided as to the
outcome of any such possible proceedings.
Presently, Apria is unaware of what claims or proceedings, if any, the
government may be contemplating with respect to these subpoenas.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE - APRIA'S FAILURE TO IMPROVE ACCOUNTS
RECEIVABLE MANAGEMENT WOULD HAVE A SIGNIFICANT NEGATIVE IMPACT ON RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
Results of operations have been adversely affected by high levels of accounts
receivable write-offs. Apria wrote off accounts receivable totaling $246
million, $302 million and $269.5 million in 1998, 1997 and 1996, respectively.
Initially caused by the disruptive effects of the 1995 and 1996 system
conversions effected in conjunction with the Abbey/Homedco merger, the high
level of accounts receivable write-offs are largely due to billing problems such
as untimely billing, improper and/or untimely preparation of, and deficiencies
in, reimbursement documentation, problems with the billing systems and the high
concentration of managed care payors from whom it has been difficult to collect.
Apria records receivables upon confirmation of the delivery of medical services
or products which is typically prior to billing and the preparation and
submission of reimbursement documentation, which can create increased collection
risks if invoices and documentation are not prepared correctly and on a timely
basis. Although management has implemented a number of initiatives and invested
significant resources to address the problems, the high level of write-offs
continued into 1998. There can be no assurance that the collectibility of
Apria's recorded accounts receivable will improve in the near future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
OPERATING SYSTEMS AND CONTROLS - APRIA'S IMPLEMENTATION OF SIGNIFICANT SYSTEM
MODIFICATIONS TO ADDRESS SYSTEM PROBLEMS EXPERIENCED IN PRIOR PERIODS COULD HAVE
A DISRUPTIVE EFFECT ON BILLING AND COLLECTION ACTIVITY AND COULD ULTIMATELY HAVE
A SIGNIFICANT NEGATIVE IMPACT ON RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Following the 1995 merger of Apria's two predecessor corporations, the company
has been adversely affected by difficulties in the establishment of a common
field information system for accurate order entry, pricing, billing, collections
and monitoring, as well as by ongoing operational problems such as high turnover
and training issues. To address these issues, management performed an evaluation
of its current systems. A significant determination of the evaluation is that
Apria is at some risk in continuing to run its infusion billing system on its
current platform, which is no longer supported by the computer industry. To
mitigate this risk, Apria is currently converting the infusion system to the
operating platform on which the respiratory/home medical equipment system
currently operates. To address the system problems experienced since the merger,
Apria is rewriting the order entry, billing and accounts receivable modules and
is installing supply chain management software to replace the purchasing and
inventory modules. There can be no assurance that the system modifications will
resolve the problems experienced in prior periods and the implementation of
these system changes could have a disruptive effect on billing and collection
activity. See "Business - Organization and Operations - Operating Systems and
Controls".
PERSONNEL TURNOVER - IF APRIA'S HIGH LEVEL OF PERSONNEL TURNOVER CONTINUES, IT
IS UNLIKELY THAT THE COMPANY WILL BE ABLE TO SUCCESSFULLY IMPLEMENT ITS BUSINESS
STRATEGIES, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
Apria's annual turnover has been at approximately 30% for most of 1998, 1997 and
1996. Apria's turnover has been highest among senior management, middle
management and the sales force. The turnover has been largely due to uncertainty
about Apria's future, its strategies and the mix of products and services
offered. No assurance can be given that recent changes in senior management and
efforts to establish a comprehensive strategy will reduce this turnover.
GOVERNMENT REGULATION; HEALTHCARE REFORM - NON-COMPLIANCE WITH LAWS AND
REGULATIONS APPLICABLE TO APRIA'S BUSINESS AND FUTURE CHANGES IN THOSE LAWS AND
REGULATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON APRIA.
Apria is subject to stringent laws and regulations at both the federal and state
levels, requiring compliance with burdensome and complex billing, substantiation
and record-keeping requirements. Financial relationships between Apria and
physicians and other referral sources are subject to strict limitations. In
addition, the provision of services, pharmaceuticals and equipment are subject
to strict licensing and safety requirements. Violations of these laws and
regulations could subject Apria to severe fines, facility shutdowns and possible
exclusion from participation in federal healthcare programs such as Medicare and
Medicaid.
Government officials and the public will continue to debate healthcare reform.
Changes in healthcare law, new interpretations of existing laws, or changes in
payment methodology may have a dramatic effect on Apria's business and results
of operations. See "Business - Government Regulation".
MEDICARE REIMBURSEMENT RATES - CONTINUED REDUCTIONS IN MEDICARE REIMBURSEMENT
RATES COULD HAVE A MATERIAL ADVERSE EFFECT ON RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Pursuant to the provisions of the Balanced Budget Act of 1997, the Medicare
reimbursement rates for home oxygen therapy and respiratory drugs were reduced
by 25% and 5%, respectively, effective January 1, 1998. An additional
reimbursement reduction of 5% on home oxygen therapy was effective on January 1,
1999. Also included in the Balanced Budget Act of 1997 is a freeze on Consumer
Price Index-based reimbursement rate increases for 1998 through 2002 as well as
other provisions which may impact reimbursement rates in the future. At least
three products Apria provides have been identified as potential 1999
reimbursement reduction candidates. See "Business - Government Regulation -
Medicare and Medicaid Reimbursement".
PRICING PRESSURES - APRIA BELIEVES THAT CONTINUED PRESSURE TO REDUCE HEALTHCARE
COSTS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY.
The current market continues to exert pressure on healthcare companies to reduce
healthcare costs, resulting in reduced margins for home healthcare providers
like Apria. Larger buyer and supplier groups exert additional pricing pressure
on home healthcare providers. These include managed care organizations, which
control an increasing portion of the healthcare economy. Apria has a number of
contractual arrangements with managed care organizations and other parties,
although no individual arrangement accounted for more than 7% of Apria's net
revenues in fiscal 1997 or 1998. Certain competitors of Apria have or may obtain
significantly greater financial and marketing resources than Apria. In addition,
relatively few barriers to entry exist in local home healthcare markets. As a
result, Apria could encounter increased competition in the future that may
increase pricing pressure and limit its ability to maintain or increase its
market share. See "Business - Sales" and "Business - Competition".
YEAR 2000 COMPLIANCE - APRIA COULD BE ADVERSELY AFFECTED IF YEAR 2000 PROBLEMS
ARE SIGNIFICANT.
The year 2000 issue is the result of many software applications being written
using two digits rather than four to define the applicable year, which may cause
the application to recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failure or malfunction. Apria has
substantially completed the necessary modifications to its field information
systems and is in the process of evaluating its ancillary systems to ensure that
they are year 2000-compliant. Further, Apria is assessing the year 2000
readiness of its external business partners such as payors, banks and suppliers.
If Apria is unable to resolve all its year 2000 issues, including those with
external agents, it may have a material adverse effect on Apria's operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".
ITEM 2. PROPERTIES
Apria's headquarters are located in Costa Mesa, California and consist of
approximately 112,000 square feet of office space. The lease expires in 2001.
Apria has approximately 320 branch facilities serving patients in all 50 states.
These branch facilities are typically located in light industrial areas and
average approximately 10,000 square feet. Each facility is a combination
warehouse and office, with approximately 50% of the square footage consisting of
warehouse space. Apria leases substantially all of its facilities with lease
terms of generally five years or less.
ITEM 3. LEGAL PROCEEDINGS
Apria and certain of its present and former officers and/or directors are
defendants in a class action lawsuit, In Re Apria Healthcare Group Securities
Litigation, filed in the U.S. District Court for the Central District of
California, Southern Division (Case No. SACV98-217 GLT). This case is a
consolidation of three similar class actions filed in March and April, 1998.
Pursuant to a court order dated May 27, 1998, the plaintiffs in the original
three class actions filed a Consolidated Amended Class Action Complaint on
August 6, 1998. The amended complaint purports to establish a class of plaintiff
shareholders who purchased Apria's common stock between May 22, 1995 and January
20, 1998. No class has been certified at this time. The amended complaint
alleges, among other things, that the defendants made false and/or misleading
public statements regarding Apria and its financial condition in violation of
federal securities laws. The amended complaint seeks compensatory and punitive
damages as well as other relief.
Two similar class actions were filed during July 1998 in Superior Court of
California for the County of Orange: Schall v. Apria Healthcare Group Inc., et
al. (Case No. 797060) and Thompson v. Apria Healthcare Group Inc., et al. (Case
No. 797580). These two actions were consolidated by a court order dated October
22, 1998. The parties have agreed that a new and first amended complaint will be
filed. Apria anticipates that allegations similar to those asserted in the
amended complaint in the federal action will be asserted in the consolidated
state action, although the claims will be founded on state law, as opposed to
federal law.
Apria believes that it has meritorious defenses to the plaintiffs' claims,
and it intends to vigorously defend itself in both the federal and state cases.
In the opinion of Apria's management, the ultimate disposition of these class
actions will not have a material adverse effect on the company's financial
condition or results of operations.
Apria has received nine subpoenas from the U.S. Department of Justice
requesting documents related to the company's billing practices. See "Business -
Risk Factors - Federal Investigation".
Apria is presently named as a defendant in at least one whistleblower suit
brought under the False Claims Act. See "Business - Government Regulation -
Other Fraud and Abuse Laws".
Apria is also engaged in the defense of certain claims and lawsuits arising
out of the ordinary course and conduct of its business, the outcomes of which
are not determinable at this time. Apria has insurance policies covering such
potential losses where such coverage is cost effective. In the opinion of
management, any liability that might be incurred by Apria upon the resolution of
these claims and lawsuits will not, in the aggregate, have a material adverse
effect on the company's consolidated results of operations and financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Apria's stockholders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Apria's common stock is traded on the New York Stock Exchange under the
symbol AHG. The table below sets forth, for the calendar periods indicated, the
high and low sales prices per share of Apria common stock:
High Low
---- ---
Year ended December 31, 1998
First Quarter $14.1250 $ 8.3125
Second Quarter 10.0000 6.0625
Third Quarter 7.1875 4.0000
Fourth Quarter 9.0625 2.5625
Year ended December 31, 1997
First Quarter $20.6250 $16.5000
Second Quarter 19.3750 15.0000
Third Quarter 18.5000 12.7500
Fourth Quarter 17.0000 13.0625
As of March 31, 1999 there were 848 holders of record of Apria common
stock.
Apria has not paid any dividends since its inception and does not intend to
pay any dividends on its common stock in the foreseeable future. In addition,
Apria has a bank credit agreement which prohibits the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of Apria, giving
effect, in periods prior to June 28, 1995, to the merger between Homedco and
Abbey using the pooling-of-interests method of accounting, for the five years
ended December 31, 1998. The data set forth below have been derived from the
audited Consolidated Financial Statements of Apria and are qualified by
reference to, and should be read in conjunction with, the Consolidated Financial
Statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in this report. As
discussed in the Notes to the Consolidated Financial Statements, certain
adjustments have been made to conform the two companies' accounting practices.
Year Ended December 31,
-----------------------------------------------------------------
1998(1,2) 1997(1,3) 1996(1,4) 1995(4,5,6) 1994(4,6,7)
--------- --------- --------- ----------- -----------
(in thousands, except per share amounts)
Statements of Operations Data:
Net revenues.................................... $ 933,793 $1,180,694 $1,181,143 $1,133,600 $ 962,812
Gross profit.................................... 603,098 729,512 780,468 772,601 675,122
(Loss) income from continuing operations
before extraordinary items................... (207,938) (272,608) 33,300 (71,478) 35,616
Net (loss) income............................... (207,938) (272,608) 33,300 (74,476) 39,031
Per share amounts:
(Loss) income from continuing operations
before extraordinary items............... $ (4.02) $ (5.30) $ 0.66 $ (1.52) $ 0.84
Net (loss) income per common share.......... $ (4.02) $ (5.30) $ 0.66 $ (1.58) $ 0.92
Per share amounts - assuming dilution:
(Loss) income from continuing operations
before extraordinary items............... $ (4.02) $ (5.30) $ 0.64 $ (1.52) $ 0.78
Net (loss) income per common share.......... $ (4.02) $ (5.30) $ 0.64 $ (1.58) $ 0.85
Balance Sheet Data:
Working capital................................. $ 14,929 $ 169,090 $ 311,991 $ 198,630 $ 157,608
Total assets.................................... 496,598 757,170 1,149,110 979,985 856,167
Long-term obligations,
including current maturities.................. 488,586 548,905 634,864 500,307 438,304
Stockholders' equity (deficit).................. (131,657) 74,467 342,935 284,238 261,910
(1) As described in Item 7, Apria recorded significant charges to provide for
estimated losses related to accounts receivable. In 1998, $18.3 million was
recorded to increase the allowance for revenue adjustments and $22.7
million was charged to increase the allowance for doubtful accounts. These
charges relate primarily to changes in collection policies and in
conjunction with certain portions of the business from which the company
exited. Apria recorded charges of $40 million and $32.3 million in 1997 and
1996, respectively, to increase the allowance for revenue adjustments and
$61.4 million and $9 million in 1997 and 1996, respectively, to increase
the allowance for doubtful accounts. These charges were due primarily
to the residual effects of the 1995 and 1996 facility consolidations and
system conversions effected in conjunction with the Abbey/Homedco merger.
(2) As described in Item 7 and in Notes 3, 4 and 14 to the Consolidated
Financial Statements, the operations data for 1998 includes impairment
charges of $76.2 million to write down the carrying values of intangible
assets and $22.2 million to write-off information systems hardware,
internally-developed software and assets associated with the exit of
portions of the business.
(3) As described in Item 7 and in Notes 3, 4, 8 and 14 to the Consolidated
Financial Statements, the operations data for 1997 includes significant
adjustments and charges to write down the carrying values of intangible
assets and information systems hardware and internally-developed software
of $133.5 million and $26.8 million, respectively, to increase the
valuation allowance on deferred tax assets by $30 million, and to provide
for estimated shortages related to patient service assets inventory of
$33.1 million.
(4) The per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, Earnings
per Share. For further discussion, see Note 9 to the Consolidated Financial
Statements.
(5) In 1995, Apria incurred charges related to merger, restructuring and
integration activities in conjunction with the Abbey/Homedco merger.
(6) The Statements of Operations and Balance Sheet Data reflect the June 28,
1995 Abbey/Homedco merger using the pooling-of-interests method of
accounting. Accordingly, the financial data for all periods prior to June
28, 1995 have been restated as though the two companies had been combined.
(7) In 1994, Apria disposed of its 51% interest in Abbey Pharmaceutical
Services, Inc.
Apria did not pay any cash dividends on its common stock during any of the
periods set forth in the table above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Apria operates in the home healthcare segment of the healthcare industry
and provides services including home respiratory therapy, home infusion therapy,
home medical equipment and other services. In all three lines, Apria provides
patients with a variety of clinical services and related products and supplies,
most of which are prescribed by a physician as part of a care plan. Apria
provides these services to patients in the home throughout the United States
through its 320 branch locations. Management measures operating results on a
geographic basis and, therefore, views each branch as an operating segment. All
the branches offer the same services, except that infusion services are not
offered in all the geographic markets in which the company operates. For
financial reporting purposes, all the company's operating segments are
aggregated into one reportable segment.
BACKGROUND. In June 1997, Apria announced that it had retained an
investment banking firm as its financial advisor to explore strategic
alternatives to enhance shareholder value, including the possible sale, merger
or recapitalization of Apria. During the first quarter of 1998, Apria entered
into a recapitalization agreement; however, the agreement was terminated by
mutual consent of the parties on April 3, 1998. This process and resulting
uncertainties are believed to have adversely affected Apria's financial results.
By May 1998, Apria's active exploration of strategic alternatives was terminated
as a result of hiring a new Chief Executive Officer and other key management
executives and the reconfiguration of the Board of Directors.
In July 1998, after an evaluation of the business, Apria's new management
team announced its strategic plan, or "reorganization", to improve the company's
performance. The key elements of the reorganization are: (1) no change would be
made to the fundamental nature of the business, (2) Apria would withdraw from
unprofitable components of the business, which would include exiting the
infusion therapy business in certain geographic areas, (3) a comprehensive cost
reduction and capital conservation program would be instituted, (4) Apria would
pursue expansion through internal growth and acquisitions, and (5) the debt and
capital structure would be reexamined. Significant actions taken by Apria's new
management team since it announced the reorganization include: a change in
management's collection policy and a refinement of the accounts receivable
collectibility estimation methodologies as described below, the sale of the
California component of the infusion therapy business ("the infusion sale"), the
exit of the infusion therapy business in Texas, Louisiana, West Virginia,
western Pennsylvania and downstate New York and the consolidation or closure of
certain small branch locations throughout the United States (collectively, "the
exited businesses"). Other significant actions include the termination of plans
to proceed with the capital-intensive implementation of an enterprise resource
planning system, a significant reduction of corporate and regional labor and
general administrative costs and the development of a comprehensive plan to
capture cost savings in the areas of purchasing, distribution and inventory
management.
RESULTS OF OPERATIONS
NET REVENUES. Substantially all of Apria's revenues are reimbursed by third
party payors, including Medicare, Medicaid and managed care organizations,
representing approximately 26%, 10% and 40% of total revenues, respectively.
Due to the nature of the industry and the reimbursement environment in
which Apria operates, certain estimates are required in recording net revenues.
Inherent in these estimates is the risk that they will have to be revised or
updated, and the changes recorded in subsequent periods, as additional
information becomes available to management.
In June of 1997, Apria determined that its strategy to focus on increasing
managed care market share had negatively impacted its financial performance,
particularly for infusion therapy, because of significant managed care price
compression, difficulties in billing and collecting from managed care
organizations and related losses of traditional referral business. In response
to these conditions, management reevaluated its strategies and began efforts to
exit certain managed care contracts not meeting minimum profitability
thresholds, as well as certain lower-margin service lines and began to
reemphasize traditional referral-based business from sources such as physicians,
hospitals, medical groups and home health agencies.
Service lines targeted for exit in 1997 included medical supplies, women's
health and nursing management, which represented annual revenues of
approximately $55.8 million. Some portion of the medical supply and nursing
business is expected to continue due to core service line customer requirements.
Through the end of 1997, Apria had exited contracted business representing
approximately $25 million in annual revenues. The contract review process
continued into 1998 resulting in the termination of contracts totaling
approximately $19 million in annual revenues. A consequence of the initiatives
to exit certain service lines and to exit certain low-margin managed care
contracts was the loss of related business which Apria would have preferred to
retain.
In addition to the specific quantifiable reductions to revenue mentioned
herein, revenues were adversely impacted by various other factors. In mid-1997
Apria began a process to explore the feasibility of entering into a transaction
such as a sale, merger or recapitalization. Apria entered into an agreement for
a recapitalization transaction during the first quarter of 1998 which was
subsequently terminated. The entire process created an environment of
uncertainty, both within Apria and with its customers and other business
partners. During this same period there were a number of changes in senior
management and to the Board of Directors, which added to the distraction and
raised more uncertainty. These issues led Apria to be characterized in a very
negative light in various newspapers and trade journals. Also, during this
period of turmoil, Apria found it very difficult to attract and retain quality
sales personnel which left many geographic sales territories lacking sufficient
coverage to compete effectively. All of these factors have adversely impacted
revenues, but attributing dollar amounts to each would not be feasible.
The following table sets forth a summary of net revenues by service line:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in millions)
Respiratory therapy................... $ 553 $ 606 $ 594
Infusion therapy...................... 211 281 293
Home medical equipment/other.......... 170 294 294
------ ------ ------
Total net revenues.............. $ 934 $1,181 $1,181
====== ====== ======
Respiratory Therapy. The decrease in respiratory revenues in 1998 compared
to 1997 is almost entirely due to the reduction of Medicare reimbursement rates
pursuant to the provisions of the Balanced Budget Act of 1997. Effective January
1, 1998, the Medicare reimbursement rates for home oxygen therapy and
respiratory drugs were reduced by 25% and 5%, respectively. The estimated
decrease in 1998 revenues and operating income resulting from these
reimbursement reductions is approximately $57 million. A further reimbursement
reduction of 5% on home oxygen therapy became effective on January 1, 1999,
which is estimated to reduce 1999 revenues and operating income by approximately
$11 million. Also effective January 1, 1998, was a freeze on Consumer Price
Index-based increases until 2002.
The increase in respiratory therapy revenues in 1997 over 1996 is due to
Apria's concerted effort in early 1997 to refocus on respiratory therapy and to
increase the number of territories covering this higher-margin traditional
business.
Infusion Therapy. The decrease in infusion therapy revenues in 1998 is
primarily due to the termination of unprofitable contracts and formidable
competition at the local and national levels. Also impacting 1998 infusion
therapy revenues was the decision to sell/exit the infusion business in certain
geographic markets. The decision was made at the end of the third quarter and
the transition out of the business in substantially all of the selected areas
took place in the fourth quarter. The impact on 1998 revenues during the
transition period was a reduction of approximately $9.5 million. The annual
revenues represented by these infusion locations is approximately $52 million.
The decrease in infusion revenues in 1997 as compared to 1996 reflects the
early effects of the contract termination process, the increased competition and
the company's focus on the respiratory business.
Home Medical Equipment/Other. Home medical equipment/other revenues
decreased significantly in 1998 as compared to 1997. The primary causes were due
to discontinuing the medical supply, women's health and nursing management
service lines and terminating unprofitable contracts. Further, the termination
of contracts or loss of business in the respiratory and infusion therapy lines
resulted in the loss of collateral business within the home medical
equipment/other line.
Home medical equipment/other revenues remained flat from 1997 to 1996. This
represents growth in the early part of 1997 due to Apria's emphasis on obtaining
managed care business as offset by the loss of medical supply and nursing
revenues in the latter part of 1997.
The freeze on Consumer Price Index-based Medicare reimbursement increases
discussed above is applicable to certain patient service equipment items within
Apria's home medical equipment line.
Revenue Adjustments. Due to the complexity of many third-party billing
arrangements and uncertainty of reimbursement amounts for certain services
and/or from certain payors, adjustments to billed amounts are fairly common and
are typically identified and recorded at the point of cash application, claim
denial or upon account review. Examples of such revenue adjustments include
subsequent changes to estimated revenue amounts or denials for services not
covered due to changes in the patient's coverage; failure subsequent to service
delivery to obtain written confirmation of authorization or other necessary
documentation; and differences in contract prices due to complex contract terms
or a biller's lack of familiarity with a contract or payor. Further, increases
in Apria's average collection periods have increased the level of unidentified
revenue adjustments accumulating in accounts receivable. These problems
originated during the system conversions and branch consolidations effected in
1995 and 1996. The related disruptions and employee turnover impeded normal
processing and account reviews and resulted in a high rate of billing problems.
Although management has taken a number of steps to address the billing and
collection problems, the high levels of revenue adjustments have persisted. Due
to the existence of unidentified revenue adjustments in accounts receivable,
management estimates and records an allowance for such adjustments. In 1998,
1997 and 1996, management recorded adjustments to reduce revenues and accounts
receivable by $18.3 million, $40.0 million and $32.3 million, respectively. See
"Liquidity and Capital Resources - Accounts Receivable".
GROSS PROFIT. Gross margins were 64.6% in 1998, 61.8% in 1997 and 66.1% in
1996. Despite the decrease in revenues due to the Medicare reimbursement rate
reductions, Apria's gross margin improved in 1998. The improvement in 1998
versus 1997 is attributable to a number of factors, the most significant of
which is the elimination of contracts not meeting profitability standards.
Mitigating the improvement were certain charges recorded during the third
quarter reorganization including $5.4 million to settle certain procurement
contracts, $3.5 million to provide for estimated losses in the company's oxygen
cylinders and $1.6 million to write-off operational assets in conjunction with
exiting certain portions of the infusion business.
As part of the new management team's strategy, a consulting firm was
engaged to help identify opportunities for operational improvement and cost
savings in the functional areas of purchasing and supply management, inventory
management and vehicle fleet and delivery management. A plan was adopted and
implementation began in early 1999. Included in the plan are standardization
initiatives and optimal operating models.
The deterioration in the gross margin in 1997 as compared to 1996 was due,
in part, to the downward pressure of managed care pricing on gross margins. Also
contributing to the decrease were charges of $23.0 million and $10.1 million
recorded in the second and fourth quarters of 1997, respectively. The second
quarter charge of $23.0 million was estimated based on the preliminary results
of asset verification and physical inventory procedures performed in the second
quarter. The adjustment was sufficient to cover actual write-offs resulting from
the third quarter completion of the company's asset verification and physical
inventory procedures. The charge was primarily due to untimely inventory relief
processes that were among the residual effects of the 1995 and 1996 system
conversions and related high employee turnover. The fourth quarter charge of
$10.1 million was an adjustment for additional inventory shortages incurred
since the completion of the second and third quarter asset verifications.
Because of the inventory relief problem, management performed supplemental
physical inventory procedures at a sampling of branches in the fourth quarter.
The procedure indicated continuing inventory and patient service equipment
shortages, therefore management estimated and recorded an increase to the
related reserves. Also contributing to the decrease in gross profit in 1997 was
an increase in patient service equipment depreciation of $17.3 million over 1996
due to higher levels of asset purchases in 1996 and 1995.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts as a
percentage of net revenues was 8.1%, 10.3% and 5.7% in 1998, 1997 and 1996,
respectively. In August 1998, management reviewed the historic performance and
collectibility of Apria's accounts receivable portfolio. Management considered
the continued high-level of bad debt write-offs and reviewed its existing
policies and procedures for estimating the collectibility of its accounts
receivable. In response, management decided to change the collection policy and
is formally shifting the focus of the collection function to the more current
balances and is assigning the older accounts to outside collection agencies.
Management believes this concentration on more current balances will limit the
amount of receivables that age. Consequently, the accounts that do age will
undoubtedly be receivables where collection will be difficult. With this change
in collection policy, management developed a new estimate of the allowance for
doubtful accounts by increasing the allowance related to balances over 180 days
outstanding. Accordingly, management recorded an adjustment in the third quarter
of 1998 to increase the allowance for doubtful accounts by $12.1 million. The
1998 provision includes $1.5 million for specific uncollectible accounts and
charges totaling $9.1 million to increase the allowance for accounts associated
with the infusion sale and the exited businesses. See "Liquidity and Capital
Resources - Accounts Receivable".
The 1997 provision for doubtful accounts included adjustments of $55.0
million and $6.4 million recorded in the second and fourth quarters,
respectively, to increase the allowance for doubtful accounts. The second
quarter adjustment was necessary because improvement in the aging of accounts
receivable and in collection timing and rates did not meet expectations.
Management had expected the impact of the 1996 field information system
conversions and high turnover among billing and collection personnel to have
substantially reversed by the middle of 1997. However, the dollar amount and
percentage of accounts aged over 180 days at May 31, 1997 remained comparable to
the December 31, 1996 amount and days sales outstanding had decreased by only
five days. Additionally, Apria had just changed its business strategy to review
its managed care contracts and exit those not meeting profitability standards
and to exit unprofitable service lines such as supplies and nursing that were
attractive to many managed care customers. These strategies put Apria's
relationship with certain of its managed care customers in jeopardy, which when
coupled with the company's poor experience in collecting receivables with
managed care payors, heightened management's concerns. Due to the managed care
issues and the failure to realize the expected increases in collections and
improvement in the aging, management increased its allowance estimate for
accounts aged over 180 days to provide for write-offs of older accounts expected
to be taken in the ensuing months. The adjustment also provided for an increased
allowance estimate for accounts aged less than 180 days, necessitated by billing
and collection difficulties that continued into early 1997. The fourth quarter
adjustment resulted primarily from refinements to Apria's allowance estimation
procedures made in conjunction with management's year-end analysis of accounts
receivable. Specifically, based on tests of subsequent realization and review of
patient billing files at selected billing locations, further increases were made
to the percentages applied to Apria's accounts receivable aging to estimate
allowance amounts. In addition, due to an increasing tendency for certain
managed care payors to accumulate significant amounts of patient balances, a
specific review and allowance estimation was performed for payors with large
aggregate patient balances. See "Liquidity and Capital Resources - Accounts
Receivable".
SELLING, DISTRIBUTION AND ADMINISTRATIVE. Selling, distribution and
administrative expenses as a percentage of net revenues were 61.6%, 52.2% and
49.1% for 1998, 1997, and 1996, respectively. The increase in selling,
distribution and administrative expenses as a percent of revenue from 1997 to
1998 is directly attributable to the lower revenue base in 1998. Actual expenses
for 1998 decreased $40.8 million from the previous year. In response to the
reduction in revenues, management has taken steps to reduce costs, the most
significant of which was a reduction in the company's labor force which
commenced in the fourth quarter of 1997 and continued throughout 1998. From
September 30, 1997 to December 31, 1998, Apria reduced its full-time equivalent
employees by approximately 1,700. The majority of the labor reductions made in
1998 resulted from the third quarter reorganization of Apria's field operations
into 16 geographic regions (previously 23, currently 15) and through the
elimination of positions at the company's corporate headquarters.
Selling, distribution and administrative expenses include the following
reorganization charges in the third quarter of 1998: $3.8 million loss on the
infusion sale, $1.8 million to record certain costs associated with the exited
businesses, $3.9 million in severance, stay bonuses and other employee costs and
$2.0 million in lease liability on vacant facilities due to facility
consolidation activities. Other charges recorded in the third quarter of 1998
include additional amounts for legal fees and settlements.
Selling, distribution and administrative expenses for 1997 increased $35.7
million over 1996. The increase was due, in part, to increased staffing levels
in those functional areas where the company had been experiencing operational
difficulties. Third and fourth quarter terminations of approximately 525
employees resulted in severance and related excise tax charges totaling $7.9
million. Charges of $2.3 million were also recorded in 1997 in connection with
exiting certain business lines and closing facilities.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets was
$12.5 million, $16.8 million and $16.9 million in 1998, 1997 and 1996,
respectively. The decrease in 1998 is due to the write-off of impaired goodwill
of $76.2 million in the third quarter of 1998 and $133.5 million in the fourth
quarter of 1997. The resulting reduction in amortization expense was offset
slightly by a reduction in the amortization period for infusion-related goodwill
from 40 years to 20 years.
IMPAIRMENT OF INTANGIBLE ASSETS. In 1998, the deterioration in the infusion
therapy industry and Apria's decision to withdraw from the infusion business in
certain geographic markets served as indicators of potential intangible asset
impairment. Other indicators of potential impairment identified by management
include, among other issues, the company's depressed common stock price, failure
to meet its already lowered financial expectations, the threat of continued
Medicare reimbursement reductions, government investigations against the
company, slower than expected progress in improving its revenue management
process, and reported financial difficulties within major managed care
organizations with which the company does business, resulting in collection
difficulties. Management conducted an evaluation of the carrying value of the
company's recorded intangible assets. Management considered current and
anticipated industry conditions, recent changes in its business strategies, and
current and anticipated operating results. The evaluation resulted in an
impairment charge of $76.2 milllion which was recorded in the third quarter of
1998. The charge includes a write-off of $4.8 million in intangible assets
associated with the exit of the infusion business in certain areas.
Certain 1997 conditions, including Apria's failure to meet projections and
expectations, declining gross margins, recurring operating losses, significant
downward adjustment to the company's projections for 1998 and a depressed common
stock value, were identified by management as indicators of potential intangible
asset impairment. In the fourth quarter of 1997, management conducted an
evaluation of the carrying value and amortization periods of recorded intangible
assets. Management considered current and anticipated industry conditions,
recent changes in its business strategies and current and anticipated operating
results. The evaluation resulted in an impairment charge of $133.5 million which
was recorded in the fourth quarter of 1997. In conjunction with the impairment
evaluation, management reduced the amortization period for goodwill related to
acquired infusion therapy businesses from 40 years to 20 years. The remaining
infusion-related goodwill is being amortized over the years remaining assuming a
20-year life from date of acquisition.
For purposes of assessing impairment, assets were grouped at the branch
level, which is the lowest level for which there are identifiable cash flows
that are largely independent. A branch location was deemed to be impaired if the
company's estimate of undiscounted cash flows was less than the carrying amount
of the long-lived assets and goodwill at the branch. In estimating future cash
flows, management used its best estimates of anticipated operating results over
the remaining useful life of the assets where, in the case of the 1997
computation, the useful life is the amortization period before giving effect to
the reduction in the infusion business goodwill from 40 to 20 years. For those
branches identified as impaired, the amount of impairment was measured by
comparing the carrying amount of the long-lived assets and goodwill to the
estimated fair value for each branch. Fair value was estimated using a valuation
technique based on the present value of the expected future cash flows.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTERNALLY-DEVELOPED SOFTWARE. One of
the actions taken in 1998 as a result of management's new strategic direction
was the termination of the project to implement an enterprise resource planning
(ERP) system. Accordingly, Apria wrote off related software and other
capitalized costs of $7.5 million in the third quarter of 1998. As part of the
decision to terminate the ERP project, management evaluated its current systems
to determine their long-term viability in the context of Apria's new overall
strategic direction. It was determined that Apria was at some risk in continuing
to run the infusion billing system on its current platform which is no longer
supported by the computer industry. To mitigate the risk, Apria is currently
converting the infusion system to the IBM AS/400 operating platform on which the
respiratory/home medical equipment system currently operates. Also, Apria is now
proceeding with a number of enhancements to the systems which rendered certain
previously-developed modules obsolete. Further, pharmacy and branch
consolidations and closures rendered a variety of computer equipment obsolete.
Due to its age and technological obsolescence, it was deemed to have no future
value. As a result of these actions, Apria recorded an impairment charge of
$11.8 million at September 30, 1998. Apria also recognized additional asset
impairments during 1998 of $1.4 million in conjunction with the exited
businesses and $1.4 million related to other facility closures and
consolidations.
During 1997, management reevaluated its current information systems in
light of year 2000 risks and ongoing operational difficulties and concluded that
significant additional costs would be necessary to adequately correct system
deficiencies and improve functionality. Accordingly, the decision was made to
replace Apria's systems, including internally-developed software, with a large
scale, fully-integrated enterprise resource planning system. A two-year
development and implementation plan was approved by the Board of Directors in
December 1997. The project was subsequently terminated as discussed above.
In light of the evaluation and decisions during 1997, management reviewed
the carrying value of the capitalized software and recorded an impairment charge
of $20.2 million. The charge included (1) a $3.9 million reduction to the
carrying value of Apria's branch information system ("ACIS") program development
costs, (2) an $11.4 million write-off of costs associated with ACIS
implementation and conversion, and (3) a $4.9 million write-off of costs of a
specialized telecommunications software program developed for ApriaDirect, a
clinical program that was discontinued in December 1997.
In connection with management's evaluation of Apria's internally-developed
software, management also conducted a review of the company's computer hardware,
including telecommunications equipment. Equipment with a carrying value of $6.6
million was identified as functionally obsolete or no longer in use and was
written off in 1997.
INTEREST EXPENSE. Interest expense was $46.9 million in 1998, $50.4 million
in 1997 and $49.2 million in 1996. Long-term debt levels, although lower than in
1997, remained constant throughout 1998 until November, when a $50 million
payment was made as a requirement of the amended and restated credit agreement.
However, Apria's effective interest rate increased steadily over 1998, as the
company did not meet the required levels of funded indebtedness to consolidated
EBITDA, the financial ratio governing the applicable interest rate margin
available to the company. Apria's cash balances have increased from $16.3
million at December 31, 1997 to $75.5 million at December 31, 1998. The interest
income from the accumulated cash reserves has helped to mitigate the impact of
higher effective interest rates.
INCOME TAXES. Income tax expense for 1998 was $3 million, which is
primarily state taxes payable on a basis other than, or in addition to, taxable
income. At December 31, 1998, Apria had net operating carryforwards ("NOLs") for
federal income taxes of approximately $380 million, expiring in varying amounts
in the years 2003 through 2013. In evaluating the realizability of the NOLs at
December 31, 1998, various positive and negative factors pertaining to the
existence of sufficient projected taxable income within the carryforward period
were considered. Management believes that its strategies may result in
sufficient taxable income during the carryforward period to utilize Apria's
NOLs. However, the achievement of future taxable income is dependent upon future
events and economic, regulatory and other factors largely out of management's
control. Therefore, such future taxable income is not assured. Additionally, in
evaluating whether a valuation allowance is appropriate, management also
considered the significant negative factors existing at December 31, 1998,
including: Apria's recent historical financial and tax losses make it difficult
to conclude a valuation allowance is not needed; Apria has, in recent years,
been unable to meet its operating plans; and while management has implemented
new strategies to achieve profitability and reported a profit in the fourth
quarter of 1998, there can be no assurances that operating profits will continue
in any future period or that management will be successful in implementing all
its strategies, including its growth plans. In considering the positive and
negative factors at this time, management concluded that it is more likely than
not that Apria will be unable to utilize the NOLs except for future reversals of
existing taxable temporary differences, and consequently, has recorded a
valuation allowance of $159 million at December 31, 1998.
Income tax expense for 1997 amounted to $36.6 million and included $30.0
million to increase the valuation allowance for deferred tax assets due to
recurring tax losses and lower estimates of future taxable income. The remaining
amount of income tax expense includes estimated state taxes payable based on
factors other than income, estimated settlement amounts for in-progress state
tax audits, foreign taxes related to the sale in 1997 of Apria's 15% equity
interest in a United Kingdom-based company and the settlement amount paid on an
examination of Apria's federal tax returns for 1992 through 1995. Certain of
these tax expense items resulted in increases to deferred tax assets for which
no benefit was recorded in 1997 due to offsetting increases to the valuation
allowance.
Income tax expense for 1996 amounted to $18.7 million and represented 36%
of income before taxes. The deductibility in 1996 of certain accruals and
merger-related reserves established in 1995 resulted in a tax loss, an increase
in refundable taxes due to a carryback of a portion of the tax loss, and a
decrease in net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING CASH FLOW. In 1998 Apria generated $133.9 million in operating
cash flow compared to $104.1 million generated in 1997 and cash used in
operating activities of $59.3 million in 1996. The primary reason for the
improvement in 1998 operating cash flow was the decrease in accounts receivable
as compared to a significant increase in 1997. Also contributing to the increase
in 1998 operating cash flow was a 39% reduction in net purchases of patient
service equipment over 1997 levels and the fact that less cash was used in 1998
due to the timing of payments against accounts payable and payroll and related
costs.
ACCOUNTS RECEIVABLE. Accounts receivable before allowance for doubtful
accounts decreased by $147.7 million during 1998. The decrease is attributable
to the decline in net revenues, a high-level of bad debt write-offs and revenue
adjustments and cash collections in excess of trailing net revenues. During
1998, Apria wrote-off accounts receivable totaling $246 million. Cash posted to
accounts receivable was 104.5% of trailing net revenues for 1998.
Background. Apria's accounts receivable problems originated with the
Abbey/Homedco merger. The 1995 merger resulted in a restructuring plan that
included a very rapid consolidation of operating locations and the conversion of
all locations to standardized information systems. During the last six months of
1995, over 1,100 employees were terminated and over 100 branch locations were
closed or consolidated with other branches. Beginning with the consummation of
the merger, each branch information system was first converted to the
predominant system in place within its region. Conversion of the branches to the
standard, company-wide systems then occurred on a region-by-region basis.
Because of the conversion to interim systems prior to final conversion,
locations representing approximately 80% of Apria's net revenues underwent
conversion. Ultimately, a total of 496 system conversions were completed; 232
were completed during 1995 and 264 during the first three quarters of 1996.
The disruptions caused by the branch consolidations and systems conversions
had a major impact on the functions of order taking, product delivery, billing
and collections. Existing employees challenged with learning new systems and
high turnover during this period created serious training issues. Further,
familiarity with the complex and payor-specific billing requirements is critical
to ensure proper and timely billing and collections. Much of this expertise was
lost due to the high turnover among billing and collection personnel.
Improvement actions. In response to these problems and the resulting high
rates of bad debt write-offs and revenue adjustments, management instituted a
number of measures. In 1996, such measures included the implementation of a
collection incentive program with special emphasis on older accounts, the hiring
of additional management-level billing and collection personnel and systems
reinforcement training. In 1997, Apria instituted a process review of the field
information systems to identify opportunities to improve billing processing,
timeliness and accuracy. Management also validated and corrected system pricing
files and implemented billing center audits to assess compliance with billing
practices and procedures. During the first quarter of 1998, management
reorganized its field operations to create a separate "revenue management"
organization which encompasses the functions of order-taking, patient
qualification, documentation coordination, timely filing and prompt follow-up.
The revenue management organization reports directly to corporate headquarters
and specifically to a newly created Executive Vice President position. The new
organization structure was intended to facilitate improved communications and
accountability. In conjunction with the reorganization, processes and procedures
were reviewed to identify additional opportunities for improvement. As a result,
additional personnel were placed in quality assurance positions to help ensure
that products and services were more accurately and timely billed and
responsibilities were consolidated to allow specifically qualified personnel to
support, direct and train the revenue management staff. Task forces were formed
to visit the billing centers to ensure compliance with policies and standard
procedures. Also, software enhancements to simplify the order-intake process
were introduced.
Allowance evaluation. Accounts receivable is reduced by an allowance for
estimated revenue adjustments and further netted by an allowance for doubtful
accounts to reflect accounts receivable in the financial statements at net
realizable value. Bad debt and revenue adjustment allowances are analyzed on a
combined basis. Management uses actual write-off classifications in conjunction
with historical experience and account reviews to determine the appropriate
categorization of revenue adjustments and bad debts, both reserved and expensed.
Apria's methodology for estimating allowances for uncollectible accounts and
providing for the related revenue adjustments and bad debt expense involves an
extensive, balanced evaluation of operating statistics, historical realization
data and accounts receivable aging trends. Also considered are relevant business
conditions such as system conversions, facility consolidations, business
combinations, Medicare carrier conditions and extent of contracted business.
Finally, specific reviews of certain large and/or problematic payors are
performed. Management periodically refines the analysis and allowance estimation
process to consider any changes in related policies and procedures such as the
recent change in focus to collecting the more current accounts. Accordingly,
management adjusts the combined allowance to reflect its best estimate of the
allowance required at each reporting date. See "Results of Operations - Revenue
Adjustments and Provision for Doubtful Accounts".
Unbilled receivables. Included in accounts receivable are earned but
unbilled receivables of $25.3 million and $31.9 milion at December 31, 1998 and
1997, respectively. There is a delay of approximately a day or two, up to
several weeks or more in some cases, between the date of service and billing due
to delays in obtaining certain required payor-specific documentation from
internal and external sources. Such documentation would include internal records
of proof of service and written authorizations from physicians and other
referral sources. Earned but unbilled receivables are aged from date of service
and are considered in Apria's analysis of historical performance and
collectibility.
LONG-TERM DEBT. Apria's credit agreement with a syndicate of banks was
amended and restated in November of 1998 and further amended in January and
February of 1999. The November amendment required a $50 million permanent
repayment of the loan upon execution. The remaining indebtedness under the
credit agreement was restructured into a $288 million term loan and a $30
million revolving credit facility with a maturity date of August 9, 2001. The
amended and restated agreement currently requires that Apria issue not less than
$50 million of senior subordinated convertible debentures or senior subordinated
notes by April 23, 1999, the net proceeds of which must be applied to the term
loan.
The amended and restated credit agreement allows Apria to make acquisitions
under an acquisition "basket" provision of up to $62 million, subject to certain
restrictions, that may be increased given certain levels of financial
performance by Apria. In 1999, the acquisition limit is subject to dollar for
dollar reduction by the amount of any unusual cash expenses (as defined by the
agreement) incurred and paid in 1999.
Term loan principal payments are payable quarterly, in varying amounts,
commencing on March 31, 1999 and continuing through June 30, 2001. Further,
between the effective date of the November amendment and the earlier of April
23, 1999 or the issuance date of the debentures or notes, Apria is subject to
prepayment requirements on the term loan based on excess cash flow (as defined
by the agreement). The resulting prepayments of $6.9 million reduced the
required amount of the quarterly term loan payment that was due March 31, 1999
to zero, and no additional prepayments based on excess cash flow are required.
The amended and restated credit agreement permits Apria to elect one of two
variable rate interest options at the time an advance is made. The first option
is a rate expressed as 2.5% plus the higher of the Federal Funds Rate plus 0.50%
per annum or the Bank of America "reference" rate. The second option is a rate
based on the London Interbank Offered Rate ("LIBOR") plus an additional
increment of 3.5% per annum. The agreement requires payment of commitment fees
of 0.75% on the unused portion of the revolving credit facility.
Borrowings under the credit agreement are secured by substantially all of
Apria's assets and the agreement also imposes numerous restrictions, including,
but not limited to, covenants requiring the maintenance of certain financial
ratios, limitations on additional borrowings, capital expenditures, mergers,
acquisitions and investments, and restrictions on cash dividends, loans and
other distributions. Further, the agreement requires that Apria maintain at
least $35 million in its depository accounts until the issuance of the senior
subordinated convertible debentures or senior subordinated notes.
At December 31, 1998, total borrowings under the credit agreement totaled
$288 million, none of which were advanced from the revolving credit facility. At
December 31, 1998, outstanding letters of credit totaled $10.3 million and
credit available under the revolving credit facility was $19.7 million (subject
to the restriction under the indenture discussed below).
Under the indenture governing Apria's $200 million 9 1/2% senior
subordinated notes due November 1, 2002, Apria's ability to incur indebtedness
becomes restricted at times when the company's "fixed charge coverage ratio" (as
defined in the indenture) is less than 3.0 to 1.0. Charges taken in the second
and fourth quarters of 1997 and in the third quarter of 1998 resulted in the
fixed charge coverage ratio being less than 3.0 to 1.0. This condition is
expected to continue at least through the third quarter of 1999. Apria has
changed its cash management procedures to avoid the need to incur indebtedness
that would otherwise require a modification of the terms of the indenture and
has accumulated a balance in its money market account of $78 million at March
15, 1999.
OTHER BALANCE SHEET CHANGES. The decrease in "accrued payroll and related
taxes and benefits" at December 31, 1998, compared to December 31, 1997 is due
to a decrease of three days in the accrual of payroll-related costs and the
reduced workforce. At December 31, 1997, "other assets" was primarily comprised
of payments for businesses acquired late in the year. The payments were then
allocated to the various underlying acquired assets in early 1998.
DISPOSITIONS AND BUSINESS COMBINATIONS. As part of Apria's new strategic
direction, management performed an extensive profitability study to identify
service lines and/or geographic markets as potential candidates for exit. Most
significant of the decisions arising from the study was the decision to withdraw
from the infusion business in California, Texas, Louisiana, West Virginia,
western Pennsylvania and downstate New York. Shortly after Apria announced its
plans to exit the infusion line in these geographic markets, a buyer emerged for
the California locations. Crescent Healthcare, Inc. purchased substantially all
the assets and business, excluding accounts receivable, of the California
infusion locations. Apria recorded a $3.8 million loss on the sale in the third
quarter of 1998. In the other locations where Apria decided to exit the infusion
business, management worked with its business partners to modify contracts and
transfer patients to other providers. This transition was substantially complete
by the end of 1998. The operations of these infusion locations had revenues of
$41.5 million, $72.7 million and $86.2 million in 1998, 1997 and 1996,
respectively. Gross profits were $14.9 million, $32.1 million and $46.9 million,
respectively, for the same periods.
Apria periodically makes acquisitions of complementary businesses in
specific geographic markets. Cash paid for acquisitions that closed during 1998
totaled $2.7 million.
PURCHASE COMMITMENTS. On September 1, 1994, Apria entered into a five-year
agreement, which was subsequently amended in June 1996, to purchase medical
supplies totaling $132 million with minimum annual purchases ranging from $7.5
million in the first year to $36.5 million in the third through fifth years.
Failure to purchase at least 90% of the annual commitment would result in a
penalty of 10% of the difference between the annual commitment and the actual
purchases, beginning with the 12-month period ended August 31, 1996. In late
1997, management made the strategic decision to exit the low-margin medical
supply business and has been working with the vendor to restructure the
agreement. In the interim, the company continues to purchase needed medical
supplies from this vendor, subject to the pricing established under the old
agreement. The company failed to meet the minimum purchase commitment for the
12-month period ended August 31, 1998, and, consequently, incurred a liability
for penalties of $1.2 million on the purchase shortfall.
YEAR 2000 COMPLIANCE. As the year 2000 approaches, an issue impacting all
companies has emerged regarding how existing application software programs and
operating systems can accommodate this date value. In brief, many existing
application programs in the marketplace were designed to accommodate a two-digit
date position which represents the year (e.g., "95" is stored on the system and
represents the year 1995). Consequently, the year 1999 could be the maximum date
value that systems would be able to accurately process.
Internal operating systems. Beginning in late 1997, Apria conducted a
comprehensive review of its operating and field information systems, including
an assessment of the nature and potential extent of the impact of the year 2000
issue. As a result, Apria began the modification process of its software in
order for its computer systems to function properly in the year 2000 and
thereafter. Apria utilized internal resources to reprogram and test the software
for the necessary year 2000 modifications. Apria's systems also underwent two
external assessments of the year 2000 issue and received a "low" risk rating.
The modification and testing were completed on schedule and management now
considers its operating and field information systems year 2000-compliant. To
further ensure a smooth transition into the year 2000, management will, among
other measures, suspend software updates between November 1999 and January 2000
and form a special team to address any related problems that may arise.
Apria has not developed a formal contingency plan in the event that the
system modifications prove to be inadequate. Such inadequacies could result in
system failure or miscalculations. This would cause disruptions to normal
business processes including, among other things, the temporary inability to
process transactions and generate billings. If such a disruption continued for
an extended period, it could have a material adverse effect on the results of
operations, cash flow and financial condition of Apria.
Apria is currently in the process of assessing and addressing any potential
issues with its ancillary software packages that perform less-critical functions
and any other electronic mechanisms that could have date-sensitive
microprocessors.
External risks. Apria depends on electronic interfaces with many of its
business partners to conduct many of its day-to-day functions. Such functions
include payments to and from suppliers and payors, transfer of funds between
Apria's banks, and electronic billing and supply ordering. Apria has been in
contact with its more critical business partners to obtain assurance of their
year 2000-readiness and is currently in the process of scheduling live tests
with the regional Medicare carriers responsible for processing approximately
one-fourth of Apria's reimbursements. As a contingency, in the event of failure
on the part of an external agent, the exchange of data and payments can continue
via paper documents and more traditional methods. Further, Apria has revised
contracts with certain of its managed care payors to include remedies should the
payor fail to reimburse the company on a timely basis due to their own year 2000
problems.
Another area of potential risk is with certain patient service equipment
items that have microprocessors with date functionality that could malfunction
in the year 2000. Although Apria has found the majority of such microprocessors
include duration time clocks and not date time clocks, management has initiated
formal communications with its suppliers to obtain assurance that the equipment
they supply is year 2000-compliant. To date, Apria has received year
2000-compliance certification letters from substantially all of its primary
vendors and approximately 40% of the entire set of vendors from which it
requested such assurance.
If Apria is unable to resolve all its year 2000 issues with external
agents, it may have a material adverse effect on the company's business, results
of operations or financial condition.
Costs. Apria does not believe the costs of its year 2000 remediation
efforts are material. To date, such costs have been expensed as incurred.
Management's expectations about year 2000-related costs yet to be incurred are
subject to various uncertainties that could cause the actual costs to differ
materially from those expectations. Such uncertainties include the adequacy of
the modifications made to Apria's operating and field information systems, the
success of the company in identifying and resolving any problems with its
ancillary systems or electronic mechanisms and the year 2000-readiness of
Apria's business partners.
OTHER. Apria's management believes that cash provided by operations
together with cash invested in its money market account will be sufficient to
finance its current operations for at least the next year or until the borrowing
restriction described above is eliminated.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Apria currently utilizes no material derivative financial instruments which
expose the company to significant market risk. However, interest rate changes
may affect the cash flow, earnings, and the fair value of its term debt due to
differences between the market interest rates and the rates at the inception of
these financial instruments. Based on Apria's term debt outstanding at December
31, 1998 and current market perception, a 50 basis point increase in the
interest rates as of December 31, 1998 would result in a net reduction of the
market value of the instruments of $4.6 million. Conversely, a 50 basis point
decrease in the interest rates would result in an $4.7 million net increase in
the market value of Apria's term debt outstanding at December 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Reports of Independent Auditors, Consolidated Financial Statements and
Consolidated Financial Statement Schedule listed in the "Index to Consolidated
Financial Statements and Financial Statement Schedule" are filed as part of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective July 6, 1998, Apria changed its independent auditors. Previous to
that date, the independent auditors were Ernst & Young LLP. The decision to
change independent auditors was not recommended or approved in advance by the
Audit Committee of Apria's Board of Directors. The reports of Ernst & Young LLP
on Apria's Consolidated Financial Statements for the fiscal years ended December
31, 1997 and 1996 contained no adverse opinion or disclaimer of opinion, and no
such report was qualified or modified as to uncertainty, audit scope or
accounting principles. Also, for the fiscal years ended December 31, 1997 and
1996 and during the year-to-date period ended July 6, 1998 there were no
disagreements regarding any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. Furthermore,
during the same periods, no event requiring disclosure under Item 304(a)(2) of
Regulation S-K occurred between Apria and Ernst & Young LLP.
Effective July 15, 1998, Apria engaged Deloitte & Touche LLP as its
principal accountants to audit its Consolidated Financial Statements for the
fiscal year ended December 31, 1998. During the fiscal years ended December 31,
1997 and 1996 and each subsequent interim period prior to engaging Deloitte &
Touche LLP, Apria did not consult Deloitte & Touche LLP regarding either the
application of accounting principles to a specified transaction, or the type of
opinion that might be rendered on Apria's Consolidated Financial Statements.
The Company has since adopted a policy that any future changes in its
independent auditors will be reviewed and approved in advance by the Audit
Committee of the Board of Directors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS
Information regarding Apria's executive officers is set forth under the
caption "Executive Officers of the Registrant" in Item 1 hereof.
DIRECTORS
Set forth below are the names, ages and past and present positions of the
persons serving as Apria's Directors as of March 31, 1999:
Business Experience During Last Director Term
Name and Age Five Years and Directorships Since Expires
------------ ---------------------------- ----- -------
David H. Batchelder, 49 Principal and Managing Member of Relational Investors, LLC 1998 2001
since March 1996. He has served as the Chairman and Chief
Executive Officer of Batchelder & Partners, Inc., a
financial advisory and investment banking firm based in La
Jolla, California, since 1988. Mr. Batchelder was
appointed by the Board of Directors in July 1998 to fill a
vacancy. Mr. Batchelder also serves as a director of
Morrison Knudsen Corporation and Nuevo Energy Company.
Philip L. Carter, 50 Chief Executive Officer and a Director of Apria since May 1998 2000
1998. Prior to joining Apria, Mr. Carter was President
and Chief Executive Officer of Mac Frugal's Bargains o
Close-Outs Inc., a chain of retail discount stores, since
1995 and had held the positions of Executive Vice
President and Chief Financial Officer of Mac Frugal's from
1991 through 1995.
David L. Goldsmith, 51 Managing Director of RS Funds, an investment management 1987** 1999
firm. Prior to joining RS Funds in February 1999 he had
served as Managing Director of Robertson, Stephens
Investment Management, an investment management firm owned
by Bank of America National Trust and Savings
Association. He was affiliated with Robertson, Stephens &
Company LLC and its predecessors from 1981 through 1999.
Mr. Goldsmith is also a director of Balanced Care
Corporation.
Leonard Green, 72 President and Chief Executive Officer of Green Management 1993* 1999
and Investment Co., a private investment management
company, since 1985. Mr. Green also serves as a director
of Lincoln Services Corp.
Richard H. Koppes, 52 Of Counsel to Jones, Day, Reavis & Pogue, a law firm, and 1998 1999
serves as a Consulting Professor of Law and Co-Director of
Education Programs at Stanford University School of Law.
He also served as a principal of American Partners Capital
Group, a venture capital and consulting firm, from August
1996 to December 1998. From May 1986 through July 1996,
Mr. Koppes held several positions with the California
Public Employees' Retirement System, including General
Counsel, Interim Chief Executive Officer and Deputy
Executive Officer. Mr. Koppes is also a director of Mercy
Healthcare, a non-profit hospital system. Mr. Koppes was
appointed by the Board of Directors in May 1998 to fill a
newly created seat on the Board.
Philip R. Lochner, Jr., 56 Senior Vice President - Administration of Time Warner Inc. 1998 2001
from July 1991 to July 1998. From March 1990 to June
1991, Mr. Lochner was a Commissioner of the Securities and
Exchange Commission. He is a member of the Advisory
Council of Republic New York Corporation. He is also a
Trustee of The Canterbury School. Mr. Lochner was
initially appointed by the Board of Directors in June 1998
to fill a newly created seat on the Board and was elected
by the shareholders to a full term in July 1998.
Beverly Benedict Thomas, 56 Principal of BBT Strategies, a consulting firm 1998 2001
specializing in public affairs and strategic planning.
Previously, Ms. Thomas was a principal of UT Strategies,
Inc., a public affairs firm, from 1995 to 1997 and
Assistant Treasurer of the State of California from 1991
to 1995. In addition to serving as a director of Catellus
Real Estate Development Corporation, a diversified real
estate operating company, Ms. Thomas also serves as a
Commissioner of the Los Angeles City Employees' Retirement
System. From 1993 to 1995, Ms. Thomas served on the
Boards of the California Public Employees' Retirement
System and the California State Teachers Retirement
System. Ms. Thomas was initially appointed by the Board
of Directors in June 1998 to fill a newly created seat on
the Board and was elected by the shareholders to a full
term in July 1998.
H. J. Mark Tompkins, 58 Independent investment and corporate advisor, President 1997 2000
and Chief Executive Officer of Exfinco, S.a.r.l., a
Belgian company engaged in investment advisory activities,
from 1994 until 1997. Mr. Tompkins was appointed by a
committee of the Board of Directors in March 1997 to fill
a vacancy and was thereafter elected to a full term by the
shareholders. Mr. Tompkins was a member of the Abbey
Board of Directors from September 1992 until the time of
the merger and is currently a director of Kemgas Limited.
He is also a director and Chairman of Partners Holdings
PLC, a publicly owned company whose shares are traded on
an exchange in the United Kingdom. From 1987 through June
1994, Mr. Tompkins served as Chief Executive Officer of a
French investment advisory concern, Cofinex, E.u.r.l..
Ralph V. Whitworth, 43 Chairman of the Board of Directors of Apria since April 1998 2000
28, 1998. Mr. Whitworth is also a principal and Managing
Member of Relational Investors, LLC, a private investment
company. He is also a partner in Batchelder & Partners,
Inc., a financial advisory and investment-banking firm
based in La Jolla, California. From 1988 until 1996, Mr.
Whitworth was president of Whitworth and Associates, a
corporate advisory firm. Mr. Whitworth was appointed by a
Committee of the Board of Directors in January 1998 to
fill a newly created seat. Mr. Whitworth is also a
director of CD Radio, Inc., Wilshire Technologic, Inc. and
Waste Management, Inc.
- ------------
* Director of Abbey from the date shown until the date of the merger, after
which the company's name was changed to its current name. Director of the
company from the date of the merger until the present.
** Director of Homedco from the date shown until the date of the merger.
Director of the company from the date of the merger until the present.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT BY CERTAIN COMPANY AFFILIATES
Section 16(a) of the Exchange Act requires Apria's Directors and officers,
and persons who own more than 10% of a registered class of Apria's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and The New York Stock Exchange, Inc.
Directors, officers, and greater than 10% stockholders are required by the
Securities and Exchange Commission to furnish the company with copies of the
reports they file.
Based solely on its review of the copies of such reports and written
representations from certain reporting persons that certain reports were not
required to be filed by such persons, the company believes that all of its
Directors, officers and greater than 10% beneficial owners complied with all
filing requirements applicable to them with respect to transactions during the
1998 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF EXECUTIVE COMPENSATION
The following table sets forth all compensation for the 1998, 1997 and 1996
fiscal years paid to or earned by each individual who served as Apria's Chief
Executive Officer, as well as the four other most highly compensated executive
officers during the 1998 fiscal year.
SUMMARY COMPENSATION TABLE
Long-Term(1)
Compensation
Annual Compensation Options All Other
Salary(2) Bonus Granted Compensation
Name Year ($) ($) (#) ($)
- ------------------------------------ ---- ----------- ---------- --------------- ----------------
Philip L. Carter................... 1998 330,499 300,000 750,000 --
Chief Executive Officer(3) 1997 -- -- -- --
1996 -- -- -- --
Jeremy M. Jones.................... 1998 48,820 -- 1,666 1,937,804(5)
Chairman of the Board 1997 467,013 -- -- 4,750(6)
and Chief Executive Officer(4) 1996 464,320 -- 20,000 4,750(6)
Lawrence M. Higby.................. 1998 424,113 n/a(8) 300,000 --
President and Chief 1997 40,969 -- 150,000 --
Operating Officer (7) 1996 -- -- -- --
Lawrence A. Mastrovich............. 1998 175,075 n/a(8) 75,000 3,940(6)
Executive Vice President, 1997 111,956 41,754 -- 4,238(6)
Business Operations (9) 1996 104,748 4,867 4,000 3,437(6)
Dennis E. Walsh.................... 1998 237,971 n/a(8) 100,000 3,940(6)
Executive Vice President, 1997 188,962 -- -- 10,720(10)
Sales 1996 177,666 4,080 4,000 4,750(6)
Lisa M. Getson..................... 1998 151,172 n/a(8) 40,000 3,940(6)
Senior Vice President, Business 1997 137,801 4,500 -- 4,750(6)
Development and Clinical 1996 127,775 7,978 5,500 4,750(6)
Services
Robert S. Holcombe................. 1998 292,869 n/a(8) 40,000 3,940(6)
Senior Vice President, 1997 263,162 4,410 -- 6,571(13)
General Counsel and 1996 153,455 7,000 35,000(12) 150,324(14)
Secretary (11)
- ------------------------------------
(1) Apria has not issued stock appreciation rights or restricted stock awards.
The company currently has no "long-term incentive plan" as that term is
defined in the applicable rules.
(2) These amounts include an automobile allowance which is paid as salary.
Salary is paid on the basis of bi-weekly pay periods, with payment for each
period being made during the week following its termination. Due to the
fact that 1998 contained a payment date for a pay period which ended in
1997, amounts reported as salary paid for 1998 vary slightly from the
actual amounts of the 1998 salaries of the executive officers listed above
who were with Apria as of January 1, 1998.
(3) Mr. Carter became Apria's Chief Executive Officer on May 5, 1998.
(4) Mr. Jones resigned as Chairman of the Board and Chief Executive Officer of
Apria on January 19, 1998. He resigned as a director on May 27, 1998.
(5) This amount includes $1,819,694 in severance payments made or to be made in
1998 and 1999 and a $118,110 payment for earned but unused vacation and
holiday time.
(6) Annual contribution by Apria to the company's 401(k) Savings Plan in the
name of the individual.
(7) Mr. Higby also acted as Apria's Chief Executive Officer from January 19,
1998 until May 5, 1998. Mr. Higby was first employed by the company in
November, 1997.
(8) Individual 1998 bonuses have not been determined as of the filing date.
(9) Mr. Mastrovich was promoted from Vice President - Operations, Northeast
Division on October 1, 1998.
(10) This amount includes a $4,750 contribution to Apria's 401(k) Savings Plan
in the name of the individual and a $5,520 cash award for individual
achievement called the "Chairman's Circle Award".
(11) Mr. Holcombe was first employed by Apria in May 1996.
(12) Mr. Holcombe was awarded 35,000 option shares in May 1996 when he was first
employed by Apria. Those options were surrendered by him in exchange for a
subsequent grant of 30,000 option shares. He was also awarded a further
option to purchase an additional 5,000 shares.
(13) This amount includes a $4,750 annual contribution to Apria's 401(k) Savings
Plan in the name of the individual and a reimbursement of $1,821 for tax
liabilities incurred in connection with the reimbursement of relocation
costs.
(14) This amount consists of various relocation expenses reimbursed by Apria.
SUMMARY OF OPTION GRANTS
The following table provides information with respect to grants of options
to all individuals serving as Apria's Chief Executive Officer and the four other
most highly compensated executive officers of the company, during the 1998
fiscal year.
OPTION GRANTS TABLE
Potential Realizable
Number of Value at Accrual Rate
Securities % of Total Expiration of Stock Appreciation
Underlying Options Granted Date of for Option Term ($)
Options to Employees in Exercise Options ------------------------
Name Granted Fiscal Year Price ($) Granted 5% 10%
- ----------------------- ------------ ----------------- --------- ----------- ---------- ----------
Philip L. Carter 750,000 21.40% 9.00 5/5/08 4,245,038 10,757,758
Jeremy M. Jones 1,666 0.05% 13.875 2/24/08 14,537 36,840
Lawrence M. Higby 300,000(1) 8.60% 10.004(2) (3) 1,887,438 4,783,139
Lawrence A. Mastrovich 75,000 2.10% 6.50 7/17/08 306,586 776,950
Dennis E. Walsh 100,000 2.90% 6.50 7/17/08 408,782 1,035,933
Lisa M. Getson 40,000 1.10% 6.50 7/17/08 163,513 414,373
Robert S. Holcombe 40,000 1.10% 6.50 7/17/08 163,513 414,373
- ----------------------
(1) This amount does not include an option for 50,000 shares issued in January
1998 under the company's Amended and Restated 1992 Stock Incentive Plan to
replace an option on the same terms for an identical number of shares
erroneously issued under the company's 1997 Stock Incentive Plan during
1997. This amount includes an option for 40,000 shares approved in 1998,
which did not become effective until January 4, 1999. The remaining options
for shares included in this amount were approved and became effective in
1998.
(2) The value shown is an average. Options for 150,000 shares are or will
become exercisable at $12.875 per share, options for 110,000 shares are or
will be exercisable at $6.50 per share, and options for 40,000 shares are
or will be exercisable at $8.875 per share.
(3) The options for 150,000 shares expire on January 26, 2008, the options for
110,000 shares expire on July 17, 2008, and the options for 40,000 shares
expire on January 4, 2009.
SUMMARY OF OPTIONS EXERCISED
The following table provides information with respect to the exercise
of stock options by all persons who served as Apria's Chief Executive Officer
during the 1998 fiscal year and the four other most highly compensated executive
officers of the company during the 1998 fiscal year, together with the fiscal
year-end value of unexercised options.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at the-Money-Options at
Shares Fiscal Year End Fiscal Year End(1)
Acquired on Value(1) ------------------------- -------------------------
Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------------- ----------- -------- ------------------------- -------------------------
Name (#) ($) (#)/(#) ($)/($)
- ----------------------- ----------- -------- ------------------------- -------------------------
Philip L. Carter 0 0 375,000/375,000 0/0
Jeremy M. Jones 0 0 516,322/1,666 0/0
Lawrence M. Higby 0 0 30,000/380,000 0/268,125
Lawrence A. Mastrovich 4,000 41,625 35,200/88,200 40,600/182,813
Dennis E. Walsh 0 0 61,120/138,880 0/243,750
Lisa M. Getson 0 0 8,200/44,500 0/97,500
Robert S. Holcombe 0 0 14,000/61,000 0/97,500
- ----------------------
(1) Market value of the securities underlying the options at exercise date or
year-end, as the case may be, minus the exercise or base price of
"in-the-money" options and transaction costs. The market value of Apria's
common stock at the close of trading on December 31, 1998 was $8.9375.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee since January 1, 1998 was either an
officer or employee of the company.
DIRECTORS' FEES
All Directors of Apria are reimbursed for their out-of-pocket expenses
incurred in connection with attending Board and Committee meetings. All
non-employee Directors receive: (i) $1,000 per Board or Committee meeting
attended in person ($1,500 per Committee meeting for the Director who is the
Committee's chairman) and (ii) $500 per Board or Committee meeting attended via
telephone. In addition, each non-employee Director receives an option to
purchase 25,000 shares of the company's common stock, at fair market value on
the date of grant, for each year that he has been a member of the Board of
Directors.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Apria has employment or severance agreements with the following executive
officers listed in the Summary Compensation Table.
PHILIP L. CARTER. Pursuant to an employment agreement which is scheduled to
expire on April 30, 2002, Mr. Carter serves as Apria's Chief Executive Officer.
The agreement provides that Mr. Carter is to receive an annual salary of
$600,000 and is entitled to participate in Apria's annual bonus, incentive,
stock and all other benefit plans generally available to executive officers of
the company. Mr. Carter is entitled to receive performance bonuses of up to 80%
of his annual salary. Mr. Carter is also entitled to receive (i) reasonable
access to the company's accountants for financial planning, (ii) an annual car
allowance, and (iii) reimbursement of certain other expenses. If the company
terminates Mr. Carter's employment without cause, or if he terminates his
employment with good reason (including upon a change in control), Mr. Carter
shall receive a lump sum severance payout equal to three times the sum of (i)
his annual salary, (ii) the average of his two most recent annual bonuses, (iii)
his annual car allowance, and (iv) an additional amount estimated at $5,000. In
addition, the company shall be required to provide an office and secretarial
support at a cost of not more than $50,000 during the year following
termination. Finally, upon any such termination not for cause or with good
reason, all stock options held by Mr. Carter shall vest and remain exercisable
for a period of three years.
LAWRENCE M. HIGBY. Pursuant to an employment agreement which is scheduled
to expire on January 18, 2001, Mr. Higby serves as President and Chief Operating
Officer of the company. The agreement provides that Mr. Higby is to receive an
annual salary of not less than $400,000 (his current annual salary is $400,004),
subject to annual increases at the discretion of the Compensation Committee, and
is entitled to participate in Apria's stock option plans and all other benefit
programs generally available to executive officers of the company. Mr. Higby is
also entitled to receive (i) such bonuses as the Compensation Committee may,
from time to time, in its sole discretion award, (ii) an automobile allowance
and (iii) reimbursement of certain other expenses. He is also provided
reasonable access to Apria's accountants for personal financial planning. If the
company terminates Mr. Higby's employment without cause, or if Mr. Higby
terminates his employment with good reason (including upon a change in control),
Mr. Higby is entitled to a lump sum severance payment equal to three times his
base salary plus an additional amount determined as set forth in the employment
agreement. In addition, all unvested stock options from the 150,000 share grant
issued to Mr. Higby on January 26, 1998, will immediately become exercisable,
and all of his vested options will remain exercisable for a period of three
years following such termination.
JEREMY M. JONES. Apria had an employment agreement with Mr. Jones, who
voluntarily resigned from his positions as Chairman of the Board and Chief
Executive Officer of the company and from his positions with all of its
subsidiaries as of January 19, 1998. Pursuant to Mr. Jones's employment
agreement, he was to serve as Chairman of the Board and Chief Executive Officer.
The agreement provided for an annual salary of not less than $390,000, subject
to annual increases at the discretion of the Compensation Committee (as of the
date of his resignation, Mr. Jones's annual salary was $460,000). Mr. Jones was
also entitled to (i) such bonuses as the Compensation Committee would, from time
to time, in its sole discretion award, (ii) an automobile allowance, (iii)
reimbursement of certain other expenses, (iv) reasonable access to the company's
accountants and counsel for personal financial planning and legal services, and
(v) participation in the company's various benefit plans. In addition, his
resignation agreement provided that the previously unvested 190,000 share
portion of Mr. Jones's total outstanding options to purchase 516,322 shares of
common stock became fully vested and each option will remain exercisable for its
stated term as though Mr. Jones had not terminated his employment. The
employment agreement also contained severance provisions which were superseded
by an agreement entered into at the time of his resignation. Pursuant to that
agreement, Mr. Jones (i) was paid a lump sum severance payment of $1,753,900
(subject to withholding for federal and state taxes) at the time of his
resignation and (ii) is being provided with an office and associated services
for a period of two years from the date of his resignation.
ROBERT S. HOLCOMBE, DENNIS WALSH, LARRY MASTROVICH AND LISA GETSON. In June
1997, Messrs. Holcombe, Walsh and Mastrovich and Ms. Getson (each referred to as
"Executive" below) entered into executive severance agreements with the company.
Pursuant to each agreement, each Executive serves in a position and undertakes
duties at Apria's discretion. As of December 31, 1998, Mr. Holcombe served as
Senior Vice President, General Counsel and Secretary of the company, Mr. Walsh
served as Executive Vice President, Sales, Mr. Mastrovich served as Executive
Vice President, Business Operations and Ms. Getson served as Senior Vice
President, Business Development and Clinical Services. Each agreement provides
that the Executive's salary shall be at the company's discretion. As of February
28, 1999, Mr. Holcombe's annual salary was $280,000, Mr. Walsh's annual salary
was $220,000, Mr. Mastrovich's annual salary was $180,000 and Ms. Getson's
annual salary was $137,800. Each Executive is entitled to participate in Apria's
stock option plans and all other benefit programs generally available to
executive officers of the company at the company's discretion. Each Executive is
also entitled to receive (i) such bonuses as the Compensation Committee may,
from time to time, in its sole discretion award, and (ii) reimbursement of
certain other expenses at the company's discretion. If the company terminates an
Executive's employment without cause, each Executive is entitled to a payment
equal to his or her annual base salary plus an additional amount determined as
set forth in the agreement. However, if such termination occurs during the
two-year period following a change of control of the company, Messrs. Holcombe
and Walsh and Ms. Getson shall each be entitled to a payment equal to two times
his or her base salary plus an additional amount determined as set forth in the
agreement. Such payments shall be payable in periodic installments over one or
two years in exchange for a valid release of claims against the company. In no
event will any Executive receive a payment which would be deemed to be an
"excess parachute payment" under Section 280G of the Code.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 31, 1999 with
respect to the beneficial ownership of Apria's common stock by each person who
is known by the company to beneficially own more than 5% of Apria's common
stock, each Director of the company, each person who served as Apria's Chief
Executive Officer during 1998, and the four other most highly compensated
executive officers who were serving in such capacity as of December 31, 1998,
and all Directors and executive officers as a group. Except as otherwise
indicated, beneficial ownership includes both voting and investment power with
respect to the shares shown.
SECURITY OWNERSHIP TABLE
Amount and Nature of Percent of
Name Of Beneficial Owner Beneficial Ownership Class
- ------------------------ -------------------- -----
Relational Investors, LLC (1) 6,923,766 13.37%
David H. Batchelder (1) 6,897,100 13.32
Ralph V. Whitworth (1) 6,823,766 13.18
Joel L. Reed(1) 6,797,100 13.12
Richard C. Blum & Associates, L.P. (2) 5,425,000 10.48
Richard C. Blum & Associates, Inc. (2) 5,425,000 10.48
Richard C. Blum (2) 5,425,000 10.48
Lazard Freres & Co. LLC(3) 2,911,700 5.62
Peter C. Cooper(4) 2,836,900 5.47
Gilbert E. LeVasseur(4) 2,836,900 5.47
Cooper & LeVasseur(4) 2,836,900 5.47
Cooper Capital, LLC(4) 2,836,900 5.47
George L. Argyros(5) 2,770,434 5.35
Jeremy M. Jones (6) 1,255,980 2.42
Philip L. Carter(7) 400,000 *
David L. Goldsmith(8) 351,902 *
Lawrence M. Higby (9) 70,000 *
Dennis E. Walsh (10) 78,400 *
Leonard Green (11) 51,666 *
H.J. Mark Tompkins(12) 41,766 *
Lawrence A. Mastrovich (13) 39,655 *
Richard H. Koppes(14) 26,500 *
Philip R. Lochner, Jr.(15) 26,000 *
Beverly Benedict Thomas(16) 25,000 *
Robert S. Holcombe(17) 29,200 *
Lisa M. Getson(18) 8,200 *
All current directors and executive officers as a group
(19 persons)(19) 8,399,814 16.60%
- ------------------
* Less than 1%
(1) According to a Schedule 13D, dated September 29, 1997, amendments thereto
dated January 27, 1998, February 3, 1998 and November 23, 1998,
respectively, and a Form 3, all of which have been filed with the
Securities and Exchange Commission, Relational Investors, LLC ("RILLC"),
its affiliated companies and Messrs. Batchelder, Whitworth and Reed,
individually and as Managing Members of RILLC, have sole voting and
dispositive power as to 6,923,766 shares, which amount includes 51,666
shares subject to options that are currently exercisable. 6,797,100 of the
shares are held by RILLC or by limited partnerships (Relational Coast
Partners, L.P., Relational Investors, L.P., Relational Fund Partners, L.P.,
or Relational Partners, L.P.) of which RILLC is the sole general partner.
Mr. Whitworth, who became a Director of Apria of January 27, 1998, holds
currently exercisable options to acquire 26,666 shares, and Mr. Batchelder,
who became a Director of Apria on July 28, 1998, holds 75,000 shares in a
personal account and a currently exercisable option to acquire 25,000
shares. Mr. Reed's holdings are all through RILLC. The mailing address of
Relational Investors, LLC and each of Messrs. Whitworth, Batchelder and
Reed is 4330 La Jolla Village Drive, Suite 220, San Diego, California
92122.
(2) According to a Form 3 filed with the Securities and Exchange Commission on
September 10, 1998, Richard C. Blum & Associates, Inc., the sole general
partner of Richard C. Blum & Associates, L.P. and Richard C. Blum,
President, Chairman and majority stockholder of Richard C. Blum &
Associates, Inc., reported indirect ownership of 5,425,000 shares. These
shares are owned directly by three limited partnerships for which Richard
C. Blum & Associates, L.P. is the sole general partner and five investment
advisory accounts for which Richard C. Blum & Associates, L.P. exercises
voting and investment discretion. According to a Schedule 13D, dated July
17, 1998, and an amendment thereto dated August 10, 1998, filed with the
Securities and Exchange Commission, Richard C. Blum & Associates, L.P. has
sole voting and sole dispositive power over these shares. As the sole
general partner of Richard C. Blum & Associates, L.P., Richard C. Blum &
Associates, Inc. is deemed the beneficial owner of the shares beneficially
owned by Richard C. Blum & Associates, L.P. As President, Chairman and
majority stockholder of Richard C. Blum & Associates, Inc., Richard C. Blum
might be deemed to be the beneficial owner of the shares beneficially owned
by Richard C. Blum & Associates, Inc. Richard C. Blum & Associates, L.P.,
Richard C. Blum & Associates, Inc. and Richard C. Blum disclaim beneficial
ownership of the shares owned directly by Richard C. Blum & Associates,
L.P.'s partnerships and investment advisory clients except to the extent of
any pecuniary interest therein. The mailing address of Richard C. Blum &
Associates, L.P., Richard C. Blum & Associates, Inc. and Richard C. Blum is
909 Montgomery Street, Suite 400, San Francisco, California 94133.
(3) According to a Schedule 13G, dated February 16, 1999, filed with the
Securities and Exchange Commission, Lazard Freres Co. LLC, a registered
investment advisor, has sole voting power as to 2,765,800 shares and sole
dispositive power as to 2,911,700 shares. The mailing address of Lazard
Freres Co. LLC is 30 Rockefeller Plaza, New York, New York 10020.
(4) According to a Schedule 13D dated March 17, 1999, filed with the Securities
and Exchange Commission Peter C. Cooper ("Cooper"), Gilbert E. LeVasseur
("LeVasseur"), Cooper & LeVasseur, LLC ("C&L") and Cooper Capital, LLC
("Cooper Capital") reported beneficial ownership of 2,836,900 shares.
Cooper and LeVasseur are private investors. Cooper Capital is a limited
liability company of which Cooper is the sole manager, serves as a general
partner or managing member of certain private investment funds and is the
general partner of a private investment fund limited partnership called
Clifton Investments, L.P. ("Clifton"). C&L is a limited liability company
managed by Cooper Capital and LeVasseur and is the sole general partner of
two private investment fund limited partnerships called C&L Capital
Partners, L.P. ("Fund I") and C&L Capital Partners II, L.P. ("Fund II").
LeVasseur also serves as the Trustee of a revocable trust ("LeVasseur
Trust"). Based on the foregoing relationships, Cooper, Cooper Capital,
LeVasseur and C&L report that they share dispositive and voting power with
respect to 1,089,000 shares beneficially owned by Fund I and Fund II,
Cooper and Cooper Capital report that they have sole dispositive and voting
power with respect to 948,940 shares beneficially owned by Clifton and
LeVasseur reports that he holds sole dispositive and voting power with
respect to 789,950 shares owned by the LeVasseur Trust. The remaining 9,010
shares do not appear to have been accounted for specifically in the filing.
Cooper, LeVasseur, Cooper Capital and C&L list their mailing address as
2010 Main Street, Suite 1220, Irvine, CA 92614.
(5) According to a Schedule 13D Amendment, dated June 25, 1998, filed with the
Securities and Exchange Commission, Mr. Argyros has sole investment and
dispositive power as to all 2,770,434 shares. This number includes 6,666
shares subject to options that are currently exercisable. This number
includes 2,430,670 shares owned by HBI Financial, Inc., of which Mr.
Argyros is the sole shareholder. This number also includes (1) 280,912
shares held in trust by two private charitable foundations of which Mr.
Argyros is a vice president and director with respect to which he disclaims
beneficial ownership, (2) 500 shares held in a charitable trust of which
Mr. Argyros is a trustee but not a beneficiary with respect to which he
disclaims beneficial ownership, (3) 31,050 shares held in a trust for the
benefit of Mr. Argyros' children, for which Mr. Argyros disclaims
beneficial ownership and (4) 20,636 shares held by Mr. Argyros
individually. The amount listed does not include 3,450 shares held in a
trust of which Mr. Argyros is not a trustee for the benefit of certain of
Mr. Argyros' adult children who do not share his household for which he
disclaims beneficial ownership and 2,400 shares held in a trust of which
Mr. Argyros is not a trustee for the benefit of Mr. Argyros' mother-in-law
for which he disclaims beneficial ownership. Mr. Argyros resigned his
position as Chairman of the Board effective as of May 27, 1998. The mailing
address for Mr. Argyros is c/o Arnel Development Company, 949 South Coast
Drive, Suite 600, Costa Mesa, California 92626.
(6) Includes 517,988 shares subject to options that are currently exercisable.
Also includes (1) 500,262 shares held in a family trust of which Mr. Jones
is a trustee, (2) 18,000 shares held in trusts for the benefit of Mr.
Jones' grandchildren for which Mr. Jones disclaims beneficial ownership,
(3) 29,730 shares held in a trust for the benefit of Mr. Jones' children
for which Mr. Jones disclaims beneficial ownership and (4) 190,000 shares
held in an income trust for the benefit of Mr. Jones' children and
grandchildren for which Mr. Jones disclaims beneficial ownership. Mr. Jones
resigned as Chairman of the Board and Chief Executive Officer effective as
of January 19, 1998. He resigned his position as Director of Apria on May
27, 1998.
(7) Includes 375,000 shares subject to options that are currently exercisable.
Mr. Carter became a Director and the Chief Executive Officer of Apria on
May 5, 1998.
(8) Includes 50,666 shares subject to options that are currently exercisable.
(9) Includes 60,000 shares subject to options that are currently exercisable.
(10) Includes 78,400 shares subject to options that are currently exercisable or
will become exercisable on or before May 31, 1999.
(11) Includes 50,666 shares subject to options that are currently exercisable.
Also includes 1,000 shares held by Mr. Green's spouse.
(12) Includes 31,666 shares subject to options that are currently exercisable.
Does not include 300,000 shares held through a company which is owned by
trusts of which Mr. Tompkins is a contingent beneficiary. Said trusts are
irrevocable, and neither Mr. Tompkins nor any member of his immediate
family has any investment control with respect to the trusts or the company
owned by them.
(13) Includes 38,800 shares subject to options that are currently exercisable or
will become exercisable on or before May 31, 1999.
(14) Includes 25,000 shares subject to options that are currently exercisable.
Mr. Koppes became a member of the Board of Directors on May 5, 1998.
(15) Includes 25,000 shares subject to options that are currently exercisable.
Mr. Lochner became a member of the Board of Directors on June 30, 1998.
(16) Includes 25,000 shares subject to options that are currently exercisable.
Ms. Thomas became a member of the Board of Directors on June 30, 1998.
(17) Includes 14,000 shares subject to options that are currently exercisable.
Also includes 200 shares held by Mr. Holcombe's spouse.
(18) All shares listed are shares subject to options that are currently
exercisable.
(19) Includes shares owned by certain trusts. Also includes 1,057,764 shares
subject to options that are currently exercisable or will become
exercisable on or before May 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
As disclosed in a Registration Statement on Form S-3 (Registration No.
333-68031) filed with the Securities and Exchange Commission on November 25,
1998 in connection with a proposed offering of 10% convertible subordinated
debentures, the company entered into a Standby Purchase Agreement with
Relational Investors, LLC. Under the Standby Purchase Agreement, in the event
the proposed debenture offering is consummated, Relational Investors, LLC will
receive from Apria a $1,000,000 standby fee as well as reimbursement for all
costs and expenses (including legal fees) incurred in connection with the
offering.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. The documents described in the "Index to Consolidated Financial
Statements and Financial Statement Schedule" are included in this report
starting at page F-1.
2. The financial statement schedule described in the "Index to
Consolidated Financial Statements and Financial Statement Schedule" is
included in this report starting on page S-1.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
3. Exhibits included or incorporated herein:
See Exhibit Index.
(b) Reports on Form 8-K:
On November 27, 1998, Apria filed a Current Report on Form 8-K with
the Securities and Exchange Commission reporting that on November 25, 1998,
Apria had issued a press release related to its filing of a registration
statement on Form S-3 regarding its previously-announced rights offering
and the record date therefor.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
----
CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Auditors................................... F-1
Consolidated Balance Sheets - December 31,
1998 and 1997................................................... F-3
Consolidated Statements of Operations - Years
ended December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Stockholders' Equity
(Deficit) - Years ended December 31, 1998, 1997 and 1996........ F-5
Consolidated Statements of Cash Flows - Years
ended December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements........................ F-7
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts................... S-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Apria Healthcare Group Inc.
We have audited the accompanying consolidated balance sheet of Apria
Healthcare Group Inc. as of December 31, 1998, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the year
then ended. Our audit also included the financial statement schedule as of and
for the year ended December 31, 1998 included in the Index at Item 14(a)(2).
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of Apria Healthcare Group Inc. as
of December 31, 1998, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Also, in our opinion, such consolidated financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 29, 1999
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Apria Healthcare Group Inc.:
We have audited the accompanying consolidated balance sheet of Apria
Healthcare Group Inc. as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended December 31, 1997. Our audit also includes the
financial statement schedule in the Index at Item 14A insofar as it relates to
the years ended December 31, 1997 and 1996. These financial statements and
schedule are the responsibility of the management of Apria Healthcare Group Inc.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Apria Healthcare Group Inc. at December 31, 1997, and the consolidated results
of its operations and cash flows for each of the two years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule insofar as it
relates to the years ended December 31, 1997 and 1996, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
March 11, 1998 (except for the second paragraph of
Note 12, as to which the date is April 9, 1998)
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
------------
1998 1997
---- ----
(in thousands)
CURRENT ASSETS
Cash and cash equivalents ................................ $ 75,475 $ 16,317
Accounts receivable, less allowance for doubtful
accounts of $35,564 and $58,413 at December 31,
1998 and 1997, respectively ............................ 132,028 256,845
Inventories, net.......................................... 16,617 26,082
Refundable and prepaid income taxes ...................... - 2,576
Prepaid expenses and other current assets ................ 4,917 9,753
--------- ---------
TOTAL CURRENT ASSETS .............................. 229,037 311,573
PATIENT SERVICE EQUIPMENT, less accumulated
depreciation of $249,921 and $245,772 at
December 31, 1998 and 1997, respectively ................. 130,652 184,704
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET .................. 51,996 87,583
INTANGIBLE ASSETS, NET ..................................... 84,365 167,620
OTHER ASSETS ............................................... 548 5,690
--------- ---------
$ 496,598 $ 757,170
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable ......................................... $ 51,252 $ 50,691
Accrued payroll and related taxes
and benefits ........................................... 25,455 40,397
Accrued insurance ........................................ 13,092 12,247
Other accrued liabilities ................................ 49,870 30,463
Current portion of long-term debt ........................ 74,439 8,685
--------- ---------
TOTAL CURRENT LIABILITIES ......................... 214,108 142,483
LONG-TERM DEBT ............................................. 414,147 540,220
COMMITMENTS AND CONTINGENCIES .............................. - -
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, $.001 par value:
10,000,000 shares authorized; none issued ............ - -
Common Stock, $.001 par value:
150,000,000 shares authorized; 51,785,263
and 51,568,525 shares issued and outstanding
at December 31, 1998 and 1997, respectively .......... 52 51
Additional paid-in capital ............................... 325,903 324,090
Retained deficit ......................................... (457,612) (249,674)
--------- ---------
(131,657) 74,467
--------- ---------
$ 496,598 $ 757,170
========= =========
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in thousands, except per share data)
Net revenues .................................... $ 933,793 $ 1,180,694 $1,181,143
Costs and expenses:
Cost of net revenues:
Product and supply costs .................. 238,656 334,766 311,539
Patient service equipment depreciation .... 76,974 84,932 67,658
Nursing services .......................... 2,309 15,973 9,798
Other ..................................... 12,756 15,511 11,680
----------- ----------- ----------
330,695 451,182 400,675
Provision for doubtful accounts .............. 75,319 121,908 67,040
Selling, distribution and administrative ..... 574,895 616,113 580,436
Amortization of intangible assets ............ 12,496 16,833 16,920
Impairment of intangible assets .............. 76,223 133,542 -
Impairment of long-lived assets and
internally-developed software .............. 22,187 26,781 -
Employee contracts, benefit plan and
claim settlements .......................... - - 14,795
----------- ----------- ----------
1,091,815 1,366,359 1,079,866
----------- ----------- ----------
OPERATING (LOSS) INCOME ..................... (158,022) (185,665) 101,277
Interest expense ................................ 46,916 50,393 49,249
----------- ----------- ----------
(LOSS) INCOME BEFORE TAXES .................. (204,938) (236,058) 52,028
Income tax expense .............................. 3,000 36,550 18,728
----------- ----------- ----------
NET (LOSS) INCOME .............................. $ (207,938) $ (272,608) $ 33,300
=========== =========== ==========
Basic (loss) income per common share ............ $ (4.02) $ (5.30) $ 0.66
=========== =========== ==========
Diluted (loss) income per common share .......... $ (4.02) $ (5.30) $ 0.64
=========== =========== ==========
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Additional Retained Total
Common Stock Paid-in (Deficit) Stockholders'
Shares Par Value Capital Earnings Equity (Deficit)
------ --------- ------- -------- ----------------
(in thousands)
Balance at December 31, 1995 ............. 49,692 $ 50 $294,522 $ (10,334) $ 284,238
Issuance of Common Stock ................. 20 242 242
Exercise of stock options ................ 1,491 1 14,717 14,718
Notes receivable payments ................ 198 198
Tax benefits related to stock options .... 10,229 10,229
Other .................................... 42 (32) 10
Net income ............................... 33,300 33,300
-------- ------ -------- --------- ---------
Balance at December 31, 1996 ............. 51,203 51 319,950 22,934 342,935
Exercise of stock options ................ 365 4,013 4,013
Other .................................... 127 127
Net loss ................................. (272,608) (272,608)
-------- ------ -------- --------- ---------
Balance at December 31, 1997 ............. 51,568 51 324,090 (249,674) 74,467
Exercise of stock options ................ 217 1 1,685 1,686
Other .................................... 128 128
Net loss ................................. (207,938) (207,938)
-------- ------ -------- --------- ---------
Balance at December 31, 1998 ............. 51,785 $ 52 $325,903 $(457,612) $(131,657)
======== ====== ======== ========= =========
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in thousands)
OPERATING ACTIVITIES
Net (loss) income .......................................... $(207,938) $ (272,608) $ 33,300
Items included in net (loss) income not
requiring (providing) cash:
Provision for doubtful accounts ........................ 75,319 121,908 67,040
Provision for revenue adjustments ...................... 18,302 40,000 32,300
Provision for inventory and patient
service equipment shortages/obsolescence ............. 23,305 35,300 10,513
Depreciation ........................................... 104,031 118,054 93,123
Amortization of intangible assets ...................... 12,496 16,833 16,920
Amortization of deferred debt costs .................... 1,747 1,197 1,703
Impairment of intangible assets ........................ 76,223 133,542 -
Impairment long-lived assets and
internally-developed software ........................ 22,187 26,781 -
Loss (gain) on disposition of assets ................... 2,985 (2,044) 340
Deferred income taxes .................................. - 29,963 15,920
Change in operating assets and liabilities,
net of effects of acquisitions:
Decrease (increase) in accounts receivable ............. 31,733 (80,229) (176,551)
(Increase) decrease in inventories ..................... (612) 2,722 (12,903)
Decrease in prepaids and other current
assets (including prepaid income taxes) .............. 7,262 32,758 2,544
Decrease in other non-current assets ................... 525 508 310
Decrease in accounts payable ........................... (162) (33,153) (17,033)
Increase in accruals and other
non-current liabilities .............................. 5,842 1,378 3,175
Decrease in accrued restructuring costs ................ (968) (5,408) (11,953)
Net purchases of patient service equipment,
net of effects of acquisitions ........................... (38,461) (63,519) (118,372)
Other ...................................................... 128 127 329
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES .............................. 133,944 104,110 (59,295)
INVESTING ACTIVITIES
Purchases of property, equipment and
improvements, net of effects of acquisitions ......... (14,607) (21,047) (54,207)
Proceeds from disposition of assets .................... 3,170 8,212 317
Acquisitions and payments of
contingent consideration ............................. (2,727) (11,283) (14,815)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ............. (14,164) (24,118) (68,705)
FINANCING ACTIVITIES
Proceeds under revolving credit facility ............... - 129,950 775,125
Payments under revolving credit facility ............... (50,000) (211,950) (641,425)
Payments of senior and other long-term debt ............ (8,773) (11,793) (11,445)
Capitalized debt costs, net ............................ (3,535) (825) (1,312)
Issuances of Common Stock .............................. 1,686 4,013 15,158
--------- --------- ---------
NET CASH (USED IN) PROVIDED
BY FINANCING ACTIVITIES ........................... (60,622) (90,605) 136,101
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... 59,158 (10,613) 8,101
Cash and cash equivalents at beginning of year.............. 16,317 26,930 18,829
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR .......... $ 75,475 $ 16,317 $ 26,930
========= ========= =========
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of Apria Healthcare Group Inc. ("Apria" or "the company")
and its subsidiaries. All significant intercompany transactions and accounts
have been eliminated.
Company Background: Apria operates in the home healthcare segment of the
healthcare industry and provides services including home respiratory therapy,
home infusion therapy, home medical equipment and other services to patients in
the home throughout the United States through its approximately 320 branch
locations. Management measures operating results on a geographic basis and,
therefore, views each branch as an operating segment. All the branches offer the
same services, except that infusion services are not offered in all the
geographic markets in which the company operates. For financial reporting
purposes, all the company's operating segments are aggregated into one
reportable segment. Respiratory therapy, infusion therapy and home medical
equipment/other represented approximately 59%, 23% and 18% of total 1998
revenues, respectively. The gross margins in 1998 for respiratory therapy,
infusion therapy and home medical equipment/other were 74%, 52% and 50%,
respectively.
Operations: Apria reported a net loss of $272,608,000 for the year ended
December 31, 1997 due primarily to (1) recognition of intangible asset
impairment, (2) high levels of bad debt write-offs and revenue adjustments, (3)
impairment of certain of its information systems hardware and
internally-developed software, (4) severance and related costs associated with a
reduction in its labor force, and (5) charges for excess quantities,
obsolescence and shrinkage of patient service equipment and inventory primarily
reflecting the results of expanded asset verification and physical inventory
procedures performed due to the impact of systems conversions and high turnover.
Consequently, Apria reported an accumulated deficit of $249,674,000 at December
31, 1997.
Apria has reported a net loss of $207,938,000 for the year ended December
31, 1998, primarily due to reductions in Medicare reimbursement rates and
charges taken in the third quarter including: (1) recognition of impairment in
its goodwill and other intangible assets, (2) charges taken in conjunction with
exiting certain product lines in specific geographic areas, (3) adjustments to
revenue and the allowance for doubtful accounts due to changes in the credit and
collection policies, and (4) impairment of certain long-lived assets and
internally-developed software. As a result of the losses, Apria's accumulated
retained deficit increased to $457,612,000 at December 31, 1998.
Despite the losses recognized during the year ended December 31, 1998,
Apria generated cash flow from operations of $133,944,000 for the year and
recognized a net profit of $2,326,000 (unaudited) for the fourth quarter of
1998.
In July 1998, after an evaluation of the business, Apria announced its
strategic plan to improve the company's performance. The key elements of the
strategic plan are: (1) no change would be made to the fundamental nature of the
business, (2) Apria would withdraw from unprofitable components of the business,
which would include exiting certain portions of the infusion therapy business,
(3) a comprehensive cost reduction and capital conservation program would be
instituted, (4) the debt and capital structure would be examined, and (5) Apria
would pursue expansion through internal growth and acquisitions. In the opinion
of management, the implementation of these plans contributed significantly to
the profitable results in the fourth quarter of 1998; however, there can be no
assurance that Apria will continue to achieve profitability. Management believes
that Apria has sufficient sources of financing to continue operations and fund
its expansion plans throughout 1999; however, if this is not the case, the
company will need to obtain additional capital and there can be no assurance
that any additional equity or debt financing will be available. Apria's
long-term success is dependent on management's ability to successfully execute
its strategic plan and, ultimately, the company's ability to achieve sustained
profitable operations.
Revenue Recognition and Concentration of Credit Risk: Revenues are
recognized on the date services and related products are provided to patients
and are recorded at amounts estimated to be received under reimbursement
arrangements with a large number of third-party payors, including private
insurers, prepaid health plans, Medicare and Medicaid. Approximately 36% of the
company's 1998 revenues are reimbursed under arrangements with Medicare and
Medicaid. In 1998, no other third-party payor group represented 7% or more of
the company's revenues. The majority of the company's revenues are derived from
fees charged for patient care under fee-for-service arrangements. Revenues
derived from capitation arrangements represented 7%, 6% and 6% of total net
revenues for 1998, 1997 and 1996, respectively.
Apria establishes allowances for revenue adjustments which are normally
identified and recorded at the point of cash application or upon account review.
Revenue adjustments result from differences between estimated and actual
reimbursement amounts, failures to obtain authorizations acceptable to the payor
or other specified billing documentation, changes in coverage or payor and other
reasons unrelated to credit risk. The allowance for revenue adjustments is
deducted directly from gross accounts receivable. Management also establishes
allowances for those accounts from which payment is not expected to be received,
although services were provided and revenue was earned.
Management performs various analyses to estimate the revenue adjustment
allowance and the allowance for doubtful accounts. Specifically, management
considers historical realization data, accounts receivable aging trends,
operating statistics and relevant business conditions. Apria periodically
refines its procedures for estimating the allowances for revenue adjustments and
doubtful accounts based on experience with the estimation process and changes in
circumstances. The estimation process was modified in 1997 to include an
evaluation of the collectibility of amounts owed by third-party payors with
aggregate patient balances exceeding a specified amount and further modified in
1998 to reflect changes in the company's collection policies and procedures.
Because of continuing changes in the healthcare industry and third-party
reimbursement, it is reasonably possible that management's estimates of net
collectible revenues could change in the near term, which could have a favorable
or unfavorable impact on operations and cash flows.
Use of Accounting Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates. Due to
the nature of the industry and the reimbursement environment in which the
company operates, certain estimates are required in recording net revenues.
Inherent in these estimates is the risk that they will have to be revised or
updated, and the changes recorded in subsequent periods, as additional
information becomes available to management.
Cash and Cash Equivalents: Apria maintains cash with various financial
institutions. These financial institutions are located throughout the United
States and the company's cash management practices limit exposure to any one
institution. Outstanding checks in excess of bank balances, which are reported
as a component of accounts payable, were $15,102,000 and $13,309,000 at December
31, 1998 and 1997, respectively. Management considers all highly liquid
instruments purchased with a maturity of less than three months to be cash
equivalents. As further discussed in Note 5, use of $35,000,000 of Apria's cash
balance is temporarily restricted.
Accounts Receivable: Included in accounts receivable are earned but
unbilled receivables of $25,262,000 and $31,919,000 at December 31, 1998 and
1997, respectively.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market and consist primarily of disposables used in
conjunction with patient service equipment.
Patient Service Equipment: Patient service equipment consists of medical
equipment provided to in-home patients and is stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
equipment, which range from one to 10 years.
Property, Equipment and Improvements: Property, equipment and improvements
are stated at cost. Depreciation is provided using the straight-line method over
the estimated useful lives of the property. Included in property and equipment
are assets under capitalized leases which consist solely of computer equipment.
Depreciation for equipment under capitalized leases is provided using the
straight-line method over the estimated useful life. Estimated useful lives for
each of the categories presented in Note 3 are as follows: land improvements --
seven years; building and leasehold improvements -- the shorter of the remaining
lease term or seven years; equipment and furnishings -- three to 15 years;
information systems -- two to four years.
Capitalized Software: Included in property, equipment and improvements are
costs related to internally-developed and purchased software that are
capitalized and amortized over periods not exceeding four years. Capitalized
costs include direct costs of materials and services incurred in developing or
obtaining internal-use software and payroll and payroll-related costs for
employees directly involved in the development of internal-use software.
The carrying value of capitalized software is reviewed if the facts and
circumstances suggest that it may be impaired. Indicators of impairment may
include a subsequent change in the extent or manner in which the software is
used or expected to be used, a significant change to the software is made or
expected to be made or the cost to develop or modify internal-use software
exceeds that expected amount. If events and circumstances indicate that the
software is impaired, management applies its policy for measuring and recording
impairment of its intangible and other long-lived assets, as described below.
Intangible and Other Long-lived Assets: Intangible assets consist of
covenants not to compete and goodwill arising from business combinations (see
Note 2). The values assigned to intangible assets are amortized on a
straight-line basis. Covenants are amortized over contractual terms, which range
from 3 to ten years. Goodwill, representing the excess of the purchase price
over the estimated fair value of the net assets of the acquired business, is
amortized over the period of expected benefit. The amortization period for
goodwill is generally 20 years. Prior to December 31, 1997 the amortization
period for goodwill related to acquired infusion therapy businesses was 40
years.
Management reviews for impairment of long-lived assets and intangible
assets to be held and used in the company's operations whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For purposes of assessing impairment, assets are grouped at the
branch level which is the lowest level for which there are identifiable cash
flows that are largely independent of the cash flows of other groups of assets.
Goodwill is generally separately identified by acquisition and branch location.
However, for multi-location acquisitions, goodwill is allocated to branches on
the basis of annual revenues as of the acquisition date. Management deems the
long-lived and/or intangible assets of a branch to be impaired if estimated
expected undiscounted future cash flows is less than the carrying amount of the
assets. Estimates of expected future cash flows are based on management's best
estimates of anticipated operating results over the remaining useful life of the
assets. For those branches identified as containing impaired assets, the company
measures the impairment as the amount by which the carrying amount of the asset
exceeds the fair value of the asset. In estimating the fair value of the asset,
management utilizes a valuation technique based on the present value of expected
future cash flows.
Fair Value of Financial Instruments: The fair value of long-term debt and
letters of credit is determined by reference to borrowing rates currently
available to Apria for loans with similar terms and average maturities. The
carrying amounts of cash and cash equivalents, accounts receivables, trade
payables and accrued expenses approximate fair value because of their short
maturity.
Advertising: Advertising costs amounting to $3,295,000, $4,088,000 and
$6,095,000 for 1998, 1997 and 1996, respectively, are expensed as incurred and
included in "Selling, distribution and administrative expenses."
Income Taxes: Apria provides for income taxes under the liability method.
Accordingly, deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities. These differences will result in taxable or deductible amounts in
the future, based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to
amounts which are more likely than not to be realized. The provision for income
taxes represents the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.
Per Share Amounts: Basic net income (loss) per share is computed by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding. Diluted net income (loss) per share
includes the effect of the potential shares outstanding, including dilutive
stock options and warrants, using the treasury stock method.
Stock-based Compensation: Apria grants options to employees for a fixed
number of shares with an exercise price equal to the fair value of the shares at
the date of grant. The company accounts for stock option grants in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25")
and, accordingly, recognizes no compensation expense for the stock option grants
to employees. However, Apria has adopted the disclosure provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-based
Compensation ("SFAS No. 123") (see Note 6).
New Accounting Pronouncements: As of December 31, 1998, Apria adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", and Statement of Financial Accounting Standards No. 131, "Disclosures
About Segments of an Enterprise and Related Information". Both statements, which
became effective for fiscal years beginning after December 15, 1997 did not have
any effect on the company's consolidated financial statements.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") was issued in
June 1998 and establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments imbedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statements of financial
position and measure those instruments at fair value. Apria's management
believes that adoption of SFAS No. 133, which is required in fiscal 2000, will
not have a material impact on its consolidated financial statements.
AICPA Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), was issued in
March 1998 and will be effective for the company beginning in fiscal 1999. SOP
98-1 broadly defines and provides guidance on accounting for the costs of
computer software developed or obtained for internal use. SOP 98-1 requires that
computer software costs incurred in the preliminary project stage be expensed as
incurred. The provisions of SOP 98-1 apply to internal-use software costs
incurred in those fiscal years for all projects, including those projects in
progress upon initial application of the statement. Costs incurred prior to
initial application of this statement, whether capitalized or not, should not be
adjusted to the amounts that would have been capitalized had this SOP been in
effect when those costs were incurred. Apria has already adopted substantially
all of the provisions of SOP 98-1, therefore formal adoption is not expected to
have an impact on Apria's consolidated financial statements.
Reclassifications: Certain amounts for prior periods have been reclassified
to conform to the current year presentation.
NOTE 2 -- BUSINESS COMBINATIONS AND DISPOSITIONS
During 1998, 1997 and 1996, Apria acquired a number of complementary
businesses in specific geographic markets. The businesses, none of which were
individually significant, were purchased for cash. The transactions were
accounted for as purchases and, accordingly, the operations of the acquired
businesses are included in the consolidated statements of operations from the
dates of acquisition. The purchase prices were allocated to the various
underlying tangible and intangible assets and liabilities on the basis of
estimated fair value.
The following table summarizes the allocation of the purchase prices of
acquisitions made by the company, including non-cash financing activities and
payments of contingent consideration:
Year Ended December 31,
---------- ------------
1998 1997 1996
---- ---- ----
(in thousands)
Fair value of assets acquired............ $ 2,610 $ 11,729 $ 15,356
Liabilities paid (assumed), net.......... 117 (446) (541)
------- -------- --------
Cash paid.......................... $ 2,727 $ 11,283 $ 14,815
======= ======== ========
The fair value of assets acquired during 1998, 1997 and 1996 includes
intangible assets of $1,653,000, $7,368,000 and $5,880,000, respectively.
During the third quarter of 1998, Apria sold its infusion business in
California to Crescent Healthcare, Inc. and decided to exit the infusion
business in Texas, Louisiana, West Virginia, western Pennsylvania and downstate
New York. Charges of $7,263,000 related to the wind-down of unprofitable
infusion operations and a $3,798,000 loss on sale of the California business
were recorded. The operations of these infusion locations had revenues of
$41,480,000, $72,677,000 and $86,242,000 for the years 1998, 1997 and 1996,
respectively.
In January 1997, Apria sold all of its 15% equity interest in Omnicare plc,
a United Kingdom-based public limited company, to a former director of Apria.
Cash proceeds from the sale were $2,791,000 which resulted in a gain of
$1,232,000.
In March 1997, Apria sold its Medicare-certified home health agency, M&B
Ventures, Inc., for cash proceeds of $2,400,000 and recorded a loss on sale of
$784,000. The company also disposed of several branch locations in California
and Arizona in the latter part of 1997. Cash proceeds from these sales were
$1,189,000 which resulted in a net gain of $386,000. The operations of M&B
Ventures and the disposed branches had revenues of approximately $4,648,000 and
$11,082,000 for 1997 and 1996, respectively.
In September 1997, Apria exercised its warrants to purchase 247,500 shares
of common stock of Living Centers of America, Inc. The subsequent sale of the
shares netted cash proceeds and a gain of $1,350,000.
NOTE 3 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following:
December 31,
------------
1998 1997
---- ----
(in thousands)
Land and improvements....................... $ 53 $ 53
Buildings and leasehold improvements........ 20,561 23,283
Equipment and furnishings................... 47,413 71,815
Information systems......................... 38,091 75,012
-------- --------
106,118 170,163
Less accumulated depreciation............... (54,122) (82,580)
-------- --------
$ 51,996 $ 87,583
======== ========
One of the actions taken in 1998 as a result of management's new strategic
direction was the termination of the project to implement an enterprise resource
planning (ERP) system. Accordingly, Apria wrote off related software and other
capitalized costs of $7,548,000 in the third quarter of 1998. As part of the
decision to terminate the ERP project, management evaluated its current systems
to determine their long-term viability in the context of the company's new
overall strategic direction. It was determined that the company was at some risk
in continuing to run the infusion billing system on its current platform, which
is no longer supported by the computer industry. To mitigate this risk, Apria
began in 1998 to convert the infusion system to the IBM AS/400 operating
platform on which the respiratory/home medical equipment system currently
operates. The company also installed a number of enhancements to the systems,
rendering certain previously-developed modules obsolete. Additionally, pharmacy
and branch consolidations and closures resulted in a variety of computer
equipment that was no longer needed. Due to its age and technological
obsolescence, it was deemed to have no future value. As a result of these
actions, Apria recorded an impairment charge of $11,843,000 in the third quarter
of 1998.
In the fourth quarter of 1997, Apria wrote down the carrying value of
internally-developed software by $20,225,000 and computer equipment by
$6,556,000. The software impairment charge consisted of $15,305,000 of
capitalized development and implementation costs related to the company's branch
information system (ACIS) which management had committed to replace and
$4,920,000 of capitalized development costs related to specialized
telecommunications software for ApriaDirect, a clinical program that was
discontinued in December 1997. The computer equipment impairment charge
consisted of computer and telecommunications equipment identified as
functionally obsolete or no longer in use.
NOTE 4 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31,
------------
1998 1997
---- ----
(in thousands)
Covenants not to compete............. $ 17,780 $ 30,874
Goodwill............................. 101,365 198,930
-------- ---------
119,145 229,804
Less accumulated amortization........ (34,780) (62,184)
-------- --------
$ 84,365 $167,620
======== ========
1998 Impairment of Intangible Assets: The deterioration in the infusion
therapy industry and management's decision to withdraw from the infusion
business in certain geographic markets served as indicators of potential
intangible asset impairment. Other indicators of potential impairment identified
by management include, among other issues, the company's declining common stock
price, failure to meet its already lowered financial expectations, the threat of
continued Medicare reimbursement reductions, government investigations against
the company, slower than expected progress in improving its billing and
collection process, and reported financial difficulties within major managed
care organizations with which Apria does business, resulting in collection
difficulties. In the third quarter of 1998, management conducted an evaluation
of the carrying value of the company's recorded intangible assets. Management
considered current and anticipated industry conditions, recent changes in its
business strategies, and current and anticipated operating results. The
evaluation resulted in an impairment charge of $76,223,000, which includes a
write-off of $4,771,000 in intangible assets associated with the exit of the
infusion business in certain areas.
1997 Impairment of Intangible Assets: Certain 1997 conditions, including
Apria's failure to meet projections and expectations, declining gross margins,
recurring operating losses, significant downward adjustment to the company's
projections for 1998 and a declining common stock value, were identified by
management as indicators of potential intangible asset impairment. In the fourth
quarter of 1997, management conducted an evaluation of the carrying value and
amortization periods of recorded intangible assets. Management considered
current and anticipated industry conditions, recent changes in its business
strategies and current and anticipated operating results. The evaluation
resulted in an impairment charge of $133,542,000 which was recorded in the
fourth quarter of 1997. In conjunction with the impairment evaluation,
management reduced the amortization period for goodwill related to acquired
infusion therapy businesses from 40 years to 20 years. The remaining
infusion-related goodwill is being amortized over the years remaining assuming a
20-year life from date of acquisition.
Measurement of Impairment: For purposes of assessing impairment, assets
were grouped at the branch level, which is the lowest level for which there are
identifiable cash flows that are largely independent. A branch location was
deemed to be impaired if management's estimate of undiscounted cash flows was
less than the carrying amount of the long-lived assets and goodwill at the
branch. In estimating future cash flows, management used its best estimates of
anticipated operating results over the remaining useful life of the assets
where, in the case of the 1997 computation, the useful life is the amortization
period before giving effect to the reduction in the infusion business goodwill
from 40 to 20 years. For those branches identified as impaired, the amount of
impairment was measured by comparing the carrying amount of the long-lived
assets and goodwill to the estimated fair value for each branch. Fair value was
estimated using a valuation technique based on the present value of the expected
future cash flows.
NOTE 5 -- CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
------------
1998 1997
---- ----
(in thousands)
Notes payable relating to revolving
credit facilities.............................. $ - $338,000
Term loans payable............................... 288,000 -
9.5% senior subordinated notes................... 200,000 200,000
Other, interest at rates ranging from
0% to 4.1%, payments due at various
dates through December 1998.................... - 172
Capital lease obligations (see Note 10).......... 8,196 16,555
-------- --------
496,196 554,727
Less: Current maturities......................... (74,439) (8,685)
Unamortized deferred debt costs............ (7,610) (5,822)
-------- --------
$414,147 $540,220
======== ========
Credit Agreement: Apria's credit agreement with Bank of America and a
syndicate of banks was amended and restated in November of 1998 and further
amended in January and February of 1999. In connection with the November 1998
amendment, the company made a required $50,000,000 repayment of the revolving
credit facility. The remaining indebtedness under the credit agreement, which
expires in August 2001, was restructured into a $288,000,000 term loan and a
$30,000,000 revolving credit facility. Term loan principal payments are payable
quarterly commencing on March 31, 1999 and continuing through June 30, 2001 in
the following amounts: $4,000,000 quarterly in 1999, $5,000,000 quarterly in
2000 and $10,000,000 quarterly thereafter until maturity.
The amended credit agreement currently requires that Apria issue not less
than $50,000,000 of senior subordinated notes or senior subordinated convertible
debentures by April 23, 1999, the net proceeds of which must be applied to the
term loan. Additionally, between the effective date of the November amendment
and the earlier of April 23, 1999 or the issuance date of the notes or
debentures, the company is subject to prepayments of the term loan based on
excess cash flow (as defined by the agreement). The resulting prepayments of
$6,938,000 reduced the required amount of the quarterly term loan payment that
was due March 31, 1999 to zero. No additional prepayments based on excess cash
flow will be required.
The amended credit agreement also allows Apria to make acquisitions under
an acquisition "basket" provision of up to $62,000,000, subject to certain
restrictions, that may be increased given certain levels of financial
performance by the company. In 1999, the acquisition limit is subject to dollar
for dollar reduction by the amount of any unusual cash expenses (as defined by
the agreement) incurred and paid in 1999.
The amended agreement permits Apria to elect one of two variable rate
interest options at the time an advance is made. The first option is expressed
as 2.50% plus the higher of (a) the Bank of America "reference rate" and (b) the
Federal Funds Rate plus 0.50% per annum. The second option is a rate based on
the London Interbank Offered Rate plus 3.50% per annum. The effective interest
rate at December 31, 1998 was 9.125% for term loan borrowings of $288,000,000.
The credit agreement requires payment of commitment fees of 0.75% on the unused
portion of the revolving credit facility.
Borrowings under the credit facility are collateralized by substantially
all of the assets of Apria. The agreement contains numerous restrictions,
including but not limited to, covenants requiring the maintenance of certain
financial ratios, limitations on additional borrowings, capital expenditures,
mergers, acquisitions and investments and restrictions on cash dividends, loans
and other distributions. The agreement also requires that the company maintain
minimum cash balances of $35,000,000 through the consummation of the debt or
equity offering. Additionally, the credit agreement allows for certain charges
from the fourth quarter of 1997, the third quarter of 1998 and unusual cash
expenses in 1999, totaling $81,740,000, $181,079,000 and up to $17,500,000,
respectively, to be excluded from the calculation of specific financial ratios
when determining covenant compliance. At December 31, 1998, the company is in
compliance with the financial covenants required by the credit agreement.
The carrying amount of the term loan approximates fair market value because
the underlying instruments are variable notes that reprice frequently.
Apria had no derivative securities as of December 31, 1998. The company is
exposed to changes in interest rates as a result of its bank credit facility
which is based on the variable rate interest options discussed above.
At December 31, 1998, the company's outstanding letters of credit amounted
to $10,276,000 and credit available under the revolving credit facility was
$19,724,000 (subject to the restriction under the Indenture described below).
9 1/2% Senior Subordinated Notes: Apria's $200,000,000 9 1/2% senior
subordinated notes mature November 1, 2002 and are subordinated to all senior
debt of the company and senior in right of payment to subordinated debt of the
company. The fair value of these notes, as determined by reference to quoted
market prices, is $199,260,000 and $211,540,000 at December 31, 1998 and 1997,
respectively.
Under the indenture governing Apria's senior subordinated notes, the
company's ability to incur indebtedness becomes restricted at times that the
company's "Fixed Charge Coverage Ratio" (as defined in the indenture) is less
than 3.0 to 1.0. Charges taken against revenues in the third quarter of 1998
resulted in the Fixed Charge Coverage Ratio being less than 3.0 to 1.0. This
condition is expected to continue at least through the third quarter of 1999.
Apria has changed its cash management procedures so as to avoid the need to
incur indebtedness in violation of the terms of the indenture and has
accumulated a cash balance of $75,184,000 as of February 28, 1999.
Maturities of long-term debt, exclusive of capital lease obligations are as
follows:
(in thousands)
1999.......................................... $ 68,938
2000.......................................... 20,000
2001.......................................... 199,062
2002.......................................... 200,000
--------
$488,000
========
Total interest paid in 1998, 1997 and 1996 amounted to $44,989,000,
$53,222,000 and $44,341,000, respectively.
NOTE 6 -- STOCKHOLDERS' EQUITY
Common Stock: Apria has granted registration rights to certain holders of
common stock under which the company is obligated to pay the expenses associated
with those registration rights.
Preferred Stock Purchase Rights: Under Apria's preferred stock purchase
rights plan, the company's common stockholders hold one right for each share of
common stock outstanding. If the rights become exercisable, each right (unless
held by the person or group causing the rights to become exercisable) will allow
its holder to purchase one one-hundredth of a share of Junior Participating
Stock ("Junior Preferred Shares") at a price of $130 per one one-hundredth of a
Junior Preferred Share, subject to adjustment. The rights will become
exercisable if a person, or group of affiliated persons, acquires beneficial
ownership of 15% or more of the company's common stock, unless the Board of
Directors determines the transaction to be fair and in the best interest of the
company and its stockholders. Each Junior Preferred Share will be entitled to
preferential dividend and liquidation payments, preferential consideration in
the event of any merger, consolidation or other transaction in which stock is
exchanged and 100 votes which vote together with common stock. In addition, upon
exercise of a right, each holder of shares of common stock will receive an
additional amount of common stock having a market value equal to two times the
then current purchase price of the right. However, Apria's Board of Directors
has retained the right to redeem the rights in whole, but not in part, at $0.01
per right within ten (10) days after they become exercisable.
Stock Compensation Plans: Apria has various stock-based compensation plans,
which are described below. Management applies the provisions of APB No. 25 and
related Interpretations in accounting for its plans. No compensation expense has
been recognized upon granting of options under its fixed stock option plans,
performance-based plan or its stock purchase plan. Had compensation expense for
the company's stock-based compensation plans been recognized based on the fair
value of awards at the date of grant, consistent with the method of SFAS No.
123, Apria's net (loss) income and per share amounts would have been adjusted to
the pro forma amounts indicated below. The provisions of SFAS No. 123 have been
applied to awards with grant dates in 1998, 1997, 1996 and 1995, only.
Therefore, until the rules are applied to all outstanding, nonvested awards, the
compensation expense reflected in the pro forma amounts presented below is not
indicative of future amounts.
1998 1997 1996
---- ---- ----
(in thousands, except
per share data)
Net (loss) income:
As reported ..................... $(207,938) $(272,608) $ 33,300
Pro forma ....................... $(212,518) $(276,213) $ 29,649
Basic net (loss) income per share:
As reported ..................... $ (4.02) $ (5.30) $ 0.66
Pro forma ....................... $ (4.11) $ (5.37) $ 0.58
Diluted net (loss) income per share:
As reported ..................... $ (4.02) $ (5.30) $ 0.64
Pro forma ....................... $ (4.11) $ (5.37) $ 0.58
For purposes of pro forma disclosure, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in 1998, 1997
and 1996: risk-free interest rates ranging from 5.72% to 4.16%, 6.45% to 5.82%
and 6.91% to 6.33%, respectively; dividend yield of 0% for all years; expected
lives ranging from 5.36 years for 1998, 6.50 years for 1997 and 1.25 to 6.58
years for 1996; and volatility of 63% for 1998, 55% for 1997 and 43% for 1996.
Fixed Stock Options: Apria has various fixed stock option plans that
provide for the granting of incentive or non-statutory options to its key
employees and non-employee members of the Board of Directors. In the case of
incentive stock options, the exercise price may not be less than the fair market
value of the company's stock on the date of the grant, and may not be less than
110% of the fair market value of the company's stock on the date of the grant
for any individual possessing 10% or more of the voting power of all classes of
stock of the company. The options become exercisable at any time from and after
the date of grant to five years and expire not later than 10 years from the date
of grant.
A summary of the status of Apria's fixed stock options as of December 31,
1998, 1997 and 1996, and the activity during the years ending on those dates is
presented below:
1998 1997 1996
------------------------ ----------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- ---------- --------------- ---------- --------------
Outstanding - beginning of year........... 2,803,952 $17.46 3,431,472 $17.12 4,111,824 $15.22
Granted:
Exercise price equal to fair value...... 774,994 $ 8.78 201,000 $15.86 710,800 $18.60
Exercise price greater than fair value.. 75,000 $12.56 53,000 $18.25 10,000 $28.25
Exercise price less than fair value..... - - 25,000 $10.00
Exercised................................. (104,638) $ 4.33 (304,635) $ 9.95 (1,073,804) $ 9.67
Forfeited................................. (1,248,339) $17.90 (576,885) $18.94 (352,348) $20.41
---------- --------- ----------
Outstanding - end of year................. 2,300,969 $14.73 2,803,952 $17.46 3,431,472 $17.12
========== ========== ==========
Exercisable at end of year................ 1,701,287 $14.20 1,469,113 $16.19 1,281,402 $13.99
========== ========= ==========
Weighted-average fair value of options
granted during the year................... $ 5.30 $ 9.91 $ 9.92
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------
Weighted
Average
Number Remaining Weighted- Number Weighted-
Outstanding Contractual Average Exercisable Average
Range of Exercise Prices As of 12/31/98 Life (in years) Exercise Price As of 12/31/98 Exercise Price
- ------------------------ -------------- --------------- -------------- -------------- --------------
$ 1.50 - $ 6.69 353,609 8.48 $ 5.71 353,609 $ 5.71
$ 7.68 - $ 9.00 314,904 9.07 $ 8.95 314,904 $ 8.95
$ 9.06 - $12.23 292,960 7.14 $11.66 134,626 $11.18
$12.25 - $16.63 327,521 6.89 $15.06 191,521 $14.65
$16.87 - $18.50 417,995 7.44 $17.34 236,495 $17.33
$20.00 - $29.00 593,980 6.49 $22.64 470,132 $23.21
--------- ---------
$ 1.50 - $29.00 2,300,969 7.46 $14.73 1,701,287 $14.20
Performance-Based Stock Options: Included in Apria's stock-based
compensation plans are provisions for the granting of performance-based stock
options. In 1998, Apria granted such stock option awards to its key employees
and to key members of senior management. The options become exercisable over a
period of seven years and expire not later than ten years from the date of
grant. Accelerated vesting will occur upon the occurrence of certain events and
on designated dates on which the average fair market value of Apria's common
stock during any period of 90 consecutive calendar days subsequent to the grant
date shall not have been less than a targeted per share price. No options have
vested under the accelerated provisions.
Also, the company has a Long-Term Senior Management Equity Plan which
provides for the granting of non-statutory stock option awards to key members of
senior management at fair market value on the date of the grant. The plan
provides for vesting at certain time intervals and accelerated vesting upon the
occurrence of certain events and the achievement of certain cumulative and
annual earnings per share targets. Due to the change in control in 1995, which
caused specific criteria in the plan to be met, half of the outstanding options
vested. An additional 32% of the outstanding options vested in 1995 based on the
achievement of the targeted cumulative earnings per share amount. The remaining
18% of the outstanding options became exercisable in March 1999 upon release of
1998 financial results. Since the 1995 change in control, no options were
granted under this plan and no further grants are authorized. Options awarded
under this plan expire 10 years from the date of grant.
A summary of the status of the Apria's performance-based stock options as
of December 31, 1998, 1997 and 1996, and the activity during the years ending on
those dates is presented below:
1998 1997 1996
------------------------- ------------------------ -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- --------------- -------- --------------- --------- ---------------
Outstanding - beginning of year........... 836,602 $11.24 919,722 $11.24 1,365,400 $11.20
Granted:
Exercise price equal to fair value...... 2,767,000 $ 6.88 - -
Exercise price greater than fair value.. 136,500 $ 6.50 - -
Exercised................................. (112,100) $11.00 (60,440) $11.15 (416,878) $11.13
Forfeited................................. (217,140) $10.85 (22,680) $11.30 (28,800) $11.00
--------- --------- ---------
Outstanding - end of year................. 3,410,862 $ 7.55 836,602 $11.24 919,722 $11.24
========= ========= =========
Exercisable at end of year................ 610,622 $10.53 641,842 $11.25 702,282 $11.24
========= ========= =========
Weighted-average fair value of options
granted during the year................... $4.52 - -
The following table summarizes information about performance-based stock
options outstanding at December 31, 1998:
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Weighted
Average
Number Remaining Weighted- Number Weighted-
Outstanding Contractual Average Exercisable Average
Range of Exercise Prices As of 12/31/98 Life (in years) Exercise Price As of 12/31/98 Exercise Price
- ------------------------ -------------- --------------- -------------- -------------- --------------
$ 4.69 - $ 6.50 2,300,500 9.57 $ 6.40 12,500 $ 4.69
$ 6.75 - $ 9.00 570,000 9.36 $ 8.74 115,000 $ 8.58
$11.00 - $13.50 540,362 3.36 $11.16 483,122 $11.15
--------- -------
$ 4.69 - $13.50 3,410,862 8.55 $ 7.55 610,622 $10.53
Approximately 9,664,000 shares of common stock are reserved for future
issuance upon exercise of stock options under these plans.
NOTE 7 -- CERTAIN OPERATING STATEMENT CAPTIONS
Employee Contracts, Benefit Plan and Claim Settlements: In 1996, Apria
recorded $14,795,000 for employee contract, benefit plan and claim settlements.
The accrual included $5,272,000 for legal settlements and related costs in
excess of amounts previously accrued and $6,223,000 to cover the settlement and
associated costs related to the termination of a proposed merger with Vitas
Healthcare Corporation. Also in 1996, a $3,300,000 increase to the settlement
loss on the termination of the Abbey Healthcare Group Incorporated ("Abbey")
defined benefit pension plan was recorded based on updated actuarial estimates.
NOTE 8 -- INCOME TAXES
Significant components of Apria's deferred tax assets and liabilities are
as follows:
December 31,
------------
1998 1997
---- ----
(in thousands)
Deferred tax liabilities:
Tax over book depreciation ................. $ 20,361 $ 20,402
Intangible assets .......................... 1,855 727
Other, net ................................. 364 206
--------- ---------
Total deferred tax liabilities .......... 22,580 21,335
Deferred tax assets:
Allowance for doubtful accounts ............ 24,353 33,150
Accruals ................................... 17,889 15,041
Asset valuation reserves ................... 6,240 4,058
Net operating loss carryforward,
limited byss.382 ......................... 128,285 66,416
AMT and research credit carryovers ......... 4,500 4,500
Other, net ................................. 305 475
--------- ---------
Total deferred tax assets ............... 181,572 123,640
Valuation allowance .......................... (158,992) (102,305)
--------- ---------
Net deferred tax assets ................. 22,580 21,335
========= =========
At December 31, 1998, Apria's federal operating loss carryforwards ("NOLs")
approximated $380,000,000, expiring in varying amounts in the years 2003 through
2013. Additionally, the company has various state operating loss carryforwards
which began to expire in 1997. As a result of an ownership change in 1992, which
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 included in deferred tax asset excludes such amount.
In evaluating the realizability of the NOLs at December 31, 1998, various
positive and negative factors pertaining to the existence of sufficient
projected taxable income within the carryforward period were considered.
Management believes that its strategies may result in sufficient taxable income
during the carryforward period to utilize Apria's NOLs. However, the achievement
of future taxable income is dependent upon future events and economic,
regulatory and other factors largely out of management's control. Therefore,
such future taxable income is not assured. Additionally, in evaluating whether a
valuation allowance is appropriate, management also considered the significant
negative factors existing at December 31, 1998, including: Apria's recent
historical financial and tax losses make it difficult to conclude a valuation
allowance is not needed; Apria has, in recent years, been unable to meet its
operating plans; and while management has implemented new strategies to achieve
profitability and reported a profit in the fourth quarter of 1998, there can be
no assurances that operating profits will continue in any future period or that
management will be successful in implementing all its strategies, including its
growth plans. In considering the positive and negative factors at this time,
management concluded that it is more likely than not that Apria will be unable
to utilize the NOLs except for future reversals of existing taxable temporary
differences, and consequently has recorded a valuation allowance of
approximately $158,992,000 at December 31, 1998.
In the fourth quarter of 1997, the company increased its valuation
allowance for deferred tax assets due to recurring tax losses and management's
reduced expectations of future taxable income. No assumption of future taxable
income was made due to the company's significant cumulative recent losses.
Income tax (benefit) expense consists of the following:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in thousands)
Current:
Federal................................... $ - $ 3,623 $ (7,917)
State .................................... 2,000 1,964 177
Foreign .................................. 1,000 1,000 -
-------- -------- --------
3,000 6,587 (7,740)
Deferred:
Federal .................................. - 25,768 14,106
State .................................... - 4,195 1,814
-------- -------- --------
29,963 15,920
Tax benefits credited to paid-in
capital and goodwill ..................... - - 10,548
-------- -------- --------
$ 3,000 $ 36,550 $ 18,728
======== ======== ========
The exercise of stock options granted under Apria's various stock option
plans gives rise to compensation which is includable as taxable income to the
employee and deductible by the company for federal and state tax purposes but is
not recognized as expense for financial reporting purposes. The tax benefit of
stock option exercises in 1998 and 1997 is included in Apria's net operating
loss carryforward and therefore not reflected as a credit to paid-in capital. In
addition, the recognition, for income tax purposes, of certain deferred tax
assets relating to acquired businesses reduces related goodwill for financial
reporting purposes.
Current state income tax expense for all periods presented includes state
tax amounts accrued and paid on a basis other than income and in 1998 and 1997
includes the estimated settlement amounts of state income tax audits in
progress. Current foreign income tax expense in 1998 and 1997 includes the
estimated foreign taxes payable on the sale of Apria's 15% interest in Omnicare
plc as well as estimated settlement amounts on foreign tax audits in progress
(see Note 2).
Current federal income tax expense in 1997 represents the amount settled
and paid in connection with an audit of Apria's federal income tax returns for
tax years ending in 1992 through 1995. The amount paid represents an increase to
certain deferred tax assets for which no benefit was recorded in 1997 because an
offsetting increase to the valuation allowance was recorded.
Differences between Apria's income tax expense (benefit) and an amount
calculated utilizing the federal statutory rate are as follows:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in thousands)
Income tax (benefit) expense at statutory rate..... $(71,728) $(82,621) $ 18,210
Non-deductible merger costs and amortization
and impairment loss on goodwill ................. 21,000 48,783 2,150
State and foreign taxes, net of federal
benefit and state loss carryforwards ............ 422 7,159 1,991
Increase in valuation allowance for
deferred items previously recognized ............ - 25,768 -
Tax benefit of net operating loss not
currently recognized ............................ 53,306 33,816 3,734
Expense (benefit) of deferred items
not previously recognized ....................... - - (7,914)
Other ............................................. - 3,645 557
-------- -------- --------
$ 3,000 $ 36,550 $ 18,728
======== ======== ========
Net income taxes refunded in 1998, 1997 and 1996, amounted to $3,103,000,
$26,426,000 and $963,000, respectively.
NOTE 9 - PER SHARE AMOUNTS
The following table sets forth the computation of basic and diluted per
share amounts:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in thousands, except per share data)
Numerator:
(Loss) income before extraordinary charge ...... $(207,938) $(272,608) $33,300
Numerator for basic per share amounts - (loss)
income attributable to common stockholders .. $(207,938) $(272,608) $33,300
Numerator for diluted per share amounts - (loss)
income attributable to common stockholders .. $(207,938) $(272,608) $33,300
Denominator:
Denominator for basic per share
amounts - weighted average shares ........... 51,732 51,419 50,811
Effect of dilutive securities:
Employee stock options ...................... - - 1,371
--------- --------- -------
Dilutive potential common shares ............ - - 1,371
--------- --------- -------
Denominator for diluted per share amounts -
adjusted weighted average shares ........... 51,732 51,419 52,182
========= ========= =======
Basic (loss) income per share amounts ............. $ (4.02) $ (5.30) $ 0.66
========= ========= =======
Diluted (loss) income per share amounts ........... $ (4.02) $ (5.30) $ 0.64
========= ========= =======
Employee stock options excluded from the
computation of diluted per share amounts:
Exercise price exceeds average market
price of common stock .................... 5,433 1,814 44
Other ....................................... 63 468 -
--------- --------- -------
5,496 2,282 44
========= ========= =======
Average exercise price per share that exceeds
average market price of common stock ........... $ 10.74 $ 20.13 $ 27.18
========= ========= =======
Because net losses were incurred in 1998 and 1997, the impact of options is
antidilutive in those years and there is no difference between basic and diluted
per share amounts.
For additional disclosure regarding employee stock options, see Note 6.
NOTE 10 -- LEASES
Apria operates principally in leased offices and warehouse facilities. In
addition, delivery vehicles and office equipment are leased. Lease terms range
from one to ten years with renewal options for additional periods. Many leases
provide that the company pay taxes, maintenance, insurance and other expenses.
Rentals are generally increased annually by the Consumer Price Index subject to
certain maximum amounts defined within individual agreements.
Apria occasionally subleases unused facility space when a lease buyout is
not a viable option. Sublease income, in amounts not considered material, is
recognized monthly and is offset against facility lease expense. Net rent
expense in 1998, 1997 and 1996 amounted to $57,670,000, $52,802,000 and
$46,493,000, respectively.
In addition, during 1998, 1997 and 1996, Apria acquired patient service
equipment, information systems and equipment and furnishings totaling $263,000,
$7,235,000 and $12,021,000, respectively, under capital lease arrangements with
lease terms ranging from two to five years. Amortization of the leased patient
service equipment, information systems and equipment and furnishings amounted to
$9,562,000, $8,578,000 and $9,314,000 in 1998, 1997 and 1996, respectively.
The following amounts for assets under capital lease obligations are
included in both the patient service equipment and property, equipment and
improvements:
December 31,
------------
1998 1997
---- ----
(in thousands)
Patient service equipment........................ $ - $ 1,930
Information systems ............................. 33,306 33,901
Equipment and furnishings ....................... - 3,648
-------- --------
33,306 39,479
Less accumulated depreciation ................... (26,044) (21,210)
-------- --------
$ 7,262 $ 18,269
======== ========
Future minimum payments, by year and in the aggregate, required under
noncancellable operating leases and capital lease obligations consist of the
following at December 31, 1998:
Capital Operating
Leases Leases
------ ------
(in thousands)
1999......................................... $ 5,814 $ 43,377
2000......................................... 2,760 36,033
2001......................................... 4 28,490
2002......................................... - 19,614
2003......................................... - 11,770
Thereafter................................... - 23,458
-------- ---------
8,578 $162,742
Less interest included in
minimum lease payments..................... (382)
--------
Present value of minimum lease payments...... 8,196
Less current portion......................... (5,501)
--------
$ 2,695
========
NOTE 11 -- EMPLOYEE BENEFIT PLANS
Apria has a 401(k) defined contribution plan, whereby eligible employees
may contribute up to 16% of their annual basic earnings. The company matches 50%
of the first 8% of employee contributions. Total expenses related to the defined
contribution plan were $3,539,000, $3,791,000 and $4,370,000 in 1998, 1997 and
1996, respectively.
Apria had a defined benefit pension plan, covering substantially all former
Abbey employees, which was terminated in 1995. In connection with the
termination, Apria recognized costs of $3,300,000 in 1996. All benefits were
distributed to participants in 1997.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Litigation: Apria is engaged in the defense of certain claims and lawsuits
arising out of the ordinary course and conduct of its business, the outcome of
which are not determinable at this time. In the opinion of management, any
liability that might be incurred by the company upon the resolution of these
claims and lawsuits will not, in the aggregate, have a material adverse effect
on Apria's consolidated results of operations and financial position. In 1998,
1997 and 1996, certain claims and lawsuits were settled and the company paid
amounts, including the cost of defense, totaling approximately $2,125,000,
$3,277,000 and $16,619,000, respectively. Charges to income of $6,590,000,
$2,760,000 and $11,533,000 were taken in 1998, 1997 and 1996, respectively, to
provide for probable losses related to matters arising in each period and to
revise estimates for matters arising in previous periods. Management is unable
to estimate the range of possible loss for all other claims and lawsuits.
Apria and certain of its present and former officers and/or directors are
defendants in a class action lawsuit, In Re Apria Healthcare Group Securities
Litigation, filed in the U.S. District Court for the Central District of
California, Southern Division (Case No. SACV98-217 GLT). This case is a
consolidation of three similar class actions filed in March and April, 1998.
Pursuant to a court order dated May 27, 1998, the plaintiffs in the original
three class actions filed a Consolidated Amended Class Action Complaint on
August 6, 1998. The amended complaint purports to establish a class of plaintiff
shareholders who purchased Apria's common stock between May 22, 1995 and January
20, 1998. No class has been certified at this time. The amended complaint
alleges, among other things, that the defendants made false and/or misleading
public statements regarding Apria and its financial condition in violation of
federal securities laws. The amended complaint seeks compensatory and punitive
damages as well as other relief.
Two similar class actions were filed during July 1998 in Superior Court of
California for the County of Orange: Schall v. Apria Healthcare Group Inc., et
al. (Case No. 797060) and Thompson v. Apria Healthcare Group Inc., et al. (Case
No. 797580). These two actions were consolidated by a court order dated October
22, 1998. The parties have agreed that a new and first amended complaint will be
filed. Apria anticipates that allegations similar to those asserted in the
amended complaint in the federal action will be asserted in the consolidated
state action, although the claims will be founded on state law, as opposed to
federal law.
Apria believes that it has meritorious defenses to the plaintiffs' claims,
and it intends to vigorously defend itself in both the federal and state cases.
In the opinion of Apria's management, the ultimate disposition of these class
actions will not have a material adverse effect on the company's financial
condition or results of operations.
Purchase commitments: On September 1, 1994, Apria entered into a five-year
agreement, which was subsequently amended in June 1996, to purchase medical
supplies totaling $132,000,000, with annual purchases ranging from $7,500,000 in
the first year to $36,500,000 in the third through fifth years. Failure to
purchase at least 90% of the annual commitment would result in a penalty of 10%
of the difference between the annual commitment and the actual purchases,
beginning with the 12-month period ended August 31, 1996. In late 1997,
management made the strategic decision to exit the low-margin medical supply
business and has been working with the vendor to restructure the agreement. In
the interim, the company continues to purchase needed medical supplies from this
vendor, subject to the pricing established under the old agreement. The company
failed to meet the minimum purchase commitment for the 12-month period ended
August 31, 1998, and, consequently, incurred a liability for penalties of
$1,180,000 on the purchase shortfall.
Certain Concentrations: Approximately 59% of Apria's revenues are derived
from the provision of respiratory therapy services, a significant portion of
which is reimbursed under the federal Medicare program. Effective January 1,
1998, reimbursement for home oxygen services was reduced by 25% with an
additional 5% reduction in 1999 and subsequent years. Apria's management
estimates the impact of the additional 5% reduction on 1999 revenues to be
approximately $11,000,000. Also effective January 1, 1998, Consumer Price
Index-based reimbursement increases on home medical equipment were frozen until
2002.
Apria currently purchases approximately 40% of its patient service
equipment and supplies from four suppliers. Although there are a limited number
of suppliers, management believes that other suppliers could provide similar
products on comparable terms. However, a change in suppliers could cause delays
in service delivery and possible losses in revenue which could adversely affect
operating results.
Other: Since June 1998, Apria has received a total of nine subpoenas from
the U.S. Attorneys' offices in Sacramento and San Diego, California, requesting
documents related to the company's billing practices. The documents requested
include those located at Apria's corporate headquarters in Costa Mesa,
California, and offices in San Diego and Sacramento, California, and Canonsburg,
Pennsylvania. Apria has substantially completed the process of complying with
the subpoenas.
Apria has experienced problems as a result of errors and deficiencies in
supporting documentation affecting a portion of its billings, including billings
under the Medicare and Medicaid programs. If the U.S. Department of Justice were
to conclude that such errors and deficiencies constituted criminal violations,
or were to conclude that such errors and deficiencies resulted in the submission
of false claims to federal healthcare programs, Apria could face criminal
charges and/or civil claims, administrative sanctions and penalties for amounts
that would be highly material to its business, results of operations and
financial condition, including exclusion of Apria from participation in federal
healthcare programs. Such amounts could include claims for treble damages and
penalties of up to $10,000 per false claim submitted by Apria to a federal
healthcare program. It is the company's position that the assertion of criminal
charges or the assertion of any such claims would be unwarranted. If such
charges or claims were asserted, Apria believes that it would be in a position
to assert numerous defenses. However, no assurance can be provided as to the
outcome of any such possible proceedings.
Presently, Apria is unaware of what claims or proceedings, if any, the
government may be contemplating with respect to these subpoenas.
As disclosed in a Registration Statement on Form S-3 (Registration No.
333-68031) filed with the Securities and Exchange Commission on November 25,
1998 in connection with a proposed offering of 10% convertible subordinated
debentures, the company entered into a Standby Purchase Agreement with
Relational Investors, LLC. Under the Standby Purchase Agreement, in the event
the proposed debenture offering is consummated, Relational Investors, LLC will
receive from Apria a $1,000,000 standby fee as well as reimbursement for all
costs and expenses (including legal fees) incurred in connection with the
proposed offering.
NOTE 13 - SERVICE/PRODUCT LINE DATA
The following table sets forth a summary of net revenues by service line:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
(in thousands)
Respiratory ................ $552,725 $ 605,387 $ 594,362
Infusion therapy ........... 211,176 281,178 293,321
HME/Other .................. 169,892 294,129 293,460
-------- ---------- ----------
Total net revenues $933,793 $1,180,694 $1,181,143
======== ========== ==========
NOTE 14 -- SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
QUARTER
-------
First Second Third Fourth
----- ------ ----- ------
(in thousands, except per share data)
1998
Net revenues ................ $250,538 $240,627 $ 219,367 $ 223,261
Gross profit ................ 164,680 159,830 122,371 156,217
Operating income (loss) ..... 5,375 3,109 (180,378) 13,872
Net (loss) income ........... $ (6,607) $ (8,956) $(194,701) $ 2,326
Net (loss) income per share . $ (0.13) $ (0.17) $ (3.76) $ 0.04
Net (loss) income per share -
assuming dilution ....... $ (0.13) $ (0.17) $ (3.76) $ 0.04
1997
Net revenues ................ $313,863 $295,735 $ 304,356 $ 266,740
Gross profit ................ 209,184 167,272 199,706 153,350
Operating income (loss) ..... 41,910 (57,144) 28,474 (198,905)
Net income (loss) ........... $ 19,240 $(69,876) $ 16,186 $(238,158)
Net income (loss) per share . $ 0.38 $ (1.36) $ 0.31 $ (4.62)
Net income (loss) per share -
assuming dilution ....... $ 0.37 $ (1.36) $ 0.31 $ (4.62)
Third Quarter - 1998: The operating results for the third quarter of 1998
include adjustments to reduce revenue and accounts receivable by $14,642,000 and
to increase bad debt expense and the allowance for doubtful accounts by
$12,065,000. During the third quarter of 1998, a new management team reviewed
the effect of certain procedural initiatives and system enhancements introduced
earlier in the year to improve billing procedures and reduce write-offs.
Although cash collections in excess of trailing revenues were strong, write-offs
increased from the second quarter. Also, specific payor reviews indicated that
collectibility of certain receivables was in question, particularly those aged
in excess of 180 days. Based upon these reviews, a definitive change in
collection strategy was implemented which shifted the focus from efforts to
collect aged accounts receivable to the more current outstanding amounts.
Management believes a concerted effort that focuses on current accounts will
better utilize the company's resources to collect the receivables before they
age, when they undoubtedly become more difficult to collect. As a result of this
change in collection procedure and policy, management increased its allowance
for account balances over 180 days. The adjustment to revenue represents the
estimated amount of accounts receivable that will ultimately be written off due
to reasons unrelated to credit risk. Also recorded was a provision for specific
accounts identified as uncollectible totaling $1,529,000 and an increase to the
allowance for doubtful accounts related to the infusion sale and the exited
businesses totaling $9,128,000.
During the third quarter of 1998, Apria sold its infusion business in
California and exited the infusion business in certain geographic markets.
Charges of $7,263,000 related to the wind-down of unprofitable infusion
operations were recorded in addition to a $3,798,000 loss on sale of the
California business.
One of the actions taken as part of management's new strategic direction
was the termination of the project to implement an enterprise resource planning
(ERP) system. Accordingly, Apria wrote-off related software and other
capitalized costs of $7,548,000 in the third quarter of 1998. As part of the
decision to terminate the ERP project, management evaluated its current systems
to determine their long-term viability in the context of the company's new
overall strategic direction. It was determined that the company was at some risk
in continuing to run the infusion billing system on its current platform which
is no longer supported by the computer industry. To mitigate this risk, the
company is currently converting the infusion system to the IBM/AS400 operating
platform on which the respiratory/home medical equipment system currently
operates. Apria is also proceeding with a number of enhancements to the systems
which renders certain previously-developed modules obsolete. Additionally,
pharmacy and branch consolidations and closures rendered a variety of computer
equipment obsolete. Due to its age and technological obsolescence, it was deemed
to have no future value. As a result of these actions, Apria recorded an
impairment charge of $11,843,000 at September 30, 1998.
Based on management's third quarter evaluation of the carrying value of
intangible assets, an impairment charge of $76,223,000 was recorded. The charge
reduced the carrying value of the company's intangible assets to reflect
management's estimate of fair value. Also included in the impairment charge is
the write-off of $4,771,000 in intangible assets primarily associated with the
exit of the infusion business in certain areas (see Note 4).
In the third quarter of 1998, Apria also recorded charges totaling
$3,939,000 for severance and other employee costs, $5,400,000 to settle issues
related to several procurement contracts, $3,476,000 to provide for estimated
oxygen cylinder losses, $2,841,000 to write-off obsolete inventory and patient
service equipment and $2,068,000 for lease liability due to facility
consolidation activities.
Fourth Quarter - 1997: The operating results for the fourth quarter of 1997
included adjustments to reduce revenue and accounts receivable by $20,000,000
and to increase bad debt expense and the allowance for doubtful accounts by
$6,423,000. The adjustment to revenue represented the estimated amount of
year-end accounts receivable that would be written off due to reasons unrelated
to credit risk. Both adjustments resulted primarily from refinements to the
company's estimation procedures which were made as a result of management's
year-end analysis of accounts receivable. Specifically, tests of subsequent
realization and reviews of patient billing files at selected billing locations
indicated the need to increase the percentages reserved for certain categories
of aged accounts receivable. Additionally, payor-specific reviews were performed
and allowances estimated for certain managed care payors that were showing an
increasing tendency to accumulate large patient balances.
An adjustment of $20,225,000 was recorded in the fourth quarter of 1997 to
write down the carrying value of internally-developed software resulting from
management's decision to replace the company's internally-developed field
information system. In connection with management's evaluation of the company's
internally-developed software, a review was conducted of the company's computer
hardware, including telecommunications equipment. Equipment with a carrying
value of $6,556,000 was identified as functionally obsolete or no longer in use
and was written off (see Note 3).
Based on management's year-end evaluation of the carrying value and
amortization periods of intangible assets, an impairment charge of $133,542,000
was recorded in the fourth quarter of 1997 to reduce the carrying value of
recorded goodwill to management's estimate of fair value (see Note 4).
The fourth quarter of 1997 also includes a $10,100,000 adjustment for
additional shortages of patient service equipment and inventory based on
supplemental physical inventory procedures performed at a sampling of branches
in the fourth quarter. The procedure indicated continuing inventory and patient
service equipment shortages, therefore management estimated and recorded an
increase to the related reserves. In addition, management's fourth quarter
decision to terminate approximately 524 employees resulted in a year-end
severance accrual of $6,000,000. Other fourth quarter charges included a
$2,151,000 accrual of incentive compensation, related to fourth quarter
initiatives, a $2,298,000 accrual of costs associated with the closure of
certain facilities and the company's ApriaDirect Clinical program, a $2,000,000
accrual of interest on a tax settlement and certain excise taxes and other
miscellaneous accruals of $1,250,000.
Apria also recorded an adjustment to increase its valuation allowance for
net deferred tax assets due to recurring tax losses and management's reduced
expectations for 1998 (see Note 8).
Second Quarter - 1997: The second quarter of 1997 included adjustments to
reduce revenue and accounts receivable by $20,000,000 and to increase bad debt
expense and the allowance for doubtful accounts by $55,000,000. The adjustments
resulted from the lack of improvement in both the aging of accounts receivable
and the length of collection periods. Management expected the impact of 1996
computer system conversions and the high turnover rate among billing and
collection personnel to be substantially reversed by the middle of 1997.
However, the dollar amount and percentage of accounts aged over 180 days at May
31, 1997 remained comparable to the December 31, 1996 amount and percentage, and
days sales outstanding decreased by only five days. Additionally, Apria had just
changed its business strategy to review its managed care contracts and exit
those not meeting profitability standards and to exit unprofitable service lines
such as supplies and nursing that were attractive to many managed care
customers. These strategies put Apria's relationship with certain of its managed
care customers in jeopardy, which when coupled with the company's poor
experience in collecting receivables with managed care payors, heightened
management's concerns. Due to the managed care issues and the failure to realize
the expected increases in collections and improvement in the aging, management
increased its allowance estimate for accounts aged over 180 days to provide for
write-offs of older accounts expected to be taken in the ensuing months. The bad
debt adjustment also provided for an increased allowance estimate for accounts
aged less than 180 days, necessitated by billing and collection difficulties
that continued into early 1997. The provision for revenue adjustments
represented management's estimate of accounts originated in 1997 that would
ultimately be written off for reasons unrelated to credit. The adjustment was
necessitated by the continuing incidence of billing problems and long collection
periods which caused increased levels of unidentified revenue adjustments to
accumulate in accounts receivable.
The second quarter of 1997 also included a $23,000,000 adjustment to
provide for shortages in patient service equipment and inventory. The amount was
estimated based on the preliminary results of asset verification and physical
inventory procedures performed in the second quarter. The adjustment was
sufficient to cover actual write-offs resulting from the third quarter
completion of the company's asset verification and physical inventory
procedures. The shortages were primarily due to untimely inventory relief
processes that were among the residual effects of the 1995 and 1996 system
conversions and related high employee turnover.
APRIA HEALTHCARE GROUP INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
--------- -------- -------- ---------- ------
Year ended December 31, 1998
- ----------------------------
Deducted from asset accounts:
Allowance for revenue adjustments .............. $ 38,058 $ - $ 18,302 (b) $ 17,960 $ 38,400
Allowance for doubtful accounts ................ 58,413 75,319 71 (a) 98,239 35,564
Reserve for inventory shortages ................ 6,373 8,598 (2,000)(c) 5,311 7,660
Reserve for patient service
equipment shortages .......................... 3,900 14,707 2,000 (c) 12,470 8,137
-------- -------- -------- -------- --------
Totals .......................... $106,744 $ 98,624 $ 18,373 $133,980 $ 89,761
======== ======== ======== ======== ========
Year ended December 31, 1997
- ----------------------------
Deducted from asset accounts:
Allowance for revenue adjustments .............. $ 32,300 $ - $ 40,000 (b) $ 34,242 $ 38,058
Allowance for doubtful accounts ................ 73,809 121,908 1,697 (a) 139,001 58,413
Reserve for inventory shortages ................ 1,825 26,716 - 22,168 6,373
Reserve for patient service
equipment shortages .......................... 4,812 8,584 - 9,496 3,900
-------- -------- -------- -------- --------
Totals .......................... $112,746 $157,208 $ 41,697 $204,907 $106,744
======== ======== ======== ======== ========
Year ended December 31, 1996
- ----------------------------
Deducted from asset accounts:
Allowance for revenue adjustments .............. $ - $ - $ 32,300 (b) $ - $ 32,300
Allowance for doubtful accounts ................ 86,567 67,040 608 (a) 80,406 73,809
Reserve for inventory shortages ................ 5,754 3,013 - 6,942 1,825
Reserve for patient service
equipment shortages .......................... 11,860 7,500 - 14,548 4,812
-------- -------- -------- -------- --------
Totals .......................... $104,181 $ 77,553 $ 32,908 $101,896 $112,746
======== ======== ======== ======== ========
(a) Includes amounts added in conjunction with business acquisitions.
(b) Amount charged against net revenues. See Note 12 to the Consolidated
Financial Statements.
(c) Transfers between reserves.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 5, 1999
APRIA HEALTHCARE GROUP INC.
By: /s/ PHILIP L. CARTER
------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ PHILIP L. CARTER
- -----------------------
Philip L. Carter Chief Executive Officer April 5, 1999
/s/ JOHN C. MANEY
- -----------------------
John C. Maney Executive Vice President and April 5, 1999
Chief Financial Officer
(Principal Financial Officer)
/s/ JAMES E. BAKER
- -----------------------
James E. Baker Vice President, Controller April 5, 1999
(Principal Accounting Officer)
/s/ RALPH V. WHITWORTH
- -----------------------
Ralph V. Whitworth Director, Chairman of the Board April 5, 1999
/s/ DAVID H. BATCHELDER
- -----------------------
David H. Batchelder Director April 5, 1999
/s/ DAVID L. GOLDSMITH
- -----------------------
David L. Goldsmith Director April 5, 1999
/s/ LEONARD GREEN
- -----------------------
Leonard Green Director April 5, 1999
/s/ RICHARD H. KOPPES
- -----------------------
Richard H. Koppes Director April 5, 1999
/s/ PHILIP R. LOCHNER
- -----------------------
Philip R. Lochner Director April 5, 1999
/s/ BEVERLY B. THOMAS
- -----------------------
Beverly B. Thomas Director April 5, 1999
/s/ H.J. MARK TOMPKINS
- -----------------------
H.J. Mark Tompkins Director April 5, 1999
EXHIBIT INDEX
Exhibit
Number Description Page/Ref.
- ------ ----------- ---------
3.1 Restated Certificate of Incorporation of Registrant. (f)
3.2 Certificate of Ownership and Merger merging Apria Healthcare Group Inc. into Abbey and amending Abbey's
Restated Certificate of Incorporation to change Abbey's name to "Apria Healthcare Group Inc." (i)
3.3 Amended and Restated Bylaws of Registrant, as amended on May 5, 1998. (u)
4.1 Form of 9-1/2% Senior Subordinated Note due 2002. (b)
4.2 Indenture dated November 1, 1993, by and among Abbey, certain Subsidiary Guarantors defined therein and
U.S. Trust Company of California, N.A. (d)
4.3 Shareholder Rights Agreement dated February 8, 1995, between Abbey and U. S. Stock Transfer
Corporation, as Rights Agent. (e)
4.4 Specimen Stock Certificate of the Registrant.
4.5 Certificate of Designation of the Registrant. (f)
4.6 Amendment No. 1 to the Rights Agreement dated as of June 30, 1997, by and among Registrant, Norwest
Bank Minnesota, N.A. and U.S. Stock Transfer Corporation. (p)
10.1 1991 Stock Option Plan. (a)
10.2 Schedule of Registration Procedures and Related Matters. (c)
10.3 401(k) Savings Plan, restated effective October 1, 1993, amended December 28, 1994. (k)
10.4 Stock Incentive Plan, dated June 28, 1995. (g)
10.5 Amended and Restated 1992 Stock Incentive Plan. (k)
10.6 Amendment Number Two to the 401(k) Savings Plan, dated June 28, 1995. (l)
10.7 Building Lease, dated July 21, 1995, between C.J. Segerstrom & Sons, a California general partnership,
and Apria Healthcare, Inc. for 10 locations within Harbor Gateway Business Center, Costa Mesa, (l)
California.
10.8 Assignment, Assumption and Consent Re: Lease (dated December 1, 1988, between C.J. Segerstrom & Sons, a
California general partnership, and Abbey Medical, Inc. for premises located within Harbor Gateway
Business Center, Costa Mesa, California), executed by Abbey Medical, Inc. and Apria Healthcare, Inc. as
of July 21, 1995 and executed by C.J. Segerstrom & Sons, a California general partnership, as of July (j)
24, 1995.
10.9 First Amendment to Complete Restatement of Lease Amendments and Amendment to Building Lease, dated July
24, 1996, between C.J. Segerstrom & Sons, a California general partnership, and Apria Healthcare, Inc.,
amending the Building Lease, dated July 21, 1995, between the parties. (n)
10.10 Assignment and Assumption of Lease (Building Lease, dated July 21, 1995, between C.J. Segerstrom &
Sons, a California general partnership, and Apria Healthcare, Inc.), dated as of January 1, 1996,
between Apria Healthcare, Inc. and Registrant. (n)
10.11 Amendment Number Three to the 401(k) Savings Plan, dated January 1, 1996. (l)
10.12 Amendment 1996-1 to the 1991 Stock Option Plan, dated October 28, 1996.
10.13 Amendment 1996-1 to the Amended and Restated 1992 Stock Incentive Plan, dated October 28, 1996.
10.14 Executive Severance Agreement dated June 28, 1997 between Registrant and James E. Baker.
10.15 Executive Severance Agreement dated June 28, 1997, between Registrant and Lisa M. Getson. (o)
10.16 Executive Severance Agreement dated June 28, 1997, between Registrant and Robert S. Holcombe. (o)
10.17 Executive Severance Agreement dated June 28, 1997, between Registrant and Lawrence Mastrovich.
10.18 Executive Severance Agreement dated June 28, 1997, between Registrant and George J. Suda.
10.19 Executive Severance Agreement dated June 28, 1997, between Registrant and Dennis E. Walsh. (o)
10.20 Resignation and General Release Agreement dated January 19, 1998, between Registrant and Jeremy M.
Jones. (s)
10.21 Security Agreement dated March 13, 1998, between Registrant, Apria Healthcare, Inc., and certain of its
subsidiaries and Bank of America National Trust & Savings Association. (s)
10.22 First Amendment to Security Agreement dated April 15, 1998, among Registrant and certain of its
subsidiaries, Bank of America National Trust & Savings Association, NationsBank of Texas, N.A. and
other financial institutions party to the Credit Agreement. (s)
10.23 Employment Agreement dated May 5, 1998, between Registrant and Philip L. Carter. (u)
10.24 Non-qualified Stock Option Agreement dated May 5, 1998, between Registrant and Philip L. Carter.
10.25 Amended and Restated 1997 Stock Incentive Plan, dated February 27, 1997, as amended through June 30, 1998.
10.26 Employment Agreement dated October 19, 1998, between Registrant and John C. Maney.
10.27 Standby Purchase Agreement dated November 3, 1998, between Registrant and Relational Investors, LLC, on
behalf of the entities named therein. (v)
10.28 Registration Rights Agreement dated November 3, 1998, between Registrant and Relational Investors, LLC,
on behalf of the entities named therein. (v)
10.29 Amended and Restated Credit Agreement dated November 13, 1998, between Registrant and certain of its
subsidiaries and Bank of America National Trust and Savings Association, and other financial
institutions party to the Credit Agreement. (v)
10.30 Amended and Restated Guaranty dated November 13, 1998, made by various Guarantors defined therein in
favor of Bank of America National Trust and Savings Association.
10.31 Second Amendment to Security Agreement dated November 13, 1998, among Registrant and certain of its
subsidiaries and Bank of America National Trust and Savings Association and other financial institutions
party to the Credit Agreement.
10.32 1998 Non-qualified Stock Incentive Plan, dated December 15, 1998.
10.33 Amendment to Employment Agreement dated January 1, 1999, between Registrant and Philip L. Carter.
10.34 First Amendment to Amended and Restated Credit Agreement and Consent dated January 15, 1999, among
Registrant and certain of its subsidiaries, Bank of America National Trust and Savings Association and
other financial institutions party to the Credit Agreement.
10.35 Second Amendment to Amended and Restated Credit Agreement dated February 23, 1999, among Registrant and
certain of its subsidiaries, Bank of America National Trust and Savings Association and other financial
institutions party to the Credit Agreement.
10.36 Amended and Restated Executive Severance Agreement dated February 26, 1999, between Registrant and Frank
Bianchi.
10.37 Amended and Restated Executive Severance Agreement dated February 26, 1999, between Registrant and
Michael R. Dobbs.
10.38 Amended and Restated Employment Agreement dated February 26, 1999, between Registrant and Lawrence M.
Higby.
16.1 Letter dated July 8, 1998 from Ernst & Young, LLP addressed to the Securities and Exchange Commission. (t)
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Deloitte & Touche LLP, Independent Auditors.
27.1 Financial Data Schedule.
REFERENCES -- DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
(a) Incorporated by reference to Registration Statement on Form S-1
(Registration No. 33-44690), as filed on December 23, 1991.
(b) Incorporated by reference to Registration Statement on Form S-1
(Registration No. 33-69078), as filed on September 17, 1993.
(c) Incorporated by reference to Registration Statement on Form S-4
(Registration No. 33-69094), as filed on September 17, 1993.
(d) Incorporated by reference to Annual Report on Form 10-K for the year ended
January 1, 1994.
(e) Incorporated by reference to Current Report on Form 8-K, as filed on March
20, 1995.
(f) Incorporated by reference to Registration Statement on Form S-4
(Registration No. 33-90658), and its appendices, as filed on March 27,
1995.
(g) Incorporated by reference to Registration Statement on Form S-8
(Registration No. 33-94026), as filed on June 28, 1995.
(h) Incorporated by reference to final joint proxy statement/prospectus as
filed pursuant to Rule 424(b) on May 26, 1995.
(i) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30,
1995, as filed on August 14, 1995.
(j) Incorporated by reference to Quarterly Report on Form 10-Q dated September
30, 1995, as filed on November 14, 1995.
(k) Incorporated by reference to Registration Statement on Form S-8
(Registration No. 33-80581), as filed on December 19, 1995.
(l) Incorporated by reference to Annual Report on Form 10-K for the year ended
December 31, 1995.
(m) Incorporated by reference to Registration Statement on Amendment No. 1 to
Form S-4 (Registration No. 333-09407), as filed on August 27, 1996.
(n) Incorporated by reference to Annual Report on Form 10-K for the year ended
December 31, 1996.
(o) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30,
1997, as filed on August 14, 1997.
(p) Incorporated by reference to Registration Statement on Form 8-A/A as filed
on July 10, 1997.
(q) Incorporated by reference to Quarterly Report on Form 10-Q dated September
30, 1997, as filed on November 14, 1997.
(r) Incorporated by reference to Registration Statement on Form S-8
(Registration No. 333-42775), as filed on December 19, 1997.
(s) Incorporated by reference to Annual Report on Form 10-K for the year ended
December 31, 1997.
(t) Incorporated by reference to Current Report on Form 8-K, as filed on July
6, 1998.
(u) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30,
1998, as filed on August 14, 1998.
(v) Incorporated by reference to Quarterly Report on Form 10-Q dated September
30, 1998, as filed on November 16, 1998.
COPIES OF EXHIBITS
Copies of exhibits will be provided upon written request and payment of a fee of
$.25 per page plus postage. The written request should be directed to the
Financial Reporting Department (Attn: Ms. Donna Draper), at the address of the
company set forth on the first page of this Form 10-K.