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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-19854
APRIA HEALTHCARE GROUP INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0488566
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)
3560 HYLAND AVENUE 92626
COSTA MESA, CA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 427-2000
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
---
As of March 7, 1997, there were outstanding 51,301,321 shares of the
Registrant's Common Stock, par value $0.001 ("Common Stock"), which is the only
class of Common Stock of the Registrant. As of March 7, 1997 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 $20.00 per share as
reported by New York Stock Exchange, was approximately $994,275,400.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the 1997 Annual Meeting of Stockholders of the
Registrant which will be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 1996.
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PART I
ITEM 1. BUSINESS
GENERAL
Apria Healthcare Group Inc. ("Apria Healthcare", "Apria" or the
"Company") provides and/or manages comprehensive integrated homecare services
including home respiratory therapy, home infusion therapy, home medical
equipment and nursing network management. The Company also coordinates the care
of patients who may require any of the aforementioned services or a combination
thereof. The Company provides its services through approximately 350 branch
locations which serve patients in all 50 states.
On June 28, 1995, Homedco Group, Inc. ("Homedco") merged with and
into Abbey Healthcare Group Incorporated ("Abbey") to form the Company. In
connection with the merger transaction (the "merger"), the Company issued
21,547,529 shares of its Common Stock for 15,391,092 issued and outstanding
shares of Abbey common stock and 26,034,612 shares of its Common Stock for
13,017,306 issued and outstanding shares of Homedco common stock. The merger has
been accounted for under the pooling-of-interests method of accounting.
Accordingly, the historical financial statements for periods prior to the
consummation of the merger have been restated as though the companies had been
combined. The restated financial statements, included herewith, have been
adjusted to conform the differing accounting policies of the separate companies.
On September 30, 1994, the Company sold its 51% interest in Abbey
Pharmaceutical Services, Inc. to Living Centers of America, Inc. ("Living
Centers") for cash consideration of $20.3 million and warrants to purchase
247,500 shares of Living Centers common stock for $35.00 per share.
On January 2, 1994, the Company acquired the outstanding stock of
Protocare, Inc. ("Protocare") for a cash payment of $11.9 million plus direct
acquisition costs of $3.7 million. In addition, pursuant to an earnout
provision, as amended in June 1994, approximately 979,000 shares of Common Stock
valued at $11.6 million were issued in February 1995 to the former Protocare
stockholders.
On November 10, 1993, the Company acquired the outstanding stock of
Total Pharmaceutical Care, Inc. for a cash payment of $154.2 million plus direct
acquisition costs of $9.4 million and the issuance of approximately 2,002,000
shares of Common Stock valued at $33.5 million.
On August 7, 1992, the Company acquired substantially all of the
business and assets of Glasrock Home Healthcare, Inc. for a cash payment of
$68.4 million plus the assumption of liabilities amounting to $3.3 million and
direct acquisition costs of $11.4 million
The Company was incorporated in 1991 in the State of Delaware.
LINES OF BUSINESS
Apria Healthcare derives substantially all of its revenue from the
home healthcare segment of the healthcare market in principally three service
lines: home respiratory therapy, home infusion therapy and home medical
equipment. In all three lines, the Company 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. These services include
high-tech infusion nursing, respiratory care and pharmacy services, educating
patients and their caregivers about the illness and instructing them on 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 and processing claims to third party payors.
Approximately 35% of the Company's business is derived from managed care
organizations for its integrated service offerings, with the remainder being
derived from traditional referral/payor sources. The Company purchases or rents
the products needed to provide services to its patients.
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The following table sets forth a summary of net revenues by source,
expressed as percentages of total net revenues:
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
---- ---- ----
Respiratory therapy ..................... 50% 53% 54%
Infusion therapy ........................ 25% 24% 25%
Home medical equipment/other ............ 25% 23% 21%
--- --- ---
Total net revenues ...................... 100% 100% 100%
=== === ===
RESPIRATORY THERAPY. The Company provides home respiratory therapy
services to patients with a variety of conditions, including chronic obstructive
pulmonary disease ("COPD", e.g., emphysema, chronic bronchitis and asthma),
cystic fibrosis and neurologically-related respiratory conditions. Apria
Healthcare employs a clinical staff of respiratory care professionals to provide
support to its home respiratory therapy patients, according to
physician-directed treatment plans.
Approximately 70% of the Company's respiratory therapy revenues are
derived from the provision of oxygen systems, nebulizers (devices to aerosolize
medication) and home ventilators. The remaining respiratory revenues are
generated from the provision of apnea monitors used to monitor the vital signs
of newborns, continuous positive airway pressure ("CPAP/BiPAP") devices used to
control adult sleep apnea and other respiratory therapy products.
The Company has developed a home respiratory medication service,
which is fulfilled through the Apria Pharmacy Network ("APN"). Through APN, the
Company offers its patients physician-prescribed medications along with the
nebulizer through which they are administered. This comprehensive program offers
patients and payors a broad base of services from one source, including
medications in a premixed unit dose form, professional respiratory clinical
training and support and claims processing.
INFUSION THERAPY. Home infusion therapy involves the administration
of nutritional supplements, anti-infectives and 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 Healthcare employs licensed pharmacists, registered nurses and dietitians
who have specialized skills in the delivery of home infusion therapy. The
Company currently operates 60 pharmacy locations to serve its home infusion
patients. Following is a brief description of the major therapies:
Anti-infective Therapy. Anti-infective therapy typically is a
short-duration therapy involving the infusion of antibiotic, antiviral or
antifungal drugs into the patient's bloodstream in order to treat a variety of
infections and diseases, including osteomyelitis, endocarditis, post-surgical
wound infections, AIDS-related infections and urinary tract infections.
Generally, anti-infectives are administered intravenously from one to six times
per day for a period of several days to several weeks.
Total Parenteral Nutrition Therapy. Total parenteral nutrition
("TPN") is the intravenous provision of life-sustaining nutrients, acting as a
replacement for normal food intake, to patients with a gastrointestinal illness
or dysfunction. TPN therapy is usually administered over a period of months with
some patients continuing therapy for longer periods due to chronic conditions.
Enteral Nutrition Therapy. Enteral nutrition is the delivery of
nutrients directly through a feeding tube to a patient's partially functioning
gastrointestinal tract to accommodate an inability to intake food normally.
Enteral nutrition therapy is often administered over a long period, generally
for more than six months.
Pain Management. Pain management is the intravenous or intraspinal
administration of analgesic drugs to patients suffering chronic pain from
terminal or chronic conditions.
Chemotherapy. Chemotherapy is the intermittent or continuous
intravenous administration of drugs to patients with various types of cancer.
Although most chemotherapy is administered in physicians' offices, the
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development of new continuous delivery pumps and antiemetic drugs has allowed
for the administration of chemotherapy in the home and other ambulatory
settings.
Chronic Condition Therapy. Chronic condition therapy is the
intravenous or injectable administration of drugs to treat congenital or
acquired chronic conditions, such as Prolastin(R) therapy for patients with
congenital emphysema, human growth hormone therapy for pediatric patients with
growth hormone deficiencies, blood clotting factor therapy for patients with
hemophilia, and intravenous immunoglobulin ("IVIG") therapy for immune-deficient
or immunosuppressed patients.
Other Therapies. New infusion delivery devices and medications that
address a broad range of patient conditions, such as cancer and complications or
side effects associated with solid organ and bone marrow transplantation,
continue to emerge for use in the home setting. Among the other therapies
provided by the Company are colony stimulating factors, chelation therapy for
patients with iron overload, dobutamine for patients with congestive heart
failure ("CHF"), and hydration therapy for patients with dehydration or
hyperemesis due to pregnancy.
HOME MEDICAL EQUIPMENT/OTHER. Apria Healthcare's primary emphasis in
the home medical equipment line of business is on the provision of patient room
equipment, principally hospital beds and wheelchairs, to its patients receiving
respiratory or infusion therapy. The Company's integrated services 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 Healthcare's managed care organization customer base has
grown, the Company has recognized the need to expand its ability to manage
ancillary provider networks on behalf of the managed care organization. The
Company may facilitate the referral process for ancillary services, such as
hospice care, physical and occupational therapy, and traditional home health
nursing services, depending on the needs of the managed care organization and in
accordance with state regulatory policy. Such networks must be credentialed and
qualified by Apria Healthcare's Clinical Services department.
Apria Healthcare has formed a strategic alliance with a provider of
women's health services to better position itself to provide such services to
its national managed care customers. The range of services, primarily related to
the continuous care associated with pregnancy and childbirth, includes
telephonic risk assessment and prenatal education, early discharge services,
home uterine activity monitoring of high-risk cases and tocolytic therapy for
women with signs and symptoms of premature labor.
ORGANIZATION AND OPERATIONS
Organization. In connection with the merger, the Company adopted a
plan to restructure and consolidate its operating locations and administrative
functions within specific geographic areas. At the end of 1995, 105 of the
planned 120 branch consolidations had been completed; the remaining
consolidations were completed in early 1996. The branches are organized into
three geographic zones, which are further divided into 21 geographic regions.
Each region is operated as a separate business unit and consists of a number of
branches which are typically clustered within 100 miles of the region office.
The region 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 locations
through the branch's fleet and other qualified personnel. This structure is
designed to create operating efficiencies associated with centralized services
while promoting responsiveness to local market needs.
Operating Systems and Controls. Apria Healthcare has developed
comprehensive operational policies and procedures which are utilized to run the
business on a day-to-day basis. Through experience, the Company has developed
the means of maintaining appropriate amounts of inventory sufficient to meet
customer requirements. In addition, the Company has established performance
indicators which measure operating results against expected thresholds, allowing
all levels of management to identify, monitor and adjust areas requiring
improvement. Operating models with strategic targets have been developed to move
the Company toward more effectively managing the clinical and distribution areas
of its business. The Company's management team is compensated using
performance-based incentives focused on revenue growth, timely cash collections
and improvement in operating income. The Company's
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management information systems enable this information to be collected and
analyzed and also provide all accounts receivable billing and collection
processing.
In connection with the restructuring plan, the Company decided to
standardize its branch information systems onto a common IBM AS/400-based
system. Of the 496 planned system conversions, about half were completed by the
end of 1995. The remaining conversions were completed by the end of the third
quarter in 1996. With the increasing emphasis being placed on cost efficiencies
by healthcare payors, the Company has begun to package data available through
its system for managed care organizations, which enables more effective
monitoring of utilization and costs. Further, the Company is now able to conduct
electronic order entry with its large volume accounts. The Company believes that
these capabilities provide an important competitive advantage.
Accounts Receivable Management. The Company derives substantially
all its revenues from third party payors, including private insurers, managed
care organizations, Medicare and Medicaid. For 1996, approximately 33% of the
Company's net revenues was derived from Medicare and 10% was derived from
Medicaid. Each third party payor generally has specific claims requirements. The
Company has policies and procedures in place to manage the claims submission
process, including verification procedures to facilitate complete and accurate
documentation.
The Company's computer systems are integral to claims submission. It
is the objective of the Company to produce claims in accordance with individual
payor specifications. In addition, the majority of Medicare claims are processed
electronically, thus facilitating prompt payment. The Company is capable of
submitting claims electronically to other third party payors capable of
receiving claims submissions in this manner. The Company's comprehensive
in-house information systems department provides for adjustment to regulatory or
reimbursement changes.
MARKETING
The Company markets its services to managed care organizations,
physicians, hospitals, medical groups, home health agencies and case managers
through its field sales force. The following marketing initiatives address the
requirements of its referring customers:
ApriaDirect. ApriaDirect is a comprehensive Company program which
allows managed care organizations and other customers to access the full range
of Apria services as well as network-managed services (home health, supplies,
etc.) through a single central telephone number (1-800-APRIA-88) and center. The
program consolidates order intake and complex care management, billing and
outcome reporting for referring clients with broad product, service and
geographic needs.
JCAHO Accreditation. The Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO") is a nationally recognized organization which
develops standards for various healthcare industry segments and monitors
compliance with those standards through voluntary surveys of participating
providers. As the home healthcare industry has grown, the need for objective
quality measurements has increased. JCAHO accreditation 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. In part because of
its leadership role in establishing quality standards for home healthcare and
its active and early participation in this process, Apria Healthcare is viewed
favorably by referring healthcare professionals. The Company's branch locations
are all accredited by or in the process of receiving accreditation from JCAHO.
Care Management Programs. 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
Healthcare has developed a series of diagnosis-specific care management programs
designed to proactively manage patients in conjunction with a managed care
partner and the patient's physician in an alternate site setting. These programs
include patient and environmental assessments, screening/diagnostics, patient
education, clinical monitoring, pharmacological management, utilization
reporting and outcome reporting. Mutually established goals for inpatient
hospital day reductions are a portion of the basis for provider compensation.
Diagnosis-specific programs include Asthma, COPD and a broad-based program
targeting diagnoses with high potential for home health utilization and hospital
day reductions.
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SALES
The Company employs approximately 320 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 the Company'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 clients, specific portions of the
sales force's working knowledge of pricing and specialty-care management
programs are being enhanced as well.
An integral component of the Company's overall sales strategy is to
increase volume through a variety of contractual relationships with both managed
care organizations and other healthcare providers. Managed care organizations
have grown substantially in terms of the percentage of the U.S. population that
is covered by such plans and in terms of their influence over an increasing
portion of the healthcare economy. Managed care plans are consolidating,
increasing their influence over the delivery and cost of healthcare services.
The Company believes this trend will continue. As a result, the Company focuses
a significant portion of its marketing efforts and specialized sales resources
on managed care organizations to develop mutually beneficial risk sharing
programs, including capitation arrangements. Managed care organizations already
represent a significant portion of the Company's business in several of its
primary metropolitan markets. No one account, however, represented more than 5%
of the Company's net revenues for 1996. Among its managed care agreements, the
Company has contracts with United HealthCare Corporation, Kaiser Permanente,
Aetna/U.S. Healthcare Health Plans, Health Insurance Plan of New York,
PacifiCare Health Systems, Inc. and Humana Health Plans. The Company also offers
discount agreements and various fee-for-service arrangements to hospitals or
hospital systems, such as Columbia/HCA Healthcare Corporation, whose patients
have home healthcare needs.
COMPETITION
The segment of the healthcare market in which the Company 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 Apria Healthcare's lines
of business are its wide geographic coverage, the ability to develop and
maintain contractual relationships with managed care organizations, price of
services, ease of doing business, quality of care and service and reputation
with referring customers, including local physicians and hospital-based
professionals. Additionally, it is increasingly important to be able to both
offer and integrate a broad range of homecare services through a single source.
The Company 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 its JCAHO accreditation. The Company also believes that its
integrated line of home healthcare products and services broadens its appeal to
local healthcare professionals and to managed care organizations.
Other types of healthcare providers, including hospitals, home
health agencies and health maintenance organizations, have entered, and may
continue to enter, Apria Healthcare's various lines of business. Depending on
their individual situation it is possible that competitors of the Company may
have or may obtain significantly greater financial and marketing resources than
the Company.
GOVERNMENT REGULATION
The federal government and all states in which the Company currently
operates regulate various aspects of the Company's business. In particular, the
operations of the Company's branch locations are subject to state and federal
laws regulating the repackaging and dispensing of drugs (including oxygen), the
maintenance and tracking of certain life-sustaining and life-supporting
equipment, the handling and disposal of medical waste and interstate motor
carrier transportation. The Company's operations also are subject to state
laws governing pharmacies, nursing services and certain types of home health
agency activities. Certain of the Company's employees are subject to state laws
and regulations governing the ethics and professional practice of respiratory
therapy, pharmacy and nursing. The failure to
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obtain, renew or maintain any of the required regulatory approvals or licenses
could adversely affect expansion of the Company's business and could prevent the
location involved from offering certain products and services to patients.
As a provider of services under the Medicare and Medicaid programs,
the Company is subject to the Medicare and Medicaid fraud and abuse laws. These
laws prohibit any bribe, kickback or rebate in return for the referral of
Medicare or Medicaid patients. Violations of these provisions may result in
civil and criminal penalties and exclusion from participation in the Medicare
and Medicaid programs. In addition, several states in which the Company operates
have laws that prohibit certain direct or indirect payments 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 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.
Recently, the federal government has made a policy decision to significantly
increase the financial resources allocated to enforcing the 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. Moreover,
both the federal government and various state legislatures have enacted bans on
the practice of so-called "physician self-referrals." Finally, recent
enforcement activity and resulting case law developments have increased the
legal risks of engaging in joint venture arrangements with physicians.
Apria Healthcare maintains several programs designed to minimize the
likelihood that the Company would engage in conduct or enter into contracts
violative of the fraud and abuse laws. All contracts of the types subject to
these laws are reviewed and approved at the corporate level. The Company
maintains an extensive contract compliance review program established and
monitored by its Legal Department. The Company 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 the Company's policy of strict compliance in this area. While the
Company believes its discount agreements and various fee-for-service
arrangements with other healthcare providers comply with applicable laws and
regulations, there can be no assurance that further judicial interpretations of
existing laws or legislative enactment of new laws will not have a material
adverse effect on the Company's business.
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 the Company operates
periodically consider various healthcare reform proposals. The Company
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, the Company cannot predict which, if any, of such reform
proposals will be adopted, when they may be adopted or that any such reforms
will not have a material adverse effect on the Company'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.
The outlook for legislative and regulatory activity that may affect
the Medicare reimbursement for home oxygen services is more favorable at the
beginning of the recently convened 105th Congress than it was at the beginning
of the 104th Congress. Two years ago, the new Republican leadership was
proposing to reduce the Medicare budget by $270.0 billion over seven years, and
during the congressional deliberations, the Health Care Financing Administration
("HCFA") that administers Medicare proposed to reduce the reimbursement for home
oxygen services by more than 40 percent.
As the 105th Congress opens, the Clinton Administration's budget
proposes a $100.0 billion reduction in Medicare and has omitted any specific
reduction for home oxygen services. While the Department of Health and Human
Services may still consider a rule proposing lower reimbursement rates, any such
rule is expected to be more moderate than the initial proposal from HCFA in
1995.
During the last Congress, the Clinton Administration and various
congressional healthcare leaders announced support for Medicare home oxygen
program reductions of approximately $1.4 billion through fiscal year 2002.
While Congress is expected to
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recommend more Medicare reductions than the Administration included in its
budget, the home oxygen industry reasonably expects any reductions to be
proportionate to the program's share of the overall Medicare budget.
Laws and regulations are often adopted to regulate new and existing
products and services. There can be no assurance that either the states or the
federal government will not impose additional regulations upon the Company's
activities which might adversely affect the Company's business.
INSURANCE
In recent years, physicians, hospitals and other participants in the
healthcare market have become subject to an increasing number of lawsuits
alleging professional negligence, product liability or related claims, many of
which involve large claims and significant defense costs. The Company is from
time to time subject to such suits due to the nature of its business. The
Company currently maintains liability insurance intended to cover such claims.
There can be no assurance that the coverage limits of the Company's insurance
policies will be adequate. While the Company has been able to obtain liability
insurance in the past, such insurance varies in cost, is difficult to obtain and
may not be available in the future on acceptable terms or at all. A successful
claim against the Company in excess of the Company's insurance coverage could
have a material adverse effect upon the Company and its financial condition.
Claims against the Company, regardless of their merit or eventual outcome, also
may have a material adverse effect upon the Company's reputation and business.
EMPLOYEES
As of March 1, the Company had 10,149 employees, of which 8,255 were
full-time and 1,894 were part-time. The Company's employees are not currently
represented by a labor union or other labor organization, except for
approximately 30 employees in the State of New York. The Company believes that
its employee relations are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles with the Company and
present and past positions of the persons serving as executive officers of the
Company as of March 17, 1997.
NAME AND AGE OFFICE AND EXPERIENCE
------------ ---------------------
Jeremy M. Jones, 55 ................. Chairman of the Board and Chief Executive Officer. Mr. Jones held these titles
with Homedco and subsequently, the Company since November 1987. He also
held the title of President until June 1995. He served as President of NME
Home Care Group and National Medical Homecare, Inc. (the predecessor to
Homedco) ("NMH") from 1984 until November 1987.
Steven T. Plochocki, 45 ............. President and Chief Operating Officer. Mr. Plochocki was promoted to
President in February 1996. He has served as Chief Operating Officer since
being promoted to this position at Abbey in June 1994. He served as Executive
Vice President, Sales and Operations of Abbey Medical, Inc. ("AMI"), a
wholly owned subsidiary of Abbey, from February 1994 through June 1994.
From April 1992 through February 1994, Mr. Plochocki served as Vice
President of Marketing and Sales of AMI. From December 1990 to April
1992, Mr. Plochocki served as Vice President of Marketing and Sales for
The Olsten Corporation.
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Thomas M. Robbins, 47 ............... Senior Vice President, Southern Zone. Mr. Robbins has served as Senior Vice President,
Southern Zone since June 1995. He served as Senior Vice President, Southeast Region since
joining Homedco in August 1992. Prior to joining Homedco, Mr. Robbins was Vice President,
Northeast Region, for Glasrock Home Healthcare, Inc., a firm in substantially the same
business as the Company, from 1990 until August 1992.
Susan K. Skara, 46................... Senior Vice President, Human Resources. Ms. Skara was promoted to Senior Vice President,
Human Resources in November 1996. She served as Vice President, Human Resources of Homedco,
and subsequently, the Company, from November 1987 until November 1996. From 1984 until
November 1987, Ms. Skara served as Vice President, Human Resources of NMH.
Lawrence H. Smallen, 48 ............. Chief Financial Officer, Senior Vice President, Finance and Treasurer. Mr.
Smallen was promoted to Senior Vice President, Finance in March 1996.
He held the titles of Vice President, Finance and Treasurer with Homedco, and
subsequently, the Company, since November 1987. Mr. Smallen served as Secretary
of the Company from June 1995 until May 1996. From 1985 until November 1987, he
served as Vice President, Finance of NMH.
Merl A. Wallace, 47 ................. Senior Vice President, Western Zone. Mr. Wallace was promoted to Senior Vice President,
Western Zone in June 1995. Mr. Wallace served as Vice President, Operations of Homedco from
April 1994 to June 1995. From November 1990 to April 1994, he served as General Manager of
the Southwest district of Homedco.
Dennis E. Walsh, 47.................. Senior Vice President, Sales and Marketing. Mr. Walsh was promoted to Senior Vice
President, Sales and Marketing in June 1995. He served as Vice President, Sales of Homedco
from November 1987 to June 1995. From 1986 until November 1987, he served as Vice
President, Sales of NMH. Mr. Walsh served as Midwest Regional Sales Manager of NMH from
1984 until 1986.
James E. Baker, 45 .................. Vice President, Controller. Mr. Baker has served as Vice President, Controller of Homedco
and subsequently, the Company, since August 1991. He served as Corporate Controller of
Homedco from November 1987 to August 1991. From 1985 until November 1987, Mr. Baker served
as Controller of NMH.
Robert S. Holcombe, 54............... Vice President, General Counsel and Secretary. Mr. Holcombe joined Apria in May 1996. 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.
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ITEM 2. PROPERTIES
The Company's headquarters are located in Costa Mesa, California and
consist of approximately 160,000 square feet of office space. The lease expires
in 2001. The Company has approximately 350 branch facilities serving patients in
all 50 states. These branch facilities are typically located in light industrial
areas and average approximately 8,000 square feet. Each facility is a
combination warehouse and office, with approximately 50% of the square footage
consisting of warehouse space. Lease terms on branch facilities are generally
five years or less.
Except for the facilities in Sherman, Texas and Beckley, West
Virginia, which the Company owns, the Company leases all of its facilities.
ITEM 3. LEGAL PROCEEDINGS
Class Action Lawsuit. On October 7, 1994, an individual who claimed
to have purchased 100 shares of Abbey common stock filed a class action
complaint, on behalf of herself and all other persons who purchased or sold the
Company's Common Stock during the period from September 7, 1993 through June 16,
1994, in the United States District Court for the Central District of
California, asserting federal securities fraud against the Company, certain of
its directors and officers and certain former directors and officers of Total
Pharmaceutical Care, Inc., a company acquired by the Company. On December 17,
1996, the District Court approved a settlement and dismissal of the lawsuit
pursuant to which the Company paid $20.5 million to the members of the class of
shareholders or former shareholders represented by the plaintiff. The Company's
insurance carriers paid approximately $16.5 million of the $20.5 million
settlement.
Qui Tam Lawsuit. The Company was named as one of nine defendants in
a qui tam lawsuit filed on August 23, 1995 in the United States District Court
for the Northern District of Georgia by a former employee alleging that the
Company had violated the Civil False Claims Act by paying illegal kickbacks to
certain healthcare providers in exchange for patient referrals. The plaintiff
also alleged that the Company had improperly generated "Certificates of Medical
Necessity" for certain products, and that his employment had been terminated
improperly in violation of the whistle blower protection provisions of the Civil
False Claims Act. The United States subsequently intervened in the lawsuit and
filed an amended complaint in which it joined in the plaintiff's allegations
concerning illegal kickbacks, but declined to join in any of the other
allegations. On February 23, 1997, the District Court dismissed the lawsuit
pursuant to settlement agreements negotiated by the parties. In the settlement
agreements, the Company admitted to no liability and agreed to pay $1.65 million
to the United States government.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the New York Stock Exchange
(NYSE) under the symbol AHG. Prior to May 16, 1996, Apria Common Stock was
listed and traded on the Nasdaq National Market tier of the Nasdaq Stock Market
under the symbol APRA. The table below sets forth, for the calendar periods
indicated, the high and low sales prices per share of Apria Common Stock as
reported by the NYSE and the high and low bid information per share of Apria
Common Stock as reported by Nasdaq. The common stock of Abbey and Homedco, the
predecessors to Apria, were listed and traded on the Nasdaq National Market. The
table below sets forth the high and low bid information per share of common
stock of Abbey and Homedco as reported by Nasdaq. In connection with the
Abbey/Homedco Merger, Apria issued 1.4 shares of Apria Common Stock for every
one issued and outstanding share of common stock of Abbey and two shares of
Apria Common Stock for every one issued and outstanding share of common stock of
Homedco.
HOMEDCO ABBEY APRIA
------- ----- -----
High Low High Low High Low
---- --- ---- --- ---- ---
Year ended December 31, 1995
First Quarter 56.500 37.000 37.750 22.875 - -
Second Quarter 60.750 48.000 41.625 33.000 - -
Third Quarter - - - - 35.750 23.250
Fourth Quarter - - - - 30.500 19.500
Year ended December 31, 1996
First Quarter - - - - 32.500 23.000
Second Quarter - - - - 35.500 29.125
Third Quarter - - - - 32.750 17.125
Fourth Quarter - - - - 22.125 16.750
As of March 7, 1997 there were 690 holders of record of Apria Common
Stock.
The Company 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, the Company has a bank credit agreement which prohibits the payment
of dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of Apria
Healthcare Group Inc., 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, 1996. The data set forth below
have been derived from the audited consolidated financial statements of the
Company 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,
----------------------------------------------------------------
1996(1) 1995(2,3) 1994 (3,4) 1993(3,5) 1992(3,6,7)
------- --------- ---------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA:
Net revenues ................................................. $1,181,143 $ 1,133,600 $962,812 $748,901 $513,269
Gross profit ................................................. 780,468 772,601 675,122 522,777 359,237
Income (loss) from continuing operations
before extraordinary items and
cumulative effect of change in
accounting method .......................................... 33,300 (71,478) 35,616 35,845 22,752
Net income (loss) ............................................ 33,300 (74,476) 39,031 37,311 27,256
Per common and common equivalent share:
Income (loss) from continuing operations
before extraordinary items and cumulative effect
of change in accounting method ......................... $ 0.64 $ (1.52) $ 0.81 $ 0.94 $ 0.61
Net income (loss) per common share ....................... $ 0.64 $ (1.58) $ 0.89 $ 0.98 $ 0.73
Per common share assuming full dilution:
Income (loss) from continuing operations
before extraordinary items and cumulative effect
of change in accounting method ......................... $ 0.64 $ (1.52) $ 0.78 $ 0.89 $ 0.61
Net income (loss) per common share ....................... $ 0.64 $ (1.58) $ 0.85 $ 0.93 $ 0.73
BALANCE SHEET DATA:
Working capital .............................................. $ 311,991 $ 198,630 $157,608 $187,370 $109,122
Total assets ................................................. 1,149,110 979,985 856,167 710,122 402,216
Long-term obligations, including current maturities .......... 634,864 500,307 438,304 391,822 202,071
Stockholders' equity ......................................... 342,935 284,238 261,910 176,632 80,401
(1) In 1996, the Company recorded significant fourth quarter adjustments and
incurred significant charges as described in Item 7. - Management's
Discussion and Analysis of Financial Condition and Results of Operations,
and Note 13 to the Consolidated Financial Statements.
(2) In 1995, the Company incurred charges related to merger, restructuring and
integration activities as discussed in Note 7 of the Notes to the
Consolidated Financial Statements.
(3) 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.
(4) In 1994, the Company disposed of a subsidiary as described in Note 2 to
the Consolidated Financial Statements.
(5) The Statements of Operations and Balance Sheet Data reflect the
acquisition on November 10, 1993 of the outstanding stock of Total
Pharmaceutical Care, Inc.
(6) The Statements of Operations Data and Balance Sheet Data reflect the
Glasrock Home Healthcare, Inc. acquisition of August 7, 1992 and a related
restructuring charge of approximately $4.3 million.
(7) The Statement of Operations for 1992 reflects the cumulative effect of
adopting the provisions of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. The impact to 1992 was to
increase net income by $3.3 million.
The Company did not pay any cash dividends on its Common Stock
during any of the periods set forth in the table above.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BASIS OF PRESENTATION: Apria Healthcare Group Inc. ("the Company")
was formed by the merger of Abbey Healthcare Group Incorporated ("Abbey") and
Homedco Group, Inc. ("Homedco") in June 1995 ("the merger"). This transaction
was accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements and narrative herewith reflect the combined financial
position and operating results of Abbey and Homedco for all periods presented.
RESULTS OF OPERATIONS
NET REVENUES: Net revenues increased 4.2% in 1996 to $1.2 billion
from $1.1 billion in 1995, and increased 17.7% in 1995 from 1994 revenues of
$962.8 million. The modest growth in 1996 was primarily attributable to volume
increases in managed care markets and to a lesser extent traditional markets.
The increase in net revenues in 1995, as compared to 1994, was due to volume
increases in managed care markets and new business generated from the
acquisition of several complementary companies. Price competition in the managed
care environment had a mitigating impact on the growth in both 1996 and 1995.
Respiratory therapy, infusion therapy and home medical
equipment/other revenues represent 50.3%, 24.8% and 24.9%, respectively, of
total 1996 net revenues. In 1996, respiratory therapy decreased by 1.0% largely
because of the disruptions caused by the merger-related facility consolidations
and systems conversions. Both of these factors caused a temporary shift in focus
away from traditional business, the impact of which was greatest on the
respiratory line. Infusion therapy and home medical equipment/other grew at
rates of 10.0% and 9.9%, respectively. The increases in both of these lines were
largely due to volume increases in managed care. Also, the infusion line
benefited from focused sales force training on infusion therapy.
Approximately 33% of the Company's revenues are reimbursed under
the Federal Medicare program. It is currently uncertain what impact the
continuing changes in healthcare regulations and reimbursement may have on the
Company's future revenues.
GROSS PROFIT: Gross margins were 66.1% in 1996, 68.2% in 1995 and
70.1% in 1994. In general, gross margins are being reduced by the Company's
increased participation in the managed care environment. In 1996, the Company
derived approximately 35% of its revenues from managed care organizations. The
intense competition in the managed care market has caused considerable price
compression. Also, competing in the managed care market requires a broad
offering of products and services, including lower-margin services, medical
equipment and supplies. To address this downward pressure on gross margins, the
Company has adopted numerous initiatives including the establishment of
automated purchasing budgets to more effectively control the purchase and use of
patient service equipment and supplies, the placement of sales force initiatives
on certain higher-margin products and services and an effort to redirect the
business development focus toward higher-margin traditional referral/payor
sources. In addition, during the fourth quarter of 1996, Management initiated a
contract assessment process whereby the Company's top 120 revenue producing
accounts were reviewed for profitability. Approximately two-thirds of these
contracts were renegotiated at better pricing and business mix and the remaining
one-third were terminated due to unacceptable profitability levels. Further,
with the information system conversions complete, Management now has access to
standardized information not previously available. Detailed management reporting
tools are being developed to quickly identify products and services not meeting
profitability standards and to evaluate product/service mix at an individual
branch level.
Other factors impacting the 1996 gross margin include a fourth
quarter adjustment of $10.0 million to provide for excess and obsolete patient
service equipment and supplies and a third quarter change in the depreciable
lives of certain classes of patient service equipment. The fourth quarter
adjustment was determined based on the results of the Company's year-end
physical inventory and quantity reconciliation procedures. The change in
depreciable lives was based on Management's analysis which indicated that the
equipment would continue in service beyond the economic lives over which they
were being depreciated. The change resulted in a reduction to the cost of net
revenues in 1996 of $6.4 million of which $5.2 million related to a single asset
type for which the depreciable life was extended from four to twelve months.
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The 1995 gross margin was impacted by an adjustment of $5.4 million
to conform the accounting policies of the predecessor companies for certain low
dollar patient service equipment items, supplies and accessories and a $7.5
million provision for excess and obsolete patient service equipment and
shrinkage associated with the Company's facility consolidations.
SELLING, DISTRIBUTION AND ADMINISTRATIVE: Selling, distribution and
administrative expenses expressed as percentages of net revenues were 49.1%,
53.1% and 53.7%, for 1996, 1995 and 1994, respectively. Much of the improvement
in 1996, and to a lesser extent 1995, can be attributed to the successful
execution of the restructuring and consolidation plan initiated in conjunction
with the merger (see Certain 1995 Operating Statement Captions). The primary
sources of savings associated with the plan are the completed employee
reductions and facility consolidations. Also contributing to the improvement in
1996 as compared to 1995 was the cessation of various integration costs included
in the 1995 amount. Such costs, which totaled approximately $11.5 million,
included employee relocation, temporary and transitional employee costs,
overtime pay and consulting.
Further, Management continually evaluates its operating cost
structure to identify opportunities to effectively minimize the cost of
providing healthcare. Management reporting, budgets and incentives are among the
tools being utilized to control operating costs.
PROVISION FOR DOUBTFUL ACCOUNTS: The provision for doubtful accounts
as a percentage of net revenues was 5.7%, 8.9% and 4.9% for 1996, 1995 and 1994,
respectively. Although lower than the 1995 doubtful accounts provision rate, the
1996 rate exceeded the 1994 rate and reflects a fourth quarter increase to the
allowance for doubtful accounts of $9.0 million. The increase was based on
Management's year-end analysis of accounts receivable and resulted from an
increase in the fourth quarter in accounts aged over 180 days.
The 1995 provision for doubtful accounts included $26.3 million for
an impairment in Abbey's infusion therapy accounts receivable, $5.5 million
resulting from the application of more conservative allowance percentages to
Abbey's home medical equipment and respiratory therapy accounts aged in excess
of 180 days and $13.0 million for the anticipated impact on realization of the
Company's accounts receivable resulting from field location consolidations,
changes in billing and collection personnel and information systems conversions
(see LIQUIDITY AND CAPITAL RESOURCES). The circumstances leading to the $26.3
million provision for Abbey's infusion therapy accounts are discussed below.
Abbey had entered the infusion market primarily through its
acquisitions of Total Pharmaceutical Care, Inc., ("TPC") and Protocare, Inc.
("Protocare") in November 1993 and January 1994, respectively. From the point of
acquisition through the end of 1994, the receivables of the acquired TPC
business were processed centrally in two billing centers. Cooperation and
assistance from the branch/pharmacy personnel responsible for the initiation and
fulfillment of orders was an important aspect of centralized billing and
collection. In mid-1994, many of the former TPC branch and region level managers
were terminated due to the post-acquisition integration of TPC's branch/pharmacy
operations into Abbey's organizational structure. These changes had a negative
impact on the morale of the branch/pharmacy personnel and resulted in
significant turnover and less cooperation with billing center personnel. Also in
mid-1994, one of the billing centers was relocated and only a portion of the
personnel were transferred to the new location. Consequently, numerous new
billing and collection employees were hired and trained. In early 1995, Abbey
began to convert and, in some cases, automate for the first time, the billing
and collection procedures of the acquired TPC operations and convert and
centralize the billing and collection functions of the acquired Protocare
branches. These changes, coupled with the announcements on March 1, 1995 of the
Abbey/Homedco merger and later of branch consolidations, led to significant
turnover of billing and collection personnel in the acquired Protocare branches.
All of these conditions and disruptions had a negative impact on the aging of
Abbey's infusion receivables.
In response to the deteriorating aging, Abbey management deployed
additional resources and instituted programs to limit potential collection
losses. These efforts included hiring an infusion reimbursement specialist,
reengineering the centralized infusion billing center procedures, hiring
additional manager and director level personnel and instituting collection
incentive programs.
In the third quarter of 1995, the Company's management decided to
transfer the infusion billing and collection processes from Abbey's recently
converted centralized system to Homedco's decentralized, branch-based system.
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Many of the incentive and other programs instituted by Abbey management were
discontinued in order to focus resources and efforts on completing branch
consolidations, effecting the planned system conversions, training personnel in
the proper use of the new systems and improving the efficiency and effectiveness
of the intake function. During the process, the centralized billing center was
downsized and relocated a second time, pending permanent closure at a later
date. Each of these post-merger decisions caused additional turnover at the
billing centers responsible for collecting the existing receivables and
seriously impacted employee morale.
In connection with Management's 1995 post-merger accounts receivable
analysis, serious consideration was given to the impact that the merger, planned
branch consolidations and system conversions and reductions in force would
likely have on the already unstable condition of Abbey's infusion accounts
receivable. As a result of a marked deterioration in the aging of Abbey's
infusion accounts and other deteriorating trends, a provision of $26.3 million
was recorded.
EMPLOYEE CONTRACTS, BENEFIT PLAN AND CLAIM SETTLEMENTS: In 1996, the
Company recorded $14.8 million in benefit plan and claim settlement costs.
Included are settlement amounts and related costs of $5.3 million recorded in
connection with two legal matters, settlement and associated costs of $6.2
million related to the November 1996 termination of a proposed merger with Vitas
Healthcare Corporation and an increase in the estimated accrual for the
settlement loss on the termination of the Company's defined benefit pension plan
of $3.3 million.
Employee contracts, benefit plan and claim settlements of $20.4
million were recorded in 1995. The total includes approximately $14.4 million
provided for employment and payroll tax related claims and lawsuits, $3.4
million to settle certain employee contracts, and a settlement loss of $2.3
million on the termination of the Company's defined benefit pension plan.
CERTAIN 1995 OPERATING STATEMENT CAPTIONS: In connection with the
merger, the Company initiated a significant consolidation and restructuring plan
to consolidate operating locations and administrative functions within specific
geographic markets. The plan provided for a workforce reduction of approximately
1,220 employees, consolidation of approximately 120 operating facilities and
conversion of branch operating locations to a standardized information system.
The employee reduction and branch consolidations were substantially complete as
of December 1995. The Company had also completed about half of the 496
information system conversions as of December 1995; the remaining system
conversions were completed by September 1996.
During 1995, a charge of approximately $68.3 million was recorded in
connection with the consolidation and restructuring plan. The primary components
of the restructuring charge included severance and related costs of $21.5
million due to workforce reductions, $22.2 million associated with the
consolidation of information systems, $23.1 million related to the closure of
duplicate facilities and $1.5 million for other restructuring activities.
Merger costs of approximately $12.2 million were incurred during
1995 and consisted primarily of fees for investment banking, legal, consulting,
accounting, filing requirements, and, as required by the merger agreement, the
cost of a six-year liability insurance policy covering directors and officers of
the predecessor companies against claims arising from pre-merger facts or
events.
INTEREST EXPENSE: Interest expense increased in 1996 to $49.2
million, from $42.9 million in 1995 and $37.2 million in 1994. The increases in
both years are primarily due to increases in long-term debt. The 1996 increase
was mitigated by a reduction in interest rates (see LIQUIDITY AND CAPITAL
RESOURCES).
INCOME TAXES: 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 current
year 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. Management believes
that future taxable income will be sufficient to assure the realization of
deferred tax assets, net of the recorded valuation allowance.
The 1995 tax benefit of $20.6 million was primarily attributable to
losses related to merger reserves and restructuring charges recorded during
1995. Income tax expense for 1994 represents the combined tax provisions of
Homedco and Abbey. The combined effective tax rate for 1994 was 43%, which
exceeded the statutory rate primarily because of the effects of non-deductible
goodwill.
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LIQUIDITY AND CAPITAL RESOURCES
Cash used in the Company's operating activities for 1996 was $59.3
million compared with $9.9 million in 1995 and $61,000 in 1994. The primary
contributor to the increased use of cash in 1996 and 1995 was the increase in
accounts receivable.
Accounts receivable, before allowance for doubtful accounts,
increased $64.5 million in 1996. In addition, the Company's average collection
period increased to approximately 130 days from approximately 110 days in 1995
and 100 days in 1994. These conditions are primarily attributable to disruptions
and delays in billing and collection activity associated with the Company's
conversion of its field locations to a standardized information system and a
higher than normal turnover rate among billing and collection personnel in 1996
and, to a lesser degree, to the continuing impact of facility consolidations and
employee reductions made in late 1995 and early 1996 in connection with the
Company's restructuring and consolidation plan.
In connection with the facility consolidations, each branch
information system was first converted to the predominate system in place within
its region. Conversion of the branches to a standard, Company-wide system then
occurred on a region-by-region basis. Because of the conversion to interim
systems prior to final conversion, locations representing approximately 80% of
the Company's accounts receivable underwent conversion. Of the 496 planned
conversions, about half were completed by December 31, 1995. The remaining
conversions, comprised mainly of the Company's larger branches, were completed
by September 30, 1996 with 125, 67 and 72 performed in the first, second and
third quarters, respectively. These activities contributed to billing delays and
errors and, ultimately, difficulties in receiving timely reimbursement.
Management's year-end accounts receivable analysis considered the
continuing impact on the aging of accounts and collection activity caused by
system conversions and employee turnover and the degree of effectiveness of
billing and collection improvement programs initiated during the year. In
addition, Management conducted a review of patient billing files and analyzed
subsequent realization for selected billing locations. Based on such analyses,
Management estimated and recorded in the fourth quarter of 1996 a $32.3 million
adjustment to reduce accounts receivable and net revenues and a $9.0 million
adjustment to increase the allowance for doubtful accounts (see RESULTS OF
OPERATIONS).
Revenue adjustments result from (1) incorrect contract prices
entered upon service delivery due to complex contract terms, a biller's lack of
familiarity with a contract or payor or an incorrect system price, (2)
subsequent changes to estimated revenue amounts for services not covered by a
preexisting contract, and (3) failure subsequent to service delivery to qualify
a patient for reimbursement due to lack of authorization or a missed filing or
appeal deadline. Revenue adjustments are typically identified and recorded at
the point of cash application or upon account review. The increase in the
Company's average collection period in 1996 has increased the level of
unidentified revenue adjustments accumulating in accounts receivable. In
addition, the significant number of system conversions performed in the second
and third quarters of 1996 and the high rate of turnover among billing and
collection personnel impeded normal processing and account reviews and resulted
in an increased rate of billing errors in the second half of 1996.
To mitigate the impact of conversion disruptions and employee
turnover, the Company, among other steps, initiated collection incentive
programs with special emphasis on older accounts, assembled an accounts
receivable task force, hired additional management level billing and collection
personnel and initiated reinforcement training for the billing locations.
Subsequent to year-end, the Company took further steps to reduce the incidence
of billing errors. These steps include a process review of the field information
system to identify opportunities to improve billing processing, timeliness and
accuracy, validation of system pricing files and implementation of billing
center audits to assess compliance with billing practices and procedures.
Cash collections at locations that were converted in early 1996
have shown recent improvement. Because of the significant number of conversions
completed in the second and third quarters of 1996, a return to routine
processing and normal collection time frames on a Company-wide basis is not
expected before mid-1997.
The Company centralized its accounts payable function in connection
with the consolidation and restructuring plan. The centralization process
disrupted day-to-day activities causing a processing backlog, which was
reflected in the
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accounts payable balance at December 31, 1995. During the first two quarters of
1996, the backlog was substantially eliminated, resulting in significant outlays
of cash.
Other factors contributing to the use of cash and corresponding
increase in long-term debt include purchases of patient service equipment and
supplies to support business growth and payments made against the restructuring
accruals for severance and trailing facility costs. Such payments are expected
to continue through the year 2000, according to contractual terms. Approximately
$32.0 million in data processing equipment was purchased in 1996, much of which
was to support the information systems conversions and enhancements and to
upgrade and standardize the consolidated field locations. Hardware purchases in
1997 are planned at $15.0 million. Income tax refunds of $6.4 million were
received in 1996, and the application of prior year payments and alternative
minimum tax credits to current year estimated tax requirements reduced cash
outlays for income taxes by $25.0 million. During 1996, the Company made
acquisitions of complementary businesses in specific geographic markets which
resulted in cash payments of $13.9 million. The issuance of Common Stock upon
exercise of stock options yielded $15.2 million in 1996.
Effective August 9, 1996, the Company entered into an agreement with
a syndicate of banks which provides for borrowings of up to $800.0 million. The
agreement is structured as an unsecured, five-year revolving line of credit,
which provides for variable rate interest options including the higher of the
Federal Funds Rate plus 0.5% per annum or the Bank of America "reference" rate,
or a rate based on the London Interbank Offered Rate ("LIBOR") plus up to 1.0%
per annum. The LIBOR option is subject to discount if the Company achieves
certain targeted ratios of debt to earnings before interest, taxes, depreciation
and amortization. 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. Loan proceeds are being used to meet the working capital needs of
the Company.
The Company has limited involvement with derivative financial
instruments and does not use them for trading purposes. Interest rate swap and
cap agreements are used as a means of managing the Company's interest rate
exposure. The swap agreements are contracts to periodically exchange fixed and
floating interest rate payments over the life of the agreement. The Company's
exposure to credit loss under these agreements is limited to the interest rate
spread in the event of nonperformance by the counterparties to the contracts.
The Company anticipates that the counterparties will be able to fully satisfy
their obligations under the contracts. The Company is currently party to two
swap agreements: an 18-month agreement covering $280.0 million in notional
principal with a fixed interest rate of 5.7% and a two-year agreement covering
$100.0 million of notional principal with a fixed interest rate of 5.6%. Both
agreements allow the counterparty an option to terminate after one year; if
these options are not exercised, the $280.0 million and $100.0 million contracts
terminate in February 1998 and November 1998, respectively. In 1996, the Company
received interest at a weighted average rate of 6.5% and paid interest at a
weighted average rate of 6.1%, the difference of which represents the benefit
derived by the Company under the various swap contracts in effect during the
year. Payment or receipt of the interest differential is made on a monthly and
quarterly basis for the $100.0 million and $280.0 million agreements,
respectively, and recognized monthly in the financial statements as an
adjustment to interest expense. Under a cap agreement, which expired in July
1996, the Company limited the three-month LIBOR rate to 6.0% on outstanding
indebtedness of up to $50.0 million. The Company did not derive any benefit from
the cap agreement in 1996.
In 1995, all outstanding 6.5% convertible debentures, which amounted
to $66.6 million, were converted into 4,771,962 shares of Common Stock, at a
conversion price of $13.97 per share.
The Company is currently in the third year of a five-year agreement
to purchase medical supplies totaling $112.5 million, with annual purchases
ranging from $7.5 million in the first year to $30.0 million in the third
through fifth years. Failure to purchase at least 90% of the annual commitment
would have resulted in a penalty of 10% of the difference between the annual
commitment and actual purchases, beginning with the twelve month period ended
August 31, 1996. Actual purchases for that period exceeded the annual commitment
by 54%.
In March 1997, the Company sold its M&B Ventures, Inc. home health
business, which operated in South Carolina under the assumed business name of
Doctor's Home Health, Inc. Proceeds from the sale were approximately $2.4
million. In January 1997, the Company sold all of its ordinary shares of
Omnicare plc; proceeds from the sale were approximately $2.8 million.
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In its 1994 sale of Abbey Pharmaceutical Services, Inc., the Company
acquired warrants to purchase 248,000 shares of common stock of Living Centers
of America, Inc. at $35.00 per share. No value was assigned to the stock.
Overall, the Company believes that cash provided by operations and
amounts available under its existing credit and lease financing will be
sufficient to finance its current operations for at least the next two years. At
December 31, 1996, availability under the credit facility was $379.5 million.
The Company believes that inflation has not had a significant impact
on the Company's historical operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors, Consolidated Financial
Statements and Consolidated Financial Statement Schedule listed in the "Index
to Consolidated Financial Statements and Financial Statement Schedule" are
filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is incorporated by reference
from the Company's definitive Proxy Statement to be filed with the Commission
within 120 days after the close of the Company's fiscal year. Information
regarding executive officers of the Company is set forth under the caption
"Executive Officers of the Registrant" in Item 1 hereof.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference
from the Company's definitive Proxy Statement to be filed with the Commission
within 120 days after the close of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference
from the Company's definitive Proxy Statement to be filed with the Commission
within 120 days after the close of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated by reference
from the Company's definitive Proxy Statement to be filed with the Commission
within 120 days after the close of the Company's fiscal year.
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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:
None filed during the fourth quarter of 1996.
18
20
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors ........................................ F-1
Consolidated Balance Sheets -- December 31, 1996 and 1995 ............. F-2
Consolidated Statements of Operations -- Years ended
December 31, 1996, 1995 and 1994 .................................... F-3
Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 1996, 1995 and 1994 .................................... F-4
Consolidated Statements of Cash Flows -- Years ended
December 31, 1996, 1995 and 1994 .................................... F-5
Notes to Consolidated Financial Statements ............................ F-6
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts ....................... S-1
21
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Apria Healthcare Group Inc.
We have audited the accompanying consolidated balance sheets of Apria Healthcare
Group Inc. as of December 31, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included the
financial statement schedule referred to in Item 14(a). 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 audits 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Apria Healthcare
Group Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated
results of its operations and cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related 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.
ERNST & YOUNG LLP
Orange County, California
February 28, 1997
F-1
22
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
-----------------------
1996 1995
---------- ---------
(IN THOUSANDS)
CURRENT ASSETS
Cash ................................................................... $ 26,930 $ 18,829
Accounts receivable, less allowance for doubtful accounts of $73,809 and
$86,567 at December 31, 1996 and 1995, respectively .................. 335,616 258,332
Inventories ............................................................ 55,733 45,198
Deferred income tax benefits ........................................... 31,106 45,883
Refundable and prepaid income taxes .................................... 34,598 27,710
Prepaid expenses and other current assets .............................. 9,764 7,770
---------- ---------
TOTAL CURRENT ASSETS ......................................... 493,747 403,722
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $198,675 and
$161,953 at December 31, 1996 and 1995, respectively .................. 213,602 167,090
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ................................ 120,030 80,108
INTANGIBLE ASSETS, NET ................................................... 312,590 319,142
OTHER ASSETS ............................................................. 9,141 9,923
---------- ----------
$1,149,110 $ 979,985
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ....................................................... $ 83,619 $ 100,653
Accrued payroll and related taxes and benefits ......................... 34,850 26,792
Accrued restructuring costs ............................................ 7,131 19,085
Other accrued liabilities .............................................. 44,568 48,910
Current portion of long-term debt ...................................... 11,588 9,652
---------- ---------
TOTAL CURRENT LIABILITIES .................................... 181,756 205,092
LONG-TERM DEBT ........................................................... 623,276 490,655
DEFERRED INCOME TAXES .................................................... 1,143 -
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value:
10,000,000 shares authorized; none issued ............................ - -
Common Stock, $.001 par value:
150,000,000 shares authorized; 51,203,450 and 49,692,266 shares issued
and outstanding at December 31, 1996 and 1995, respectively .......... 51 50
Additional paid-in capital ............................................. 319,950 294,522
Retained earnings (deficit) ............................................ 22,934 (10,334)
---------- ---------
342,935 284,238
COMMITMENTS AND CONTINGENCIES ............................................ - -
---------- ---------
$1,149,110 $ 979,985
========== =========
See notes to consolidated financial statements.
F-2
23
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues ......................................................... $ 1,181,143 $ 1,133,600 $ 962,812
Costs and expenses:
Cost of net revenues:
Product and supply costs ......................................... 311,539 286,919 234,604
Patient service equipment depreciation ........................... 67,658 57,400 42,735
Nursing services ................................................. 9,798 7,361 5,947
Other ............................................................ 11,680 9,319 4,404
----------- ----------- -----------
400,675 360,999 287,690
Selling, distribution and administrative ........................... 580,436 602,478 517,027
Provision for doubtful accounts .................................... 67,040 100,463 46,716
Amortization of intangible assets .................................. 16,920 16,273 11,504
Employee contracts, benefit plan and claim settlements ............. 14,795 20,367 -
Restructuring costs ................................................ - 68,304 -
Merger costs ....................................................... - 12,193 -
----------- ----------- -----------
1,079,866 1,181,077 862,937
----------- ----------- -----------
OPERATING INCOME (LOSS) .......................................... 101,277 (47,477) 99,875
Interest expense ..................................................... 49,249 42,942 37,155
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE TAXES AND EXTRAORDINARY CHARGE ............................ 52,028 (90,419) 62,720
Income tax expense (benefit) ......................................... 18,728 (18,941) 27,104
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY CHARGE ...................................... 33,300 (71,478) 35,616
Income from discontinued operations, net of taxes .................... - - 344
Gain on disposal of discontinued operations, net of taxes ............ - - 3,071
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY CHARGE ........................ 33,300 (71,478) 39,031
Extraordinary charge on debt refinancing, net of taxes ............... - 2,998 -
----------- ----------- -----------
NET INCOME (LOSS) ................................................ $ 33,300 $ (74,476) $ 39,031
=========== =========== ===========
PER COMMON AND COMMON EQUIVALENT SHARE:
Income (loss) from continuing operations before extraordinary charge $ 0.64 $ (1.52) $ 0.81
=========== =========== ===========
Extraordinary charge on debt refinancing, net of taxes ............. $ - $ (0.06) $ -
=========== =========== ===========
Net income (loss) .................................................. $ 0.64 $ (1.58) $ 0.89
=========== =========== ===========
Weighted average number of common and common equivalent
shares outstanding ............................................... 51,997 47,112 44,096
PER COMMON SHARE ASSUMING FULL DILUTION:
Income (loss) from continuing operations before extraordinary charge $ 0.64 $ (1.52) $ 0.78
=========== =========== ===========
Extraordinary charge on debt refinancing, net of taxes ............. $ - $ (0.06) $ -
=========== =========== ===========
Net income (loss) .................................................. $ 0.64 $ (1.58) $ 0.85
=========== =========== ===========
Weighted average number of common and common
equivalent shares outstanding ...................................... 52,053 47,112 49,284
See notes to consolidated financial statements.
F-3
24
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED TOTAL
---------------------- PAID-IN EARNINGS TREASURY STOCKHOLDERS'
SHARES PAR VALUE CAPITAL (DEFICIT) STOCK EQUITY
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
Balance at December 31, 1993 ........ 38,223 $ 38 $ 161,229 $ 16,432 $ (1,067) $ 176,632
Issuance of Common Stock ............ 1,362 2 17,785 17,787
Treasury stock issued ............... 142 49 1,067 1,116
Exercise of stock options ........... 395 1,830 1,830
Notes receivable payments ........... 15 15
Tax benefits related to stock options 1,343 1,343
Conversion of subordinated
debentures ........................ 799 1 11,159 11,160
Common Stock issued for acquisitions
and earnouts ...................... 1,081 1 12,877 12,878
Other ............................... 118 118
Net income .......................... 39,031 39,031
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1994 ........ 42,002 42 206,405 55,463 - 261,910
Net activity for Homedco - October 1,
1994 to December 31, 1994 ......... 51 1,663 8,647 10,310
Issuance of Common Stock ............ 36 570 570
Exercise of stock options ........... 1,473 2 13,259 13,261
Notes receivable payments ........... 6 6
Tax benefits related to stock options 8,138 8,138
Conversion of subordinated
debentures, net of issuance costs
of $2,785 ......................... 4,772 5 63,856 63,861
Exercise of warrants ................ 1,338 1 (1) -
Acceleration of stock option vesting 542 542
Other ............................... 20 84 32 116
Net loss ............................ (74,476) - (74,476)
--------- --------- --------- --------- --------- ---------
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
========= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
F-4
25
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss) ......................................................... $ 33,300 $ (74,476) $ 39,031
Items included in net income (loss) not requiring (providing) cash:
Extraordinary charge on debt refinancing .............................. - 4,684 -
Discontinued operations ............................................... - - (3,415)
Provision for doubtful accounts ....................................... 67,040 100,463 46,716
Depreciation .......................................................... 93,123 84,607 63,895
Amortization of intangible assets ..................................... 16,920 16,273 11,504
Amortization of deferred debt costs ................................... 1,703 1,908 4,878
Loss on sale of property, equipment and improvements .................. 340 3,938 765
Impairment losses ..................................................... - 32,557 -
Deferred income taxes ................................................. 15,920 (19,548) 4,031
Change in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable ....................................... (144,251) (118,151) (86,116)
Increase in inventories ............................................... (9,890) (4,904) (4,895)
Decrease (increase) in prepaids and other current assets .............. 2,544 (12,194) (2,147)
Decrease in other non-current assets .................................. 310 3,269 4,221
(Decrease) increase in accounts payable ............................... (17,033) 18,942 16,231
Increase (decrease) in accruals and other non-current liabilities ..... 3,175 3,434 (6,735)
(Decrease) increase in accrued restructuring costs .................... (11,953) 19,085 -
Net purchases of patient service equipment, net of effects of acquisitions (110,872) (72,518) (85,729)
Other ..................................................................... 329 2,733 (2,296)
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES ......................... (59,295) (9,898) (61)
INVESTING ACTIVITIES
Purchases of property, equipment and
improvements, net of effects of acquisitions ........................ (54,207) (49,327) (26,757)
Proceeds on disposal of discontinued operations and U.K. subsidiary ... - 926 20,344
Proceeds from sale of property, equipment and improvements ............ 317 331 540
Acquisitions and payments of contingent consideration ................. (14,815) (46,086) (73,782)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ......................... (68,705) (94,156) (79,655)
FINANCING ACTIVITIES
Proceeds under revolving credit facility .............................. 775,125 463,999 172,954
Payments under revolving credit facility .............................. (641,425) (229,171) (164,532)
Proceeds from senior and other long-term debt ......................... - 126,557 44,474
Payments of senior and other long-term debt ........................... (11,445) (275,022) (12,929)
Capitalized debt costs, net ........................................... (1,312) (1,429) (2,502)
Issuances of Common Stock ............................................. 15,158 13,064 2,042
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..................... 136,101 97,998 39,507
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH ........................................... 8,101 (6,056) (40,209)
Cash at beginning of period ............................................... 18,829 21,188 61,397
Net activity for Homedco - October 1, 1994 to December 31, 1994 ........... - 3,697 -
--------- --------- ---------
CASH AT END OF PERIOD ......................................... $ 26,930 $ 18,829 $ 21,188
========= ========= =========
See notes to consolidated financial statements.
F-5
26
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. ("the Company")
and its subsidiaries. All significant intercompany transactions and accounts
have been eliminated. As described more fully in Note 2, on June 28, 1995,
Homedco Group, Inc. ("Homedco") merged with and into Abbey Healthcare Group
Incorporated ("Abbey") to form the Company ("the merger"). The merger was
accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements reflect the combined financial position and operating
results of Abbey and Homedco for all periods presented.
In conjunction with the merger, the Company adopted a fiscal year
end of December 31. Previously, Abbey reported on a fiscal year ending the
Saturday nearest December 31, and Homedco reported on a fiscal year ending
September 30. The consolidated financial statements for 1994 combine the results
of Abbey for the fiscal year ended December 31, 1994 and the results of Homedco
for the year ended September 30, 1994. The consolidated balance sheet and
statements of cash flows at December 31, 1995 combine the accounts of Abbey and
Homedco on such date and reflects the activity of Homedco from October 1, 1994
through December 31, 1994. The consolidated statements of operations for 1995
reflect combined results for the year ended December 31, 1995 and exclude the
operations of Homedco for the period October 1, 1994 through December 31, 1994.
Homedco's revenues and net income for this period amounted to $146,293,000 and
$8,647,000, respectively.
Company Background: The Company provides home healthcare services
including home respiratory therapy, home infusion therapy and home medical
equipment, nursing network management and other services to patients in the home
throughout the United States. Respiratory therapy, infusion therapy and home
medical equipment/other represent approximately 50%, 25% and 25% of total
revenues, respectively.
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 43% of the
Company's revenues are reimbursed under arrangements with Medicare and Medicaid.
No other third party payor group represents 5% or more of the Company's
revenues. The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific third party payors, historical
trends and other information. Because of continuing changes in healthcare
regulations and reimbursement and disruptions caused by the Company's
information systems conversions, it is reasonably possible that the Company's
estimates of net collectible revenues could change in the near term.
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 6%, 5% and 5% of total net revenues for
1996, 1995 and 1994, respectively.
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.
Cash: The Company 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 $24,469,000 and $27,608,000 at December
31, 1996 and 1995, respectively. The Company considers all highly liquid
instruments purchased with a maturity of less than three months to be cash
equivalents.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market and consist primarily of medical supplies sold
directly to patients for use in their homes.
Patient Service Equipment: Patient service equipment consists of
medical equipment provided to in-home patients and is stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the equipment which range from one to ten years. Included in
patient service equipment are assets under capitalized leases which consist
of oxygen related equipment. Depreciation for equipment under capitalized
leases is provided using the straight-line method over the estimated useful
life or the lease term.
F-6
27
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
primarily of computer equipment. Depreciation for equipment under capitalized
leases is provided using the straight-line method over the estimated useful life
or the lease term. 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 fifteen years; information systems - three
to eight years.
Long-lived Assets: Effective January 1, 1995, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To
Be Disposed Of. In accordance with the statement, the Company records impairment
losses on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets. No financial statement impact resulted from the adoption of the
statement.
Intangible Assets: Intangible assets consists of covenants not to
compete and goodwill arising from business combinations (see Note 2). The values
assigned to intangible assets, based in part on independent appraisals, are
amortized on a straight-line basis. The covenants are amortized over contractual
terms, which range from three 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 periods for goodwill range from twenty years for businesses
operating primarily in the home respiratory therapy and home medical equipment
lines and forty years for pharmaceutical and infusion therapy businesses. The
carrying value of goodwill is reviewed if the facts and circumstances suggest
that it may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the carrying value of the
goodwill is reduced.
Fair Value of Financial Instruments: The fair value of long-term
debt is determined by reference to borrowing rates currently available to the
Company for loans with similar terms and average maturities.
Advertising: Advertising costs amounting to $6,095,000, $3,849,000
and $3,753,000 for 1996, 1995 and 1994, respectively, are expensed as incurred
and included in "Selling, distribution and administrative expenses."
Income Taxes: The Company 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 that 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: Primary per share amounts are calculated by
dividing the applicable operating statement caption by the weighted average
number of common and dilutive common equivalent shares outstanding. Common
equivalent shares consist primarily of stock options. Fully diluted per share
amounts include further adjustments to the applicable operating statement
captions and weighted average shares outstanding to assume conversion of
convertible debentures from issuance, if dilutive. The calculation of per share
amounts for periods prior to the merger reflect the issuance of two shares of
the Company's Common Stock for each share of Homedco Common Stock used in such
calculation and one and four tenths shares of the Company's Common Stock for
each share of Abbey Common Stock used in such calculation.
Stock-based Compensation: The Company grants options for a fixed
number of shares to employees 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. However, the Company has adopted the disclosure
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-based Compensation ("SFAS No. 123") (see Note 6).
F-7
28
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- BUSINESS COMBINATIONS AND DISPOSITIONS
On June 28, 1995, Homedco merged with and into Abbey to form the
Company. Homedco and Abbey provided similar homecare services including
respiratory therapy, infusion therapy and home medical equipment. In connection
with the merger transaction, the Company issued 21,547,529 shares of its Common
Stock for 15,391,092 issued and outstanding shares of Abbey common stock and
26,034,612 shares of its Common Stock for 13,017,306 issued and outstanding
shares of Homedco common stock.
The merger was accounted for under the pooling-of-interests method
of accounting. Accordingly, the historical financial statements for periods
prior to the consummation of the combination were restated as though the
companies had been combined. The restated financial statements were adjusted to
conform the differing accounting policies of the separate companies. Such
differences related principally to the use of salvage values recognized for
certain patient service equipment and the capitalization of low dollar patient
service items, supplies, accessories and repairs.
Separate and combined results of Abbey and Homedco prior to the
merger were as follows:
ADJUSTMENTS
AND
ABBEY HOMEDCO RECLASSIFICATIONS COMBINED
-------- -------- ----------------- --------
(IN THOUSANDS)
Three months ended March 31, 1995
Revenues ........................... $123,394 $161,175 $ 40 $284,609
Net Income ......................... 7,091 9,047 (346) 15,792
Year ended December 31, 1994
Revenues ........................... $439,175 $523,469 $ 168 $962,812
Net Income ......................... 12,307 29,810 (3,086) 39,031
On January 2, 1994, the Company acquired the outstanding stock of
Protocare, Inc. ("Protocare") for a cash payment of $11,915,000 plus direct
acquisition costs of $3,700,000. In addition, pursuant to an earnout provision,
as amended in June 1994, approximately 979,000 shares of Common Stock valued at
$11,594,000 were issued in February 1995 to the former Protocare stockholders.
The shares are reflected in the accompanying financial statements as issued and
outstanding at December 31, 1994.
In addition to the Protocare acquisition, during 1996, 1995 and
1994, the Company acquired numerous complementary businesses in specific
geographic markets. The businesses were purchased for a combination of cash,
Common Stock and notes and none was individually significant. The transactions,
including Protocare, 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 value ascribed to a
portion of the common shares issued in 1994 reflects a discount from the quoted
price of the Company's Common Stock due to the absence of registration. The
purchase prices were allocated to the various underlying tangible and intangible
assets and liabilities on the basis of estimated fair value, determined in part
by independent appraisal.
F-8
29
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the allocation of the purchase
prices, including non-cash financing activities, of acquisitions made by the
Company:
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
Fair value of assets acquired ...... $ 15,356 $ 50,255 $ 124,496
Liabilities assumed ................ (541) (3,382) (14,749)
Promissory note payable to seller .. - - (4,382)
Common Stock issued ................ - (787) (31,583)
--------- --------- ---------
Cash paid ........................ $ 14,815 $ 46,086 $ 73,782
========= ========= =========
In June 1995, the Company entered an agreement for the sale of the
capital stock of Omnicare Group Ltd. ("Omnicare"), a United Kingdom-based
subsidiary, to a newly formed holding company, Stanton Industries Ltd.
("Stanton"), that is owned and managed by an officer/director of Omnicare and a
shareholder/former director of Abbey. Consideration for the sale amounted to
$2,913,000 and consisted of cash of $968,000, a convertible note in the amount
of $1,605,000 and the assumption of a liability in the amount of $340,000. The
difference between the net sales price per the agreement and the carrying value
of the Company's investment in Omnicare was reflected as a loss in the
accompanying financial statements.
In September 1995, Stanton transferred its shares of Omnicare common
stock to a newly-formed public limited company, Omnicare plc, in exchange for
6,166,656 ordinary shares of Omnicare plc. Also in September 1995, the Company
converted the note due from Stanton into 1,875,000 unregistered ordinary shares
of Omnicare plc. As a result of these transactions, Stanton and the Company held
approximately 63% and 27%, respectively, of the issued ordinary share capital of
Omnicare plc. The investment in Omnicare plc was accounted for using the equity
method. In January 1997, after obtaining a release from the Omnicare Board, the
Company sold all of its shares to a former director of Apria. Proceeds from the
sale were approximately $2,791,000.
On September 30, 1994, the Company sold its 51% interest in Abbey
Pharmaceutical Services, Inc. ("APS") to Living Centers of America, Inc.
("Living Centers") for cash consideration of $20,300,000 and warrants to
purchase 248,000 shares of Living Center common stock for $35.00 per share. No
value was assigned to the warrants. The APS operating results have been
presented as discontinued operations for 1994, net of applicable income taxes of
$1,879,000. Net revenues of the discontinued operations were $43,770,000 in
1994.
Supplemental unaudited pro forma information giving effect to
business acquisitions made in 1994 and excluding the operations of APS, is as
follows:
YEAR ENDED
DECEMBER 31, 1994
-----------------
(IN THOUSANDS)
Net revenues ........................... $ 986,062
Income from continuing operations ...... 35,209
Per share amounts:
Primary .............................. $ 0.79
Fully diluted ........................ $ 0.76
The pro forma financial information presented above is not
necessarily indicative of any trends or results that may be expected for any
other period. Pro forma financial information for business acquisitions and
dispositions made in 1996 and 1995 are not presented because the effects on the
Company's operating results are not material.
In March 1997, the Company sold its M&B Ventures, Inc. home health
business, which operated in South Carolina under the assumed business name of
Doctor's Home Health, Inc. Proceeds from the sale were approximately
$2,400,000, which approximates the book value of the business. The operations
of Doctor's Home Health, Inc. had revenues of approximately $7,227,000,
$8,870,000 and $7,340,000 for 1996, 1995 and 1994, respectively.
F-9
30
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consists of the following:
DECEMBER 31,
-----------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Land and improvements .................. $ 88 $ 88
Buildings and leasehold improvements ... 22,067 14,620
Equipment and furnishings .............. 69,136 56,507
Information systems .................... 112,215 74,741
--------- ---------
203,506 145,956
Less accumulated depreciation .......... (83,476) (65,848)
--------- ---------
$ 120,030 $ 80,108
========= =========
NOTE 4 -- INTANGIBLE ASSETS
Intangible assets consists of the following:
DECEMBER 31,
-------------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Covenants not to compete ........... $ 31,824 $ 32,815
Goodwill ........................... 327,821 319,571
--------- ---------
359,645 352,386
Less accumulated amortization ...... (47,055) (33,244)
--------- ---------
$ 312,590 $ 319,142
========= =========
NOTE 5 -- CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-----------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Notes payable relating to revolving credit facilities ...........$ 420,000 $ 286,300
9.5% senior subordinated notes .................................. 200,000 200,000
Other, interest at rates ranging from 4.1% to 10.3%, payments
due at various dates through December 1998 .................... 1,267 4,071
Capital lease obligations (see Note 9) .......................... 19,790 16,520
--------- ---------
641,057 506,891
Less: Current maturities ........................................ (11,588) (9,652)
Unamortized deferred debt costs ........................ (6,193) (6,584)
--------- ---------
$ 623,276 $ 490,655
========= =========
Credit Agreement: Effective August 9, 1996, the Company executed a
credit agreement with a syndicate of banks and Bank of America, as
administrative agent. The agreement, which expires in August 2001, provides a
revolving loan facility of up to $800,000,000. Proceeds were used, among other
purposes, to retire borrowings under the previous credit agreement with Banque
Paribas.
The agreement provides for variable rate interest options including
the higher of the Federal Funds Rate plus 0.5% per annum or the Bank of America
"reference" rate, or a rate based on the London Interbank Offered Rate ("LIBOR")
plus an additional increment of 1.0% per annum, which increment may be reduced
to as little as 0.35% per annum, if the Company achieves certain targeted ratios
of debt to earnings before interest, taxes, depreciation and amortization. The
effective interest rate at December 31, 1996 was 6.3% for borrowings of
$420,000,000. The credit agreement requires payment of commitment fees of .125%
to .25% on
F-10
31
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the unused portion of the facility and contains numerous restrictions, including
but not limited to, covenants requiring the maintenance of certain financial
ratios, limitations on additional borrowings, capital expenditures, mergers,
acquisitions and investments and restrictions on cash dividends, loans and other
distributions.
At December 31, 1996, the Company's outstanding letters of credit
amounted to $470,000 and credit available under the revolving credit facility
was $379,530,000.
The Company has limited involvement with derivative financial
instruments and does not use them for trading purposes. Interest rate swap and
cap agreements are used as a means of managing the Company's interest rate
exposure. The swap agreements are contracts to periodically exchange fixed and
floating interest rate payments over the life of the agreement. The Company's
exposure to credit loss under these arrangements is limited to the interest rate
spread in the event of non-performance by the counterparties to the contracts.
The Company is currently party to two swap agreements: an 18-month agreement
covering $280,000,000 in notional principal with a fixed interest rate of 5.73%
and a two-year agreement covering $100,000,000 of notional principal with a
fixed interest rate of 5.55%. Both agreements allow the counterparty an option
to terminate after one year, with the $280,000,000 swap terminating in February
1998 and the $100,000,000 swap terminating in November 1998 if these options are
not exercised. For the fiscal year ended December 31, 1996, the Company received
interest at a weighted average rate of 6.5% and paid interest at a weighted
average rate of 6.1%, the difference of which represents the benefit derived by
the Company. Payment or receipt of the interest differential is made on a
monthly and quarterly basis for the $100,000,000 and $280,000,000 agreements,
respectively, and recognized monthly in the financial statements as an
adjustment to interest expense. The Company was previously a party to an
interest rate cap agreement which expired in July of 1996. The cap agreement
limited the three-month LIBOR rate to 6% on indebtedness of up to $50,000,000.
The Company received no benefit from the cap agreement in fiscal year 1996.
The carrying amount of the revolving credit facility approximates
fair market value because the underlying instruments are variable notes that
reprice frequently.
9.5% Senior Subordinated Notes: The 9.5% 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
$209,940,000 and $210,340,000 at December 31, 1996 and 1995, respectively.
Maturities of long-term debt, exclusive of capital lease
obligations, for the five years ending December 31, 2001 and thereafter, are as
follows:
(IN THOUSANDS)
--------------
1997 ..................................................... $ 1,046
1998 ..................................................... 221
1999 ..................................................... -
2000 ..................................................... -
2001 ..................................................... 420,000
Thereafter ............................................... 200,000
--------
$621,267
========
Total interest paid in 1996, 1995 and 1994 amounted to $44,341,000,
$37,454,000 and 32,395,000, respectively.
F-11
32
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- STOCKHOLDERS' EQUITY
Common Stock: The Company has granted registration rights to certain
holders of Common Stock under which the Company is obligated to pay the expenses
associated with certain of such registration rights.
Under the Company's preferred stock purchase rights plan, the
Company's common stockholders were granted one right for each share of Common
Stock held. Each right allowed its holder to purchase one-hundredth of a share
of Junior Participating Preferred Stock at a specified price, subject to
adjustment. The rights become exercisable at certain times associated with a
transaction whereby a person or group of affiliated persons acquires beneficial
ownership of 20% or more of the Company's general voting power, unless the Board
of Directors determines the transaction to be fair and in the best interests of
the Company and its stockholders.
Stock Compensation Plans: The Company has various stock-based
compensation plans, which are described below. The Company applies the
provisions of APB No. 25 and related Interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized upon granting of
options under its fixed stock option plans and in 1995, the Company recognized
$542,000 in compensation cost related to accelerated vesting on options awarded
in earlier years. No compensation cost has been recognized for its performance-
based plan or its stock purchase plan. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below. The provisions of SFAS No. 123 have been
applied to awards with grant dates in 1996 and 1995, only. Therefore, until the
new rules are applied to all outstanding, nonvested awards, the compensation
cost reflected in the pro forma amounts presented below is not indicative of
future amounts.
1996 1995
---------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income (loss):
As reported ........................... $ 33,300 $ (74,476)
Pro forma ............................. $ 29,649 $ (76,359)
Primary earnings (loss) per share:
As reported ........................... $ 0.64 $ (1.58)
Pro forma ............................. $ 0.58 $ (1.62)
Fully diluted earnings (loss) per share:
As reported ........................... $ 0.64 $ (1.58)
Pro forma ............................. $ 0.58 $ (1.62)
Fixed Stock Option Plans: The Company has various fixed stock option
plans that provide for the granting of incentive or non-statutory options to its
key employees, non-employee members of the Board of Directors, consultants and
independent contractors. 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 over periods ranging from three to five years and expire not
later than ten years from the date of grant. Approximately 5,214,000 shares of
Common Stock are reserved for future issuance upon exercise of fixed options.
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 1996
and 1995: risk-free interest rates ranging from 6.91% to 6.33% and 7.69% to
5.55% for 1996 and 1995, respectively; dividend yield of 0% for both years;
expected lives ranging from 1.25 to 6.58 years for both years; and volatility of
43% for both years.
F-12
33
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's fixed stock option plans as
of December 31, 1996, 1995 and 1994, and the activity during the years ending on
those dates is presented below:
1996 1995
--------------------------- --------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- ---------- --------------
Outstanding - beginning of year ..................... 4,111,824 $ 15.22 4,008,801 $ 10.32
Granted:
Exercise price equal to fair value ................ 710,800 $ 18.60 2,280,475 $ 22.06
Exercise price greater than fair value ............ 10,000 $ 28.25 -
Exercise price less than fair value ............... 25,000 $ 10.00 -
Substitute options granted for outstanding
options of acquired company .....................
Exercised ........................................... (1,073,804) $ 9.67 (1,233,243) $ 8.32
Forfeited ........................................... (352,348) $ 20.41 (944,209) $ 19.96
---------- ----------
Outstanding - end of year ........................... 3,431,472 $ 17.12 4,111,824 $ 15.22
========== ==========
Activity from October 1, 1994 to December 31, 1994
(see note 1):
Granted ...........................................
Exercised .........................................
Forfeited .........................................
Outstanding - end of year, as restated ..............
Exercisable at end of year .......................... 1,281,402 $ 13.99 1,541,461 $ 9.56
========== ==========
Weighted-average fair value of options
granted during the year ............................. $ 9.92 $ 11.01
1994
----------------------------
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
---------- ---------------
Outstanding - beginning of year ....................... 4,062,351 $ 8.59
Granted:
Exercise price equal to fair value .................. 1,178,110 $ 15.53
Exercise price greater than fair value .............. -
Exercise price less than fair value ................. 25,200 $ 14.11
Substitute options granted for outstanding
options of acquired company ....................... 308,622 $ 7.56
Exercised ............................................. (394,933) $ 4.63
Forfeited .............................................(1,087,129) $ 11.24
---------- ---------
Outstanding - end of year ............................. 4,092,221 $ 10.22
Activity from October 1, 1994 to December 31, 1994
(see note 1):
Granted ............................................. 12,000 $ 16.50
Exercised ........................................... (51,220) $ 4.44
Forfeited ........................................... (44,200) $ 10.16
----------
Outstanding - end of year, as restated ................ 4,008,801 $ 10.32
==========
Exercisable at end of year ............................ 1,374,944 $ 6.64
==========
Weighted-average fair value of options
granted during the year ...............................
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE PRICES AS OF 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/96 EXERCISE PRICE
- ------------------------ -------------- ---------------- -------------- -------------- --------------
$ 0.75 - $ 9.83 310,983 4.29 $ 4.71 310,983 $ 4.71
$10.00 - $14.29 524,581 5.69 $ 12.21 351,598 $ 12.49
$15.09 - $18.50 1,143,928 8.71 $ 17.10 284,107 $ 16.60
$20.00 - $20.50 1,153,380 8.77 $ 20.50 245,182 $ 20.48
$25.25 - $29.00 298,600 8.32 $ 25.72 89,532 $ 25.99
--------- ---- ------- --------- -------
$ 0.75 - $29.00 3,431,472 7.83 $ 17.12 1,281,402 $ 13.99
F-13
34
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Performance-Based Stock Option Plan: The Company's Long-Term Senior
Management Equity Plan provided 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 provided for vesting at the rate of 25% per year beginning
in 1995 and accelerated vesting upon the occurrence of certain events and the
achievement of certain cumulative and annual earnings per share targets. As a
result of the 1995 merger, 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. No further vesting occurred in
1996. Options awarded under this plan expire ten years from the date of grant.
No options were granted in 1996 or 1995 under this plan, and no further grants
are authorized. Approximately 920,000 shares of Common Stock are reserved for
future issuance upon exercise of stock options under this plan.
A summary of the status of the Company's performance-based stock
option plan as of December 31, 1996, 1995 and 1994, and the activity during the
years ending on those dates is presented below:
1996 1995 1994
-------------------------- ----------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
Outstanding - beginning of year ......... 1,365,400 $ 11.20 1,858,000 $ 11.54 1,894,000 $ 11.20
Granted ................................. - - 176,000 $ 14.63
Exercised ............................... (416,878) $ 11.13 (239,600) $ 12.54 -
Forfeited ............................... (28,800) $ 11.00 (253,000) $ 12.41 (116,000) $ 11.17
--------- --------- ---------
Outstanding - end of year ............... 919,722 $ 11.24 1,365,400 $ 11.20 1,954,000 $ 11.51
========= =========
Activity from October 1, 1994
to December 31, 1994 (see note 1):
Forfeited ............................... (96,000) $ 11.00
---------
Outstanding - end of year, as restated .. 1,858,000 $ 11.54
=========
Exercisable at end of year .............. 702,282 $ 11.24 681,400 $ 11.19 -
========= =========
As of December 31, 1996, the 702,282 options outstanding under
the performance-based plan have exercise prices between $11.00 and $13.50 and a
weighted-average remaining contractual life of 5.41 years.
Employee Stock Purchase Plan: Under the 1994 Employee Stock
Purchase Plan (the "Plan"), the Company was authorized to issue up to 350,000
shares of Common Stock to its full-time employees, nearly all of whom were
eligible to participate. This Plan was effectively terminated on December 31,
1995 and was replaced by a noncompensatory plan in 1996. Under the terms of the
Plan, participants could choose to have up to 10% of their annual base earnings
withheld to purchase the Company's Common Stock. The purchase price of the stock
was the lesser of the beginning-of-the-year market price or 85% of the
end-of-year market price. Under the Plan, the Company sold 21,456 shares to
employees in 1995. The fair value of the employees' purchase rights was
estimated using the Black-Scholes model with the following assumptions for 1995:
risk-free interest rate of 7.23%; dividend yield of 0%; an expected life of one
year; and expected volatility of 68.7%. The weighted-average fair value of
purchase rights granted in 1995 was $5.76.
F-14
35
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- CERTAIN OPERATING STATEMENT CAPTIONS
Restructuring Costs: In connection with the 1995 merger, the Company
adopted a plan to restructure and consolidate its operating locations and
administrative functions within specific geographic areas. The principal
elements of the plan included a workforce reduction of approximately 1,220
employees across all employee groups, the consolidation of approximately 120
branch locations and the conversion of continuing branches to a standardized
information system. The plan, which was completed by September 1996, resulted in
a restructuring charge in 1995 of approximately $68,304,000 consisting of
accrued costs and impairments.
Through December 31, 1995, the Company had completed a significant
portion of the plan, including the consolidation of approximately 105 branch
locations and a reduction of approximately 1,120 employees. The Company's
decision to consolidate branches and standardize branch information systems
resulted in write-offs of excess patient service equipment, leasehold
improvements and the hardware and capitalized software related to information
systems being discontinued. Approximately $1,325,000 in hardware and capitalized
software costs, representing the approximate amount of depreciation attributable
to the expected period of usage prior to completion of the conversion plan, was
included in property, equipment and improvements at December 31, 1995. The
following table summarizes the principal components of the charge, amounts paid
through December 31, 1996, and the remaining accrual at December 31, 1996.
ACCRUALS IMPAIRMENTS
-------- -----------
(IN THOUSANDS)
Severance and related personnel costs................... $21,538 $ -
Branch and billing center closures...................... 13,709 9,354
Information systems .................................... - 22,160
Other .................................................. 1,000 543
------- -------
36,247 $32,057
======= =======
Severance amounts paid through December 31, 1996........ (19,620)
Other amounts paid through December 31, 1996............ (9,496)
-------
Accrual at December 31, 1996............................ $ 7,131
=======
The remaining accrual balance consists primarily of $2,058,000 for
severance and related personnel costs and $4,941,000 for branch and billing
center closure costs.
1995 Provision for Doubtful Accounts: The 1995 provision for
doubtful accounts includes (1) an adjustment made in the third quarter of
approximately $26,300,000 to provide for an impairment in Abbey's infusion
therapy receivables arising from integration activities associated with two
prior business combinations and the Abbey/Homedco merger, and (2) a provision
recorded in the fourth quarter of approximately $13,000,000, or 3.7% of accounts
receivable, for the anticipated impact on realization resulting from field
location consolidations, changes in billing and collection personnel, and
information systems conversions. Such activities detracted from normal
operations and resulted in billing and collection delays which reduced the
ultimate collectibility of accounts receivable.
1995 Merger Costs: Merger costs totaling $12,193,000 were incurred
and paid during 1995 and consisted primarily of investment banking fees of
$4,899,000, accounting, consulting, legal and filing fees of $4,767,000 and
liability insurance of $1,699,000 covering directors and officers of the
predecessor companies against premerger claims.
1996 Employee Contracts, Benefit Plan and Claim Settlements: In
1996, the Company recorded $14,795,000 for benefit plan and claim settlements.
Two lawsuits were settled which resulted in the recording of $5,272,000 for
settlement amounts and related costs in excess of amounts previously accrued.
The November 1996 termination of a proposed merger with Vitas Healthcare
Corporation resulted in a settlement and associated costs totaling $6,223,000.
Further, based on information provided by actuarial consultants, the estimated
settlement loss on the termination of the Abbey defined benefit pension plan was
increased by $3,300,000.
1995 Employee Contracts, Benefit Plan and Claim Settlements: In
1995, the Company accrued $20,367,000 for employee contract, benefit plan and
claim settlements. The accrual included $14,407,000 provided for employee and
payroll tax related claims and lawsuits, $3,481,000 to settle certain employee
contracts, and the settlement loss of $2,275,000 for the termination of the
Abbey
F-15
36
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Medical, Inc. Employee Retirement Plan, a defined benefit pension plan. At
December 31, 1995, the remaining accrual was $10,479,000, all of which was
settled and paid during 1996.
NOTE 8 -- INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities are as follows:
DECEMBER 31,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
Deferred tax liabilities:
Tax over book depreciation ............................... $ 13,220 $ 7,836
Intangible assets ........................................ 718 1,733
Other, net ............................................... 2,889 3,552
-------- --------
Total deferred tax liabilities ............................. 16,827 13,121
Deferred tax assets:
Allowance for doubtful accounts .......................... 33,105 34,194
Accruals ................................................. 13,404 24,855
Asset valuation reserves ................................. 2,379 13,371
Net operating loss carryforward, limited by Section 382 .. 23,985 19,771
AMT credit carryover ..................................... 4,977 -
Other, net ............................................... 457 3,047
-------- --------
Total deferred tax assets .................................. 78,307 95,238
Valuation allowance ........................................ (31,517) (36,234)
-------- --------
Net deferred tax assets .................................... 46,790 59,004
-------- --------
Net deferred taxes ......................................... $ 29,963 $ 45,883
======== ========
Current deferred tax assets, net of current deferred
tax liabilities .......................................... $ 31,106 $ 45,883
Non-current deferred tax liabilities, net of non-current
deferred tax assets ...................................... 1,143 -
-------- --------
Net deferred taxes ......................................... $ 29,963 $ 45,883
======== ========
The reduction in 1996 of net deferred tax assets was based primarily
on the deductibility in 1996 of certain accruals and merger-related reserves
established in 1995. The Company's future taxable income assumption considers
the Company's pretax earnings in 1996 and in the fourth quarter of 1995, the
Company's history of earnings in periods prior to the merger, and certain
revenue concentration uncertainties (see Note 12).
At December 31, 1996, the Company's federal operating loss
carryforwards approximated $125,000,000 which begin to expire in 2003.
Additionally, the Company has various state operating loss carryforwards which
begin 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
federal and state operating loss carryforwards are each limited to
approximately $5,000,000 per year. Because of the annual limitation,
approximately $60,000,000 each of the Company's federal and state operating
loss carryforwards may expire unused.
A valuation allowance is provided primarily against the Company's
net operating loss carryforwards and certain other deferred tax assets, the
expected use of which exceeds beyond the Company's earnings assumption and are
not otherwise offset by deferred tax liabilities.
F-16
37
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income tax (benefit) expense consists of the following:
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Currently (refundable) payable:
Federal ........................... $ (7,917) $ (9,569) $ 17,746
State ............................. 177 495 3,984
-------- -------- --------
(7,740) (9,074) 21,730
Deferred tax benefit or liability:
Federal ........................... 14,106 (16,810) 3,650
State ............................. 1,814 (2,738) 381
-------- -------- --------
15,920 (19,548) 4,031
Tax benefits credited to paid-in
capital and goodwill............... 10,548 9,681 1,343
-------- -------- --------
$ 18,728 $(18,941) $ 27,104
======== ======== ========
The exercise of stock options granted under the Company'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. In
addition, the recognition for income tax purposes of certain deferred tax assets
relating to acquired businesses reduces related goodwill for financial reporting
purposes.
Differences between the Company's income tax expense (benefit) and
an amount calculated utilizing the federal statutory rate are as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-------- --------- --------
(IN THOUSANDS)
Income tax expense (benefit) at statutory rate.................................. $ 18,210 $ (30,742) $ 21,952
Non-deductible goodwill and merger costs........................................ 2,426 4,907 1,353
Use of net operating loss carryforward.......................................... - - (1,453)
Tax benefit of deferred items not (previously) currently recognized............. (2,705) 5,287 -
Tax benefit of acquired company................................................. - - 2,142
State taxes, net of federal benefit and state loss carryforwards................ - 825 3,116
Other........................................................................... 797 782 (6)
-------- --------- --------
$ 18,728 $ (18,941) $ 27,104
======== ========= ========
Net income taxes (refunded) or paid in 1996, 1995 and 1994, amounted
to $(963,000), $15,159,000 and $25,323,000, respectively.
NOTE 9 -- LEASES
The Company operates principally in leased offices and warehouse
facilities. In addition, the Company leases delivery vehicles and office
equipment. 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.
In addition, during 1996, 1995 and 1994, the Company acquired
patient service equipment, information systems and equipment and furnishings
totaling $12,021,000, $5,876,000 and $10,719,000, respectively, under capital
lease arrangements with lease terms ranging from two to five years. Amortization
of the leased patient service equipment and information systems amounted to
$9,314,000, $4,410,000 and $5,669,000 in 1996, 1995 and 1994, respectively.
F-17
38
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following amounts for assets acquired under capital lease
obligations are included in both the patient service equipment and property,
equipment and improvements:
DECEMBER 31,
-----------------------
1996 1995
-------- --------
(IN THOUSANDS)
Patient service equipment ............ $ 1,930 $ 3,145
Information systems .................. 31,474 19,891
Equipment and furnishings ............ 3,648 3,796
Buildings and improvements ........... 66 565
-------- --------
37,118 27,397
Less accumulated depreciation ........ (15,270) (9,905)
-------- --------
$ 21,848 $ 17,492
======== ========
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, 1996:
CAPITAL OPERATING
LEASES LEASES
--------- ---------
(IN THOUSANDS)
1997 ................................................ $ 11,477 $ 46,583
1998 ................................................ 7,517 40,864
1999 ................................................ 2,120 34,730
2000 ................................................ - 25,155
2001 ................................................ - 17,215
Thereafter .......................................... - 27,904
--------- ---------
21,114 $ 192,451
=========
Less interest included in minimum lease payments .... (1,324)
---------
Present value of minimum lease payments ............. 19,790
Less current portion ................................ (10,542)
---------
$ 9,248
=========
Rent expense in 1996, 1995 and 1994 amounted to $46,493,000,
$47,602,000 and $37,855,000, respectively. Facilities leased from a lessor in
which an employee has a financial interest amounted to annual rent expense of
$208,000 in each of the three fiscal years presented.
NOTE 10 -- EMPLOYEE BENEFIT PLANS
The Company had two defined contribution plans and a defined benefit
plan covering substantially all employees. The defined contribution plans were
401(k) plans whereby eligible employees voluntarily contributed up to a defined
percentage of their annual compensation. Employee contributions were partially
matched by the Company under one plan. Total expenses to the Company relating to
the defined contribution plans for 1996, 1995 and 1994 were $4,370,000,
$2,980,000 and $3,080,000, respectively.
Effective January 1, 1996, the net assets of the Abbey 401(k) plan
were transferred into the Apria 401(k) plan, formerly the Homedco 401(k) plan.
As amended, the plan provides eligibility for all employees having completed one
year of service with at least 1,000 hours worked annually. Participants may
contribute up to 16% of annual basic earnings. Employee contributions are
matched 50% for the first 8% by the Company.
On September 22, 1995, the defined benefit plan trustees agreed to
terminate the defined benefit plan effective April 1, 1996. As a result, the
Company recognized costs to terminate the plan of $3,300,000 and $2,275,000 in
1996 and 1995, respectively.
F-18
39
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On February 11, 1997, the Company received a favorable determination letter from
the Internal Revenue Service and anticipates final benefit distributions to
participants to occur in the second quarter of 1997.
Prior to the termination, the defined benefit plan benefits were
based upon years of service and the employees' average compensation over the
last five years of employment. The Company's funding policy was to fund the
recommended amount as determined by the plan's actuaries. Contributions were
intended to provide not only for benefits attributed to services performed to
date, but also for those expected to be earned in the future. Net periodic
pension cost included in selling, distribution and administration expenses
amounted to $925,000 and $1,136,000 in 1995 and 1994, respectively.
NOTE 11 -- RELATED PARTY TRANSACTIONS
In December 1992, pursuant to a secured promissory note agreement,
the Company loaned $1,250,000 to an officer/director. The note bore interest at
8% per annum and principal and interest were due December 28, 1996. During 1995
and 1994, principal and interest of $196,000 and $188,000, respectively, were
canceled and recorded as compensation expense. Pursuant to the terms of a
severance agreement dated November 7, 1995, the remaining outstanding principal
and related interest totaling $397,000 was forgiven and was recorded as
compensation expense in 1995.
Through September 1995, the Company retained a firm, in which a
member of the Board of Directors of the Company is a managing director, to
provide ongoing financial advisory services. During 1995 and 1994, the firm was
paid fees of $3,810,000 and $910,000, respectively, in connection with various
financing transactions and other investment banking activities. The fees paid in
1995 related primarily to the Abbey/Homedco merger.
In connection with the Protocare acquisition, the Company assumed
from Protocare a 9% loan to an officer of the Company which amounted to
$597,000. The officer resigned in May 1995 and the outstanding principal and
interest on this assumed loan, amounting to $499,000 and $288,000, was
forgiven and expensed in 1995 and 1994, respectively. In December 1994, the
Company made an interest bearing loan of $100,000, which is due in December
1997, to the same officer.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Purchase Commitments: On September 1, 1994, the Company entered into
a five-year agreement to purchase medical supplies totaling $112,500,000, with
annual purchases ranging from $7,500,000 in the first year to $30,000,000 in the
third through fifth years. Failure to purchase at least 90% of the annual
commitment would have resulted in a penalty of 10% of the difference between the
annual commitment and actual purchases, beginning with the twelve month period
ended August 31, 1996. Actual purchases for that period exceeded the annual
commitment by 54%.
Litigation: The Company 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. The Company has insurance
policies covering such potential losses where such coverage is cost effective.
In the opinion of Management, any liability that might be incurred by the
Company upon the resolution of these claims and lawsuits will not, in the
aggregate, have a material adverse effect on the Company's consolidated results
of operations and financial position. In 1996 and 1995, certain claims and
lawsuits were settled and the Company paid amounts, including the cost of
defense, totaling approximately $16,619,000 and $10,590,000, respectively.
Charges to income of $11,533,000 and $12,400,000 were taken in 1996 and 1995,
respectively, to provide for probable losses related to matters arising in each
period and to revise estimates for matters arising in previous periods.
Subsequent to year end, the Company settled claims totaling $139,000.
Certain Concentrations: Approximately 50% of the Company's revenues
are derived from the provision of respiratory therapy services, a significant
portion of which is reimbursed under the Federal Medicare program. Various
budgets currently under consideration by Congress and the Clinton Administration
propose reductions in Medicare spending including, among other matters,
reimbursement for home oxygen. It is currently uncertain whether a budget
agreement affecting home oxygen reimbursement will be reached or whether other
regulatory changes to oxygen reimbursement will be made and the ultimate impact
such changes may have on the Company's future revenues.
F-19
40
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company currently purchases approximately 32% of its patient
service equipment and supplies from two 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: Management is not aware of any material claims or disputes
related to any of its third-party reimbursement arrangements.
NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER
----------------------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
Net revenues ......................................... $ 295,303 $ 306,579 $ 306,026 $ 273,235
Gross profit ......................................... 201,212 209,636 212,109 157,511
Operating income (loss) .............................. 42,868 46,234 45,231 (33,056)
Net income (loss) .................................... $ 20,326 $ 21,908 $ 20,749 $ (29,683)
Per share amounts:
Primary:
Net income (loss) ................................ $ 0.39 $ 0.42 $ 0.40 $ (0.58)
Fully diluted:
Net income (loss) ................................ $ 0.39 $ 0.42 $ 0.40 $ (0.58)
1995
Net revenues ......................................... $ 284,609 $ 287,286 $ 277,670 $ 284,035
Gross profit ......................................... 199,073 199,016 178,833 195,679
Operating income (loss) .............................. 36,032 22,115 (133,948) 28,324
Income (loss) before extraordinary charge ............ 15,792 7,497 (112,166) 17,399
Net income (loss) .................................... $ 15,792 $ 4,499 $(112,166) $ 17,399
Per share amounts:
Primary:
Income (loss) before extraordinary charge ........ $ 0.34 $ 0.15 $ (2.32) $ 0.34
Net income (loss) ................................ $ 0.34 $ 0.09 $ (2.32) $ 0.34
Fully diluted:
Income (loss) before extraordinary charge ........ $ 0.32 $ 0.15 $ (2.32) $ 0.34
Net income (loss) ................................ $ 0.32 $ 0.09 $ (2.32) $ 0.34
The operating results for the fourth quarter of 1996 include
adjustments based on Management's year-end analysis of accounts receivable to
reduce revenues and accounts receivable by $32,300,000 and increase the
allowance for doubtful accounts by $9,000,000. The adjustment to revenues
represents an estimate of the amount of year-end accounts receivable that will
ultimately be written off due to price discrepancies, failure to obtain payor
authorizations, missed filing deadlines and other reasons unrelated to credit
risk. Revenue adjustments are normally identified and recorded by the Company at
the point of cash application or upon account review. The increase in the
Company's average collection period during the year, the significant number of
system conversions performed in the second and third quarters of 1996 and an
increased turnover rate in 1996 among billing and collection personnel resulted
in a slow down in cash applications and account reviews, an increased rate of
billing errors in the second half of 1996, delays in the identification and
recording of revenue adjustments and an increased level of unidentified revenue
adjustments in the year-end accounts receivable balance. Although some portion
of the revenue adjustment relates to transactions originally recorded in periods
prior to the fourth quarter, Management does not believe a reasonably accurate
allocation of the adjustment to
F-20
41
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
prior quarters is determinable. The adjustment to the allowance for doubtful
accounts was due in part to an increase in the fourth quarter in the amount of
accounts aged in excess of 180 days.
The fourth quarter of 1996 also includes a $10,000,000 adjustment to
provide for excess and obsolete patient service equipment and supplies which was
determined based on the Company's year-end physical inventory and quantity
reconciliation procedures. In addition, two lawsuits were settled in the fourth
quarter which resulted in the accrual of $5,272,000 for settlement amounts and
related costs in excess of amounts previously accrued. The November 1996
termination of a proposed merger with Vitas Healthcare Corporation resulted in a
settlement and associated costs totaling $6,223,000, which was accrued and paid
in the fourth quarter. Further, based on information provided by actuarial
consultants, the estimated settlement loss on the termination of the Abbey
defined benefit plan was increased by $3,300,000 in the fourth quarter.
Gross profit in the third quarter of 1996 reflects a change in the
depreciable lives of certain classes of patient service equipment. The change
was based on Management's analysis which indicated that the equipment would
continue in service beyond the economic lives over which they were being
depreciated. The change resulted in a reduction to the cost of revenues in the
third quarter of $3,200,000 of which $2,900,000 related to a single asset type
for which the depreciable life was extended from four to twelve months. The
impact to the year ended December 31, 1996 was a reduction in the cost of net
revenues of $6,400,000. The impact to net income per share for the third quarter
of 1996 and the year ended December 31, 1996 were increases of $.04 and $.08,
respectively.
The quarterly financial information presented for 1995 reflects the
conformed accounting policies of Homedco and Abbey (see Note 2).
The second and third quarters of 1995 include charges of
approximately $12,900,000 and $133,800,000, respectively, relating to
restructuring, merger and integration activities and to accounts receivable
valuation and employment-related matters. During the fourth quarter of 1995, the
Company reevaluated the estimates inherent in the restructuring and other
merger-related costs recorded through the end of the third quarter. This
evaluation resulted in a reallocation of expenses which increased the provision
for doubtful accounts by $13,000,000 and reduced restructuring costs and other
merger-related costs by $10,316,000 and $2,684,000, respectively. Additionally,
an extraordinary charge on debt refinancing of approximately $2,998,000, net of
income taxes of $1,686,000, was recorded in the second quarter of 1995.
F-21
42
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, 1996
Deducted from asset accounts:
Allowance for revenue adjustments..................... $ - $ - $ 32,300(g) $ - $ 32,300
Allowance for doubtful accounts....................... 86,567 67,040 608(c) 80,406 73,809
Reserve for inventory excess,
obsolescence and shrinkage......................... 5,754 3,013 - 6,942 1,825
Reserve for patient service equipment
excess, obsolescence and shrinkage................. 11,860 7,500 - 14,548 4,812
--------- --------- -------- --------- ---------
Totals........................... $ 104,181 $ 77,553 $ 32,908 $ 101,896 $ 112,746
========= ========= ======== ========= =========
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts ...................... $ 61,038 $ 100,463(a) $ 2,655(f) $ 77,589 $ 86,567
Reserve for inventory excess,
obsolescence and shrinkage ........................ 3,952 2,898(e) 8(f) 1,104 5,754
Reserve for patient service equipment
excess, obsolescence and shrinkage ................ 4,546 9,216(e) 117(f) 2,019 11,860
--------- --------- -------- --------- ---------
Totals........................... $ 69,536 $ 112,577 $ 2,780 $ 80,712 $ 104,181
========= ========= ======== ========= =========
Year ended December 31, 1994
Deducted from asset accounts:
Allowance for doubtful accounts ...................... $ 52,102 $ 48,718(b) $ 9,089(c) $ 48,871(d) $ 61,038
Reserve for inventory excess,
obsolescence and shrinkage ........................ 3,143 1,124 - 316 3,952
Reserve for patient service equipment
excess, obsolescence and shrinkage ................ 1,810 3,312 448 1,024 4,546
--------- --------- -------- --------- ---------
Totals........................... $ 57,055 $ 53,154 $ 9,537 $ 50,211 $ 69,536
========= ========= ======== ========= =========
- ----------
(a) See Note 7 to the Consolidated Financial Statements.
(b) Includes $2,002 for discontinued operations for the year ended
December 31, 1994.
(c) Includes amounts added in conjunction with business acquisitions.
(d) Includes the charge-off of uncollectible accounts receivable and a
reversal of the allowance for doubtful accounts related to
discontinued operations for the year ended December 31, 1994.
(e) Includes amounts recorded to conform the accounting policies of
Abbey and Homedco.
(f) Represents the net activity for Homedco for the period of October 1,
1994 through December 31, 1994. See Note 2 to the Consolidated
Financial Statements.
(g) Amount charged against net revenues. See Note 13 to the Consolidated
Financial Statements.
S-1
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 25, 1997
APRIA HEALTHCARE GROUP INC.
By: /s/ JEREMY M. JONES
--------------------------
Jeremy M. Jones
Chairman of the Board and 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/ JEREMY M. JONES Chairman of the Board and March 25, 1997
- ----------------------------- Chief Executive Officer
Jeremy M. Jones (Principal Executive Officer)
/s/ LAWRENCE H. SMALLEN Chief Financial Officer, Senior Vice March 25, 1997
- ----------------------------- President, Finance and Treasurer
Lawrence H. Smallen (Principal Financial Officer)
/s/ JAMES E. BAKER Vice President, Controller March 25, 1997
- ----------------------------- (Principal Accounting Officer)
James E. Baker
/s/ DAVID L. GOLDSMITH Director March 25, 1997
- -----------------------------
David L. Goldsmith
/s/ LEONARD GREEN Director March 25, 1997
- -----------------------------
Leonard Green
/s/ TERRY HARTSHORN Director March 25, 1997
- -----------------------------
Terry Hartshorn
/s/ CHARLES D. MARTIN Director March 25, 1997
- -----------------------------
Charles D. Martin
/s/ FREDERICK S. MOSELEY, IV Director March 25, 1997
- -----------------------------
Frederick S. Moseley, IV
/s/ VINCENT M. PRAGER Director March 25, 1997
- -----------------------------
Vincent M. Prager
/s/ H.J. MARK TOMPKINS Director March 25, 1997
- -----------------------------
H.J. Mark Tompkins
44
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION PAGE/REF.
- ------ ----------- ---------
2.1 Amendment to Amended and Restated Agreement and Plan of (g)
Merger dated June 24, 1994, among Abbey, Abbey
Healthcare Acquisition Corp. and Protocare, Inc.
2.2 Agreement and Plan of Merger dated March 1, 1995 between (h)
Abbey and Homedco.
2.3 Agreement and Plan of Merger dated March 1, 1995, as (l)
amended on May 18, 1995, by and between Abbey and
Homedco.
2.4 Agreement for the Sale and Purchase of the Whole of the (m)
Issued Share Capital of The Omnicare Group Limited and
Assumption of Certain Liabilities, dated June 20, 1995,
between Abbey Health Services Limited and Stanton
Industries Limited.
3.1 Restated Certificate of Incorporation of Registrant. (i)
3.2 Amended and Restated Bylaws of Registrant, as amended
on February 27, 1997.
3.3 Certificate of Ownership and Merger merging Apria (m)
Healthcare Group Inc. into Abbey and amending Abbey's
Restated Certificate of Incorporation to change Abbey's
name to "Apria Healthcare Group Inc."
4.1 Form of 9 1/2% Senior Subordinated Note due 2002. (d)
4.2 Securities Purchase Agreement, dated November 4, 1991, by (b)
and among Abbey and the Purchasers named therein,
together with the Forms of Warrants to Acquire Common
Stock issued pursuant thereto.
4.3 Class A Warrant to Purchase of Common Stock, dated (c)
November 4, 1991, issued by Abbey to General Electric
Capital Corporation.
4.4 Addendum Number One to Warrant to Acquire Common Stock (c)
dated January 2, 1992.
4.5 Indenture dated November 1, 1993, by and among Abbey, (f)
certain Subsidiary Guarantors defined therein and U.S.
Trust Company of California, N.A.
4.6 Shareholder Rights Plan dated February 8, 1995, between (h)
Abbey and U. S. Stock Transfer Corporation, as Rights
Agent.
4.7 Specimen Stock Certificate of the Registrant. (q)
4.8 Certificate of Designation of the Registrant. (i)
10.1 Abbey 1991 Stock Option Plan. (b)
10.2 Abbey 1992 Stock Option Plan. (a)
10.3 Agreement and Plan of Reorganization, dated September 1, (f)
1993, among AHH, Abbey, Life Air, Inc., Louis McNabb,
M.D., Jagminder Bhalla, M.D., Clyde Dos Santos, M.D.,
Hormohinder Gogia, M.D., William E. Matteson, James
Pearle, M.D., Narindar Singh, M.D., Bruce Tammelin, M.D.,
Dennis Wolin, and Brea Medical Group.
10.4 Abbey Schedule of Registration Procedures and Related (e)
Matters.
10.5 Abbey Employees' Retirement Plan, dated December 19, 1994. (q)
10.6 Homedco 401(k) Savings Plan, restated effective October 1, (q)
1993, amended December 28, 1994.
45
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION PAGE/REF.
- ------- ----------- ---------
10.7 Apria/Homedco Stock Incentive Plan, dated June 28, 1995. (k)
10.8 Stock Option Agreement dated March 23, 1995 between (j)
Homedco and Jeremy M. Jones.
10.9 Abbey Amended and Restated 1992 Stock Incentive Plan. (p)
10.10 Executive Employment Agreement dated June 16, 1995 between (o)
Abbey and James F. Philipp.
10.11 Executive Employment Agreement dated June 23, 1995 between (o)
Abbey and Manny A. Brown.
10.12 Executive Employment Agreement dated June 26, 1995 between (o)
Homedco and Jeremy M. Jones.
10.13 Executive Employment Agreement dated June 26, 1995 between (o)
Abbey and Steven T. Plochocki.
10.14 Executive Employment Agreement dated June 26, 1995 between (q)
Abbey and Sarah L. Eames.
10.15 Loan Agreement dated June 26, 1995 between Abbey and James (o)
F. Philipp.
10.16 First 1995 Amendment to the Abbey Employees' Retirement (q)
Plan, dated June 27, 1995.
10.17 Amendment Number Two to the Homedco 401(k) Savings Plan, (q)
dated June 28, 1995.
10.18 Credit Agreement, dated June 28, 1995, among Apria (m)
Healthcare Group Inc. and certain of its subsidiaries,
Banque Paribas, Bank of America National Trust and Savings
Association, Nationsbank of Texas, N.A., Nationsbanc
Capital Markets, Inc. and certain other financial
institutions from time to time party thereto.
10.19 Employment Agreement dated June 29, 1995 between Apria (o)
Healthcare and Timothy M. Aitken.
10.20 Employment Agreement dated July 1, 1995 between Apria (q)
Healthcare and Richard J. Rapp.
10.21 Building Lease, dated July 21, 1995, between C.J. (q)
Segerstrom & Sons, a California general partnership,
and Apria Healthcare, Inc. for 10 locations within Harbor
Gateway Business Center, Costa Mesa, California.
10.22 Assignment, Assumption and Consent Re: Lease (dated (n)
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 24, 1995.
10.23 First Amendment to Complete Restatement of Lease
Amendments and Amendment to Building Lease, dated as of
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.
10.24 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 Apria Healthcare Group Inc.
10.25 Amendment Number Three to the Homedco 401(k) Savings Plan, (q)
dated January 1, 1996.
11.1 Statement of Computation of Earnings per Share.
21.1 List of Subsidiaries.
46
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION PAGE/REF.
- ------ ----------- ---------
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule
REFERENCES -- DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
(a) Incorporated by reference to Abbey's Definitive Proxy Statement for
the 1992 Annual Meeting of Shareholders, as filed on June 5, 1991.
(b) Incorporated by reference to Abbey's Registration Statement on Form
S-1 (Registration No. 33-44690), as filed on December 23, 1991.
(c) Incorporated by reference to Amendment No. 2 to Abbey's Registration
Statement on Form S-1 (Registration No. 33-44690), as filed on
February 5, 1992.
(d) Incorporated by reference to Abbey's Registration Statement on Form
S-1 (Registration No. 33-69078), as filed on September 17, 1993.
(e) Incorporated by reference to Abbey's Registration Statement on Form
S-4 (Registration No. 33-69094), as filed on September 17, 1993.
(f) Incorporated by reference to Abbey's Annual Report on Form 10-K for
the year ended January 1, 1994.
(g) Incorporated by reference to Amendment No. 3 to Abbey's Annual
Report on Form 10-K/A for the year ended December 31, 1994.
(h) Incorporated by reference to Abbey's Current Report on Form 8-K, as
filed on March 20, 1995.
(i) Incorporated by reference to Abbey's Registration Statement on Form
S-4 (Registration No. 33-90658), and its appendices, as filed on
March 27, 1995.
(j) Incorporated by reference to Homedco's Quarterly Report on Form 10-Q
for the period ended March 31, 1995, as filed on May 11, 1995.
(k) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No.33-94026), as filed on June 28, 1995.
(l) Incorporated by reference to Abbey's Final Joint Proxy
Statement/Prospectus as filed pursuant to Rule 424(b) on May 26,
1995.
(m) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q dated June 30, 1995, as filed on August 14, 1995.
(n) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q dated September 30, 1995, as filed on November 14, 1995.
(o) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q/A dated June 30, 1995, as filed on November 15, 1995.
(p) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No.33-80581), as filed on December 19,
1995.
(q) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995.